Fomento Economico Mexicano SAB de CV (FMX) 2005 Q1 法說會逐字稿

Good day everyone and welcome to FEMSA's first quarter earnings results conference call. [OPERATOR INSTRUCTIONS]

During the conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance. These forward-looking statements should be considered as good faith estimates made by the Company. These forward-looking statements reflect management's expectations and are based upon certain currently available data. Actual results are subject to future events and uncertainties, which can materially impact the Company's actual performance. Furthermore, the statements made in this conference call do not constitute an offer to sell or the solicitation of any offer to buy any securities. There shall be no sale of any securities in any jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration under the securities laws of such jurisdiction.

At this time, I would like to turn the conference over to Mr. Federico Reyes, FEMSA's CFO. Mr. Reyes, please go ahead Sir.

Thank you. Good afternoon ladies and gentlemen and welcome to FEMSA's first quarter 2005 earnings conference call. We will be brief with our prepared remarks and will spend the majority of our time focusing on your questions.

I am pleased to be joined today by Javier Astaburuaga, Co-CEO of FEMSA Cerveza, and Gerardo Estrada, CFO of FEMSA Cerveza, who will discuss our performance in the year. Also with me on the call are Juan Fonseca, Head of FEMSA Corporate Finance and Jose Antonio Fernandez and Alan Alanis, both of whom you know well.

What you saw in our release this morning, the results announced today reflect a steady but balanced growth across our core operations, in soft drinks, beer and in our Oxxo stores.

Our total consolidated revenues increased 6.9% and income from operations increased 2.2% during the quarter. Before getting on to the results, let me just cover the upcoming FEMSA equity offering.

We have been advised by our lawyer that we should not discuss the specifics of the offering, particularly its timing. However, I am pleased to report that we are making very good progress. We expect to receive approval from the regulator soon, which will permit us to move forward with the offering.

With that, let's move on to our operations. At Coca-Cola FEMSA we are focusing on bringing the new territories to our first class operational standard and that is bearing fruit as the operations outside of Mexico continue to increase their contribution to overall growth and profitability.

In Mexico we continue to focus on delivering the best acquisitions and the right brand portfolio to our consumers. For the quarter, our Mexico sales volume declined a slight 0.3% compared to the first quarter of last year, with [CSD] sales volume growth remaining almost flat. A decline of 3.1% in the average price per unit case resulted from a shift in our packaging mix to multi-serving presentations, which have a lower average price per unit case.

The price increases that we implemented in the first quarter of 2005 are positively impacting our prices for the second quarter. So far, we have increased our weighted average prices by 3% throughout Mexico.

Our operating margin in Mexico decreased 160 basis points to 7.7% of total revenues during the quarter. The operating efficiencies achieved during the quarter did not completely offset the 3.5% decline in total revenues, as well as raw material price pressures. However, we are encouraged by our efforts to contain expenses during the quarter and expect that our strategies to reactivate single-serve consumption in Mexico will help us improve our bottom line as the year moves ahead.

Operations outside of Mexico represented 49% of Coca-Cola FEMSA's total sales volume. On a consolidated basis, the growing relevance of this market helped us achieve revenue and sales volume growth of 1.5% and 1.4% for the quarter respectively.

Brazil and Argentina stand out with 7.1% and 5.9% respective increases in sales volumes. From a profitability standpoint, Brazil has [remark required] delivering a near two-fold increase in its operating margin. At the consolidated level, top line and bottom line improvements are trickling down to income from operations, with an increase of 2.7% over the first quarter of 2004, as well as 10 basis points of operating margin expansion for the quarter.

Many of you listened to [indiscernible] and Coca-Cola FEMSA's conference call earlier today. If you were unable to participate, you can access a replay over the webcast, if you need additional details on the results.

At FEMSA Comercio, our Oxxo retail chain delivered another solid quarter based on total revenues and same-store sales growth. We added 97 net new Oxxo stores during the quarter, an increase of 666 new stores during the first quarter of 2004. This marked another consecutive quarter of same-store sales growth that reached 8.9%, driven by improved promotional activity with our main supplier partner and resulting in a 7.3% increase in traffic. As well as very strong category management, evidenced by a 1.6% increase in average ticket.

At the gross margin level, we experienced a 40 basis point contraction, driven mainly by a change in the intra-year calendarization of certain discounts and incentives received from suppliers in the first quarter when compared to the same period of 2004. This should not have a long-term effect on the overall profitability of our business.

The relevance of Oxxo in our overall diverse strategy will continue to grow. It already represents over 7% of our total domestic beer volumes, with over 38% of Oxxo sales coming from beverages.

Going forward, we see significant opportunities to improve our fast food offerings and enhance our [redistribution], while at the same time rapidly grow our store base. These investments are long term in nature and will add to profitability in future years.

Now I will turn the call over to Javier, so that he can talk about some of the events and developments at FEMSA Cerveza.

