Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q2 2007 Earnings Report, Transcript and Summary

Good morning everyone and welcome to Coca-Cola FEMSA's Second Quarter 2007 Earnings Results Conference Call. As a reminder, today's conference is being recorded and all participants are in a listen-only mode. At the request of the company, we'll open up the conference for question and answers after the presentation. During the conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as a good faith estimate made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties which can materially impact the company's actual performance. At this time, I would now like to turn the conference over to Mr. Héctor Treviño, Coca-Cola FEMSA's CFO. Please go ahead, Mr. Treviño. Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Good morning everyone and thank you for joining us today. Our operations generated strong results for the second quarter of 2007. We continue achieving double-digit operating income growth on a consolidated basis. Double digit increases in operating income in the majority of our markets more than offset a slight reduction in Mexico, producing 10.5% consolidated operating growth for the quarter in real terms. Our total revenues increased more than 8%, driven by close to 6% growth in our consolidated margin and a 2.2% increase in our consolidated average price per unit case. This was the sixth consecutive quarter in which brand Coca-Cola contributed more than 65% of our incremental consolidated volumes. As we anticipated last quarter, the launch of Coca-Cola Zero is delivering extraordinary results, reaching almost 2% of our total carbonated soft drink sales volume in a very short period. We believe that we are capturing new consumers with this product while improving our average price per unit case. In addition, we continued to produce strong growth in the non-carbonated beverage segment across our franchise territories. We have a total volume of more than 35% year-over-year. Powerade in Mexico and Colombia, Dune Iceberg [ph] in Central America and Brazil and the continued strong performance of Nestea in Venezuela contribute significantly to this growth. For the quarter, our consolidated revenues rose to more than 16 billion Mexican pesos, close to $1.5 billion. Our consolidated operating income increased 10.5% to 2.8 billion Mexican pesos, approximately $216 million. Our consolidated EBITDA reached almost 3.5 billion Mexican pesos or $200 million to $210 million, resulting in a solid EBITDA margin of 21.2%. And our majority net income increased 130%, resulting in earnings per share of 0.94 Mexican pesos or equivalent of $0.86. Now, let me talk about our operations. Continuing the trends of the past year, our Central American operations achieved strong top line results, posting 7.7% volume growth compared with similar growth in the second quarter of 2006. This quarter our growth was driven by single serve non-returnable presentations which carry a higher average price per unit case. Brand Coca-Cola contributed more than 40% of our incremental volume in the retail. Also, our broad, well balanced product portfolio enabled us to capture market opportunity and drive volume growth of our flavored carbonated soft drinks. We continue posting outstanding results in the non-carbonated beverage segment, fueled by Hi-C and Powerade, which volumes grew close to 80% and 60% respectively in the second quarter. We are making great strides in these high potential segments to stimulate the consumption of our products through successful marketing initiatives and innovative new presentations. Building on comparable growth last year, our Central America operations achieved double-digit bottom line growth for the quarter as a result of our strong top line growth, our effective execution and a more stable competitive environment. The region post more than 15% increase in operating income in the second quarter. Our Argentine operations volumes grew 2.5% for the second quarter. Coca-Cola Zero and our core flavor soft drink brands more than compensated for the volume decline in value protection category, resulting in a 1% CSD volume growth compared with almost 15% growth in the same period of 2006. In the non-carbonated beverage segment, excluding bottled water, the strong performance of Dasani and the juice-based beverage products drove more than 100% growth of this category. Consequently, this segment contributed more than 3% of our Argentine operations total sales volumes and more than 40% of our Argentine operations incremental volume for the quarter, providing additional top line as the average price per unit case as disclosed [ph] is higher than the rest of our growth portfolio while participating in the category of faster growth. Despite the continued cost pressure in the market over the past few years, we were able to maintain stability at operating profit level in the second quarter. Moving to Venezuela, we achieved strong 16.1% growth in sales volume for the second quarter. Brand Coca-Cola was our main driver, growing almost 30% in the quarter as a result of a greater focus on the brand. Our defined product portfolio is reaping positive results as exemplified by the 8% growth in the flavored carbonated soft drink category this quarter. In the non-carbonated beverage segment, we continued to post steady [ph] growth led by Nestea in which sales volumes in Venezuela is more than six times that of Mexico. Improvements to our operating efficiency, which are designed to adapt to the current economic environment have proved successful despite difficulties in procurement. With straightened raw material availability, we have been able to supply the market with a greater volume of our core products. Consequently, our Venezuela operation was able to double its profitability compared to a small base in the second quarter of 2006. Our focus on execution supported by the improved Colombian economy, drove the sales of our core brands in both the cola and flavor segments. Our Colombian operations post a double-digit increase in revenues, driven by higher average price implementing throughout last year. Brand Coca-Cola continued to outperform the rest of the carbonated soft drink portfolio, delivering almost 75% of our incremental volume growth in the quarter. Our flavored carbonated soft drink volume grew 3% in the quarter, driven mainly by marketing activity focused on capturing growth in the flavored segment through brand thrust [ph]. In the water segment, it is import to highlight that as a result of our marketing strategies implemented in the year, our proprietary brand Ciel [ph] is now the Columbian market leader. Shifting our marketing mix to single serve presentations has also made this segment more profitable. Our highly effective multi-segmentation strategy, which divides Colombia into several target markets has completely refreshed our business model and allow us to focus our marketing efforts more effectively. Colombia is one of our most constantly growing markets, posting double-digit growth at the operating income level for the 7th consecutive quarter. We almost doubled our operating income compared with the second quarter of 2006, expanding our margin by 690 basis points to 17.3%. Our Mexican operations posted 3.8% volume growth. On top of the strong results volume figures of last year, mainly influenced by the marketing campaign related to FIFA Soccer World Cup, brand Coca-Cola continued to drive our Mexican operation