Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q4 2011 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Coca-Cola FEMSA Fourth Quarter Earnings Event Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions] During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance. At this time, I will turn the conference over to Mr. Héctor Treviño, Coca-Cola FEMSA's CFO. Please go ahead, Mr. Treviño. Héctor Treviño Gutiérrez: Good morning, everyone, and thank you for joining us today. During the fourth quarter of 2011, our operators delivered double-digit top and bottom line growth in both of our divisions in the face of a challenging cost environment and tough weather conditions in some of our territories. During the fourth quarter of 2011, we are integrating the results of Grupo Tampico, as of October, under results of Grupo CIMSA as of December in our Mexican operations. These results contribute to our Mexico & Central America division and our consolidated results. In addition to these newly merged territories, the main drivers of our company's performance were our strategy of selective price increases implemented across our operations in the year and the strength of our multi-category portfolio variances, led by brand Coca-Cola and our growing array of still beverages. In the fourth quarter, our consolidated revenues reached more than MXN 36 billion, up 29% from the fourth quarter of 2010. Excluding the integration of Grupo Tampico and Grupo CIMSA in Mexico, total revenues grew approximately 24%. On a currency neutral basis and excluding the newly merged territories in Mexico, our consolidated total revenues grew 18% for the quarter, driven by average price per unit case growth in every operation and volume growth mainly in Mexico, Argentina, Colombia and Brazil. Our consolidated sales volume grew 11% including our newly merged territories in Mexico. Organically, our volumes grew 4%, primarily supported by the performance of our sparkling beverage portfolio in which brand Coca-Cola in Mexico, Argentina and Colombia, combined with Schweppes in Brazil, were the main drivers of the category's growth. In addition, our still beverage category grew 11%. This growth mainly resulted from the recent launch of the Jugos del Valle line of business in Venezuela and its continuous strong performance in Mexico and Brazil, together with Hi-C orangeade and the Cepita juice brand in Argentina. Our bottled water portfolio registered low single-digit volume growth. Our consolidated gross profit grew 27%, reaching more than MXN 16 billion in the fourth quarter of 2011. Higher PET and sweetener cost across our territories, combined with the average depreciation of our main's operations local currency as it applies to our U.S. dollar-denominated raw material cost accounted for the majority of the increase in our cost of goods sold. As a result, our consolidated gross margin declined almost 80 basis points, 45.6% in the fourth quarter of 2011. Our consolidated operating income grew 28% to MXN 6.5 billion during the fourth quarter supported by double-digit operating income growth in both of our divisions, including our recently integrated territories in Mexico. Operating leverage, achieved mainly through higher revenues, compensated for higher labor cost in Venezuela, increased labor and freight cost in Argentina and cost associated with the integration of our new territories in Mexico, as well as increased marketing investment to reinforce our execution, widen our cooler powers and broaden our returnable base. Our operating margin remained almost flat at 18%, compared with 18.1% in the fourth quarter of 2010. On a currency neutral basis, our consolidated operating income grew 22%, demonstrating our operator's ability to deliver strong bottom line in the face of important raw material headwinds. Our consolidated EBITDA increased 27% to MXN 7.8 billion in the fourth quarter. During this quarter, we also reported MXN 1,142 million in other expenses. These expenses mainly reflect the write-off of certain nonproductive assets including production equipment, coolers, forklifts and returnable bottles and cases resulting from a routine inventory. And also consistent with prior quarters, the recording of employee profit sharing and the loss on sale of fixed assets. For the quarter, our consolidated net controlling interest income grew more than 6%, reaching MXN 3.2 billion. Now I will expound on the performance of our operations. In the fourth quarter, our Mexico & Central America division recorded close to 18% volume growth, selling more than 410 million unit cases of beverages. Our Mexican operations, volume grew more than 19%, including 49 million unit cases contributed by our newly merged territories. Organically, our volumes in Mexico grew 4%. This increase mainly resulted from 5% growth in brand Coca-Cola in both single and multi-serve presentations: 14% growth of our still water brand and personal presentations, and 4% growth of the still beverage category, supported by the Jugos del Valle line of products along with Nestea and PowerAde. In Central America, we've registered 6% volume growth during the fourth quarter. This increase was driven mainly by brand Coca-Cola, which grew 7% combined with double-digit volume growth in the still beverage category reported by our recently incorporated Estrella Azul portfolio. Our multi-segment based on a strategy and strong execution of the point of sale contribute to a 6% increase in our average price per unit case in the division during the fourth quarter. As a result, our division's total revenue grew close to 26%, reaching MXN 14.5 billion. Excluding the integration of Grupo Tampico and Grupo CIMSA, total revenues grew approximately 13%. And on a currency neutral basis and excluding the integration of the new territories in Mexico, total revenues grew 11% for the quarter. With regard to our profitability, higher PET and sweetener cost across the division was further impacted by the average depreciation of the Mexican peso as applied to our U.S. dollar-denominated raw material cost. Compared with the fourth quarter of 2010, our gross profit increased 17% to MXN 6.6 billion, and our gross margin reached 45.4%. Our operating income increased 16% to MXN 2.5 billion. Operating leverage, achieved through higher revenues, actually compensated for gross margin pressures across the division. As a result, our operating margin was 17.2%. On a currency neutral basis, our operating income grew approximately 15%. Our EBITDA grew more than 20% to MXN 3.1 billion, compared with the fourth quarter of last year. In sum, our Mexico & Central America division delivered positive results for the quarter. Our strategy of selective price increases targeted to mitigate the increased cost of raw materials continues to build on the brand equity of our products, especially brand Coca-Cola. We continue to benefit from the investment we have made over the years in support of our base of returnable presentations, which continue to contribute significantly to our company's growth. In addition, we seek to foster the availability of single-serve packaging alternatives, such as the 200 milliliter one-way presentation for brand Coca-Cola in Mexico and the affordable 12-ounce presentation for brand Coca-Cola in Central America, contributing to a healthier price mix. Still the still beverage category, we continue to incorporate the Estrella Azul portfolio in Panama, distributing shelf-stable milk and juice products in our RED trucks. This new venture with our partner, The Coca-Cola Company, continues to provide us with a deeper knowledge and understanding of this exciting category. We have successfully integrated the beverage division of Grupo Tampico, now our new Northeast region in Mexico, as well as the Beverage division of Grupo CIMSA. And we are working to capture the announced synergies according to the time frame we previously shared with you. Additionally, as you may know, in December 2011, we announced our agreement