Fomento Economico Mexicano SAB de CV (FMX) 2003 Q2 法說會逐字稿

Welcome, ladies and gentlemen, to FEMSA's second-quarter earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open up the conference up for Q&A after the presentation.

During this conference call, management may discuss certain forward-looking statements concerning 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 would like to turn the conference over to Mr. Federico Reyes.

Good afternoon, ladies and gentlemen, and thank you for joining us in our comments on FEMSA's second-quarter 2003 results. On the call today are Hector Travino, Chief Financial Officer of Coca-Cola FEMSA (indiscernible); Chief Financial Officer of FEMSA Cerveza, (indiscernible); (indiscernible) director of FEMSA Cerveza; and Juan Fonseca, head of FEMSA investor relations. We will be glad to answer your questions today.

As is customary on our conference calls, let me start by providing a brief overview of the economic context of our markets. In Mexico, the second-quarter was unstable in terms of inflation, interest rates and the dollar/peso parity. Specifically, we observed a slight depreciation of the peso as compared to the first quarter, with some inter-quarter volatility. Nevertheless, the average exchange rate of the quarter, at 10.4 pesos per dollar. This is still almost 10 percent above the average of last year's second-quarter, which affects some of our comparisons in the income statement. We see (indiscernible) reach historic low during the quarter. (indiscernible) of Mexican (indiscernible) debt.

Now let me give a brief update on some (indiscernible) indicators for Mexico. We estimate that retail sales for the second-quarter of 2003 display a year-over-year growth of 1.5 percent, with a noticeable recovery in June, owing to mostly improving indicators in employment and in real wages, specifically in the (indiscernible) retail and wholesale sectors. From a regional point of view, the southern region appears to have the highest growth in retail sales activity. Regarding the all-important (indiscernible ) industry, it is encouraging to know that, according to the Mexican (indiscernible) statistics bureau, (indiscernible), while more than 1500 (indiscernible) operations shut down during the second-quarter of 2002, approximately 80 of them opened their doors during the past quarter -- most of them located in the states of Baja, California, Sonora and (indiscernible). Overall, we estimate annualized growth of 0.9 percent for the Mexican economy in the second-quarter, which is lower than the 2 percent recorded in the comparable period of 2002.

FEMSA -- general overview. Clearly, the most notable development during FEMSA's second-quarter was the closing of the Panamco acquisition by Coca-Cola FEMSA, and its effect on our operating and financial results, capital structure and investment programs. As we discussed earlier during Coca-Cola FEMSA's conference call, we are moving at a rapid pace in (indiscernible) opportunities and implementing measures that are already beginning to bear fruit in terms of materializing synergies and improving our newly-acquired operations. At FEMSA Cerveza, we saw a significant recovery in demand, driven in large part by lower real prices as well as by extremely warm weather during the first two months of the quarter, supported by modest signs of improving consumer sentiment that also manifested itself through positive same-store sales trends at FEMSA (indiscernible). Significant quarterly sales growth of OXXO, however, was mainly driven by the continued accelerated expansion (indiscernible) selling space. For its part, FEMSA Empaques experienced a strong demand for (indiscernible), which, coupled with a weaker peso year-on-year, generated an increase in revenues during the fourth quarter.

We would now like to expand on the results of each division as well as of FEMSA Consolidated. For Coca-Cola FEMSA -- as always, we encourage you to listen to the replay of Coca-Cola FEMSA's conference call, which took place earlier today, for a more detailed discussion on operating performance. We must stress the fact that the financial results as reported include the former Panamco Corporation for the month of May and June only, and are not comparable to the same period of last year. Reported volumes, however, are comparable, even though we did not manage the former Panamco assets during the first month of the quarter.

Several items stand out from Coca-Cola FEMSA's quarterly results. On the integration and synergy front, actions have been taking place at a very rapid pace following the careful analysis that has been performed since the beginning of (technical difficulty). 4 plants have been already closed, along with 15 distribution centers. (indiscernible) platforms are rapidly being integrated, controls and procedures are being (indiscernible) and management (indiscernible) have been put in-place in a powerful combination of (indiscernible) and former Panamco talent. And very importantly, the majority of the acquisition financing has been refinanced in such a way that 50 percent of Coca-Cola FEMSA's debt is now denominated in Mexican pesos and at favorable cost.