growth for the quarter. Our successful introduction of Coca-Cola Zero continued to add momentum to the growth of the cola category, accounting for the majority of the incremental volumes in the segment for the quarter and performing beyond our expectations. Because the majority of the volume is sold in a single serve presentation, Coca Cola Zero is also providing us with more balanced growth between multi and single serve package. Our average price per unit case is also improving sequentially as the majority of our cola growth came from non-returnable packages along with price adjustments through our entire portfolio. In our single serve water portfolio, we are realizing the results of our improved execution at the point of sale combined with our reinforced marketing campaign that features a new image for the brand. These initiatives helped us to achieve 15% sales volume growth in single serve water for the quarter while reinforcing our presence in the market. Thanks to our consistent efforts to complement and broaden our product portfolio, the non-carbonated beverage category continued to deliver extraordinary results, posting almost 40% volume growth in the quarter. This growth was driven by the very strong performance of Powerade and Hi-C, which volume grew more than 75% and 60% respectively in the second quarter and the continued growth of the rest of our non-carbonated products [ph]. Jug water volume growth was close to 10% given the expansion in inventories and the growth of Mexico region. In the second quarter, our Mexican operations revenue increased 4%, in line with our volume growth despite incremental volumes from our jug water business which has a lower price relative to rest of our non-carbonated portfolio. As we anticipated, the pricing environment in Mexico is stabilizing. We increased prices at the end of the first quarter and the incremental volumes in the soft drink portfolio coming from the introduction of Coca-Cola Zero are supporting this development. On the profitability front, in spite of the increases in sweetener costs, which were on average 20% higher year-over-year and concentrate prices, our gross margin declined only 130 basis points due to savings achieved throughout our light weighted initiative. Based on our [ph] ability to diminish the impact of higher raw material prices and cost cutting initiatives along the value chain, our operating income declined only 1.6% in the quarter. As we anticipated, we continue to face sweetener cost pressures in Mexico in the second quarter, but as sweetener prices peak at the end of last year, we expect a more favorable comparison for the second half of the year. We are confident that the improving trend in our profitability is sustainable for the second half of the year as a result of greater operating levers, that we are achieving top line increases, and a more favorable raw material price comparison. Our Brazilian operations have continued to generate sustainable top and bottom line growth with close to double-digit growth in every quarter since 2004 one year after the acquisition of the franchise. For the second quarter, our Brazilian operations achieved EBITDA margin of 16.3%, up more than two-fold from 8.1% in the same period of 2004. The main drivers of these results are the improvements that we have implemented along the value chain combined with a constantly improving macroeconomic environment. Excluding beer, our volume rose 11.1% in the second quarter with double-digit growth across all of our product categories. Brand Coca-Cola continued to generate the majority of the growth, driven by the successful performance of Coca-Cola Zero. After only a quarter on the market, the Coca-Cola Zero and Coca-Cola Light brands increased on a combined basis more than 40%. In the non-carbonated beverage segment, the strong demand across our product portfolio resulted in 80% volume growth for the quarter. On the beer side, we are moving in the right direction. We are working on building brand equity while we are capturing consumers in the market. In this regard, we are implementing certain point of sale strategies that in the short term is having another negative impact on our average price, but we are confident that those will bring us healthy growth in the long run. For the second quarter of 2007, our Brazilian operations revenue increased 13% excluding beer as a result of an increased sales volume and better average price per unit case. Strong growth of brand Coca-Cola in single serve presentations combined with price increase implemented over the past 12 months contribute to a 2% improvement in our average price per unit case. On the profitability front, we posted 24.1% growth in operating income, achieving, as I say, a 16.3% EBITDA margin for the quarter, an improvement of 190 basis points year-over-year. Now, let's talk about our financial performance in the quarter. During the quarter, we paid down approximately $170 million of Mexican peso equivalent bonds that mature on April 20th and we made a dividend payment of approximately $75 million. We are reaching our net debt to EBITDA coverage of almost one time, underscoring the strength of our balance sheet. Our performance for the first six months of the year underscores the advantages of Coca-Cola FEMSA's balanced geographically diverse scheme [ph] of incremental cash flow. Our operations outside of Mexico are now generating the majority of our consolidated growth. Looking ahead, we foresee a more favorable raw material environment for the second half of the year. We continue to build on the diversified portfolio of beverage and packages that we have designed and deploy over the past four years. We want to share with you two important developments that have taken place lately. First, the Mexican Antitrust Commission recently announced its decision to approve the acquisition of Jugos del Valle subject to certain conditions that we anticipate will be acceptable. We expect to receive the final notification from the commission in the coming weeks and thereafter initiate a public tender offer in Mexico for up to 100% of the outstanding public shares of Jugos del Valle. Beyond the potential for significant synergies, this transaction will considerably increase the Coca-Cola systems presence in Latin America, fast growing, under developed non-carbonated beverage segment. And secondly, in line with our strategy of expanding our footprint in Latin America, we have reached an understanding with The Coca-Cola Company to acquire REMIL. Our franchise territory wholly owned by The Coca-Cola Company in the state of Minas Gerais, which includes Belo Horizonte, the third largest city in Brazil. The understanding with The Coca-Cola Company implies an aggregate value for this transaction of $380 million including tax credit for $10 million. The valuations assume that REMIL will sell approximately 100 million unit cases of CSD and water in 2007, generating an estimated EBITDA of over $45 million during this year 2007. This transaction will increase our presence in the growing Brazilian market by more than a third. As we mentioned in our press release, the terms and conditions are subject to a confirmatory due-diligence process, the negotiation of a definitive agreement, the approval from The Coca-Cola Company and Coca-Cola FEMSA Board of Directors. We expect to close this transaction during the first quarter of 2008. With this, I would like to open the call for any questions that you might have. Question And Answer