to merge with Grupo Fomento Queretanos for RED division, another key step for the Mexican Coca-Cola FEMSA. We are honored to have reached our third merger agreement with one of the Mexico's deeply respected family-owned bottlers, with whom we share an aligned vision of economic and social value creation. These transactions, combined with our incursion in the dairy segment in Panama, together with our partner, The Coca-Cola Company, amounted to more than MXN 28 billion, our most significant investment since the acquisition of Panamco in 2003. Other retrospected synergies from our mergers in Mexico are more than MXN 800 million. We remain confident that our operators' abilities and discipline will continue to deliver positive result, despite raw material cost pressures. Now let's talk about our South America division. Our South America division's total sales volume grew more than 3% in the fourth quarter, reaching more than 320 million unit cases. This increase was driven by volume growth in every operation. In Argentina, we continue to expand the strong performance experienced in 2011. Every category group, leveraging on solid consumer environment. Sparkling beverage grew 9%, driven by 13% volume growth of brand Coca-Cola. Still beverages expanded their solid performance, growing more than 45%, leveraging the successful launch of Hi-C orangeade earlier in the year, as well as the strength of the Cepita juice brand. The Aquarius flavored water line drove the 5% growth of our water portfolio. In our Colombian franchise, volume increased 3% despite tough weather conditions experienced during the quarter. The sparkling beverage category supported by 6% growth of brand Coca-Cola and the performance of Quatro and the Sprite in flavored sparkling beverages grew 5%. The still beverage category grew 3%. This increases compensated for a volume decline in our water portfolio. In Brazil, despite unfavorable weather during the later part of the quarter, our volume grew more than 1%, building on strong fourth quarter of 2010 in which we post 8% volume growth. Sparkling beverages grew 1%, supported by the Fanta and Schweppes brands. Still beverages, driven by the Jugos del Valle line of business and PowerAde, grew 5%. These increases compensated for a volume decline in our water portfolio. With regard to Venezuela, our volumes grew almost 2%. Our operator's continuous efforts to evaluate different portfolio alternatives for our consumers, start to introduce [ph] most still beverages offers in the marketplace, combined with increased consumer spending, yield positive results. Our still beverage portfolio volume doubled, mainly as a result of the successful introduction of del Valle fresh orangeade. This increase, in combination with 1% growth in the sparkling beverages, offset volume declines in the water category. We will continue to evaluate different portfolio strategies for our consumers, such as affordable one-way value-protection [ph] presentations and expanded availability of our single-serve returnable package. In the fourth quarter of 2011, our South America division's total revenues grew 32% to MXN 21.7 billion as a result of double-digit revenue growth in every territory. Excluding beer, which accounted for MXN 1.2 billion of revenues, our total revenues reached MXN 20.5 billion. Selective price increases implemented over the past several months across the division accounted for close to 90% of our incremental revenues, and volume growth in every country accounted for the remaining. On a currency neutral basis, total revenues in the division grew approximately 24%. With regard to our profitability, our South America division's gross profit increased 35% to MXN 9.9 billion. Higher PET and sweetener cost across the division were further impacted by the average devaluation of our main's operations local currency as applied to our U.S. dollar-denominated raw material cost. Nevertheless, our gross margin expanded 100 basis points to 45.7% for the fourth quarter of 2011. Our operating income grew 36% to MXN 4 billion. Operating expenses were affected by higher labor cost in Venezuela, higher labor and freight cost in Argentina and increased marketing investments in the division to reinforce our execution. Consequently, our operating margin expanded 60 basis points to 18.4% during the fourth quarter. Our South America division's EBITDA increased 32% to MXN 4.6 billion in the fourth quarter. In summary, our South America division delivered solid results in the fourth quarter of 2011. Our broad array of beverage alternatives on top of consumer's preference for our brand, Coca-Cola, and our ability to offer these consumers valuable packaging alternatives such as returnable and affordable single-serve presentations have proven successful. Today, we are able to provide our consumer with a wider array of choices to quench their thirst. We continue to foster the introduction of new products that capture volume and value opportunities in the beverage space such as the del Valle Fresh and Hi-C orangeade in Venezuela and Argentina, respectively. Indeed, one of our main competitive advantages continues to be the multi-category portfolio of high-quality beverages we have developed through the years. Now allow me to walk you through our financial performance for the quarter. This quarter, once again, our geographically balanced portfolio franchise territories delivered increased cash flows. As of December 31 last year, we've had a cash balance of MXN 12.6 billion and our total debt was MXN 22.6 billion. Our net-debt-to-EBITDA leverage ratio was 0.4x and our debt -- EBITDA to net interest coverage ratio was 22x, highlighting the strength of our balance sheet and financial flexibility. Our financial flexibility is underscored by the solid balance sheet and the strong cash flow generation that our company has built over the years. In addition to the investments we have made to grow our business and vanity [ph] via innovations in categories, business models and packaging alternatives and through value-creating mergers and acquisitions. We have been increasing the dividend we pay to our shareholders. With this in mind, our Board of Directors have agreed to propose a dividend of approximately MXN 5,625 million to our shareholders. This proposed amount represents a dividend of approximately MXN 2.77 per share, computed on the basis of 2,030.5 million shares, which include the 45.1 million shares to be issued in connection with the merger of Grupo Fomento Queretano. As compared with the dividend of MXN 2.36 per share pay as of April of last year, this represents an increase of approximately 17%. We are confident that the strong brand equity of our multi-category portfolio of beverages, our operator's relentless pursuit of optimal execution at the point of sale, the innovation capabilities of our talented team of professionals, the incorporation of new businesses into our company and the financial flexibility that we have achieved over the past several years will enable us to continue growing our business and delivering increased value for our shareholders now and into the future. As many of you may know, on February 20 of this year, we announced that we have signed a 12-month exclusivity agreement with The Coca-Cola Company, who will value the potential acquisition for a controlling stake in the Philippines' bottling operation. Both parties are confident that our company's expertise as demonstrated by our successful track record of operating in fragmented markets and emerging economies can be effectively deployed in this territory and contribute significantly to expanding the penetration of, and consumer preference for, the Coca-Cola company's brand in this markets. This agreement does not require either party to enter into a transaction and there can be no assurances that a definite agreement will be executed. Thank you, as always, for your continued confidence in us. And now I would like to open up the call for any questions that you may have.

