Fomento Economico Mexicano SAB de CV (FMX) 2003 Q3 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen to FEMSA third-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 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. Mr. Federico Reyes, please go-ahead sir.

Good afternoon, ladies and gentlemen, and thank you for joining us in our comments on FEMSA third-quarter 2003 results. As you may have really be aware along with our quarterly results release earlier today, we announce (inaudible) changes to our organizational structure at the most senior levels of FEMSA which we will discuss at some length later in this call. With that being said, on the call today are, our Alfredo Martinez Urdal, Chairmen of the Board and CEO of FEMSA Cerveza, Hector Trevino, Chief Financial Officer of Coca-Cola FEMSA, Sergio Garza, Chief Financial Officer of FEMSA and Juan Fonseca, Corporate Finance. Although with all of you (inaudible) participate in today's call (inaudible) to (inaudible). We will glad to answer your questions today regarding our third quarter results and the recent.

In today's call and (inaudible) always he is supposed to clear all of them. We will be glad to answer your questions today regarding our third quarter results, and the recent structural changes that were just announced.

And just (inaudible) our conference call, let me start by providing a brief overview of the economic context of our market. Mexico, despite the seasonal pressure on the exchange rate at this of the year, the third quarter ended with moderate inflation level as well as minutely positive indicators in the resale sector. The three (inaudible) remained at historic lows, with (inaudible) going to research of 40% year over year. Nevertheless, the average exchange rate for the quarter at 10.7 pesos per dollar was still 8.4% above the average of last year state of quarter, affecting some of our comparisons in the income statement.

On the consumer side, we estimate that the refill sales for the third quarter of 2003 with a year over year growth of 2.9%, which can be partially explained by the same inflation of waiting into higher purchasing power, lower interest rates, most of the growth is attributable to the southern and central regions, driven by relatively stable employment and growing consumer credit. Northern Mexico continuous to lag at growth in the manufacturing sector, which is still lacking. Overall, we estimate annualized growth of 1.9% for the Mexican economy in the quarter.

Moving on to FEMSA, we know that the closing of the Panamco acquisition by Coca-Cola FEMSA, we have continued to move out of Swiss base towards integration of our newly acquired operations and on finding additional opportunities to create (inaudible). At FEMSA Cerveza, we are pleased to report solid growth in third quarter volumes and sales despite adverse weather conditions and the absence of a price increase. Furthermore, we are seeing positive advancement in this information observation, in terms of ERP system deployment and further potential cost savings. At FEMSA (inaudible), we continued expansion of off the source (inaudible) transaction resulted in strong revenue growth of setting the lower traffic per store caused by increased rainfall throughout Mexico. Before further discussion in this review, I consolidated on subsidiary third quarter results. So, we would encourage you to listen to the replay of Coca-Cola FEMSA conference call, which took place earlier today. For a more detailed discussion of the earnings performance.

We must stress that due to our recent acquisition, financial results of Coca-Cola FEMSA as reported are not comparable to the same period of last year. Reported volume however are comparable. Parallel items that stand out from Coke senses positive result. On integration and seniority front, actions get invariably taken place, following careful analysis performed since the beginning of the year. After seasonal significance, (inaudible) effort, we can reduce the total number of plants by 35%, since competing the acquisition of Panamco in early May, and our integration process is moving along as planned. These has not been a simple task and we believe it is clear evidence of our unique expertise in the production, distribution and (inaudible) of beverages, but what is our understanding of how business is conducted in Latin America.

In Mexico including volume generated from promotional activity with part of product last year, total volumes grew by 3.2% during entire quarter of 2003. This performance was mainly driven by a 1.5% volume growth of brand Coca cola and a strong performance of our flavor brands and of our (inaudible) Scene (ph) in the Balio, Mexico which grew by more than 6% during the quarter. Our current market initiatives include introducing the turn over presentations to strengthen the equity of the Coca cola brands, rationalizing in some markets and increasing in order the portfolio brands.

During the fifth quarter of 2003, we launched several different packages and brands across our newer territories. In Mexico, we launched Coca cola-Vanilla in two different presentations and in Brasil, we launched Coca cola live with lemon and Quartz Bannana with orange. We have also made similar brand and packaging introductions in Columbia, Venezuela, Argentina and throughout Central America.