Thank you very much. [Operator Instructions]. And your first question comes from the line of Andrea Teixeira with JP Morgan. Please proceed.

Hi, good morning everybody. I just wanted to... if you can say more about this depreciation. So the $10 million that you are including in this some $380 million plus or $10 million includes all the liabilities of the company and then what do you expect in terms of getting... what are the EBITDA margins of this franchise in terms of synergies, if you can tell us how much you believe you can extract, not synergies, but improvement, I would say, from these margins through your execution? Thank you. Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Good morning, Andrea. Let me just clarify the figure. The $380 million includes the $10 million tax credit, which is basically... which would contribute... that basically is cash that is there and so obviously to us, given that we can receive those resources and the price will be adjusted accordingly. So at the end of the day, the firm value or the high [ph] value for the company is being set at $370 million plus again this $10 million tax save that we are mentioning.

Okay. Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: We just initiated due diligence at the beginning of this weak. So we are in the process of analyzing and confirming some of the comments that we have received from The Coca-Cola Company with respect to margins and projections and business plans. We are very confident that given the proximity that we have with this franchise that we certainly can improve in the terms of synergies. We have not fully analyzed that department or that area of evaluation in there. The understanding is a little bit strange in a way because senior management of both companies agreeing that we should acquire this franchise. Also understanding on the basis of conversation with The Coca-Cola company really the projections and the anticipation that we have for this year in terms of margins and EBITDA, cash flow generation of being able to do some preliminary analysis with respect to the valuation that this franchise might have for us. But basically, on our own desk way. But importantly, given the fact we were starting due diligence this week, it was important to disclose that we have started the due diligence process and so the market knows that we are handling this process. Usually, we would have effective... awaited more than expected a little bit more time to release those information until we have a more thorough analysis of the acquisition and probably closer in terms of the country [indiscernible] will be general levels at. But both companies believe that it was important given the fact that we have now people in the field working and visiting plants and offices that for this to be built next fall.

I appreciate the disclosure. But in terms of the amount of sales, can you tell like how much you expect to make in '07 to have a $45 million expectation for EBITDA with the level of sales? Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: In terms of sales, the estimate that we have is that they will do something around $340 million in cash.

Okay, great. And -- Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Andas I mentioned in this call, the estimate is that they will sell close to 100 million unit cases in CSDs and water. They also have some other products they sell including beer that we need to evaluate once we do all the analysis.

