Fomento Economico Mexicano SAB de CV (FMX) 2003 Q4 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to FEMSA's fourth-quarter 2003 earnings release conference call. (OPERATOR INSTRUCTIONS). 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's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties which could materially impact the Company's actual performance.

At this time I would like to turn the conference over to Federico Reyes, CFO of FEMSA. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and thank you for joining us in our comments on FEMSA's fourth quarter and full year 2003 results. On the call today are Hector Trevino, Chief Financial Officer of Coca-Cola FEMSA, Gerardo Estrada, Chief Financial Officer of FEMSA Cerveza, and Juan Fonseca, head of FEMSA’s Corporate Finance. We will be glad to answer your questions today.

By way of context let me start by providing a brief overview of the economic environment as we perceive it. While there is evidence that industrial production is picking up in the United States, Mexico has yet to receive the full benefits of this, which should be reflected in industrial production and employment increases during 2004. In fact, last December industrial production in Mexico show an increasing underlying growth rate of 2.4 percent. And the overall economy, as mentioned by the (indiscernible) Economic Activity Index, registered an annualized increase of 3.9 percent.

The low interest rate environment, combined with growth in consumer credit and a slight increase in wage purchasing power, are boosting consumption levels in Mexico. For example, as of December retail sales forces an annualized sales growth of 4.1 percent. Therefore we're cautiously optimistic and expect to benefit from these trends in all of our businesses as the year goes by.

Let us move on to FEMSA and our results. 2003 was a landmark year for us mainly as a result of the finance execution. However, we are pleased to report that progress was made across all of our operations. At Coca-Cola FEMSA we made significant strides towards fully integrating the new territories. We continued transfer of KOF best practices and various operating processes to our new territories has been done with a keen awareness that different markets will require different solutions.

In Mexico we developed target competitive strategies to meet the changing market dynamics. At FEMSA Cerveza solid volume growth trends observed in the second and the third quarters continues through the end of year. These allowed us to close the year in positive territory up 3.3 percent, and confirm our belief that market conditions are appropriate for selected price increases which we are implementing in the first quarter.

At FEMSA Cerveza the continued expansion of Oxxo stores, combined with an increased level of traffic and a high ticket per transaction resulted in a strong revenue growth. Our packaging operations benefited from increased sales to the new KOF franchises.

Before further discussions (indiscernible) fourth quarter results. As always we encourage you to listen to a replay of Coca-Cola FEMSA's conference call which took place earlier today for a more detailed discussion on operating performance. We must stress that due to our recent acquisition, the financial results of Coca-Cola FEMSA as reported are not comparable to the same period of last year. Reports in volumes however are comparable.

Several items stand out from Coke FEMSA's fourth quarter and full year results. On the integration continuation front after a significant rationalization effort, we reduced the total number of plants from 52 at the time at the acquisition in early May to 33 at year end. The active base of the Company is becoming much leaner than it was when we closed the acquisition.

In Mexico total sales volume remained unchanged during the fourth quarter of 2003 and increased by 2.2 percent for the year. New favorite brands such as Fanta Multiflavors, Fresco Pink Grapefruit, and Lift Green Apple. The incremental sales volume of Ciel water in five liter presentations for Valley of Mexico.

And volume growth of our Coca-Cola brands all continued to (indiscernible) sales volumes growth. Despite the volume increases, all of our Mexican territories face a challenging environmental in 2003 as the market reacted to price based competition, particularly in (indiscernible) pressuring our margins.

We continued to fine-tune our strategies in order to meet the challenges presented by new and existing competitors in Mexico. In KOF territories outside of Mexico results were very encouraging. Throughout the year rationalization measures were taken to increase profitability and improve the structure of each market as required by introducing new presentations, modifying the returnable mix and increasing our direct contribution in some markets. For example, Argentina reached record EBITDA margin of 22.1 percent in the fourth quarter. And Brazil also generated positive EBITDA for the first time in many quarters.

