Fomento Economico Mexicano SAB de CV (FMX) 2004 Q3 法說會逐字稿

Good afternoon everyone and welcome to FEMSA's third quarter earnings results conference call. As a reminder, today's conference is being recorded, and all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers 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 could materially impact the Company's actual performance. Furthermore, the Company -- the statements made in this conference call do not constitute an offer to sell, or the solicitation of an offer to buy any securities. There shall not be any sales of any securities in jurisdictions in which such offers, solicitations or sales would be unlawful prior to registration under the securities laws of such jurisdiction.

At this time, I'd now like to turn the conference over to Mr. Federico Reyes, FEMSA's CFO. Please go ahead, sir.

Hi. Good afternoon, ladies and gentlemen, and welcome to our discussion on FEMSA's third quarter results.

With me on the call today are Gerardo Estrada, Chief Financial Officer of FEMSA Cerveza, Hector Trevino, Chief Financial Officer of Coca-Cola FEMSA, and Juan Fonseca, Head of FEMSA Corporate Finance.

By this time, most of you have likely read our earnings release, so I'll try not to repeat what's there. We plan to use most of our time for your questions and answers. So with that being said, let's move on to the results.

We are very pleased with the achievements obtained in the third quarter of this year. Moreover, 2004 is shaping up to be a good year, reflecting solid performance on all of our operations and meaningful progress towards our long-term beverage strategy.

On the strategic front, in August we completed the repurchase of 30% of FEMSA Cerveza, and since then we have been hard at work with Heineken U.S.A., in fine-tuning our plans for the key U.S. market.

Now, moving on to the business results.

At FEMSA Cerveza we are pleased to report another robust quarter on all fronts. Domestic volumes grew 4.3%, and depletions increased by 8.1% in the U.S., as wholesalers moved some of the inventory built up during the first half.

While we experienced some pressure in the gross margin from increased costs of sales, we were able to offset these to increase efficiencies in SG&A, and operating income rose 4.6%.

In order to lever the capabilities being developed and to continue to broaden our portfolio, we launched several new products and SKU's that have been well received in the marketplace, such as our Sol Brava brand extension. And on the transformation front we continue full speed ahead in the final phases of implementation.

Based on the last conference call, it is clear to all that many of you are keen to understand what has been happening in the domestic beer market, in terms of pricing and market share trends. Therefore, I will spend some time on that subject, as well as on the overall progress of our domestic beer strategy and the competitive trends that are beginning to impact our operating environment.

As you recall, our market share gains in the first 6 months were a result of exceptional factors as well as internal initiatives. We attributed approximately two-thirds of those gains to a 6-week delay in implementation of our price increase versus our competitors, and the geographical effect resulting from the improved economic and weather conditions in our dominant markets, relative to the rest of the country.

The remaining third, we attributed to our initiatives in the marketplace, such as enhanced availability for products, which we refer to as 'increased coverage'; improvements in our packaging and product portfolio and more effective execution of our strategies through the use of pre-sale and ERP.

ERP and pre-sale are enabling us to implement new commercial practices with the point of sale, in order to ensure an aligned execution for our entire brand portfolio. As a result, we are able to bring differentiated offerings to our customers, and selling the same presentation of our products at their different price points, per brand, something that was not possible before the transformation.

Today, our sales organization is not just meeting sales targets, they are now responsible for maximizing profitability, which includes a mix change, the differentiation of prices per brand, package and channel, and the marginal effects of pricing promotion. Additionally, they are responsible for their asset base, including working capital.

Our sales force is shifting from focusing only on volume, to focusing on both volume and value, working with retailers to achieve the appropriate balance.

During the third quarter we maintained relatively stable pricing, and we anticipate a stable market share, with the possibility of a slight lull, given steeper discounting activity from our competitor in certain regions throughout Mexico. We are responding to this competitive dynamic with some promotions for our products. Our promotions have been selected, differentiated and allocated in terms of the timeframe and magnitude of the discount.

We are convinced that price promotions are valuable and beneficial to the development of the beer industry in Mexico, and that the competitive dynamic we are experiencing is part of this further development.