Okay, perfect. And in terms of the Jugos del Valle acquisition, can you elaborate on the restrictions? I understand that they wanted to limit the exclusivities of the other [ph] stores and I understand that accelerates about 2% of your sales that would go through outside any of your franchises in Mexico. Can you comment on that, what you feel is the impact on the value? I mean can you renegotiate the valuation based on the fact that the synergies will not be as high as I anticipated before? Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Let me comment on the Jugos del Valle acquisition. The main concern that the Antitrust Commission have is that they think that we have very strong dominance with brand Coca-Cola in the marketplace. And they were concerned that we were going to do some kind of bonding of Jugos del Valle products with Coca-Cola brand or some of our CSD products. So when the case was first presented to the authorities, the vote went two commissioners in favor of the transaction and two commissioners against the transaction. And in case of a tie, both the President of the commission has a quality vote and he was voting against the transaction. So we have this... let me use the word... appeal process, which is you have once chance to... for your case to be reviewed and actually follow the [indiscernible], which is kind of an appeal process. So we visit again the commissioners, present them again our case and started to... negotiation process on some of these conditions. The main conditions are one, what you said about the exclusivity with us. It's important to mention that they are only concerned with brand Coca-Cola; they are not including flavors. It's just brand Coca-Cola. So it is only the cola segment that they want one Cola-Cola FEMSA not to have exclusivity without this. Important also to mention that also is not a participant in this transaction and they are not signing any single documents here. It's just Cola-Cola FEMSA agreeing we will not have exclusivities in lots of stores for the cola segment. For the next five years, we will be using 20% per year so that in a five year terms, the area for colas will be totally open. And also, we feel whatever is convenient for that. Okay? I know don't have exactly the figure of the amount of... I know that for us it's around 2.3 for the top-end products, but I don't remember exactly how much is colas. It should be close to the number that you mentioned of 2%, probably it's likely less than that. For us it's important to make the distinction about colas with the rest of the favors because obviously brand Coca-Cola is our most strong brand in our portfolio and definitely it's an area where we feel comfortable that the strength of the brand will maintain a lot of the power. In some of the areas of Mexico, or sample in the City of Monterrey and somebody else did not, also already sells some other competitor products. And what has happened there is that the volume of brand Coca-Cola has continued to increase as well as traffic quality. So that's the only data that we have right now in terms of that. It is very difficult to predict exactly what is going to happen in the territories that we have, but specifically in the case of Monterrey, when we historically were open for Pepsi, the Coca-Cola brand also increased in volume because of the additional traffic. Another important condition in that we will... they are seeing since they were worried about the evolving of sales or forcing the sales of Jugos del Valle on Coca-Cola brand, they are asking for certain of urban areas where you have large clients and they are defining large clients, those clients that sell more than 10 unit cases per week of juices. We will go with separate sales force. So we have up to standard, but there was Jugos and a preseller that sells soft drinks. Distribution will use the same truck. They don't have any problem with distribution, they just want to structurally avoid the temptation of having a salesperson trying to force or to leverage the brand Coca-Cola to sell some of the new products. It's something that we feel confident also because as long as we go through these definition of the large client in new areas, I think that it's also advisable for the health of the business to have this separate workforce. So that's one... second important condition. Another condition is that they say basically that in those cases where the small mom and pops have one single cooler and this cooler is owned by FEMSA, that we should open the cooler for... or part of the cooler for potentially competitive bidder. The agreement or the way we presented our proposal to the Antitrust Commission is that in those cases, again, where the small mom and pop have only one cooler available, we will replace that cooler with a cooler that has two doors. The part that is above... the cooler is... the superior part of the cooler will have 75% of the space and that will be exclusive for Coco-Cola for products in which we have a separate door to be used by the store owner at his discretion. They might have dairy products, they might have vegetables, they might have competitor products, or if demonstration of our products is appropriate, they might have our products. But it's going to be the discretion of the store owner. For us, it was very important to divide this cooler into separate spaces, different from what we probably have seen in some other areas of the world when [indiscernible] this has been applied. It's important because we have what we call internally the picture of success, which is a design of how the cooler should look like with our products. And we rate the performance of the preseller and the merchandisers according to the execution on that specific... term that we use is the picture of research. They basically need space being clean, not contaminated by other products including things that might have some odors like vegetables or cheeses or whatever, all the labels tracing forward, the cans placed in the specific area for cans and the big bottles for -- area of the big bottle. So quality was very important to maintain the exclusivity on that specific area even if the cooler has a separate door for competitors or some other folks. So with that what we are achieving is that our space we handle only by our merchandiser and sales people. This is our analysis of that, and the number of coolers that are in that situation is basically around 15,000. It's important to mention that that's less than 4% of our total coolers, which we have close to 400,000, a little more than 400,000 coolers in our area. So it's a small portion of the coolers that will be in that situation for five years. It's also important that the obligation is for five years, and we feel that compromise of that condition is also acceptable for us. The last thing that is important to mention is the idea of selling Barinito [ph] brand in Mexico. It's important also to mention there that we are doing the distinction of our Barinito [ph] in Mexico and what happens outside of Mexico where the commission... where the Antitrust Commission doesn't have any influence. So they are in agreement that we have a two year period to sell the Mexican operation for Barinito brand. We are keeping the brand... we are keen to see the portfolio that has been named Del Valle, which is important because it is exactly the same brand name that we have for the news and it was important for that brand to be kept by Coca-Cola Company and Coca-Cola FEMSA. So those are basically the main conditions there in the agreement. With those conditions, the commissions went into a second meeting. This time around there were there commissioners. The President, we understand, were against the transaction and two other commissioners were in favor. Important to mention that one of the commissioners that were in favor have both against in the past is one that changed because now they feel that with this conditions that we have offered that they feel confident that the transaction is pro-competitive.

[Operator Instructions]. Your next question comes from the line of Lore Serra with Morgan Stanley. Please proceed.

Good morning and thanks for that explanation. It was helpful. I wanted to ask a question on the Mexican operations. You talked in your opening remarks about delivering operating leverage or positive operating leverage in the second half of the year. And the revenue growth this quarter of 4% was a good number given the recent growth in Mexico, yet your operating expenses grew at a similar pace. So can you help us understand why you didn't get positive operating leverage in the second quarter and why you expect it to be different in the second half of the year? Thanks. Hello? Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Lore, I am here. Sorry. Hello?