[Operator Instructions] And the first question will come from the line of Lauren Torres, HSBC.

Héctor, despite some significant cost pressures last year, you were able to maintain or we saw maybe slight compression for the full year with your gross and operating margins. Just curious how you're thinking about this year, I assume some of your cost pressures are still weighing on your result or will weigh on your results this year. So if you could talk about the offsets, I mean, is pricing still your main option here or do you think we'll see some further compression on the margin side, if these pressures do exist? Héctor Treviño Gutiérrez: As you correctly explained, this year, during 2011, the pressure we've had on raw materials, especially PET and sugar, was very, very strong. And you look back -- and just a reference, I know Mexico being a very important market, and you look back at sweet -- at sugar prices 2 years ago, we basically have more than doubled the prices of sugar. And in the case of PET, and that's basically across all of our territories, we have suffered increases for around 65%. So those are very tremendous increases for this very important raw material. As you know, PET and sugar, well, together with the share that we pay to The Coca-Cola Company are basically 90% of our raw materials that we use. So with that pressure -- that cost pressure that we have experienced in the past, definitely having some flexibility in the pricing is very important and I think that basically we have, as we've seen from the numbers, been able to pass along most of those price increases -- most of those cost increases to our consumer. In total, the impact that we have just because of sugar and PET, the whole company for the full 2011 was basically around MXN 1,900 million, which is a very large feat. We have flexibility in some countries, in others -- some more than others, and -- but I think that the good news is that those are cost that are impacting the full inch [ph], but we are seeing some more pricing flexibility from our competitors and as you might expect and I'm sure that you visit some of the markets and you look at our prices, we still are maintaining very significant price gaps versus our competitors. I'll say that the main yellow light, if you want to use that expression, is in Mexico, where we have a new operator after -- with Pepsi Cola, after the formation of the new bottling operation in Mexico together with the Venezuelans. We had been a bit aggressive on the pricing. As an example, on cans, we are basically selling at double the price for what they are selling. They are selling, in some instances, even at a lower price than some of the big brands, but we think that those are probably temporary -- in our opinion, those are temporary price points that they are using just to, I guess, reignite a little bit their presence in Mexico, no? Other than that, really, I think, that, in general, we are expecting for the full year more or less stable prices in PET and worry a little bit because of the oil prices at the beginning of the year have been increasing. So January has been a little bit higher than what we are anticipating in PET prices. And sugar prices, we will expect that to see still some volatility and some potentially increase. And we feel that the main lever which is fixing the price of our products, fixing meaning that taking care of the prices of our products, I think that we have this flexibility to start moving by going forward because everyone in the industry is suffering from this same-cost pressure. The other part of the equation is what can you do with operating expenses? And I think that -- and you have seen in the past that we are stressing a lot on that line. I think that at Mexico, Central America, we have been very successful in improving the OpEx line. We still have some room to move in, in South America, but I think that we are moving in the right direction. But trying to compensate exclusively with a more efficient operating expenses line, these increases that we have been suffering with raw materials is complex. So we will need this flexibility on the pricing front in our approach to fully compensate for that. And as I said, most of what we're seeing most of our competitors moving the prices, as I said, the only exception is right now and I think it's more as an effort for the new management of PepsiCo in Mexico is the only way we're working some reluctance to move prices, but again, we believe this is more as a temporary price activity.