We will continue to improve our execution, and work hard to maintain the right balance between pricing and volume growth.

All in all we are confident that industry dynamics are becoming more positive for the consumer, and that there are tremendous opportunities for top-line growth through revenue management and increased per-capita consumption in Mexico.

Ultimately, we are not only serving our customers with the right price, but also offering a combination of broad availability of the right product and brand portfolio for the appropriate consumption occasion.

We are convinced that these changes can take place without deteriorating -- deterioration in the profitability of the beer industry in Mexico. The key is how and when to capitalize volume growth opportunities with our retailers and consumers.

I would now like to comment on the integration of our glass bottle and beverage can operations into our beer operation.

FEMSA Cerveza is the largest single customer of these businesses, consuming approximately 75% and 50% of the output of the glass and can operations, respectively.

This packaging operation has been managed in alignment with our core beverage business for some time, for integration -- integrating them with [indiscernible] volumes that grew was a shareholder of FEMSA Cerveza. As you read in our release, our Board has now approved this initiative, and therefore the next set of numbers that we present to you for the full quarter and full-year 2004 will reflect the change. This should make it easier for the market to analyze our Company, and to compare our beer operations with those of our peers.

Now, let me say a few words about Coca-Cola FEMSA, where the focus on aligning our new territories to our first-class operational standards is beginning to pay off.

In Mexico, despite increased competition in CSD's, we continued to focus on marketplace execution and building our brand portfolio through new package alternatives and targeted strategies. The results of this initiative are visible in CSD's, sales volume growth of 1.6%, and an improvement in our operating margin, which reached 21.6%, up 120 basis points versus the second quarter of 2004. However, this is an ongoing effort and there is still much to do to achieve the goals we have set.

Outside of Mexico, once again we are very pleased with the results. Every 1 of our international operations posted year-over-year growth in operating income.

1 example is the outstanding performance of Brazil, which increased CSD volumes by 12.3%, and its average price per unit case by 3.4%, resulting in 760 basis points of operating margin expansion, to 9.7% during the quarter.

All in, our international operations contributed an EBITDA increase of MXN165m, during the third quarter. We continue to see gradual improvement in all of our markets, and anticipate further growth in profitability.

If you would like to hear more details about Coca-Cola FEMSA's third quarter results, I invite you to listen to a replay of their webcast, which took place this morning.

At FEMSA Comercio, our strong sales growth was again driven by a significant expansion in the number of the stores, and by an improvement in same-store sales.

The recent openings of 3 new regions for Oxxo, Juarez, Morelia and La Paz has contributed 129 new stores, but it has also put some pressure on margins, as the growing store base begins to compensate the infrastructure overhead. In fact, the accelerated rate of store growth across the country generates some pressure on overall profitability.

ERP and systems-related amortization and expenses are also impacting margins, and as a result, operating margins for the quarter contracted by 80 basis points versus last year.

We are building our business model for the long term. Ultimately, this investment should add to our sustainable profitability in future years.

Regarding FEMSA's upcoming equity issuance, we are still in the process of having the SEC and the CNBV in Mexico review our information. Timing is dependant on this process, but we still expect the offering to take place during the fourth quarter.

With that, we can now turn to your questions. Operator?

Thank you. [OPERATOR INSTRUCTIONS].

Our first question will come from Dan Kwiatkowski (ph), with Schroeders.

Good afternoon. A question on your gross margin in your beer division. I'm having a bit of difficulty trying to understand how it dropped 150 basis points quarter-over-quarter, when it looks like your revenue actually rose quarter-on-quarter and you actually seem to have a pretty similar packaging mix.

Could you help explain that, please?

Hi, Dan. This is Gerardo Estrada.

As we mentioned in the press release, it is a combination of 2 things. Partly the -- we lost a couple of -- 20 basis points, let's say, of the price increase related to the elective promotions that we did during the quarter, as a reaction of heavy discounting of our competitors. And the other part is the impact in cost of goods sold. In fact, it is -- we calculate that the cost of goods sold of [indiscernible] lead to an increase 3.2% in real terms.