Yes, please. Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Yes, I think that what we are seeing there... I don't know if we have... operator, we have a... are we okay with the line? I am hearing a bit here.

Yes, we can hear you clearly sir. Go ahead. Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Okay. In Mexico, I think that the main factor here, Lore, is that we are going to a transformation. We go to market and that have created some pressure on some of the operating expenses line. But I think that we have basically finalized that process. What I am anticipating is that if we continue growing with this kind of volume growth and with the price performance of our process that we have achieved that was, as you know, is the first time that we're seeing in several quarters an improvement in the CSD average price per unit case. That improvement in revenue together with a more convenient, a more favorable raw material, it's an area that I think will help a lot to leverage that top line growth. In terms of the operating expenses, I do see that those will be a little more flattish going forward. Again, we have gone through a transformation process that John Santa Maria has basically finished in terms of reorganizing the way we go to market. And I will expect for the second half of the year to have a better leverage on that top line growth.

Thanks.

Your next question comes from the line of Alex Robarts with Santander. Please proceed.

Hi. I guess my one question would just be about top line in Mexico and your selling price. I mean you basically could have got some multi-serve price pick up in the end of first quarter, we're seeing Coke Zero come out as well. And I am just kind of looking at... I would have thought you would have gotten some real price increase in Mexico in the quarter. Can you tell us what you're thinking about for the second half as far as that selling price in Mexico? Is there... is it safe to assume that you can get above inflation or is that going to be an aggressive assumption? Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Good morning, Alex. I think it's important that we made the distinction to understand how the total pricing for that we see in the P&L is behaving. What's important to note is that since the end of 2005, this is the first time that we see a positive price increase in real terms when you look at the CSD portfolio. When you include the slide that jug water is growing 10% in the quarter, and you certainly factor then the rest of the portfolio or the combined portfolio. That is holding down a little bit the prices for the total mix of our products. As a reminder, I mean prices of jug per unit case in jug water is very low compared to the rest of the portfolio. You are basically probably close to 10% or 12% of the price of a unit case is where we are standing. So every time that we see just of watering jug growing importantly on a higher base than the rest of the portfolio, we will see that effect. But in the total pricing formula, our price will come down slightly. So it's very important that we do the distinction which is a total effect related to mix. On the CSD front, what we are seeing as you correctly pointed out, we have an increase at the end of March in large ices [ph] that we have a total effect in the portfolio for around 2.5%. We have introduction of Coca-Cola Zero that, as you know, is basically being sold in cans and 600 ml. That also helps a lot in the pricing. Coca-Cola Zero is performing very well as I mentioned. So those two effects are helping the pricing for CSDs during the quarter. What can we expect going forward? I think that what we have seen in the market is that we increase the prices at the end of March. We saw some of the competitors, not all of them, basically Pepsi, Big Cola move the prices several days or weeks after we did it. Barinito has not moved their prices. So you have now a two liter... three liter of rev cola being sold per peso, and you have 2.5 liter of brand Coca-Cola on one way being sold about into 16 or 17 pesos depending on the market. So we still have a very large gap in price of... in terms of probably that gap versus our competitors. I have to also mention, which is important that both Pepsi and Big Cola also increased their price, because, as you know, there has been some raw material pressure on the industry. How long is Barinito and cola going to stay at those prices? We don't know. I think that some of the strategy that we have followed are in the right direction in terms of trying to carry the price in this industry at a higher price level as opposed to us giving [indiscernible] at a lower price level. I think that it is also important to mention Alex, the effect of the flavor category in the industry, which is not growing. Basically the growth is being... is coming from cola, which is also in a way positive for us because of the strength that we have in brand Coca-Cola. So you have to consider a lot of this is... all of these issues together when you look at the pricing formula. The very good news for me this quarter in Mexico is that we have turned the trend to a positive trend in terms of pricing in CSDs because we have got several quarters in production and average price per unit case of CSDs that we were growing to multi-serve. And now for the first time since the end of 2005, we are seeing a trend the other away. That I think is very important. Second point, very important, we are achieving very important volume growth, which are also relevant in this industry as you leverage... these last cases are all revolving cases for profitability. I don't know if this is helpful Alex.

Yes. Thank you very much. That's great.

Your next question comes from the line of Reinaldo Santana with Deutsche Bank. Please proceed.

Hi yes. Good morning. I would like to know if you anticipate the approval of Jugos del Valle in Brazil to happen in the next month and also, if you expect similar conditions in the case of juices in Brazil because of higher concentration of market share there. Thank you. Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Yes. Good morning, Reinaldo. The filing with the Antitrust Commission in Brazil was made basically at the same time that in Mexico around January of this year. Different that in Mexico... in Mexico, we cannot proceed with acquisition until we get clearance from the antitrust authorities. In Brazil, you can go out there with the acquisition and then CADE, which is the antitrust authority, has one year to oppose or approve this transaction. So we are expecting to hear from them towards the end of this year at the most in January of last year. But that's the way it works in Brazil. As you correctly pointed out, there is a slightly higher concentration there in terms of the players. The industry is not as large and we are talking that Jugos del Valle is the number one player selling 50 million unit cases in the whole country. So it's not a huge operation. But right now we are not anticipating any problem with the acquisition, but we basically have to wait and see what the authorities would say to us.