We are quickly designing strategies to address each market's particular needs, with always keeping a close eye on expected returns on investment, and going through very strict capital allocation procedures and controls. Once again, we stress the high relative importance of the Mexican territories in our overall strategy.

FEMSA Cerveza. For the second-quarter, total revenues of FEMSA Cerveza increased by 2.8 percent. Domestic volumes were strong, mainly as a result of very warm weather, the timing of (indiscernible) in April and the fact that we have not increased prices so far this year. Export volumes fell by 4.5 percent, reflecting overall weakness in beer demand in the United States. In Mexico, we experienced very strong demand that drove volume growth, particularly during April and May, tempering somewhat during the month of June. In terms of regional performance, every region showed volume growth during the quarter, but the trend was consistent with that of recent quarters, where southern Mexico delivered the best performance with an increase of 12.2 percent, followed by the North with 4.8 percent, and finally central Mexico, with growth of 3.3 percent. (indiscernible) and Indio continued to be our fastest-growing brands.

Operating income at FEMSA Cerveza decreased by 5.8 percent, mainly due to an increase of 11.1 percent in selling expenses. While we can expect selling expenses growth to track sales growth during the quarters, Cerveza increased its reserve for uncollectible accounts, bringing expense figures on both the (indiscernible) for the quarter, and also incur additional costs linked to the operation of acquired distributors.

We would like to comment now on the status of the transformation of FEMSA Cerveza. The ongoing effort to adjust our third party distribution network is moving ahead. When the process is finished by year-end, we expect our direct distribution to cover approximately 75 percent of our total domestic volume, up from 65 percent when this project began three years ago. This final stage does have implications for the level of capital expenditures we expect to incur doing during 2003. We will discuss that further in a few moments.

Regarding the enterprise resource planning initiative, the SAP systems platform that has been customized for FEMSA Cerveza is finally becoming operational on a pilot basis, with (indiscernible) coming online during the past month, and other cities such as (indiscernible) to follow during the third quarter. In a powerful example of the strategy coming together, our acquisition of the (indiscernible) third party distributor in northern Mexico, combined with the capabilities brought about by the ERP platform, should allow us to reduce the number of distribution centers in the Monterey metropolitan area, along with their inventory (indiscernible), from 8 today to 2 by the end of this year. We will be able to operate the existing 8 sales agencies with only 2 warehouses and distribution fleets, realizing considerable cost and inventory reductions, while maintaining close contact with the market.

At the same time, we are beginning to have revenue management capabilities in some parts of the city, (indiscernible) sales force is gradually improving its level of execution at the point of sale. While this (indiscernible) results have yet to make a difference on the income statement, and the SAP platform rollout takes time, we expect it to be over 50 percent operational by the end of 2004 and fully operational nationwide by mid-2005. But clearly, we are beginning to show tangible results as the strategy matures across our territories, and the positive effects can already be felt across FEMSA Cerveza. We are more committed than ever to its strategy as we begin to see firsthand the power of the tools we have developed.

FEMSA Commercial. FEMSA Commercial increased it's rapid expansion of selling space. The opened 122 net new OXXO stores in the second-quarter, to reach a total of 2399 units. FEMSA Commercial results were, again, primarily driven by (indiscernible) selling space growth. Although we saw an improvement in like for like sales for 2.8 percent, it was partially influenced -- as in the case of Cerveza -- by the warm weather and the timing of Easter. Total revenues increased by 28.7 percent for the quarter and operating income grew by 38.5 percent, while operating margin increased by 30 basis points to 5.1 percent of total revenues.

FEMSA Empaques. Demand for beverage cans was again stronger in the quarter, with volume growth of 10.1 percent that drove an increase of 6.6 percent in total revenues. However, operating margin contracted by 150 basis points, mainly reflecting depreciation charges for two of our three (indiscernible) adjusted their useful life, as well as increased rate expenses in the can business.