Turning now to FEMSA Cerveza, we know that this been particularly wet summer but the revenues increased by 1.3% to 5.638 billion pesos. Domestic sales volume grew by 3.1% for the quarter. We believe that the increase in demand was driven by a combination of the absence of a price increase during the first nine months of 2003 and an increasingly evident gradual economic recovery throughout Central and Southern Mexico.

We will -- the domestic revenue for (inaudible) remain 90 basis points above 4% inflation for the period, declining by only 3.1% and the best thing to our successful shift in mix was more premium presentation. In terms of regional performance, in Southern and Central regions of the Mexico delivered the best performance. Seoul and India continued to be our fastest growing branch in the domestic market. Export's volume increased by 9.2%, reflecting solid growth of the Scathe branch in the US market.

In the third quarter, selling expenses decreased 0.3% due to various cost containment initiatives while administrative expenses in turn increased by 3.3%. Increasing administrative expenses were related to the additional amortization associated with the Enterprise Reserve Planning system role out or ERP. An environment with out pricing and with a weakening peso, inflating expense growth contention was not enough to compensate for the duration of the gross margin level, resulting in increase of 1.4% in operating income before management fees.

Moving on to FEMSA (inaudible), we know that the contained, the continuous, it's strong growth, trend with the addition of 142 new oxy stores, now totalling 2541 locations nationwide. But the revenues for the quarter increased 23.6%, primarily as a result of the expansion of selling space. Sales of comparative mature sports increased by 0.7% for the quarter due to as a result of effective implementation of category initiatives leading to higher ticket with transaction. Due to an increasing electricity costs as well as maintenance and side enhancement, operating expenses as a percentage of total revenues increased by 20 basis points. Despite these, it is important to know that FEMSA (inaudible) managers operating margin before management fees remained at 5.1% for the quarter.

Attention package, sales of packaging and point of sales, refrigeration equipment for the expansion of Coca cola France operations, continue to solid revenue growth of 6.1% during the quarter. Additionally, glass bottles recorded sales volume growth of 3.9%, with increase in purchases from (inaudible). However, in gross margin contracted by 310 basis points, may reflecting lower units crisis for coke glass and can products combined with dollar the nominated cause of raw materials. Further more this space (inaudible) electricity cost during the quarter due to a year or a year increase of almost 21%. Operating expenses decreased by 0.1% reflecting lower labor cost and upgrading income decreased by 9.1%.

Looking now obtains of conform liar results we know that revenues increase on every major subsidiary and therefore at the consolidated level, but as mentioned before the seniors are not comparable at the KUAF or at the consolidated levels. Transfer consolidated income from operations increased by 20.1% resulting in a consolidating operating margin of 15.6% for reduction of 350 basis point from the previous year. The absurd margin contraction were mildly resulted from the incorporation of Coca Cola franchises new bottling territory, at a lower level of profitability then Coca Cola franchises original territory. Minor margin contractions were also served at FrendsMan (ph) and in package due to the lack of pricing, the impact of a weaker base in the course of dollar denominated raw materials and higher energy cost. Below the operating line net interest stand increase as the result of the new debt related to the excision of financial (ph).

We also recorded a foreign exchange loss of 1 billion reflecting our higher US dollars denominated liabilities resulting from the new batch in Korea in our recent acquisition and a 5.3% weaker exchange rate of the Mexican Pesos that through the dollar during the quarter. We should now look like to comment on favorable evaluation of our debt structure. September 08, our consolidated net debt reached 30.877 billion in Pesos. We have achieved significant balance in the composition of our debts with approximately 53% denominated in US dollars and the rest in local currency.

Mitigating foreign exchange risk giving that most of our revenues are also in local currencies. Regarding cost today we have a weighted average rate of 4.8% for our total dollar debt and 7.9% for out total local currency debt. For the 53% of the total debt that has a fixed rate. The weighted average cost is 5.9% for the dollar portion and 9.5% for the local currency portion. And this can you see reducing our exposure to interest rate volatility. We would also like to note that despite the pesos depreciation seen during the period we reduce our consolidated debt by 268 million dollars quarter over quarter. Finally, we will like to expand on changes to our organization and structure by leveraging the considerable managerial talent within FEMSA, this change reflect a positive structural adjustment to adapt our organization to the new stage and scale of our operations.