Okay, great. Thank you, Héctor. Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: And I think that the fact that the Mexican authorities have made a pronunciation in this direction I think that it will also help because at the end of day all the agencies around the world are communicating.

Okay, great. Thank you very much.

Your next question comes from the line of Sohel Amir [ph] with Lucite Research. Please proceed.

Good morning. Just a question on the acquisition in Brazil. Now if got my numbers correct, and it seems that your return on invested capital on this investment is in the region of 13% to14% compared to what you have been earning recently, which is significantly higher than that. So I am just thinking for this acquisition, did you face a lot of competition in terms of buying these assets? Were there other bottlers that were looking to acquire this asset in Brazil? And if so, in the future, do you anticipate that when you do make acquisitions, you will be facing a lot of competition there? Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Yes, good morning. I think that the answer is to a specific question about competition is no in this case. We have... we know that The Coca-Cola Company has stated publicly in the past that they were looking to divest some of the assets that they have in bottling operations. I think that the fact that we have been performing very well in Brazil over the last four years help us also to have a very good rapport with them in terms of being the selective bottler for this acquisition. They didn't perform an auction process with the rest of the bottlers in Brazil. It's just that in that composition that we have with them we expressed our interest in buying that. They said I think that you are the right bottler and we start conversation with them. So we mentioned the agreement was basically calling for both factors that I mentioned about the size of the operation and the price that has been agreed in principle. And we have started due diligence at the beginning of this past Monday. In the future, when we find competition in some of our territories, depending on how this is impacting our business over there. I think that is initially to find competition for an acquisition when the asset or when it's owned by a bottler because you are starting looking for a more... a bottler that is failing to leave the system... the interest is getting the highest price possible because they will no longer be involved with the Coca-Cola when they exit. The case of The Coca-Cola Company, I think that it is important to make that distinction because they will stayed as the only brand which... whoever buys the asset. So for them it is very important to be sure that whoever is buying the asset is the most appropriate bottler either because they are... because it's close to the operation or because it's part of a proven track record in terms of turning around the businesses and improving the execution. What they are looking at this is not to have the asset and to have someone that is an expert in this to continue multiplying the volumes and present profit from sale of quantities. So in the future, we might find a situation where we are bidding for an asset that is owned by a bottler... not by The Coca-Cola Company, but a separate company, a family. And in those cases, we do anticipate to find competition.

Right. So I take this to mean that in the future growth is going to come at a higher price. Just a quick follow up, are there any other bottling territories or assets in Brazil that you believe are up for sale? Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: I think that... well, looking just... with the explanation I mentioned, I don't mean to say that The Coca-Cola Company is not trying to get as high a price as possible. They will look for that value, of getting the highest price they can when they sell the asset. They have to ensure responsibility with their own shareholders. We are saying that we have to buy as lowest... as low price as we can achieve. And there is always this tension of where do you walk away from an opportunity like that, and that balance is important to find out. I think that in the past we have been very diligent in our evaluation processes and in the way we approach the evaluation. So I am not sure that that business is already... that in the future the acquisition will be more extensive. I think that we might find even more competition or by definition we might have a little more pressure on the price. But I will not say that is just a straight formula to buy a separate bottler and to pay a higher price. Usually, when you go to a private bottler, the synergies that you can create because of the proximity to the purchase opportunities is also a very important element of who ends up buying those assets. In terms of if there is another opportunity to buy something in Brazil, we have five... a few more things that are... small operations that are around there. One of the very positive things about this evaluation process also with The Coca-Cola company, which is also important to express here in this conference call is that we are doing a contract with someone that will continue to be next to us in the future. It's someone that is our partner because they own a percentage of our company, someone that we have a very strong and very large relationship in the rest of the world. So we have a very good understanding that as a partner we won't face the kind of contingencies that we have found in the Brazilian market, especially with respect to taxes. When you go to a separate franchise that is owned by a third party, in Brazil, our experience is that deals start to complicate when you start asking for rates and royalties and when you start asking for forms to stay at an escrow for potential contingencies. In this case, we have a very comfortable situation with The Coca-Cola Company because of the... because being there has been a very well organized institution but it has all the books and everything in line as opposed sometimes to families that are a little more disarray in terms of how they have their books and reference with respect to taxes. And we have the commitment that if something arises in the future that was interfering, it will basically be covered by them. So that also at the end of the day is a very important element in how much cushion you have in terms of putting a value on a transactional basis because there is basically no contingency that we'll face in this case.

Your next question comes from the line of Carlos Laboy with Credit Suisse. Please proceed.