FEMSA Consolidated. Revenues increased at every major subsidiary, and therefore, at the consolidated level. But as mentioned before, these figures are not comparable at the (indiscernible) or at the consolidated level. FEMSA's operating margin contracted by 290 basis points, mainly reflecting the incorporation of the former Panamco Corporation, as well as minor contractions at Cerveza and Empaques. Below the operating line, net interest expense increased as a result of the new debt related to the acquisition of Panamco. We also recorded a foreign exchange loss of 773 million pesos, resulting from the large foreign exchange transactions entered for the acquisition, as the quarter saw significant exchange rate volatility. Further detail can be found in our press release, as well as in Coca-Cola FEMSA's press release. We must also note 430 million pesos recorded (indiscernible) expenses, of which approximately 70 percent relate to the write off (indiscernible) production facilities and equipment at FEMSA Cerveza, (indiscernible) new technologies replaces older technology.

Capital expenditures. We would now like to comment on our capital expenditure budgets for the year 2003. Beginning in the first quarter and as discussed on the previous conference call, we saw every one of our subsidiaries increasing its CapEx as they advance in their strategies. Coca-Cola FEMSA invested in the two (indiscernible) bottles for the 2.5 liter launch in the valley of Mexico. Cerveza acquires several third party distributors, commercial increased its rate of expansion and acquired a number of choice sites and Empaques (indiscernible) one of its glass furnaces.

During the second-quarter, we saw a continuation of these processes. As we detailed in our form 20-F. presently filed with the SEC, we expect the consolidated level of CapEx for the whole year could reach approximately $1 billion. While this is a large number, we must put it in perspective. Particularly in relation to the Panamco acquisition and the investment required to bring the new assets to the standards of Coca-Cola FEMSA.

At Coca-Cola FEMSA, we are estimating capital expenditures of about (indiscernible) million for the year, with a large proportion directed at manufacturing assets and an increasing (indiscernible) across markets, but with a heavy emphasis in Mexico, and representing roughly $200 million over the average Panamco CapEx budget for KOF (ph). At FEMSA Cerveza, this year we are bringing a significant percentage of our domestic beer volume in-house, where the largest individual negotiation is still in progress. This negotiation also includes a convenience store operation in northern Mexico, which is part of OXXO's expansion strategy, along with the acquisition of selected store sites. Apart from these negotiations, OXXO is on track to open more than 500 stores in 2003, and such rapid expansion requires increased levels of investment.

Many of these initiatives are short-term, non-recurring projects, but all of them are consistent with the long-term strategic direction for our company and represent, in our view, the best alternative to employ our capital and to continue to generate returns for our shareholders. Now we can turn to your questions.

(CALLER INSTRUCTIONS). Carlos LaBoi (ph) with Bear Stearns.

Federico, I was hoping you could expand on the pricing outlook of Cerveza, as you look out through the rest of this year? And also, any update that you could give us on where the situation with InterBrew (ph) stands?

Let me speak a little bit about the outlook on pricing. As far as the management is concerned, with what we have seen so far in the market -- in spite of a strong second-quarter, we still see some weakness. At the end of the quarter we saw some weakness, so the management of Cerveza is essentially planning all its actions on the basis of no price increase for the rest of the year. So we are looking for a price increase probably very early next year, but at this stage -- although we have not discarded the possibility of a price increase -- our plans are all indicating that there won't be one, and we are taking actions correspondingly.

The situation with (indiscernible) has not seen any major change. We continue having a dialogue with them. We have stated in the past (indiscernible) Mr. Brock has brought to the picture, a different perspective on the relationships, and we have continued (indiscernible) but there is basically no major thing to communicate. Both parties have an interest in trying to find solutions for the differences that we have had in the past. We will continue trying to find those solutions.

Federico, Mr. Brock has indicated that he would expect a resolution to the problems with FEMSA in less than a year. Do you agree with that timeframe?

I think that the possibility is there. I would not say that it is impossible. I think it can be done. Again, it depends on many things, and how both sides approach the gap in perceptions and differences that we have. But yes, it can be done.