In our beer operations FEMSA Cerveza closed the year on a strong note with a domestic volume growth of 5.2 percent during the fourth quarter. For full year 2003 domestic volumes were up 3.3 percent. Despite the lack of a price increase in Mexico, we were able to successfully shift our package mix to our more premium presentations increasing our nominal average domestic revenues per hectoliter by 1.4 percent.

Additionally the domestic market Sol and Indio were again the fastest-growing brands. In export, sales volume was up 2.9 percent during the quarter and 1.4 percent for the year. Selling expenses decreased by .3 percent during the fourth quarter due to various cost containment initiates, while administrative expenses in turn increased by 9.7 percent. The increase in administrative expenses was mainly related to the amortization of investments in our ERP system.

Operating income before management fees grew by 2 percent in the quarter. For the full year however, operating income decreased by 2.1 percent primarily reflecting the lack of a price increase during this period.

We would like to give you an update on the progress on the market rollout of the ERP platform. As of the end of 2003 the system was operational in nine markets, representing approximately 36 percent of our domestic direct volume, all 27 percent of our total domestic volumes. By the end of this year approximately 30 percent of our direct volume should be operational, including volume from the Valley of Mexico. We expect to finish these rollouts in the first half of 2005.

More importantly, our people in the field are learning to use (indiscernible) tools in our beer market in conjunction with our marketing strategy, setting the foundation for price differentiation by brand and for the development of revenue management capabilities.

Moving on to FEMSA Comercio, the Oxxo chain continued its strong growth trend with the addition of 257 net new stores during the quarter, ending the year with 2,798 locations nationwide. Same-store sales increased by 11 percent during the quarter as a result of an increase of 6.7 percent in store traffic and a 4.1 percent in the average ticket per transaction. However, administrative expenses increased by 12.3 percent in the period as the Company's infrastructure was strengthen further, and two new regional administrative officers were added to the system. The operating margin expanded by 72 basis points to 5.2 percent. For the year, and in spite of significant selling space expansion, operating margin was stable at 4.7 percent.

FEMSA's consolidated income from operations increased by 41.4 percent during the fourth quarter resulting in a consolidated operating margin of 16.5 percent for a reduction of 130 basis points relative to the fourth quarter of 2002. These margin contractions primarily resulted from higher costs of goods sold driven by dollar denominated raw materials, as well as incorporation of Coca-Cola FEMSA's new bottling territories that have a lower-level of profitability than the original territories of KOF.

For the full year consolidated operating income increased by 22.6 percent, and operating margin contracted by around 180 basis points. Below the operating line, net interest expense increased as a result of the new debt related to the Panamco acquisition. We also recorded a foreign exchange loss of 452 million pesos in the fourth quarter reflecting higher use of dollar-denominated liabilities from the new debt incurred, and a weaker exchange rate for the Mexican peso versus the dollar during the quarter. For the full year, foreign exchange loss was 2.5 – (indiscernible) billion pesos.

Moving on I would now like to comment on the favorable evolution of our debt structure. As of the end of 2003 our consolidated net debt reached $2.7 billion. We can achieve significant balance in the composition of our long-term debt with approximately 48 percent denominated in U.S. dollars and the rest in local currencies, 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 4.7 percent for our total dollar debt and 7.3 percent for our total peso debt. For the 71 percent of the total debt that has a fixed-rate, the weighted average costs are 12.8 percent for the dollar portion and 9.5 percent for the peso portion, significantly reducing our exposure to interest rate volatility.

We will also like to note that from the Panamco growth in the second quarter to the end of the year, our (indiscernible) allows us to reduce our consolidated net debt by approximately 230 million. In addition, the effect of the devaluation of the peso in our peso denominated debt represented an additional reduction of approximately $120 million in our consolidated net debt (indiscernible).

Now we can turn to your questions.

Jose Yordan with UBS.

I just have a quick question on the price increase in (indiscernible) Mexico in the past couple of weeks ago. Can you give us what the weighted average of this increase is? I have seen some numbers in the local press going up as much as 8.5 percent or something like that. If you could clarify what the weighted average for the whole country would be, that would be great.