Yes, good afternoon Hector. Two quick questions. One is how do you see the process going forward for defining the value that Mexican and Brazilian bottlers are going to have to pay for del Valle and when does that process begin? And the second issue relates to the Brazilian acquisitions. What type of investments do you think this acquisition is going to require? Do you think it mean new plants, new truck fleets and are there any M&A considerations for adjoining territories that you would have to make before you decide how you reinvest in those fixed assets? Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Yes, good morning Carlos. With respect to Jugos, your first question, we have already through the means of a road show to present this transaction to the rest of the Mexican bottlers. We basically have established with the Brazilian bottlers and the Mexican bottlers whether they value the assets for Brazil and for Mexico. I think that everyone is basically in agreement on that. We are discussing how we are going to manage Jugos del Valle going forward because remember that in this case we have this new model for everything that is non-carbonated with The Coca-Cola Company. And there was a little bit different of the way the CSD operations are being managed presently in Mexico and Brazil. In this case, The Coca-Cola Company will stay a shareholder of the production. Basically, the idea is that everyone will maintain the rights to their franchise for everything that is with traditional markets, and in those cases leverage the strength that the systems have in terms of the distribution and the way to go market. And for regional channel and in the specific case of non-carbonated products, where what we call modern phrase meaning the auctions and the Wal-Marts and super markets and etcetera. It's a more important part of the mix for non-carbonated products. That market is going to be managed centrally by an organization similar to Solesco [ph]. We are basically in the discussion with all the bottlers and with The Coco-Cola Company to fully align the governments for that part of the equation. So they case has been presented to all the bottlers. As we speak, we continue to have discussions with them. I don't think that there is issue with the valuation of the assets and the allocation to each of the bottlers of the evaluation, which is basically in line with the volume they serve for a combination or a formula versus what they sell in juices. And what Jugos del Valle has in its bottler territory plus what its bottler sells in terms of soft drinks. So we have a formula related to that. That's helpful with the allocation. And the idea is that while we receive the official notification from the Antitrust Commission that we are expecting in two or three quarter weeks, we will start a tender offer process that will by law have to reopen basically for 20 working days in Mexico. It's basically a model that we have to have that open. And once we close that, the idea is that all the bottlers will start putting or buying from Coca-Cola FEMSA the portion of this half. So right now, the first step is Coca-Cola FEMSA and The Coca-Cola Company buying 50-50 and then Coca-Cola FEMSA reducing it's ownership to the corresponding level by selling to the other bottlers. Obviously, we have to pick consideration for... care for the tax considerations. And we don't have a lot of taxes in that organization like that. And that's basically what we are anticipating on the Jugos del Valle front. In Brazil, I am not sure that I understand your question about the M&A consideration for doing the investments, Carlos. But basically these operations has one plan and perhaps 5 or 6 distribution centers. And I think the plan will continue to be open. We might find some opportunities to work on the distribution centers and generate some efficiencies there with the resulting that we need to own a license as we start all this process of doing the due diligence and everything else. I don't have to make a lot of investments with respect to CapEx. They're kind of are a very well run operation right now.

So you don't need a new plant there? Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: No, not at the beginning.

Thank you.

Your next question comes from the line of Celso Sanchez with Citigroup. Please proceed.

Hi. Just wanted to check on the status, if you can give us some color of the Jugos del Valle business, but also the Sucos Mais and the del Valle in the territory you will be acquiring, is it reasonably well developed there relative to the rest of the country or certainly relative to your existing territories or is there is a lot of room for improvement in that business as well as any other territory? Thanks. Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Yes. Good morning Celso. Yes, I think that in terms of Jugos del Valle, I think that we have to consider first the following thing that we announced the transaction in December 19. We are basically seven months after that. It has been a very, very long time, and our expectation... we have a limit of both... several things happening with two important. One is that Jugos del Valle related in Mexico on the wholesalers and distributors, and obviously this third party individuals or companies have been worried about what is the future of the business with Jugos del Valle if the Coca-Cola system pass this acquisition. So some of them have been abandoning the operations and looking for an alternative product anticipating that strong Coca-Cola bottler will be doing the distribution and results in the territory. That already has hurt a little bit the performance of the volumes and I will have to say that Jugos del Valle has lost some market share during this period this 7 month period. On the other hand, the positive trend is that in the dialogue that we have had with them, we have convinced them that it's important to maintain a better price formula for their products. And they have been able maintain improvements in the pricing that have been sustained and some of the competitors have started to increase price. So on one hand, we are suffering a little bit on the market share. That's what we have analyzed and I have to clarify that we do not have 100% access to the numbers. It is just the conversation that we continue to have with them. Obviously, as the transaction was not approved for all this time, the access to information is quite meaningful, because they were not sure about the transaction being completed or not. So on one side, we have lost a little bit of market share while on the other hand, the pricing mix has been moving in the direction that we would like to see that the pricing mix moving, the pricing formula. So I think that we have some kind of mixed feelings here in Mexico. But that's... obviously, our anticipation is that while we recover our operation, start improving importantly on volumes and also to start capturing some of the [indiscernible], close down some of the facilities, distribution centers, all of the normal things when you do an acquisition. In Brazil, as I mentioned, even though it is the number one player, it's a small operation which sells around 15 to 17 million unit cases. Sucos Mais is already integrated in the operation, which is the second player in Brazil and The Coca-Cola Company has recently been the Matelliao [ph] is very important on the tea segment, it's certainly the leader. And there we are participating with NBTY in that market. Matelliao also works a lot with this middle back room for the cost reduction control. And they are certainly the leaders in that area also. So that's an area where we don't have any experience at all other than working... so I think that there will be opportunities to improve there because the market doesn't have the per capita that we see in other regions. So I think that in that area it's more integrating the synergies in that field, saving the synergies the chain and increasing the per capitas on growing volume. But that's my anticipation for this transaction in Brazil.