Mark Overa (ph) with Deutsche IXC.

On the CapEx, the jump for Cerveza from original guidance -- I understand the general nature of the projects you are overtaking, including these distributorships, but I still can't fully come up with the composition in my mind of the entire $200 million. And I was looking for more help on this front.

We included a figure in that planning of approximately $460 million, and that is including assumptions of part of the third party distributors that we are still negotiating.

But just trying to put something together here, which is that to my understanding, year end last year you were at 69 percent internal distribution, and the target is 80. So if the plan this year is to get to -- as you mentioned in your early remarks, Federico -- 75, we are talking roughly 5, 6 points for $200 million. So should I expect another big lump next year for you to reach your target of 80 percent?

I believe the 80 percent and the figure presented in the F-20 are consistent with each other. If we reach only 75 percent, you should expect a reduction on the figure given on the F-20.

Given the material jump in OXXO, on another sub -- can you be more specific as to how many stores will exactly be added or you are expecting to add to the base this year? More importantly -- also probably for me a related question, which maybe you can include in the (indiscernible) the following -- I assume there is a significant overhaul that you're going to (indiscernible) OXXO with some of the incremental CapEx that I am seeing in the 20-F. Should I somewhat see this as a project -- as Project Cerveza brought to your retail subsidiary? And if so, maybe you can give me more color as to your vision regarding the subsidiary, and whether I should expect (indiscernible) increase the pension and capital budgeting allocation (indiscernible) in the future relative to other subs?

There are several factors there. One is we have now a larger number of stores being contemplated to be opened this year, which we are estimating is going to be about 500. There has also been a slight change in the mix of the stores that are being opened. We used to lease most of them; now, because of specific requirements in several cities, we have been changing that mix to buying some of the sites -- more of the sites than what we used to do in the past. That has put an additional strain in that number. We are not interested in converting the store into a real estate (indiscernible) -- that is (indiscernible). We will continue trying to reduce the investment in real estate as much as we can. But on the other hand, we have to make sure that the sites that we have have the continuity and the long-term viability that we want. As you correctly point out, there is a possibility that we might acquire a chain of stores in a city in the north of Mexico, and that is included in the numbers that were put in the CapEx that we estimated in the F-20. But that is basically it. The business is the same. We are not changing the -- how should I say? -- the general framework of the business, we are not changing the nature of the business. It is just that we are facing a different environment, and we might be forced to open, again, more sites which we owned rather than leased, if there is this possibility of this change in northern Mexico. Which we are not sure that it is going to materialize when we will materialize, or how much.

So the stores from that change in the north are predominantly owned, I would assume, from your comments?

Yes. Well, no. It's a combination of owned and leased. Again, the mix has changed, and we are presently investigating possibilities by which we can assure ourselves of the site for a very long-term, but at the same time where we are not required to hold the assets completely on our books. So whenever we find that (technical difficulty) the solution for that or a viable economic solution for that, we will immediately report it to all of our investors.

Could you maybe give us guidance like Hector, on the normalized level of CapEx to revenues for OXXO? Hector said 6 on the soft drinks. What would it be for your OXXO?

On the normalized CapEx for OXXO?

Yes. Because typically it has been six, but this year it may be more like 12. Maybe you can give us guidance for normalized going forward, as the business is, as you rightly point out, changing.

These guys keep making us say the wrong thing to the market, because every year they keep increasing the number of stores that they open. So I don't have that number now. Maybe we could address it at some point in time later.

My last question would be your thoughts after examining the beta (indiscernible) regarding (indiscernible) up for sale in Argentina?

The process is not one that is really moving. We don't expect that to -- as you know, there are a number of legal complications in that process. We don't expect that to be moving very fast, so we have not reached conclusions there. We are looking at that as one of the possibilities. if that possibility materializes, that is fine; if not, we will have to look at some others. I think (indiscernible) commented on -- a little bit on that subject in (indiscernible) teleconference conference call. Right now, we have not been affected by the lack of (indiscernible) there. But that does not mean that we will not be looking to that with very eager eyes.