(inaudible) to understand the (inaudible) in Mexico, and Latin America as well as Alfredo Martinez Urdal during the 1990s he was instrumental in the confirmation of Coca Cola franchise in term of operational power house and in recent years he also led the performance formation network, of FEMSA Cerveza, but is now well advanced in reaching the stage where the tools and its keels are in place to begin delivering significant result. Therefore, in order to allow everyone of our businesses to a benefit from our self, but experienced and unique division, our board of directors has named him Deputy CEO of FEMSA. From that bankers point, if I would provide his invaluable input to FEMSA's board and its Chairman of the HR, the strategic core for our company. Then his role will complement his main responsibility of leaving the ongoing transformation for BO patients, for which he has been named Chairman of the Board of FEMSA Cerveza.

There are some --the important responsibilities of the CEO will be shared by two seasoned Sense Executives. Avirez Thavurana (ph) and (inaudible) is headed to visit domestic commercial operations. We have (inaudible) running the north of the country, while Corce Louis(ph) focus on central and south of Mexico. Going forward, Corce Louis will run the commission operations nation wide, while Havier will be responsible for manufacturing, marketing international operations and all corporate functions, such as finance, planning and human resources. (inaudible) completely focus on the sales and distribution, will allow him to fully leverage the present tools and infrastructure developed with the transformation of Cerveza. Driving for (inaudible), promotions and competitive strategies will be designed and implemented with the national picture in mind, starting much of benefits from the powerful systems that has been built.

Meanwhile, have we (inaudible) applied experienced gain over a 21 years of FEMSA, to make Cerveza more profitable, efficient and nimble. We are certain that the combination of these talented executives on the trained eye of Fullfero(ph) will produce a solid (inaudible) result. As the competitive landscape continuous to involve for our Dallas patients, the strategic advantages provided by the ortho chain, they come even more relevant. (inaudible) also presents the powerful tool in his comprehensive strategy to deal with new and all competitors. However, for FEMSA Cerveza, retail operations have become most useful as (inaudible) expansion strategy is becoming instrumental for Cerveza's own growth. As our portfolio becomes more differentiative, our revenue management capabilities increase, as channel marketing develops further, also plays an increasingly important role. The chains growing scale of the enormous potentially being is to complement and enhance the distribution of our beverage products required increase resources and focussed from its management team.

Consequently, FEMSA's board of directors has determined that it is (inaudible) who until now here is follow for our strategic business, concentrate entirely on FEMSA (inaudible) as its Chief Executive Officer. It is all has been the lead architect for (inaudible) expansion, and now you will have the renewed mandate to fully support our beverage businesses while continuing to develop the extraordinary distribution channel that is Oxen (ph). Furthermore, you will carefully explore opportunities to expand our retail capabilities in support of our core beverage operations outside of Mexico, not to provide them with an additional competitive advantage or appropriate.

Our second new operations will be compared to FEMSA, the strategic procurements and winning corporate is designed and coordinated of procurement efforts across FEMSA, under the (inaudible) until now Chief Financial Officer of FEMSA Cerveza. (inaudible) considerable operating experience with service will, as his business unit will adjust to supply the growing demands of our beverage operations through our Latin America. At this position, at Cerveza CFO will be taking my (inaudible) Cerveza administrative director

Sergio Sáenz Garza: These changes represent the next step in the evolution of FEMSA in our pursuit of excellence of the premier beverage company in Latin America. They follow (inaudible) our consistent track record of delivering profitable growth year-after-year. The businesses where we operate are constantly changing and we will continue to change with them. We are fortunate to have a deep bench of bank manager, which we continue to invest and develop. We are also convinced that the new structure is the right one for the continued long-term success of FEMSA or we take on new challenges and new opportunities. Now we can turn to your question.

Thank you sir, the question and answer session begin at this time. If you using the speaker phone, please pick up the handset before pressing any numbers. If you have any question, please press "star, one" on your pushbutton telephone. If you like to withdraw your question please press "star, two". Your question will be taken in the order we receive. Please standby for your question. The first question comes from Marco Vera with Deutsche Ixe. Please state your question.