Okay. Just to get the nuance question I guess is the opportunity for the non carbs in the new territory perhaps greater than the opportunity on a relative basis as you are already operating with some of these products, i.e., your existing business? Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: I think that you are referring to REMIL, REMIL is operating in a very similar basis and what we saw in terms of mix of different factors that we have in our regions. Clearly, Sao Paolo is basically a very large CDM [ph] customer area that are now more like some of the others in Mexico where you have small series and rural areas etcetera. And that's taking into consideration that there are some differences between that, I think that the execution in terms of the million on non-carbs is similar to what we have.

Okay, thank you.

Your final question comes from the line of Robert Ford with Merrill Lynch. Please proceed.

Hi Héctor, congratulations on the acquisition. I have a question with respect to the sell through rates right now on Zero and the cannibalization or lack thereof across territories and what your package and your pricing strategies are trending toward. Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Let me give you some information here. In general, we have basically Coca-Cola is here in Mexico, in Brazil and Argentina. In the three markets, the growth that we are getting because of Coca-Cola series is very important. We are truly thinking that we are getting new consumers in this marketplace. In the three areas, we are ahead of our expectations. In some of the areas, for example in Mexico, Coca-Cola Zero, if you look at this picture right now, it's close to 60% of the volume of what we sell for Coca-Cola Light, which is very important. And it is not because Coca-Cola Light has decreased significantly in size. And some effect of Coca-Cola Light, you are... Coca-Cola Zero and Coca-Cola Light together, you are growing important. So I think that the good news here is that we have a presentation that is attracting consumers that are drinking some other product or consumers that have started to bring brand Coca-Cola, the regular Coca-Cola because of weight consciousness or health concerns, and they like to start improving that area on their diet in that perspective. So at the end of the day, I think that it has been that... has proven to be a very important introduction for us in those three markets. As I mentioned, Mexico represents 2% of the total mix of our approach. Brazil, it's very close to 80% of the size of Coca-Cola Light. But both products [ph] have improved significantly. The light category in Brazil was basically around 11% last year and now it is close to 14%. But significantly, for example, we have separate, if you look at the volumes of Coca-Cola Light along separate, you are seeing slightly lower volumes of Coca-Cola Light. The Coca-Cola Light plus Coke Zero is certainly improving the performance in the three territories where we have it. So we have... we are very happy with the performance of Coca-Cola Zero in the market.

And thus far Héctor, just a little bit on personal sizes, but are you about to put into multi-serve soon? Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Yes, I'm not certain about the dates. But I know that we are doing some pilots with larger. Want to start presentations in CSD. I'll check on... let me borrow on that information and I'm sure we'll do the next quarter and give you everything... abreast of any development on Coca-Cola Zero. We are analyzing that also for some of the other areas that we don't have, basically what we call the Latin Central division. We are analyzing how do grow with that. There are very interesting areas of opportunity just to say we do an additional thing for calculating [ph]. In Venezuela, you know that there are concerns about the availability of sugar in the future just in general in the country, just as the way the market has operated over there. So we are looking at Coca-Cola Zero as an alternative to have the growth available in the market without depending of our first raw material like sugar in the Venezuela market.

Interesting. And just out of curiosity, where would you price the 3 liter red product in the market? The prices are somewhat depressed. Do you feel they have to follow in terms of the price increase? What's that package costing them right now? Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: We have been doing some in and out testing with 3 liters on regular Coca-Cola in Mexico and we have priced that as 19 pesos.

Yes. But the other think I am trying to say is what is it costing them to produce and deliver that at the point of sale? Just to understand where you think they start to feel the squeeze? Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: I am not sure that I follow the question. Are you speaking about the cost of producing a 3 liter presentation?

Exactly. Sugar sweetened cola in Mexico and delivering it to the POS? Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: I don't know... you're getting me... I don't have that detail with me right now, but I need to check on that.

All right. Hey, thank you very much. Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Thank you, Robert.

And ladies and gentlemen, this concludes the Q&A session for today. I would like to turn the call back over to Mr. Treviño for closing remarks. Héctor Treviño Gutierrez - Chief Financial and Administrative Officer: Well just to thank you for your attention during this time and obviously Alfredo and Julieta will be available to answer any further calls. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes the presentation. You may now all disconnect and have a great day.