Robert Ford with Merrill Lynch.

I was very surprised, in terms of the disclosure you made on your 20-F with respect to your CapEx. It would suggest to me that at the point of publication, that the probability of this transaction closing had risen dramatically, and that if you are willing to disclose a number, that you must be negotiating something other than price at this point. Because it places you at a strategic disadvantage otherwise. Is that perception correct?

What do you mean by a strategic disadvantage?

Meaning that you are putting a number on the table with respect to the price that you might pay for these incremental assets.

You know, every time you deal with public disclosure, you have a very fine balance to try to achieve between giving the market the right information, but at the same time keeping the essence of the business not fully disclosed and not to damage the business. The negotiation is a complicated one. It has been very tough for the team managing that. It still is moving on. Even today, we see a very good probability that the negotiation may be close. Timing has extended because of other details. It's not as simple as buying some shares and then you start (indiscernible) the business, but the transaction can be there. Again, the (indiscernible) that we put in our disclosure, we tend to -- on advice of our lawyers, we tend to go to the upper limits, in order to be on the conservative side. So you might look at those numbers as kind of the maximum numbers. (indiscernible) not necessarily assigning probability to us reaching those numbers.

With respect to the increase in the absolute number, has there been a change to your internal hurdle rates as a result of the dramatic reduction in interest rates over the last 12 months? Is it easier to make it through an investment committee meeting?

No, actually we have not changed our guidelines. That might be wrong, or it might be that we have (indiscernible). But the guidelines have always been the same.

With respect to the doubtful account issue, I understand that you are changing the way that you are evaluating those. Can you go into that aspect of the surprise in expenses in greater detail? I was just a little bit disquieted by the recurring nature of this item.

Are you talking about the uncollectibles?

Yes, I am.

The policy that we applied in this quarter is the policy that we have been always applying in the closing of our year, when we (indiscernible) the fully audited financial statements. What we just decided is that we will apply the same accounting procedures of (indiscernible) of receivables every quarter. We started doing it in the closing of this semester and we will do it again in September and also in December. And that was the effect of that.

What are those specifically? I am just trying to understand exactly what has changed here.

It's just with all the effects of the (indiscernible) the peso in some markets, all of the different accounts that you have with your customers -- at some point, you have to estimate that you will be able to collect 100 percent of what you have in the financial statement or not. And you have to apply a more conservative criterion. We just apply that. It is not on a specific customer.

So it's not simply a change in terms of the number of days in (indiscernible), and if it's in excess of 30 -- boom -- we are just going to take the hit. If it's in --

No. (indiscernible).

It's more subjective than that, in terms of the evaluation of the client?

It's the whole relation with a client and what has been the past history of sales with them and collection with them.

Thank you (indiscernible). With respect to the transition or the repurchase of distribution, I am still a little bit unclear, in terms of the actual amount of beer that goes through your wholly-owned distribution infrastructure right now, or what was it on average for the quarter -- what was it last year? What would the impact have been, in terms of your average pricing year on year and the gross margin benefit? Because you should have some benefits, as well, right? It is not just expenses?

As part of the benefit, you can see it on the reduction of the price per have (indiscernible) liter as having fallen a half percent more or less of inflation year on year. We just have a reduction of 2.8 percent. Part of that (indiscernible) is the thing that you -- in the third party distributors (indiscernible) were giving an additional discount to cover their operations. (indiscernible) expenses, and now you are saving that discount (indiscernible) what you are incurring with (indiscernible) expenses (indiscernible). So that the counterparty's partially offsetting the reduction in the income per hecta-liter.

Laurie Cerro (ph) with Morgan Stanley.

I just wanted to follow up on the prior question. If I look at the FEMSA Cerveza results, you had a 51 percent increase in other non-cash charges. And I am assuming that part of that is the uncollectibles, so I have a couple of questions. First, if you could just confirm for us or tell us what is in that increase? And then the second question on the uncollectibles -- I am still unclear whether this is a onetime adjustment to tighten the way in which you qualify something as past due, or whether this is sort of an ongoing expense on a quarterly basis?