I can tell you that, that part is some increase of -- half of that is related to the mix, and the other part is related to some gap, specifically in energy, and also the new harvest that happened during the summer. It was a price increase in real terms that was affecting us in the average.

I should say, those 2 companies will give you more than 80% of the increase of our cost of goods sold.

The issue that I find quite difficult to understand is that you're supposed to be using revenue management to increase your contribution margin. And if your gross margin is being impacted negatively by your presentation mix, then surely that's your contribution management working in reverse?

Okay. Let me just explain a little bit. What we have done during this year in the price increase, as we have mentioned, is that in average we increased 5% our average price.

Certainly, if you achieve the change in mix -- have the 3% increase in numbers around 2.2 are cans. And if we got deeper analyzing the information that we have, it's basically that the brand or the presentation and cans have been growing, so it's possible for all the growth of the 2.2 in the mix is related to Tecate, Tecate Light and Carta Blanca cans. Specifically, Carta Blanca cans did not exist last year. It was a result of the successful launching of the Carta Blanca can, and also very successful re-launching of Tecate Light and also the change of image of Tecate.

So we have been working in complementing the product portfolio to our customers.

Those 3 brands that I was telling you, basically are sold in our strongholds, okay?

So that increase and also that part, Tecate specifically, is -- most of the consumption is in the towns closer to the borderline.

So our decision at the beginning of the year, and we implement prices in February, is specifically can in those markets was increased only 3%, okay?

So it is also the economy is recovering in those markets. Always in the past we have seen that as the economy starts recovering, also the mix is switched to the more expensive presentation, okay?

But once you see that the mix is switched to the growth, that we increase a lesser percentage. That's the reason why we are losing a little bit of margin.

The second part of the question is, what should we expect for the last quarter? In terms of greater margin, what should we expect for going into 2005?

As you know, we have a policy of not giving specific guidance. But I shall tell you that our cost, and let's say, that in the part of that guess and barley, it has a level that you are seeing in the third quarter. We do not see any change going forward.

In the other raw materials we have a specific -- I know that somebody is --there is a lot of speculation about what is happening with -- impact is happening in the aluminum market. What we can tell you is that we have -- also is that we have hedged for the rest of the consumption of this year. So you should expect the level of our aluminum costs for the rest of the year at the levels that we had.

We already have, also, some hedges for next year. Certainly, higher prices than the ones that we have had this year. But also we are considering that we have some efficiencies to obtain during next year.

So in some ways, we are expecting very similar cost per hectoliter than the 1 that you are seeing in this third quarter.

Okay. Thanks very much.

You're welcome.

And our next question will come from Robert Ford with Merrill Lynch.

Hi, everybody. I have a couple of questions. The first one is kind of an odd question. You guys made quite a bit of progress with respect to selling expenses, that was very impressive. And I was hoping you could elaborate on the sources of selling expense opportunity, and the extent of opportunity that you see going forward, please?

Excuse me, I didn't hear well the second part of your question, Bob.

Yes. It was the extent of the expense opportunity that you envision, going forward.

Okay. I'll do you something -- and thank you for the congratulations on the fact that we have been successful in containing the operating costs. I should say, not only in the sales part, but also in the administrative part.

The increase, as we have said, has been more related to the ERP capitalization costs.

In the sales part, we can tell you that the reorganization that we had at the end of last year allowed us to focus more into the way that we were extending in the markets. But it's a [close state of] focus, and being more precise on what do work and what doesn't work. I shall say, in the past in some ways we had acting different things in the markets. Now we have answers. We understand what can be implemented in the activity on those things and what things we shall a little bit disincentives.

So, these work, and in some ways also the implementation of the new tools and the new information, is helping us to better look at what was being spent, and to [indiscernible] the worthiness of those kind of expense. I shall say, that more or less it's that kind of behavior through all the organization, specifically the commercial area, with much better information on a comprehensive way to what kind of practices to increase and what to disincentive.

I think if there is any reasonable room, yes, we still think there is a reasonable room to take savings. The problem is will be to give you any specific figures, I think that some reasonable savings can be achieved, but I'm not able to give you any specific numbers.