Hi good morning, I have several questions today, but number one, elevating an expected (inaudible) clearly comes without confidence or surprise, as far as (inaudible) is concerned, but I am a little concerned about the figuring you may be conveying in your release and maybe you can help to call the concern. Assuming the allegations through other divisions will, of course, take sometime away from Cerveza Banc, but I think some of those are not prepared to see the job at Cerveza as completed task. I wonder if you could elaborate on that.

Alfredo Martínez Urdal: Good morning Marco, this is Alfredo.

Good morning.

Alfredo Martínez Urdal: Your question is a very dollar one, but I think the answer really is that my operation of involvement would be very much limited at first certainly would be limited to the Cerveza to continue to oversee the Cerveza transformation process. Whereas my other responsibilities are activities would be related to sorting out issues together with Jose Antonio on the opportunities and challenges that a multi beverage systems such has FEMSA has in today's world.

Correct. So in other words, it will be a very slow transition out of Cerveza.

Alfredo Martínez Urdal: Yes exactly and basically, there is no, shall we say operating line to the other divisions.

Alfredo, maybe you can also answer my next question and I am thinking a quote directly from the release where (inaudible) expansion strategies becoming instrumental for (inaudible) some growth. Are you now pinning more hope to this channel to under pin organic (inaudible) growth than to other potential Cerveza growth such as market share in the traditional channel.

Alfredo Martínez Urdal: We surely consider you know the OXXO channel process 5-6% of our sales. Market share in the traditional channel.

We certainly consider, you know the OXXO channel offers 5-6% of our sales and certainly we are very interested in propelling our growth to the other 94% of the market, but what OXXO does provide us is with sort of our price and promotion control mechanism that is important in certain markets to us.

Why have I never heard this channel being so instrumental to the performance of Coca-Cola FEMSA then?

But it is a different situation completely in America. The national presence of Cerveza is more suited to be complimented by an organization like OXXO. OXXO's growth has been instrumental in getting sort of, to have stronger position in some regions of the country where we did not have good presence and we didn't have control over everything in prices or some of the promotional activities that does are over out there. A regional Coca-Cola FEMSA OXXO was not really strategic. I'm talking about the fact. Right now, with these new territories and with the presence of some other branch, OXXO might be playing in the future of defending the morning (inaudible) role also with Coke FEMSA, but again we are dealing these more being a compliment to the Cerveza strategy but again we are viewing these more seeing a complement to the Cerveza strategy which is a way out actually OXXO started.

Alfredo Martínez Urdal: The big one important thing is that as the market goes to bigger play segmentation such as what you see in something like cola or something like big cola entering, you want to be sure you to be able to control the gap between your products and the cola products and OXXO would play a role there.

Correct, I mean that make senses if indeed at one point of age become instrumental to coke FEMSA as well. My final question regards the revenue (inaudible) comparison this quarter it outperformed Mobelos (ph) and it could have been modern mix rather than pushing your premium brands but the way you are conveying it in your initial statements, it seems that your are reiterating mostly to double pushing your premium brands would you guys be prepared to make a call that this is indeed the beginning of higher class revenue management evident and better pushing your premium brands rather than a more coincidental change in mix geographic or throughout this quarter.

Alfredo Martínez Urdal: (inaudible) that seems more of the result of the managing the mix more than the (inaudible) of the revenue management has been already working and producing this is a matter that we are waiting over the and sold the older (inaudible) system and the systematical part of repairing to be able to in fact the (inaudible) managing this. I cannot say that that is already showing in the results.

OK, Thank you.

The next question comes from Robert Ford, Merrill Lynch. Please take your question.

Hello. Good afternoon gentleman. With respect to the advances in the ERP you mentioned that a drop decline by 5% their warehouses are down 11%. Are there any other metrics you can point to help us understand the power of the ERP and its success that you are gaining today?

Alfredo Martínez Urdal: Can you speak up and tell us about ---

I apologize. I was trying to, I was asking for other metrics perhaps, that are good indicators of the advances generated by ERP.