This is Federico Reyes. We are expecting 5 percent in our income in nominal terms will depend on the inflation, but all of the others will be 5 percent.

Robert Ford with Merrill Lynch.

I had a few questions, and the first one was with respect to the nonreturnable growth it seems as if there's been more of a competitive response in the marketplace. I was just wondering if Corona’s great emphasis on the (inaudible) presentations having any impact right now?

The increase basically is related to the introduction of the nonreturnable one liter presentation that we issued in the fourth quarter, in the month of October, plus a trend that we already have in the past quarter.

So in the individual size servings are they having any impact with you right now or is it negligible?

The effect of the (indiscernible) Corona that is not returnable has not been -- affected our presentations and numbers.

Based on my observations, and I am not the writer now, but I am looking for so some confirmation. Is there any change in the trend with respect to point of sale exclusives in the sense that maybe both of you are becoming a little bit more rational in terms of going after these accounts?

What I can tell you is that the (indiscernible) of exclusives this quarter was -- increased only 4.2 percent. And for the total year it was only 6.7 percent. So in some ways it is a chance in the trend. As you recall in the first of two quarters we were in double-digit growth. Now we are in the low single digits.

When it comes to U.S. export volumes the growth rates are pretty big in the third quarter. They weakened a little bit in the fourth quarter. Can you explain what is going on there?

This was related to an increase of the loading of inventories in the fourth quarter of 2002. And this year we did not do that.

Are you going to be raising prices in the U.S.?

We have not increased them yet. But we will be following what the market can absorb the increase of some of the competitors.

When it comes to the European implementation cost with respect to specifically training and consulting, things that may not be recurring, can you give us an idea what that was in the quarter?

I couldn't give you -- when I know that you are asking something about the ERP, but specifically what are you looking for?

I was looking here for training and consulting expenses or expenses that will not the recurring?

It will be recurring during the period of the rollout. (indiscernible) mentioned, by December we were in the 36 percent of our direct volume, and we will go the whole year implementing the rollout. That has a part of some expenses that will be recurring during the whole year. Plus amortization as we start the rollout or continue the rollout, amortization also increased during the year. And more or less will stabilize throughout 2005 and start reduction (indiscernible). We are amortizing in the fourth year period the investment in ERP.

Is there a portion of that though that will not be amortized? Is this going to be incurred as part of the implementation that will not recur beyond the second half of 2005? And if so, could you tell us what that number is?

Yes, but it is a part of the risk related implementation. I do not have that precise number for going forward. But I shall say that the expense for this year it will get reduced, let's say, 20 percent in closing and in five years will be 50 percent of that 80 percent (indiscernible). And in 2006 it will be nothing of that.

With respect to brand growth, I've been a third party consultant that is telling me you've got contractions in Tecate, (indiscernible) for the full year 2003. Is that correct? Do you have brands that are contracting? Is Carta Blanca and Tecate -- or are they contracting?

Contracting? In what market?

In terms of volumes? I have got total Mexican volumes and I have got a third party report that suggests you're experiencing contraction still in Superior, but now in Carta Blanca and Tecate.

Contraction in the volume of sales you mean?

Yes.

As part of the branch mix?

In absolute volumes. They are suggesting that you're down.

In the fourth quarter I can tell you that Carta Blanca was up. And in the case of Superior we have been having the whole year reductions, mainly driven by let's say the swapping specifically in the south from Superior to Sol. One of the things of the high growth of Sol is (indiscernible) Superior, but if you take together we have a combined high growth in that region. In some areas Superior is being affected by the growth of Sol. So with Carta Blanco we have growth in the fourth quarter, certainly a lower amount of growth compared to Sol.

Carlos Laboy with Bear Stearns.

Federico, I was hoping you would comment on some recent developments and pending issues use it; three items specifically. One is the negotiated exit mechanism from the Kaiser relationship in '05, if you could give us any detail on some of the terms that you may have obtained in that negotiation?