Okay. And as a follow-up, can I ask that the visibility that you have now, with respect to pricing and managing the operating expense line, do you think you can maintain margins this year? Héctor Treviño Gutiérrez: Yes, Lauren, I think that is, given the expectation we have with prices, operating expenses and cost of raw materials, I think that we can certainly maintain the margins on a consolidated basis. You might see some differences country-by-country, but on a consolidated basis, I think that we can -- the idea is to maintain the margins that we have.

And the next question comes from the line of Alan Alanis, JPMorgan.

A couple of questions, one technical and one more strategic, Héctor. The technical question is that is the improvement that we're seeing on the SG&A in Mexico related at all with the write-downs that you're doing in the fourth quarter? And I guess, I mean you already answered that you expect flat to -- I mean you don't expect margin contraction for -- based on Lauren's question. But I just want to understand what would be the right level of selling and SG&A expense that we should see going forward and if these write-downs, in any way or form, are related to that improvement also in 2011? Héctor Treviño Gutiérrez: For the first question, I think that in general, we can see from additional efficiencies in Mexico on the operating expenses line. And I certainly hope that in South America we can also improve. I've seen, as I've mentioned, some improvement in Mexico already, but I think that's just because of the integration on the territories and the scale that we are gaining that. We will continue to see some improvement in the operating expenses line. In South America, we are still working, we are behind with what's going on in Mexico probably by 12 months, but we'll little by little be improving on the operating expense line. And as I've mentioned in general, I see on a consolidated basis, flat margins at the operating income line and again we might see some difference in a temporary basis on a country-by-country basis, depending on how raw material costs are affecting each of the different countries and maybe some of the movements on currencies. Remember that most of the raw materials are dollar-denominated, no? But I think that's basically the -- how I'm seeing 2012, no?

Yes, but you're not -- I mean these improvements are not -- have nothing to do with declines on marketing spending, correct? Héctor Treviño Gutiérrez: Well, I think that general marketing expenses had been very flat. We do have some adjustments at the end of the fourth quarter because sometimes due to some provisions during the year and you end up spending a little bit late than what you were anticipating, no? But at the end of the day, basically, we target a certain level of marketing expenses together with The Coca-Cola Company. Even times at the fourth quarter, you need to take an extra charge because your provision were a little bit smaller than anticipated, and sometimes your marketing expenses goes a little below. But at the end of the day, the full amount for the year is what you'll spend for the year, no? Is that clear, Alan?