Alfredo Martínez Urdal: At this point in time, we really can't point to actual metrics and the performance in the market place, because what we have is we have a complete ERP system that goes all the way down to the hand-held, but we have only installed this, we all are every at the total system available -- we don't evident five markets to roll it out into the 52 distribution areas that were rolling it out into were taken to the second semester of 2005, but we do see a really habit, like in Monterey, reducing a great deal of potential for improvement, especially in our execution capabilities. I would not like to give a number and say, you know, this is what we have, mean for us, but it does mean that we will be able to manage a much more segmented market with much more target, we would be able to target by store, the pricing, the promotions and we will have a continual feedback and online feedback till the promotors and the supervisors, and the salesmen, worth their activities in that one given, how much should be. We are very excited about the ERP.

It sounds tremendous. On a completely different topic, I was curious if this is the growing numbers for exports are up pretty big, and some secretly, there is a little bit of friction between you and in (inaudible), and I was wondering what the probability is, a solution that would be acceptable to both parties through which tempo remains part of Lobii USA.

Bob, this is Federico. It should have been a number of compensation, our sales and inter pool realities to all of those issues. I can, fortunately there is nothing concrete that I can communicate to you and in the process of talking to them, there is no agreement yet that we can communicate. These questions continue and hopefully, there would be, we always had some success, but trying out there is nothing that I can't communicate on that front.

OK, and then Alsabol, said that 6% of the semester volume are going through the OXXO, I believe, what is the total proportion of sub-versatile that go through all retail affiliates because there is --

Total retail affiliates is about $12.5

$12.5 through out the retail. And then in the press release, you suggested that there is a possibility that you grow oxy outside of Mexico. Can you expand on that, why expand out of Mexico and where would you choose to go first?

We tried to read carefully in the quarter but we would not careful enough. This is just one of the potential areas for growth for OXXO, that has been discussed at the board level, we have, I don't know if you have read this story but there are -- for the last 5 or 6 years, we have received requests from people in Central and South America for us to take OXXO to a lot of countries, which we refused at that time because we are concentrating on growing in Mexico because there was no other major reasons to do it.

Now with the expansion of Coca Cola, FEMSA, the mundane that (inaudible) has that he will look at some of the conscious (Ph) things which Coke-FEMSA has operations in Central America and South American and may he will take a look at this study if also completely rule there is anything that might make also successful entity in some of those countries and if there is anything that they can that are not that lot of operation in those countries can contribute to the strategy of our better operations there. But if they live premature we just want to let you know because we don't want that to come as a rumor of the market, we have growing, I mean it is upfront, but it is very early in the game, I can tell you up to this date. As far as though per year to my knowledge he thinks they have not taking any plane author (Ph) Mexico to look at possibilities of expansion. They have taken place to go outside to seek other examples of people operating retail businesses but not with the idea of expanding outside of Mexico. They will be starting that and we try to say they will be doing that carefully, we will not make any rash decisions just to go to the sake of going. It has to make business sense for our beverage operations.

After seeing the travel related expense purchases that (inaudible) should probably take a bus anyway. But seriously this distance of pay for exclusive, exclusive points of present in the offshore chain

Yes, we have an (inaudible) we contracted at the (inaudible) level and that is contemplated that certain for new offshore stock, so he is going to consider and for any stock evaluation.

But here -- the expenses had (inaudible) pay, transfer fee for that exclusive.

FEMSA Cerveza (Ph) has an agreement, a commercial agreement at the in frontal stage, the exclusivity of feature (inaudible).

Alfredo Martínez Urdal: The agreement contemplates transfer prices, it contemplates support for (inaudible) rations and contemplates supporting promotions, it contemplates like any exclusive agreement. This agreement was in place when the joint venture with Inturbu was formed. So it was the part of the normal way of doing business when they came to be shareholder there. Basically a fairly straightforward commercial agreement. It is good business for FEMSA and it is good business for (inaudible).

I am sure it is, thank you very much.

The next question comes form Lore Serra with Morgan Stanley, please state your question.

Excuse me, I have a couple of questions for Alfredo Martinez Urdal. I guess the first question is, I, I know this will allow over time but as you assume these new responsibilities could you give us a sense of roughly what percentage of your time your expecting to be spending on the transformation process of FEMSA and how much time in your new responsibility.