Let me answer the second one. It is not (indiscernible) -- in some ways, not onetime, but the amount of the increase compared to the last quarter or the same quarter of last year, that is none comparable. Because part of the adjustment that's reflected in that analysis was reflected at the closing of 2002, not in this quarter. That's some collectible, and part of the increase -- as you mentioned, the 51 percent -- yes, it is included, but that part -- the amount -- you are talking about an increase of uncollectibles quarter over quarter is around 70 million pesos. That is the one that is (indiscernible) part of the increase in sales expenses and also in other non-cash (indiscernible) charges.

I understand the 70 million is the increase. I'm still -- I'm sorry -- I'm just not understanding whether this is something that is a changed policy or something that is an increase, quarter on quarter?

It is not a change of policy, it is just a change of when you apply that true analysis. Quarter on quarter we didn't do it last year (indiscernible) June.

You did it in December?

We did it in December, yes. So in some way, that increase will be -- (indiscernible) the percentage of increase will be diminishing in the following --

But the absolute number, the 434 million of other non-cash charges is a number that you think will be maintained on a quarterly basis over the rest of 2003?

No. We don't have a number for you there, but I don't think it will be maintained. As a matter of fact, I am sure it won't be maintained.

Maybe I can follow up afterwards, but I guess I am not really understanding. Maybe just another question. If I got your numbers right in your opening comments, you mentioned that your volume growth was 3.3 percent in the center against almost 5 in the North and 12 in the South. At what point do you think we will start to see more improved -- or you'll start to see holding onto your market share a bit better in the central Mexico, given you spoke about in the last conference call some of the product strategies in that market? When do you expect to see some results in the center?

We should start seeing the results at the end of the third quarter, beginning of the fourth. And we do expect to be able to compensate the market share loss that you have observed today. That's as much as I can tell you.

Pablo (indiscernible) with JP Morgan.

Sergio, I am just trying to understand in terms of the implementation of revenue management and this pilot in Monterey and (indiscernible) -- why has it taken actually 3 years to get to this point? I understand that (indiscernible) didn't takes six months either, but three years seems like a long time, and we still have to wait another two years for the full rollout and implementation. Just give us some color in terms of what were the (indiscernible) during this three year period?

As mentioned through our time in other conversations, it is a process that we would have hoped that it would take less time, there's no question about it. Hector is here. He can testify as to whether it took five years or three years at (indiscernible). But the issue is how much is it taking at Cerveza. Obviously, as we said before, the fact that the economy has been weak has slowed down our efforts. But set that aside, and I will tell you that first, we had to implement the presell in most of the country; then, it is a matter of designing and installing systems, and you are talking about systems that are -- I don't remember the word -- first product sales from SAP to FEMSA Cerveza . So this took a long time. It is a very significant change culturally for FEMSA Cerveza. It is something with which we are very pleased, and we have a lot of support from our Board in what we are doing. As now we are able to start to show them some of the results, some of the implications. And I am with you, as far as saying that it has taken longer, and we would have wanted it to take a lot less time. I would tend to disagree as far as whether this is too much time compared fared -- if you benchmark other efforts that had been similar to this one. So it's, again, the implementation of a new culture; the sign of a completely different system, one that has never been done before, as far as the software is concerned; as far as the concept, of course, it has been done. And the rollout takes a lot more time, essentially because you have to continue operating in the traditional way and (indiscernible) with the two systems when you do one thing and the the other. I'm sure this is not a very strong answer as you would have expected, but at this stage, this is the best I can give you.

Just to follow up (indiscernible) also contributing in this question -- but when I think of revenue management and presell and the implementation of SAP and ERP -- in the case of Coca-Cola FEMSA, my belief is that the operating leverage came from market share gains also in (indiscernible ) the strategy at the point-of-sale allowed Coca-Cola FEMSA to have the better product needs, better pricing, packaging mix at the point-of-sale -- and probably take business away from other brands that were in that particular point-of-sale -- Pepsi-Cola or Bajaritos (ph) or (indiscernible). FEMSA Cerveza does not have that luxury, because it is an exclusive point-of-sale. So by definition, you will would have less operating leverage. So what I am just trying to get to hear is, how much of the strategy doesn't work in terms of taking sales away from the point-of-sale across the street, were actually taking sales away from other brands in that particular shop?