Second of all, on Interbrew, I don't know if you can update us on where a resolution stands with respect to Interbrew and Labatt USA. And third, on this (indiscernible) money majority shareholders are coming into a few hundred million dollars. Do you expect this to have any impact on the makeup of the trust or in its duration?

Let me start with the last one. This is a very private thing of the shareholders (indiscernible) and is publicly known that those shares and the offer goes through, I don't know if they will participate or not. I assume they will. I really don't know. What will they do that again that is not for me to say how they might be channeling their resources or what they might be looking for.

The trust itself it is there. It is very stable and full support to the continuity of the trust. And it is known that the trust has sufficient shares now to have control now. And if the control of the share structure was to (indiscernible) as is planned in 2008. I don't know what else I can tell you about that. I don't see this as having any impact on this (indiscernible) near-term, but again I'm not qualified to speak on their behalf.

With Interbrew we have mentioned in recent months we have had conversations with our partners, and conversations are still there. However, potential outcomes, one is just staying as we are and the other might (indiscernible). But right now there's nothing that we can inform the market. I mean if there is any resolution, of course, we will immediately communicate it to our markets. (indiscernible) relationship stays as it is. Again, the dialogue has been more productive, I don't know how --.

Substantive.

Yes. We're getting closer -- we're trying to have a close dialogue, but again there's nothing that we can inform as of today.

The last point about Kaiser, it has happened that we had two things basically happening at the same time. Kaiser was approaching the Coca-Cola FEMSA to change the relationship. They wanted to have more focus on their brand. Coca-Cola FEMSA was also looking to concentrate on its own portfolio of brands, so it wasn't -- the two partners ended up negotiating, it was something that was valuable for both.

They have been concentrating on selling their brands, and we have been concentrating on selling our brands. We think it is very positive. It is a stronger combination than it was before. And it is a temporary arrangement. The intention of the processes is that at the end of three years the original situation will be restored in which Coca-Cola FEMSA will again be responsible for sales of beer (indiscernible) in the brand. We think it is positive for both. And again we're looking forward to this being something that is going to be good and will be a more strong channel for both types of beverage in the field. That is the intention of the parties, and we're very encouraged by the initial results.

Federico, but if you need to exit, you are not stuck there for 20 years?

Parts of the new agreement, it was contemplated the possibility that it might not be -- might be the case that either party would decide to exit. And yes, there was no resolution related to that.

Lori Serra with Morgan Stanley.

Yes, I have a couple, but let me start on beer. Could you just comment or just give us a better clarification of when the price increases started in beer, and when you will finish the rollout of those price increases? And I guess related to that, it looks to me like over the course of 2004, I'm sorry, 2003, use lost slight marketshare on an annual basis, maybe something like 25 basis points of market share. If there's any way you could give us some color on what you have seen on a regional basis, that would be helpful.

This is Federico. Yes, in terms of -- our numbers tell us that in the full year we lost 21 basis points in marketshare. Basically it was denominated in the fourth quarter. We were almost -- even as the end of -- very close to the close to the third quarter. We do not have exact figures of when our competitors announced their price increases. But we know they started increasing prices during the month of January. We acknowledge one part of the volume was related to that announcement of the price increase. And the effect of the price increase was started during the month of February. And we are in the process of rolling out, and we're expecting to finish the price increase this week, or at the latest next week.

In the U.S. business you mentioned in the press release that part of the reason for the JV decline at Labatt USA was higher marketing expenses. Could you give us a sense of whether marketing expenses -- or greater marking researches are being dedicated to your brands in the U.S. market as part of the Labatt USA agreement?

That is related to the fourth quarter. In a way that lets say to spend the marketing support to (indiscernible) not discounts but to support promotions at the (indiscernible) was more easily distributed in the year. And besides part of our agreement with them to include Bass in one of the (indiscernible) to be distributed by Labatt USA. It was wasn't a specific program to support our brands, and that was implemented.

Last question, if I could ask both you and Hector, could you just run through your outlook for 2004 in terms of the major commodities in your cost structure? That would be helpful.