Okay. The next question, perhaps a little bit more difficult question, and I think Federico was saying the key is capitalizing on some of your volume increases.

I'm a little bit concerned about the packaging trends, the 1% decline year-on-year in terms of non-returnable packaging. The designs of graphs more or widespread discounting and promotion, and the statements by your competitor, which seems very angry in terms of their response. Perhaps they're frustrated they can't respond as surgically to your initiatives.

How can you avoid any further escalation in this environment of discounting? I don't want to use the term price war, but I think everybody is beginning to fear that that's where we're going with this.

Certainly, it is good to know that our competitor is talking about us more and more. That just indicates that we are doing the right thing in the market.

By doing the right thing, I shall say that we, as Federico mentioned, we are doing selective differentiated discounting. We are using our portfolio of different brands. We are working with a retailer. We are looking to have an aligned execution in the market, but at the end, being able to hit our consumer and to attract more consumers to our products.

Certainly, we do understand that we are playing with different tools that they do not have, and for them it makes it more difficult to identify exactly what we are doing. I can tell you that we are not deeply discounting. We are, as Federico mentioned, we are doing some selective discounting, selective differentiated, and differentiated not only in terms of where, but also in size and in type. If we are not maintaining as we did -- as they did this quarter, deeply discount in any market. And they did it for, let's say for the whole quarter in some of the markets, some of the presentations, up to 30% discount our prices.

We do care about profitability of the industry. We are aware that we are changing the dynamics of the industry. We believe that we are changing in favor of the consumer, in order to capitalize opportunities to grow the top line. And through revenue management, as we were saying, and increasing the per-capita consumption.

Widening or targeting the specific consumers, and channel [means], no? And also widening our portfolio brands and packages. Certainly extending the packaging portfolio and the portfolio brands is not with the intention of discounting. It is to give in to the consumer what we have learnt, part of the money that we have been spending in the last year, as we have mentioned before, is in marketing research. Marketing research is asking the consumer what do they want? What do they like? What does work? And what doesn't work?

So what we're doing is in fact unleashing some of the flexibility that in the industry we have, and certainly we're doing it because we were the losers in the industry. We were the lesser market share in the market. So that's the reason we are changing those things, because we think that in this way, we will be able to grow better our markets and we will be able to access some of the markets that we were not able to grow.

Certainly, we do care about not creating an overreaction, as we think that this quarter it was an overreaction. We have said, and Federico mentioned in the opening remarks, that 150 basis points we did not assign that successful vote. It was a one-time, let's say, effect. The delay of the 6 weeks in prices, we said it was not intentional, it was that we learned almost in Christmas time that they were moving prices. They took us out of the hook and we decided to apply the use of our new tools in order to implement differentiated pricing in the same SKU's.

That was the only reason we delayed in making the price increases, and we are very certain that it's a one-time shot. And one-time shot that in some way, measuring all the market share, in the first quarter next year will reverse against us.

So we are not considering that as part of the result of our transformation. As Federico said, it's only one-third of the market share gained in the first half was related to our actions in the market. In this quarter we don't know. Tomorrow we will know exactly whether what we're expecting is stable, let's say, or even maybe if they have the tendency to give a lesser guidance than the actual results. Considering that behavior in the past, we are anticipating that maybe they will be growing a little bit more than ourselves. So it will be losing a minimal part of market share.

But the very important part is that we will be looking at -- with a very different behavior in terms of prices, because what we're doing is using much more things beyond pricing. Even if the part of pricing that we use is related to a promotion, let's say, to our soccer game, to our baseball game, some musical event, and precisely is hitting them out. And certainly the level of discount is much less than that.

And the other part that you mentioned, the trend of the non-returnable presentations. As I mentioned earlier, out of the 3.1% of the switch and the mix, 2.2 is can and it's not intentional. It's a result of the dynamics of the market. It is in our stronghold, we are not using that in order to gain market share.