Yes. No, it is clear. And last question, most of the -- again, I know you and I discussed this in the past many times but it will be good to get an update. Regarding your views on the Philippines. I mean, the context of the question is Amatil operated that territory for some years. Unfortunately, they had to sell it back at a lower price than they had acquired so it was painful for them. I guess, the question that I'm framing here is why the Philippines? And what can Coca-Cola FEMSA do differently than Amatil and other coke bottlers in order to create value in that country? And what's the likelihood of closing if you could throw in a percentage. I mean, do you see more than 50%, less than 50% chances on closing. I know you were very clear in saying that there's no guarantee, but if you could throw in there a percentage, it'll be highly appreciated. Héctor Treviño Gutiérrez: Yes, Alan, I think that when they gave that -- you have heard me say for many quarters that we will continue looking for opportunities to grow. When you look at what is left, when [ph] you use that expression in Latin America, you have very large bottler like Arca, we have Andina that had a recent merger announcement. Well, assuming that these Coca-Cola bottlers continue independent, there is not much opportunities to continue growing. I mean, there are a few territories in Mexico, there are some in Brazil and then not much left. So a little bit of our thinking is how to -- setting aside, Alan, everything related to new categories as when we did the acquisition of Jugos del Valle, what we did with the dairy business in Panama. Those are -- our strategic thinking is these categories are growing, we need to be present if [indiscernible] these participants in the nonalcoholic, ready-to-drink businesses. Looking on the sparkling opportunities, we have to look at our geographies, because, again, in Latin America, there are not that many opportunities left. And even if you do all of those that are available, it's not that large in term of cases. It's not another Panamco or another opportunity like that. Obviously, Asia always catches the attention of our R&D [ph] during analysis because of the potential for growth that you see and the stage of development that you see in this industry [ph]. As we announced on February 20, both The Coca-Cola Company and Coca-Cola FEMSA, we were very concerned that a lot of rumors will be triggered. We will start visit in Philippines and we'd concluded what better to do this announcement, basically saying that for this 12-month period, we have an exclusivity from The Coca-Cola Company to analyze this opportunity. We are not reaching any conclusion [indiscernible] because we are just starting to analyze that. We have very few information. We'll start traveling to Philippines in the following weeks and actually as a reference, the 12-month exclusivity period have also to do with the fact that this is-- we are starting at a very important high season -- they are starting at a very important high season on sales and on volume in the Philippines, so they prefer to delay our, let me use the word, landing in the Philippines to start analyzing and do all the analysis that we have to do after Easter. So we basically have very few information right now. And from a very preliminary analysis of just what we have visit in the past and analyze, we've seen that is a market that is, in certain aspects, similar to what we have in Latin America in the fragmentation of the repaid [ph] system and the consumption pattern of some of the consumers, et cetera. So we feel that we can take advantage of some of our expertise that we have that, that will [ph] impact in these markets. I will not venture to give you a percentage of possibility of success, because as I said, we are just starting to do our own analysis. But what I will ask is give us the benefit of the doubt that we will work a very profound analysis, negotiate the structure and the price and the conditions as we have done in the past. I think we worked appropriately and we have demonstrated that in the past, so give us some time and we'll keep you informed on how we're evolving. But so far, we are so early in the beginning of the process that it's very difficult for us to venture to give possibilities of closing the transaction or even venture to give some additional information on values or whatever. Because we are just starting to do that, no?

The next question comes from the line of Lore Serra, Morgan Stanley.