Basically what we have in terms of aluminum and gas, both of them we have hedged. We're not expecting -- I should say we're expecting lesser of an increase compared to U.S. inflation. And in the case of the domestic gas, which is the old stuff that we have also hedged. It will be an impact a little bit above inflation, but we will compensated with (indiscernible) with raw materials. We're not expecting lets say price increase per hectoliter related to cost of raw materials. Assuming that the exchange rate will behave along with inflation. That is on the beer side. I don't know if --.

High, Lore. On the soft drink side one of the big unknowns that we have is what is going to happen with sweetness in Mexico. There were some expectations that high fructose would be allowed again. This has not been the case clearly as of the beginning of year. Sugar price have been increasing importantly in the past. And we think that if high fructose is not allowed it will continue to increase even further this year. So we are expecting some price increases (indiscernible) slightly above inflation.

And for all the challenges we can start using a better mix of raw sugar versus refined sugar. In the case of BC (ph) which is the other big component, all of the movements on the exchange rate was in a very stable environment for raising prices.

Juan Domingo with the Gabelli & Company (ph).

My next question is on -- I just have one question on Oxxo. Has there been any thoughts, or better yet, will you have -- or you consider a spinoff of the Oxxo division to keep management focused on its coke and beer business?

The Board has recently confirmed the role of Oxxo as an integral part of our beverage strategy. I would say that right now we have no plans to do that. There is still a lot of growth to have there and every day Oxxo is getting to be a very important piece in the way we are covering the market. And the (indiscernible) that they play is really quite important.

We all realize that at some point in time the way Oxxo is growing, it is generating a lot of volume by itself. At the time in which it loses some of the present relative importance with our beverage operations, would we will reconsider spinning it off, yes maybe. But again, which presently it has been confirmed an important part of our beverage strategy.

Alex Robarts with Santander.

A few questions on beer. I wanted to start out first of all with just a clarification on the price increase. I have heard also that the price increase by FEMSA Mexico began in the middle of January. And I just want to confirm and clarify that. Are you saying that in fact the price increase starts in Mexico in February?

Yes. I know that (indiscernible) my recollection is that we everywhere the price increase within the month of February. It was not everywhere at the same time. It started in the first week of February and we went making a rolling out with different prices in different regions. And what I'm telling you is that the (indiscernible) will represent about 5 percent. But it was started in February (indiscernible) that it started in January with our competitor.

As far as I can understand this and this kind of a month here gap. You starting a month later than they are, because they went up January 1. What is the thinking behind that? Were you looking to see about the stickiness, or if you could give us some color further on the strategic idea of waiting for a month?

We did not wait. We had to make decisions what to do. Where to do it as we have told you. What we want is to be able to implement a differentiation of pricing and to start using revenue management with our new tools that we are learning to use -- lets say our salespeople are learning to use. And we wanted to take advantage of this opportunity to be more focused on what to do, where to do -- what to do.

Just drilling into the 5.2 percent growth domestically in the quarter, can you give us a sense -- you have done this in other calls -- the regional growth north and central and south? How did that 5 percent -- how was it allocated roughly?

I shall tell you that the evidence 5.2, it was originally it was 12 minus 50 basis points. So from 4.6 to 5.7 more or less. It was an important increase across the board. It was not even, but I should say that everywhere we had 4.5 plus growth.

I'm sorry. It is 4.5 roughly average in each of the regions?

The average was 5.2. The region with the lowest growth was 4.6.

I think what you're seeing, Alex, is for several quarters we had seen very marked differences between the north and the center and the south. This quarter we really saw them coming closer to the mean.

That is helpful. I'm interested to hear why you think -- you had stabilized the market share. Obviously focusing on quarterly market share is not the only thing here, far from it. But stabilizing the market share versus the competition 2Q, 3Q, and getting a good -- getting this slower growth here versus the competition in the fourth quarter by a couple of percentage points. What do you think was explained in your opinion the difference in the relative growth rates?