The other part, the glass part, the 0.9% switch to non-returnable glass. A small part of that is related more to the behavior of the returnable glass in the States, because that mix is total mix including export. And the other part, I shall say the most important part, is related to the domestic market. Certainly, we have 2 different uses for that. In some cases, we are reducing it to obtain -- to have the possibility of our consumers, or the consumer to have the trial of our [liquid], and getting and obtaining some loyalty for our brands. Certainly, we are using that as well.

But at the same time, the other good part of that non-returnable glass use is we are doing that, as we mentioned in the press release, to launch at a premium price the non-returnable [indiscernible] in the normal way. So we are launching the Sol [indiscernible] non-returnable glass at a premium price over the 12 ounces of Tecate.

So it's working. We think the revenue management, it's too early to decide that it does work or it doesn't work. We are positive that it will work, and working with everything. Certainly, it is very important for us, the profitability of the industry. If they continue deeply discounting, certainly they will be able to obtain some market share back but the cost of that will be very expensive for them. And we think that we can do it without going that far discounting.

Thank you very much, Gerardo.

You're welcome, Bob.

Our next question will come from Carlos Laboy, with Bear Stearns.

Good afternoon. Gerardo, I was hoping you could share with us where you estimate returns on invested capital to currently stand at Cerveza? Where it was 3 or 4 years ago? How we should think about our ROIC going forward? And also comment on the weighted average cost capital at Cerveza, and how that's been changing? Thanks.

Hi, Carlos. How are you? Yes, certainly, I shall thank you for the question, because what I can tell you, in fact, is that we just had our Board meeting last week. And I had the honor to present formally that for the first time in at least 10 years we were able to achieve the milestone of 11% of return on investments -- invested capital, which was a long-term goal set for the administration of FEMSA Cerveza. In the third quarter of this year, we were able to achieve that milestone, I shall say.

Our intention is to continue growing that profitability. We are certain and we are not blind, that does also depend on how our competitor behaves in the market. But we still believe that they are also profitability driven. Certainly, what happened in market share last 2 quarters was something that was deeply in their minds. We think that the industry can still be growing and maintaining profitability.

Gerardo, where did you start off on return on invested capital, 3 or 4 years ago? And where is your cost of capital in Cerveza?

Our assigned cost of capital, as you can imagine, is really -- it's 11%. And I can tell you that 10 years ago it was 4%; 5 years ago, it was 7 something. 3 years ago it was 9, and now we get to the 11%. Basically, that's where we stand now.

Thank you.

And we'll take our next question from Lore Serra with Morgan Stanley.

Good afternoon. I guess I have a follow up on some of the comments you've already made. And I guess some of this is uncertain, because as you say, we'll see more specifics behind what Modelo's doing tomorrow when they report. But what we see now, at Cerveza for 2 quarters in a row, is that your pricing relative to your mix changing doesn't look like you've put -- it looks you're doing, as you say, some promotional activity. And when we look at Modelo, it doesn't seem to be the case. They seem to get pricing ahead of inflation, and it seems to be the indication in terms of where the third quarter is.

So I wondered if you could just go back? And you're talking about the Modelo discounting as being widespread. If you could just review for us what you saw in the quarter, in terms of market? Or specifics in terms of the discounting activity by Modelo?

About their performance in price, I cannot know. I do not know their numbers, not even with the numbers they publish tomorrow. But what I can tell you that we saw during the quarter in the market, I can tell you that Corona, the reflection brand, the 1 liter presentation, was offered [indiscernible] without any selected brand, by channel or whatever, at MXN10.

In Monterrey?

In Monterrey. And at the time that we had our main brand in Monterrey at MXN14 per liter. But also they did it in other markets. They were reducing even in Mexico City. They reduced the presentation of Corona from MXN14 to MXN13. Our main brand in -- before that, in Indio we were selling at MXN13. It's less than -- it's about 8% discount to the Indio market. Now they've reduced Corona from MXN13 to -- sorry, from MXN14 to MXN13. We reduced just from MXN13 to MXN12.50 in Indio.

So it is -- I can tell you more things. In Mexicali they offer Corona. From the price of MXN14.50 in the second quarter they reduced price of the Corona 1 liter to MXN12. Even in the -- probably even in some of the strongholds they are -- they were discounting their main brands.