Alfredo Martínez Urdal: I think that the stag certainly most of the time would be devoted to the FEMSA Cerveza. But that thing. is on track. Really I would think it would be maybe 50:50 or 60:40, but basically do a lot -- most of the work has been done there are some, but we still have to do some brand development that would be basic work that has be done, but I call part of the operational potential, but I certainly and as far as our capabilities are concerned that is pretty much is now a matter of third and fourth level competences of the skilled (inaudible) down at the street level, but we were working on that very, very successfully. We have a client 14 traveling laboratories where we go to the different markets and we do the training of the people for what is the instillation of VIP and what we expect, how did we expect them to work. This has to be a successive process that is already in place and that would be wonder things at but at least we would see into that process is completed.

All these questions are in board level it is related to this restructuring and management. I can tell you that the first priority or the first understanding of restructuring lasts, you have to have in mind the continuity of the transformation process. That was the key concern in every discussion that we there and the board actually reinforced that, so I would the board conveyed to Alfredo the message that the confirmation process is still a part of (inaudible), but he will be changing jobs in the way he addresses that, but the concern of the board was very clear and there is not going to be anything that impedes this process to continue.

Alfredo Martínez Urdal: And also I would like to point out that the two executives named have been board the whole transformation process and has been very key leaders in it and I think I feel very comfortable with that situation and I am sure that we will bring to full potential the transformation process is now in place.

And Alfredo, I guess we are sort of entering the final stages of that fear characterization of the transformation that you have put in place back in the year 2000, I am just trying to make sure I understand exactly how thing going to play out or try to better understand how they are going to play out in the next over sort of one to two years. You mentioned that you have the ERP in five areas and that you are putting it in 52 areas and I thought use of that is going to take to 2005.

Alfredo Martínez Urdal: I would say we would have about 70% of the volume by the second semester of 2005. Right now, we will have about five markets completed by January and that is really zapped together with some brand of all of (inaudible) done. Really, the two longest critical paths, what has been completed has been the logistical part. This process of transformation really has five parts to it and we are really answering the questions, how do we do things? What should we be doing? When we should be doing them? Where and with whom? And I would say that well along on the logistic (inaudible) has been finished, so I would say that how we go to market has pretty much been defined and we are in the process of rolling out what will enable us to be able to pinpoint where and when, and who we will go to market with. And then the other question of what we take the market, there is a brand of element piece that we are working on and that will be soon done. For all this, you have a different time frame between when you make your decisions and when you can roll these things out.

OK. And I know that this is the primary aim of this conservation was not cost reduction, but there is some cost efficiencies you are going to gain as you rationalize some of the distribution of the structure, so, can you walk us through has that process been done? Is it in the numbers?

Alfredo Martínez Urdal: The problem is you don't see it, because what you are seeing are operating costs and you know our EBIT. Now what disguise in there, is that the savings we have had on logistics. All of our saving has been transferred into the cause of the transformation process. This year we are spending substantial amounts of money on ERP and I am sure (inaudible) you can point that up and that of course is coming in the market that has been difficult to handle because we have not had place increases. So it has been a challenge to be able to recover sufficient savings to be able to generate a profit level and still be able to sustain the transformation process.

OK. And then, two more remaining questions. Once you finish the full integration, I guess by the end of 05, I guess that we are thinking that a lot of this is going to come from better revenue management meanings to have better. I am thinking that that is better pricing, but what is your biggest opportunity, is it differentiated pricing, it is better sales through the existing point of sales more coverage. What is the most critical issues from a distribution point of views that you want to improve through this process.

Alfredo Martínez Urdal: Well. I think, there are two things, there are two basic pieces, which is your execution capabilities which means on the street, pinpoint level and your pricing differential, and I would also think brand of differentiation which is not only price, but it includes several other things that I don't we want to go into too much detail right now.

OK., and I guess the last question is you mentioned that the branding part is going to happen soon. I guess the obvious question is given how important brands are. Why is it a sort of tail end of the transformation process if you could elaborate on that?

Alfredo Martínez Urdal: Well we were looking at it, you know, those time lines sort of coincide. You really can't move a lot of brands in a lot of segment that portion of the market unless you have the ERP capabilities.

OK, Thank you.

As a reminder, Ladies and gentleman, if you wish to ask any question at this time, please press "star, one" on your push button telephones. The next question comes again from Marco Vera, please take your question.

Hello again, I guess the follow-up from Lori's question has been how much have you been spending on your ERP this year and now their implementation related issues, so that we can try and quantify a bit of that benefit.