As you point out, Coke or (indiscernible) and cerveza in Mexico are two very different experiences. I would agree with you that we do not have the same level of leverage in (indiscernible) and cerveza. There is no question about that. We do not have any doubt as to whether we will have enough leverage. We think we will. I am not able to give you details as to where it is going to come from. At this stage, I would prefer to keep our expectations to ourselves in that particular period. And hopefully, at this time next year, we will be able to show you wonderful success stories.

In terms of on the CapEx front -- I don't know if I misunderstood the question before, but (indiscernible) page 125 (indiscernible) -- nowhere in that CapEx guidance, you are making a comment about acquisitions in Argentina on the beer front, or did I miss understand? I thought that you mentioned that on the CapEx that that might have included.

There's nothing there.

Alex Robards with (indiscernible) Bear.

Understanding the presale status, I am not clear really where you were at the end of the year, and where you are, let's say, at the end of June? If you could start out with that?

Protect I am trying to think where we were at the end of last year. Where we are today is 76 percent of our total sales, and I think at the end of last year we were somewhere around 55. I will have to check that out.

The idea is to get -- again, if you could just give us that end game number here, where do you want to be?

(multiple speakers) retail it will be high 70s, low 80s. Or (indiscernible) essentially.

So the higher market research expenses -- this is another thing I was interested to hear a little bit about the color -- what is behind this. Is this something that we can see going on. It's it helping specifically some brands like Sol, maybe you can give us some color their? You're are talking about the market research expenses? Yes. In the beer.

I would say that in the last two years our marketing group has established a market research that is probably three times or even more what we used to do in the past. The information coming out of that effort of market research -- it's proving to be very valuable in our decision-making, present and future. We are very happy with that. I can tell you that the market research will continue. It will continue to be strong. Nevertheless, it will not have the ingredients of setting it up, which has been the case in the last two years. So essentially, you'll continue to see a strong effort on market research, but one that is based on a foundation that has been established on the last two years. I can't give you a precise number.

Just to also understand this idea of the full revenue management implementation, I guess thinking about your comments earlier this year, I was under the impression that you get the ERP and the revenue management going in 2004 concept, is this the first time that you are introducing the first half 2005, or is the first half of 2005, has that always been part of the thinking for the final rollout?

Let me resort to the memory of our investor relations group, because --

I think we have spoken in the past about early 2005, in order to be totally rolled out nationwide. One thing to keep in mind, though, is that this is a rolling process, as was the presale with (indiscernible). So you will see and we are already beginning to see different degrees of advancement, in terms of the revenue management capabilities. Again, (indiscernible) we mentioned in the press release and we mentioned earlier, we are beginning to have some very basic, if you will, revenue management capabilities in Monterey, which is a pilot city. So when you think about early 2005, I think we are now saying first half, but I think that is pretty consistent. You should think of that as sort of the last few cities coming online, and that doesn't prevent the majority of the countries from being fully operational during 2004.

The final clarification was just on the third party, to the extent that you have got -- where are you now, as far as the percentage of your volume going through the third party? Where would you like to be at the end of this year?

Let me clarify something before we can give you a number. Essentially, this is an effort of alignment with the third party distributors that includes, in some cases, negotiations, the acquisition. This is not an effort of integrating the third party distributors to the distribution at FEMSA Cerveza. That has been a result of this alignment process. And you may be (indiscernible) you may collect it whenever you want -- where are we in 2002? We had approximately 70 percent of our sales were direct, and domestic sales pass-through -- 244 company-owned distribution centers.

Where are we today? I believe we are already at mid-70, 74 percent, at this stage. And there are a few small operations that will be integrated to the company. Others, as expressed before, are being aligned, and some of them are being given additional territory. The big question is whether the reported transaction in northern Mexico will come true, in which quarter of this year or probably the beginning of next year, if the negotiations were to be extended, and that will take us from 75 to 80.