Gerardo, I think it's very nice but it's probably a bit premature for us to speak about [indiscernible] numbers, are they going to be presenting. The activity that we see on the market, sometimes is not -- it does not correspond to the overall performance that they do in all of the markets. It's very tough to make judgments on that. We need to wait to see what numbers they present tomorrow.

Okay. And then just a separate question on the reclassification of packaging, just so I understand conceptually where you're going. Given that the brewery doesn't take all of the output of the glass and bottle segment, will we see within the breweries an 'other packaging' revenue segment? And then the segments that you're not going to consolidate, will they be just part of the 'other' consolidation into FEMSA?

Lore, we'll be putting out some guidelines on how those numbers are going to be consolidated and we will provide all of the information how those numbers are going -- can be read from our information. So we'll try to be very clear and not present any information that might mislead the analysis that all of you do on our numbers. But we will be doing that on the -- I would say during the next 3 months. We already have something that we presented to our Board when we -- when that was approved. But to be very honest, we would like to fine-tune them and [report them]. Those should be the exact numbers for you to read.

Terrific, thank you.

Okay.

And we'll go next to [Johan Lopez] with Deutsche Bank.

Hi. Gerardo, Federico, good afternoon. I just really have 2 questions, regarding the packaging reclassification. Number 1 is, what should we expect in terms of the impact on the Cerveza margin from these reclassifications?

Our numbers that we run, based on the September numbers of packaging and the part of packaging that is coming into Cerveza, we are expecting some margin -- incremental margin. In both cases, it is on sales and EBITDA, on sales of about 250 basis points. And [indiscernible] maybe 80% for the EBIT or EBITDA, is the 1 that is being closely related into Cerveza.

Okay. And in terms of the -- are you giving yourselves any specific timeframe to dispose of the rest of the assets in packaging that are not going to be incorporated into the Cerveza operation?

The remaining operations are quite small. I would say the biggest 1 is Graforeja (ph). And we have not made a big noise about it, but we have been in the process of talking to people and running active processes to sell that for, I would say, almost -- a little bit less than 2 years. We have had kind of a [feel around]. That was not successful, which we were not able to get the kind of value that we felt that it's worth.

And right now we are in the middle of a second process. I wouldn't call it a formal process, but it's conducted by an investment banker. We have several interested parties there and we would like to see if that is also 1 that can be sold at a good price.

We have another operation, a small operation, which is Keypoloopo (ph), for which we have received some expressions of interest of 2 parties. Also that we can -- we have hopes that maybe those can -- may materialize also on the short term. We don't have a very defined timetable for that, but I can assure you that we are actively seeking to dispose at a reasonable price of all those remaining assets.

Thanks so much guys.

Thank you.

Our next question comes from Jose Yordan with UBS.

Good afternoon. Maybe -- I just want to go back to a question, the first question, where you mentioned barley prices having gone up and you mentioned the harvest. And I'm still not clear on why the barley price has gone up significantly. Maybe you can outline for us how much you're sourcing locally and how much are you importing lately, and where those prices have moved? It's really just a question of 1 weak harvest that reached a spike in prices can -- is it fair to assume that next year they'll come back down? So if we can get a better picture on that.

And then a second question, for Federico, just on the offering. It -- You filed an initial prospectus in July and 2 follow ups, which don't seem to be all that different from the first 1 as far as I can tell. But it just seems to me like we're about to lose the window here and if you don't do it by the second, third week in November, that you're done for the year. Am I missing something here or is this process just protracted so long that it's fair to assume it's going to just keep going?

No. Well, I think you have a reason to be a little bit skeptical about this, but -- We have been -- The original timetable that we communicated to everybody, we have been trying to follow that. Basically, when we filed with the SEC, the SEC is now, according to the advise that we get from our -- from the underwriters and from the lawyers, the SEC is now being more, I would say more strict or more careful or detailed in its provision of all filings, not just ours. We ended up getting a very long list of questions from them, that we took some time to respond and we filed again. We've responded those questions, then we get into a second round.