I wanted to just follow up a bit on the cost pressures you faced particularly in Mexico in the quarter. And I wonder if you could just go back and sort of just give us a better -- well, I'd like to understand how much of the fourth quarter pressure kind of was related to currency and the currency strengthened a bit here. You also mentioned that you're expecting PET to be stable this year. But I guess I think PET rose during the course of last year, so I'm not sure if you're talking about stable with fourth quarter level or stable with the average of last year. And then -- and sugar is also down from its highs, although not from maybe the average level. So could you give us a sense of how much of the -- sort of intense cost pressures you felt in the fourth quarter was going to be sustained as you start the beginning of 2012, or how much of it was unique to some of those factors or more associated with those factors in terms of the fourth quarter? Héctor Treviño Gutiérrez: Let me give you some figures and maybe I'll refer to Jose and Roland to just to confirm a little bit the breakdown of how much is FX and how much is price later on. The figures that I have right now and as I've presented to the Board of Directors last week, the effect that we have during the fourth quarter -- probably in the fourth quarter for both the effect of foreign exchange and the prices of sweeteners and PET. It's MXN 920 million. More or less it's half-and-half between Mexico, Central America and half was South America. I don't have an specific breakdowns right now, Lore, of how much of that is related to just to pure pricing and how much is related to the FX effect because as you correctly are pointing out a lot of that has to do with a very important devaluation of some of the currencies toward the end of the fourth quarter. I'll ask José to try to break that down between prices of raw materials and FX, but the total impact in Mexican pesos, which combines both effects is MXN 920 million. For the full year, as I mentioned a little bit earlier, it was around MXN 1.9 billion. So during the fourth quarter, the effect was basically half of the total effect that we have during the year. It was very important. During January, we have seen some increases in PET compared to December, compared to the prices we have in November and December. And that's the sale [ph] of what we have last January, also, but in general trend -- as a general trend, Lore, I would say that PET in average for the full year should be flat or slightly up and again, I'm a little bit concerned with the rise in oil prices that we are seeing right now and that might change a little bit how we look at prices going forward. And in the case of sweeteners, we are seeing a flattish average prices for the full year compared to last year. Then -- so all the currencies are -- have been recuperating, some of it have lost space [ph] that they have at the end of last year, so that will benefit a little bit during January and February, but it will depend on how the currencies behave and I'll ask Jose and Roland to try to breakdown between prices and the FX for the fourth quarter so you'd have a clear picture. But that's more or less our -- the environment that we are seeing. Now PET, flattish to a slightly up and sugar prices, more or less flat compared to the full average for last year.

Okay. And then in terms of Tampico and also CIMSA, can you just give us a sense of -- or just an overview of where you are in the integration process. You mentioned that you've -- the OpEx includes some cost to integrate the acquisitions, kind of when do you expect to see the positive effect of those acquisitions. And then just lastly, if you could give us your CapEx budget for 2012, that would be helpful. Héctor Treviño Gutiérrez: Just -- in the case of Tampico, which is the one that we started with the process earlier. Strange enough, it's the one that is going to take a little bit more to fully integrate, not because of the distance but because of the some of the integration on systems that work very different from what we have. In there, we are still running from -- I don't know how to -- technicians call that, but we are running separate processes in terms of systems, and the administrative expenses related to the management, some of the accounting. And that will probably take us 2 more months to finalize and then we will substantially start saving on that front. So the commercial process is fully integrated, the logistic process is fully integrated, the -- all the production capacity has been decided, how we're going to do it and allocate it to the different plants. So I think that industrial, we are advancing very fast, and again, the OpEx line in Tampico is the one that we are having a little bit more problem because of the difference in systems that we have. But I'll say that 2 more months, that will take probably 5 full months since we started the integration, will help -- will imply for us to really cut those expenses down. In the case of CIMSA, we started in December, but CIMSA was a company -- was running systems very similar to what we have. And in the case of CIMSA, we are advancing a little bit faster in the OpEx front. We are pretty much advanced in the integration of logistics and production, but we are still probably a month away from that full integration of CIMSA. So I'll say that, during the full year 2012, I'll expect somewhere around 65%, 70%, 75% of the synergies that we announced for the full year to be achieved during 2012, no? And just to give you the latest number, we are more or less expecting around MXN 300 million in each of the operations around synergies. Once we integrate Queretano, that we expect to have concluded transaction at the end of the first quarter, we will start looking at around to add another MXN 200 million for a total MXN 800 million net figures [ph].

And then just the CapEx budget for this year, please? Héctor Treviño Gutiérrez: Ah, the CapEx, it's -- we're expecting somewhere around $600 million of CapEx, Lore. But bear in mind that we are starting plants and waiting for authorization for 2 additional production plants: one in Colombia, and one in Brazil, depending on the speed of the authorizations for all the work permit that you need from the different government agencies in the 2 countries. That might increase -- I'd probably say around $100 million more if we start building those 2 plants during this year. So if the speed of the permits goes fast, we might end up closer to $700 million this year.

And the next question comes from Karla Miranda, GBM.

I had a question regarding the debt during the quarter. When you announced the acquisition of Tampico and CIMSA, you announced that both companies had a net debt of around MXN 4.7 billion. I was wondering if the outflow of cash that we saw during the quarter was related with the payment of these debts? Héctor Treviño Gutiérrez: Yes, it's totally related to that. They've had that level of financing that was part of the -- let's say acquisition price at the end of the day and we ended up immediately paying those financings as soon as we took control of the operations.