Alfredo Martínez Urdal: Marco, there are part, the ERP part has been in the topic, part of that now is being reflected as part of the mobilization as we mentioned in the (inaudible) part of the increases. Means of the expenses is part of increase, has been in the (inaudible) position of the ERP and fulfill. As also 2002 the cumulative investment in ERP has been $200 million. The other parts of the transformation, that is, based on accounting rules cannot be even though, they will provide benefits in the future, do not comply with accounting rule (inaudible) mentioning we had been increasing our level of operation expenses in the last few years.

Thanks.

The next question comes from Jose Galvan of BBVA. Please state your question.

Juan José Galván: Hello, good morning. Some questions regarding Cerveza. On which place, can we expect regarding pricing (inaudible) for 2004 and can we expect an increase at the beginning of the year. Also in the line of the year, the main Cerveza, what are your expectations regarding the operating margin for 2004 and finally can you give us an update regarding your strategy of -- for India -- in Central Mexican sounds that evolving. Thank you.

Alfredo Martínez Urdal: I think that, we continued with that work. Our criteria is not that providing any valid as for the future, as Federico evaluates in the conference call of the - it was a first quarter of -- the end of the year (inaudible), we will continue to not providing value and with respect to pricing and volume in the future. As, the question in the India has been growing with us - as we mentioned double digits and has been so faithfully solid in with a lot of success in the Central and the Southern part of Mexico.

Juan José Galván: Thank you very much.

The next question comes from Alex Robarts with Santander. Please take your question.

Yes, hello. Just taking advantage, of having Rado here, I mean the, just mention how your saving about 50% of your time, you know, in this, deputy CEO position is now operating lines to the other businesses but, I mean, what is -- I mean, a deputy CEO and I guess, is it fair to assume it, perhaps, this time might be spend looking at the integrating issues with cost and may be ultimately the question of whether you guys kind of over the 5 year time frame or so, whatever moved -- had been, a really a butler versus a brewer, I mean, is that a kind of a safe way to think about it?

Alex, this is Federico. Reality again was, you are talking about this specific points which I' tell, will not just start to get into that. The main issue is that you would be supporting Antonio and the board in analyzing the overall strategic direction of FEMSA. For me to try to answer if the (inaudible) specific worries are conservative all those. I think I would be a little bit to surely varying on my side as we have said is knowledge of the beverage business in Latin America is tremendous both in the beer and soft drinks and we have a lot of issues in Mexico and in other countries, so the complexity of defining the strategic direction for center has increased, and now it is going to be a very (inaudible) he will be supporting Antonio in a lot of (inaudible).

Alfredo Martínez Urdal: OK, I mean I get, but we are kind of in several conference call prior we can talk little bit about the integration with cause and I think you kind of chide back and kind of talking about you know items beyond warehouse sharing and such, maybe you could kind of just give it another past update on your current, you know, thoughts here six months into owning Panamco, if there are any other changes of this account. How are you thinking about integration with cause and you know specifically, it seems to that the bear aspect of going into Argentina is left, is going to top because of this legal idea but I mean is beer going into central America, is that something that perhaps is a little bit more likely.

I can tell you the-the people of (inaudible) are completely dedicated to actually swallow the big, big theory. It was a very large and very complicated operation and I think I could describe in some manner, all of the advancement that they have done is a tremendous job what they are doing, but it is also a massive effort that is being exerted in trying to get hold of that very complicated operation that is, a lot of things moving on there. I can tell you now that have been the priority for everybody in the realization on this month. It is too early for us to start looking deeply into its more complicated or structural issues that you are mentioning now. (inaudible) we don't have a position.

OK, fair enough. Just shift into the export, they are actually interesting to see the growth in 3Q. How was your growth in the US versus the US import beer segment? There is still now, and really the strength of segment itself in the US returned the corner as far as you know obviously a very difficult first half and might you give us some color as to following or not following the idea, you know, kind of doing some price increase that we are seeing from the (inaudible).