We have been working like hell, I can tell you. Our people are really working very hard. But we want -- we would like to satisfy all of these questions that the SEC is putting to us. So we're interested in having a clean filing, 1 which them and our investors feel comfortable with everything that is put there.

You're right in talking about the window of opportunity. We still think that we might make it late November, maybe the first week of December. But you're right, if the -- if we keep not satisfying fully the SEC, yes, it might fall into next year. Fortunately, the market has not -- are not looking that badly for next year either.

It looks like you're generating plenty of cash. Is there a chance that if this goes into the first quarter of next year, you guys will come back to the view that some of us had before you even announced the equity offering, that basically maybe you just don't need it? That with that and your cash generation, it's enough.

I'm not sure that we'd go that far. Jose, excuse me, I always confuse you with your brother. I'm not sure that we'd go that far, but again, if this takes longer than we expected, of course we will review the decision or we might just review the size. I don't know. But you're right, we will consider that if it goes -- we would reconsider the elements of the offering if it goes for next year. But it has not been done on purpose. It has not been our intention. It has really been an unplanned delay caused by a very thorough revision by the SEC.

Just on the first question, your question. I'm not trying to say that the huge increase was on barley. In fact it was the minimum part that was affected by barley, but what happened is that we -- fortunately the whole harvest was [indiscernible]. And in that price increase, above inflation, so it had an effect in real terms. But certainly, the orders that are presented, information is the mix is a little bit more than 50% of the effect. The second largest is energy, gas. And the third 1 is barley, that did some way affect it but is not the big issue in there. But it's part of the things that affect it.

Also there is a little bit of some freight benefit that we have in the quarter, in the third quarter of 2003 that we didn't have now. But that will not sustain. So that is something that will not affect in the future.

And if I could have just 1 last quick question. What's your volume outlook, both for domestic and especially for exports, for the fourth quarter? What kind of disruption might we expect from the handover to Heineken U.S.A.?

We are not expected disruptions. We are working very closely with them. They are in the first day of September starting working together, and even in this month our contract with [Lavaj SA] allows us to -- even the people of Heineken U.S.A. to get in contact with distributors and in the market. So we are not expecting an important effect on the transition.

Okay. Thanks a lot.

You're welcome.

And we'll go next to Tobias Stingelin with JP Morgan.

Yes, thank you very much. I have 2 quick questions. In the past, your competitor has been using a strategy sometimes of not raising prices to gain market share. Do you think that for the next year -- I know it's early, but it could be fair to assume no price increase at all in the industry during 2004 -- 2005, I'm sorry.

And the second question would be, it's also a tough question but would you be very surprised if, for instance, Modelo did report and you don't see any decline sequentially in terms of pricing per hectoliter in real terms?

Okay. In the start of -- if we are anticipating any price increase next year, I shall say that directionally our intention is to recover inflation, if it is feasible market-wise. Considering also how strong are the national and the economic -- the economics, national economics and regional economics. But certainly, what we are anticipating is we will do it in a differentiated manner, market by market, using our brand portfolio in each market. That's where we have directionally our intention.

In respect of the other part, as Federico said, let's wait and see. But yes, I will be very surprised if they do not have an effect in average price -- sequentially average price per hectoliter.

Thank you. And if I can just make a follow up on the first 1. Let's say, you are the second player and so your pricing activity, it really depends on what the market leader does. And it just seems [about following] right now, probably is seeking raising prices but they seem to be a competitor if you raise prices as well. But if he decides not to raise prices, then in this case really you are following, it will depend on what [indiscernible] does for you, right? For your strategy?

Well, just that it's right, as a whole, as a country. Certainly in the other regions, that we are the main player. And in those cases also we will be looking to at least recover inflation, but as I mentioned, in a differentiated manner. So -- and we will be also considering what is our competitor doing even in those markets. Okay?

Thank you.

You're welcome.

At this time we have no further questions standing by. I'd like to turn the conference back to Mr. Reyes for any additional or closing comments.

No, no additional comments. Thank you very much for joining us in this conference call, and have a good evening.

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