I shall say that the focus of the (indiscernible) people -- it was a mandate from the Board to take care of market share in a profitable way. As I said in the past, it is not a matter to gain or to sustain market share, it is related to profitability of the industry. Whether the people had been part of the critical success factor to maintain and even looking for possibility to gain market share.

And what we're anticipating is -- let's say if we were successful in that second and third quarter, and we were sure that we were getting that during in the fourth quarter. But we do not have the exact figures of the announcement of the price increases on Morello (ph) during the month of December. How much of that growth -- the excess growth that they had, we had also give us the same market share. I cannot assure that they were not announced that the price increase we will maintain the market share in the fourth quarter also. We will be able to lose that by the end of the first quarter whenever we compare our volume with their volume we will know how much of that goes to 20 basis points because of the anticipated announced price increase.

Fair enough. Last question, just really on the beer administrative expenses just to get an understanding here. If you look at the line items the P&L, (indiscernible) beer on an annual basis for the full year but also on the quarter 4Q, the line items that grows the most is this admin expense line. Clearly fourth quarter has this boost related to the commercial module of ERP. And I just wanted to get an understanding, so basically as you roll this out say you had 100 people in the area, you hire people on the payroll I guess in this fourth quarter to implement this. Is it linear in the sense that as you roll out more of the ERP into '04 that the head count increases as well -- that expense number comes out? How much is just kind of front ended? If you could give us a sense of where might this admin as a percentage of sales number just be looking out into '04?

Its very basically accounting rules. If you let me (indiscernible) my decision will be that that should be a sales related expense. But the accounting rules shows that anything that you spend on information systems should be registered as an administrative expense, even though the administrative systems are used by the salespeople. What we're talking about is totally related to systems. One is the amortization of the investment that we capitalized. And once we start using it -- we started using not in the fourth quarter. We started using it in the first quarter. But let's say in our pilot period. And with slowly the roll out during the second quarter and we intensified the range of the roll out in the fourth quarter. And as we continue rolling out during the year we will be starting the amortization of the new series as we're implementing. That is for the part of amortization.

Also, the people that you use to train -- that you have to use to train people to assure that the implementation is (indiscernible) it is an amount of people that is not permanent. It is temporary, basically. That cannot be part of the assets so it is expense. So you have to every year to go over this that during the year that will be -- it is not one time. It will be for the whole year of 2004. But it is it something that will disappear once we finish rolling out. That will happen in during the first semester of 2005. I don't know if that clarifies it?

No, no that is helpful, but just to get the amortization schedule then, is it safe to say that there is more front ended amortization as you roll out the ERP? Or is it like as you roll out the ERP this year that amortization level will continue to climb up and then level off?

That is it -- what you said is the situation. We are increasing the amortization by a series that we increase -- or that we start using the system. The tenure of the amortization of the system is four years. starting with the month that we first start using it. As we use the system in other cities the period of amortization it will be less than four years. So we will end amortizing specifically the convention load by the end of 2006. Yes, by the end of 2006.

Marco Vera with Deutsche ISC.

From what has been said I have to assume that your recent price increase climbed after (indiscernible). You must admit some sign of Superior revenue management in the regions where ERP has already been rolled out, like say Monterey. Can you give us some specific examples of your improved credentials in this sense?

I can tell you the first part of this year that -- I rather not give you details because it will not (indiscernible) only for you. And I think that you will understand that.

Basically in national, if we go and look for evidence through third-party consultants or ourselves, we will find it, or just in the regions where you have rolled out ERP?

Yes.

National or just in the regions where ERP is rolled out?

You can go everywhere. What I can tell you it is that we will be more successful where we have better tools, and even more successful where we have people that already excel those tools. We will be seeing an success let's say in using those tools or using the revenue management. Because we cannot expect that people without those tools would excel in the use of the tools will be able to perform the same way that the ones that have all the tools and the expertise.

So given similar weighted average increases for both (indiscernible) and if for some reason volume growth were very similar domestically, we should expect your revenue lines to outperform (indiscernible) this year?