Okay, great. And then just a follow-up, previously you mentioned that the new Pepsi system in Mexico was being reluctant to move prices. Besides that, have you seen any other changes how they're -- regarding competition, are they more aggressive in the market, maybe? Héctor Treviño Gutiérrez: Yes, Karla, as I say, during some of the comments, I think that -- again, I think that PepsiCo is being a little bit more aggressive, more as a temporary process for the startup of the new entity of the new company operating here in Mexico. I'll say especially in single-serve presentations, as I was describing, this huge price differential that we have in cans. That we are -- basically we are selling at double the price than Pepsi. But the good news is that some of the other competitors, that for years were reluctant to move prices, have started to move prices last year especially [indiscernible]. For many years as you remember and you probably heard during these conference calls, saying that they have the 2-liters at MXN 10. During last year, they moved their prices to MXN 11, and we understand and we are seeing some price movements from Caritus [ph] and Dipole [ph] or [indiscernible] and Cariyus [ph] and Sapolis [ph], and in some areas, starting to move to MXN 12. So it's an important increase from our competitors and because of that, I feel confident of the comments I made earlier that this raw material pressure is affecting other competitors, and that's why we see that the pricing lever have been an important element in the past to compensate for that, and those prices are sticking because of the competitors are also moving their price.

And the next question comes from the line of José Yordán, Deutsche Bank. José Yordán: One quick question and then a question about Brazil. When you first started Jugos del Valle business, you had said you were going to be reinvesting all the profits for a few years until the marketing spend was up to par, et cetera. And then at some point, we're going to see some equity income. If you could update us as to when we could expect to see the first trickling of equity income from that unit. And then the second question is just after the big minimum wage increase in Brazil, have you seen a marked impact in consumer behavior in Brazil in January, and how should we look at Brazil volume growth for 2012 in the context of this? Héctor Treviño Gutiérrez: Let me tackle first the Jugos del Valle question. In general, we have 2 different models with respect to Jugos del Valle in Mexico versus Brazil. Remember that Jugos del Valle when we acquired a very important operation in Brazil. The agreement that we had with the Mexican bottlers is that Jugos del Valle is basically a [indiscernible] world, the [indiscernible] basically, a self-producing or a [indiscernible]. Jugos del Valle makes -- has a very small margin and basically the 50% of the profits, we share with The Coca-Cola Company. The Coca-Cola Company receives that through selling some of the formulas and ingredients through the formulas that they sell to the self-producing entity. And we get a price from Jugos del Valle and the margin that we get when we sell that to our plants is basically our 50%. So there's not that much money left in Jugos del Valle and the only exception is that better serve more than freight. Jugos del Valle is the one that sells more than freight for the whole country. And then those with a modern trade you have information of the number of stores that you have by region, and everything so it's very efficient in terms of serving that clients -- those clients, and also being able to allocate the 50% profit for the bottlers, to each of the bottlers according to the presence of those stores in the different regions. In Brazil, the formula is totally different because there are important tax incentives in the area where the productions happen. So most of the profits in Brazil remain of the joint venture, and then the joint venture, it pays dividends to the different participants more as a -- let me give the words, [indiscernible] we've had a reasonable profit there in the operation. In both instances, Jose, right now, we continue to be at a level where we continue to invest heavily behind those brands, because as you see, in some cases, it's growing faster than others. Mexico has not grown very importantly, but we have continued to invest behind the brands. And I think that the important element for next year is that under the new international accounting rules, we will have to register and would help to explain with much more detail in the coming weeks, but would have to register the participation on these associated companies as part of the operating income. It's not going to be anymore as an other revenue line below the operating line. But in general, to try to answer your questions, both businesses, both Brazil and Mexico are profitable, but we continue to reinvest some of the money. In the case of Mexico, that margin is staying directly in Coca-Cola FEMSA, because we have a margin [indiscernible] In the case of Brazil, it was just as a participation on the equity of that joint venture. In case of the second question with respect to Brazil, I think that, I mean, we have the salary increase -- important salary increase in Brazil. I think that is going to be positive for the consumer. So far, in January, we haven't seen that because the weather continues to be unusually wet, especially in January. So I think that one thing has compensated the other, but I'm optimistic that the consumer has a little more disposable income. So we would see some volume growth that we haven't seen lately in Brazil and we'll start to see some volume growth in that operation. José Yordán: But I guess, in the case of January -- not in December, but in the case of January, this wetness was already in the base because last year we had already -- had already been a wet January. So I guess -- and I'm not sure how much of a case you can make about the weather playing a part in January given that it's in the base, but I hear you on the answer, no impact yet. Héctor Treviño Gutiérrez: I see what you're saying. I mean, I look at some of the presentation from the operators. They are complaining about that, they show me pictures of some of the disruption that have been caused in highways and all of that. It is important. Honestly, I don't remember how it was last year, but you know that in this industry, sometimes if I hear excuse from the operators of the weather, and I hear you and I'll take a look at what has been happening last year, the charts that they had been showing to me in terms of rain and inches of rain and how that have been damage on some of the roads, it's important to me. I was in Brazil in January and I was amazed. We were trying to look at some of the area where we could be building this plant. It was impossible to reach it because it was totally flooded, no? But honestly, I don't remember exactly how that was that year, but that's -- I think that my message, José, is I think that salary increases, although it's not affecting everyone, will help in the disposable income. And I'm positive that, at some point in time that will start to trickle down in some of our margins. So far, January has been very flattish, February is a little bit better, but still flattish compared to last year.