Alfredo Martínez Urdal: We are well being in the (inaudible) represent in the quarter. Is a little bit lower than the leader (inaudible), but we do see signs of recovering (inaudible) we are affecting again the (inaudible). In the (inaudible) we increase prices (inaudible) in some part of the (inaudible) reflects the benefit in this (inaudible) about (inaudible) and yet we will be reviewing how that the price implementation was in the market and even that is room going that we can repurchase we will consider that but we do not hire us I will be featuring it.

OK and I am sorry, just to understand the first part of your answer, what was, I mean the import dear segment as a whole, what was that growth in 3Q, obviously you were referring to that?

Alfredo Martínez Urdal: I would have wrote to the sales to the sales grew 8.4%. Information of, we have OK, Neilson (ph) shows that, but that is not the total industry, farther news and recover that, that shows 4.4%, but the information does appear to have an somewhat 9 compared to 37.6 base, so it's a little bit that we were more or less for the quarter, we were along with them, but that increase of our competitory thousand Nielson and information rather then, we don't have the total inwards.

Right, so 4.4 is your sense of Neilson is what the import segment grew.

Alfredo Martínez Urdal: Yes, that's the income said.

Got you, OK and then a final question here turning for, I thought was you know, this idea of what's going on with your average selling price and the mix shift to the premium presentation, I mean can you talk a little bit about where that ship ultimately is going and may be just give us some numbers as if what do you think are, how much of your sales do you see are right now in premium presentation and where might that go in the next quarter?

As if you see the trend in the sub particles is reflected in the non-excess of the privileged, the mix has increased about 1.5% of point from a cumulative service through that to September. This is accounting, it's been not necessarily including both. But that friend is more or less, it's not a leader of let's say that we are a pushing that specific going to that premium is as well, for using and markets where those for contention Cerveza or rate of those received.

I am sorry, specifically what is the premium presentation?

Basically (inaudible)

Got you, and how much are cans right now the percentage of total sales.

23.3%

OK and that should perhaps get higher or that particular percentage or do you think that I might be stable going forward.

Going forward, I don't know.

Alfredo Martínez Urdal: I think it depends a lot of how the Mexican economy performs. Chance are something that goes up in the mix when you have better, you cannot make, you have more money disposable income and people will go to the can and in terms of noise and markets, the can has been horrific as of the lack of disposable income because employment has going down. Employment in the Northern market has come back, that's where the can is very strong, you could have a greater mix of cans than you do today. that is very dependent on the economic factors.

OK, thank you.

The next question comes again from Lore Serra. Please state your question.

Hi, this question is like I guess for Federico, or has there, and it relates to this show's information at this FEMSA, I guess one of the things that you represent in your opening comments, was that you are finding additional synergies outside of Mexico, yet you sort of decline to put a number on that, I think we are all grasping because of the difficulty of analyzing this company, so I guess my question is if you don't want to tell us how much of additional synergies are, when do you think you are going to be positioned to tell us.

Do you mean of all these tenders used to outside of Mexico.

Yes, Exactly.

At the end of, we would be report that the you know, we disclose during our conference calls of, providing some guidance into Q2, we mentioned when we have this acquisition, it should comfortable enough for our synergy team Mexican and that we will mention in one program even though they are figures. In the case of the rest of the operations, I would say that more than synergies is this practices, is and adopting the operations to our standards. I would not make really call them synergies because the fact no.

Yes.

So, what we are doing right now is reflecting as they are accruing some of the savings that we got by closing this plant or distribution centers in some of the areas. In that, for example, the opportunities are not there because of that but because of greedy (ph) transforming or reinventing the business and moving away from this or say this often, I find very difficult to try to set up numbers for those because of the disappoints of the practice that we are applying in each of the other countries.

OK, so what we are just saying is we just going to see them a lot into the numbers?

And I think that we should have explained this as they have to sent in the numbers, as well as the what you got up the idea of what is happening with the businesses.

OK, and you recently made some changes in terms of your footprint and in Colombia, was that reflected in the third quarter or should we expect to see that in the fourth quarter.

As the footprint, you mean, the is closing of some of this facility --

Yes.

No, it's the field of the works. We got close if the facility, but it just happened during the, very recently, so we would expect to reflect that in margin to fourth quarter and next year.

OK, thank you.

There are no further questions. I'll turn the conference back to Mr. Reyes.

Thank you for joining us in this conference call. We hope that this has been useful for everybody. Thank you very much.

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