The right answer to your question should be yes.

Selso Sanchez (ph) with ING.

Actually just to follow on this ERP thing a little bit. I think I understood the answer to Alex's question which is that you have started rolling the expenses for the ERP out in the first quarter of 2003, and obviously that takes you through to 2006. That is your four year amortization period. It is that correct?

I hardly can hear you. Could you repeat your question please?

Sorry. Just to clarify, my understanding of the answer to Alex's question was that you started amortizing ERP in the first quarter of 2003, which takes you through the end of 2006 to look for your amortization? Is that correct?

That is correct.

But the ERP --.

That is for the commercial model. We started amortizing the financial model this last year.

Now the --.

2002, sorry.

The commercial model to the extent to which you actually rolled it out in practice though in these nine cities was not until the fourth quarter in fact. Can you give us an idea of what part of the fourth quarter, was it December, was it there for the whole fourth quarter?

I can tell you that in the first quarter we had one city. In the second it was implemented in another two cities, and another three cities in the third quarter, and three more in the fourth quarter.

I guess I am just trying to get a feel for should we see the real benefit for these nine cities, and it sounds like it was amortized -- if it was rolled out that gradually then we won't see as big an increase as I might expected from the first quarter of '04 versus the fourth quarter of '03 from a benefit standpoint.

Let me put it as the growth, of course, will be higher during the first quarter and lower at the end. From the point of the benefit, it should be shown by the end of the year period.

Can you give us an update on the distribution -- distributorship agreement -- sorry -- negotiations that you had talked about last year in the northern part of the country, the northeastern part of the country? Is there any update on that?

The only update I can tell you is that has not been closed. Amortizations continue.

Is there a sense that it is any closer or further away that it was when you spoke about it in the middle of year?

I don't have anything for that.

And then just finally on the Oxxo division, obviously the results look impressive, but can you clarify of the stores have been opened this past year how many were Barra stores? And you continue to open those, or have you really focused largely on just the Oxxo chain?

By and large it has been Oxxo. The Barra format continues to be in pretty much the same stage it has been for awhile now, meaning basically around the Lyon territory, still tweaking the model itself. In terms of the number of stores probably in the single digits, in terms of new (indiscernible). So that gives you an idea. It is basically Oxxo that we have been opening.

Single digits for the full year of 03?

Yes.

(OPERATOR INSTRUCTIONS) Lori Serra with Morgan Stanley.

I have a question for Hector on Colombia. You mentioned in the conference call this morning that the competitive environment has changed a lot in Colombia. And I know that the Panamco people had spent some time thinking about whether their product pricing had just gotten too high in that market. If you think about the pricing infrastructure in Colombia, do you think that there's tactical things you need to do to give more affordability? Do you think in a generalized sense pricing levels currently are higher than they ought to be?

Yes. The situation in Colombia basically what we're doing right now is trying to focus a little bit more on return on presentations, which is of cost trend across our territories. We do believe that (indiscernible) will bring some affordability to our consumers, and that is where we're focusing. The difficult part in Colombia is not so much with brand Coca-Cola but with flavors as we compete with (indiscernible). It is a very new competitor on the flavor market. But the main focus that we have with respect to any changes in pricing that architecture has to do with the introduction of returnable bottles in Colombia.

As you benefit from all of the cost reduction that you talked about this morning in terms of the asset rationalization in Colombia, should we expect that to be reinvested in pricing, or should we expect that to be reflected in better profitability for the Colombian franchise?

We are expecting to see it in better profitability of the Colombian franchise.

(OPERATOR INSTRUCTIONS). If there are no further questions, I'll turn the call conference back to Federico Reyes to conclude.

Thank you for joining us. And good afternoon.

Ladies and gentlemen, if you wish to access to replace the replay for this call that you may do so by dialing 1-800-428-6051 or 973-709-2089 with the passcode of 329800. This concludes our conference for today. Thank you offer all for participating and have a nice day. All parties may now disconnect.