And the next question comes from the line of Robert Ford, Bank of America Merrill Lynch.

Héctor, I had a question with respect to hedges you may have in terms of high fructose corn syrup, as well as any sugar positions for the coming year. Héctor Treviño Gutiérrez: In general, I'll say that in Mexico, we have advanced importantly with high fructose and we basically have agreed that the estimate that we have to use for the full year, we are basically 90% covering the price, at what I believe are good prices compared to last year. We don't have, as you know, any hedges on sugar in Mexico. We will have some in Brazil, but I'll say around 30% to 35% of the needs in Brazil, which have been entering to some hedges. And we have done some hedges with respect to the currency and some of the dollar-denominated raw materials, which we are not hedging this early, the price of the raw material because maybe there's not a market for that. But for example, for PET in Colombia or PET in Brazil, we have a bunch in hedging some of the exposure to the dollar in those markets. And I'll say it probably -- if my memory doesn't fail here, it's probably around 20%, 25% of needs from Brazil from here to probably all of September. So it's not the full year, but around 20% to 25% of the need from here to August, we have covered some of the exposure to foreign exchange for some of the raw materials.

Great. And then I had a second question, and that is, with your experience in Panama with Estrella Azul, can you talk a little bit about maybe some of the synergies you're seeing with better distribution and perhaps the products that you think lend themselves to more -- to better distribution opportunities, right? Things that may be higher margin in nature, but at the same time, shelf stable or can -- you can with these minor modifications to your distribution, you can add them to the pipe. Héctor Treviño Gutiérrez: Estrella Azul is a very important learning experience for us in this category, and I'm glad that we did this in a country like Panama. We are leaving brand like Estrella Azul, again, because it's a small market and we are following exactly what we said in the past, it's we are learning from that, it's a small market. I will not call it an experiment, but it's a learning process for us, an important learning process. In Estrella Azul, we have been running that operation together with The Coca-Cola Company, and say that pretty much according to the model that we use for the acquisition. We're a little bit behind our budget. The budget was a little bit more aggressive than the valuation model. And the 2 areas where we are a little bit behind, one, related to your question: we have been getting shelf stable products in the RED truck, mainly juices and some of the dairy products. Remember that Estrella Azul was -- Estrella Azul, had, in the past very few SKUs with shelf stable milk. Most of their competitive base was with the milk that is -- they are not shelf stable, and they also have non-shelf stable juices and nectars which is an important element there. Though, as we develop some of the new formulas and new products, and moving towards shelf-stable approach, we have been getting those products in the RED truck. And I'll say that we are having our own share of pains and problems, as -- all the way from finding the right incentive to the preseller and the guidance of the distribution, in convincing the store owner of buying from the same guy, Coca-Cola, and these products. So we are curving our learning curve there. I think that we are improving little by little, but again, we [indiscernible] very well as a learning experience. The other area where we have some delays in our plant have to do with all the supply chain. Getting the product from the farmers all the way to our production plants and having the efficiencies that we are used to seeing our CSV [ph] plants have been a little bit of a challenge. I think that again we are advancing little by little with very solid states. Those are the 2 areas where we find our challenge. And I think that whenever you have a chance to visit Panama, it's a very nice experience because you see how this business is being transformed from the previous stage that was 100% dairy company. We had a lot of the -- a lot of their own problems and how we are trying to integrate with a very fast-moving company of coke franchise in terms of value chain and distribution efforts, no? I think that the example, with the -- the exercise is going in the right direction. Again, we are a little bit behind our budget, but ahead of our valuation plans, and the 2 areas is everything that has to do with supply of dairy and how it goes to the production plant, and all of the problems that you find in production. And then in the distribution plan, how do you better serve your clients with the RED truck, taking these products and with our presells.

This concludes the question-and-answer portion for today. I'll turn the call back to management for closing remarks. Héctor Treviño Gutiérrez: Thank you for your interest in our company. And, obviously, José and Roland are available to answer any of the remaining questions that you may have. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you for your participation. You may now disconnect, and have a great day.