Is that where you are going to feel comfortable, or does it go beyond that?

No, that's it.

I think I would like to make a comment here. This process was not driven by a percentage target. This really was driven by a very thorough analysis of each one of the situations. And it so happens that the numbers could be very close to 80 percent, but that is sort of the result of the process, not really a number for which we were shooting.

Carlos LaBoi with Bear Stearns.

How much are you spending on taking back these 10 points of distribution in this 3 year timeframe, and how do you think about the return on these investments?

I don't have that amount. If we can call you back with a number?

That would be great. Federico, we noticed in the latest 20-F that Coke FEMSA is no longer under (indiscernible), but is rather broken out from all the other units. Can you expand on the range of reasons for breaking Coke FEMSA out of (indiscernible) please? Protect.

There is no -- there is really no major implication in that. It was really driven by some kind of technical or fiscal conservation, and that was it. There's nothing -- I would not recommend anybody to read anything from that.

Robert Ford with Merrill Lynch.

Tell the truth -- you are going to spin off the beer division, aren't you? In your initial comments, you were very upbeat with respect to the progress you seem to be making when it comes to ERP or revenue management. Historically, or at least my perception is that you pursued a very homogeneous pricing strategy across all your brands and packages. What I seem to be hearing is that in Monterey, you're changing that structure, either by brand or by package or by channel or all of the above. And that those initiatives are either meeting or exceeding your expectations. Is that correct?

I think we are starting really. The degree of progress that we have is giving us a lot of confidence -- it reinforces our belief that we are really on the right track, that we started a road in which we are convinced that it would take us to the place where we want. (indiscernible) I would like to put (indiscernible) idea that we are already doing a lot of those things in a very active manner in the day-to-day operations.

I think you are correct.

But you are seeing something? You're doing something, and you are seeing something and you're upbeat about the results?

Oh, yes. It's allowing us -- as we mentioned in the initial stages, it is going to produce great efficiencies. Reducing distribution centers, and droughts and trucks and everything. But let's be very clear -- for all that is another benefit, that is not the intention. This is not a process that has a sole purpose to gain efficiencies. We get them get them (indiscernible) -- we will continue striving for those. But it's really driven (indiscernible) by a desire to go to the market in a better way, that suits the needs of the consumer and the retailers much better, putting the right product at the right temperature with the right package, the right pricing strategy, everything. That is the main core of the strategy. Efficiencies are fine, and we are really looking at some of those. We are happy that we are getting those. In fact, the Beer team has a lot of (indiscernible) related to that. So they are doing the right thing. But again, this is not a process to gain efficiencies only.

Now I'm hearing something different, which maybe I was reading into it initially. Now I am hearing you're saying that the progress is coming on the cost side, not necessarily on the revenue side?

Not yet, yes. I would say that is a fair assumption.

Let me just add again, I think your original question was towards our enthusiasm for the very incipient revenue management capabilities in the pilot. And I think the message is, yes, we are liking what we are seeing, but they are very rough in nature. Certainly, we used (indiscernible ) as a benchmark. We're a ways away from there. But the overall message, both on the revenue management as well as on the efficiency side, is a positive one.

Let me just add something very briefly. It was last week -- was Antonio and myself and some (indiscernible) on the contract team. We had a meeting one day in one of the officers here in Monterey, which we saw the progress that they are doing. I can give you my personal impression -- I came out extremely impressed (indiscernible) they are doing, (indiscernible) what is being done and by how they are doing it. I came out extremely impressed. I cannot fortunately (indiscernible) I cannot give a lot of details of what was shown to us, but I would say that the perception of what is being done there is -- at least my personal -- was extremely good.

(CALLER INSTRUCTIONS). If there are no further questions, I will turn the conference back to Mr. Reyes to conclude.

Thank you very much for joining us, and we will continue working to do things much better for our shareholders. Thank you.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051, or 973-709-2089, with an ID number of 301-313. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

(CONFERENCE CALL CONCLUDED)