Thank you Federico. Good afternoon everyone. I am pleased to report that we achieved solid domestic volume growth of 4% during the first quarter. It was achieved with good growth throughout most of Mexico, despite difficult comparisons with 6% volume growth in the first quarter of 2004. While our price per hectoliter declined 1.6% in real terms from the first quarter of 2004, on a sequential basis it increased 0.8%, reflecting mainly a reduction in the level of price activity as compared with the fourth quarter and some tactical pricing done through the quarter.

On the innovation front we continued to make progress, rolling out packages and presentations we brought to the market in 2004, such as Sol Brava, [liter or quart], which is almost in all the markets that we decided to launch these new brands last year. As well as developing new product introductions, such as Tecate Light in the [quartito] presentation, the 7 ounce presentation returnable glass. This was mainly done in Northern Mexico during this first quarter.

We continue to pursue innovation in returnable as well as in non-returnable presentations, striving to provide the consumers with the products and presentations they want, while increasing the potential for price differentiation by brand, product and package.

Regarding our beer exports, the handover of our brands to the Heineken USA platform took place on January 1 and we are pleased to report that the first quarter results reflect healthy brands and a solid start. We both - Heineken USA and FEMSA Cerveza - have been taking care of the normal and anticipated issues that always appears in complex and massive transition processes, such as the one that we are managing.

The 35% increase in the unit price of our beer exports reflects the structural change brought about by the new commercial agreement with Heineken USA. Now we receive a higher price for our exports, but we also pay a larger portion of the marketing expenses and there is no equity income component.

As indicated in our release, export volumes were down 5.5% for the quarter on very difficult comps of over 32% growth in the comparable period of 2004, and some inventory build up in the months leading up to the handover of the brands. The volume reduction during the first quarter was expected as a short-term result of the transition and the volume trends on a month-by-month basis are encouraging.

Furthermore, coverage is improving rapidly, particularly in key markets such as New York City, where as an example, we doubled the number of accounts during the first quarter. All in, we are pleased with the results of FEMSA Cerveza and in the quarter, with 1.8% growth in operating income and 5.1% growth in EBITDA. With that we can now turn to your questions. Operator?

Thank you gentlemen. Ladies and gentlemen, our question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS]. And for our first question we go to Joaquin Lopez with Deutsche Bank.

Hi, good afternoon gentlemen. I actually have a couple of questions. The first one is if you could tell us why the management fee as a percentage of sales declined at both Cerveza and Oxxo?

Hi, this is Juan Fonseca. We've adjusted the mechanics, which the management see as calculated. In the case of Cerveza, there is also the effect of not having Interbrew as a partner any more. The level that you see in this quarter is representative of what you should continue to see going forward.

Perfect. And my other question relates to the export side. You did mention as an example that in New York you had doubled the number of points of sale where you are present. Could you perhaps give us what kind of goal or what kind of expectation would you have on outside of your sunbelt states to increase the number of points of sale and to increase penetration?

We have a specific target for increased distribution in key markets in which we think we can take advantage of the competitive position of Heineken [indiscernible] but we would rather not share the specific objectives. So what I can tell you is that we are using New York as a good example of how fast we can start taking advantage of that platform.

I understand. Thank you very much.

Thank you.

And for our next question we go to Lore Serra with Morgan Stanley.

Good morning or good afternoon. Long day. I wanted to ask you about pricing domestically. You pointed out that the pricing improved sequentially but it improved more for your primary competitor, that took a big price increase in the middle of the quarter. Can you just give us an update on your thinking in terms of pricing for 2005, including reviewing actions you've taken to date?

Sure. The increase sequentially comparison among the two companies is true. It's increased sequentially on the competitor's price per hectoliter. It's significantly higher. That's basically as a consequence, as we told at the end of the fourth quarter, due to the fact that they really went very, very down in terms of pricing starting at the late third quarter and all during the fourth quarter.

And we share with you the notion that FEMSA Cerveza reacted in a, let's say, linked way, knowing that we have made good in growth in terms of penetration, market share, volume during the first six to eight months of the year. So we are looking at the price activity coming down to a much more reasonable level and that's basically the difference between the price per hectoliter of [Morvillo] and ourselves on a sequential basis.

On the other hand, what we've been looking at, starting at the end of February, is precisely movements in price all across Mexico in different timings and overall increase that we are measuring in the marketplace on the competitor's portfolio. It's not precisely in line with the expected inflation, at least the inflation that we're expecting for the year. But still it's a good progress in the right direction, trying at least to partially offset part of the expected inflation.

We took basically the month of March to take a closer look at the fundamentals of the price increase, which for the first time is different from the normal pattern of price increase which now tends to our belief to reflect an approach to segment the brand portfolio in a more detailed way. And we are basically following the price increase on a market-by-market basis. We started to roll out our price increase based on our portfolio strategy at the beginning of April. We are pretty much done. We are about to finalize these movements next week and we are still seeing some areas of opportunity in terms of continuing to take strategic and tactical price increases when the markets and the opportunities tell us it is the right thing to do.

So all in all, moving into the right direction, shortening the deep discounting activity that took place in the fourth quarter, moving ahead in nominal increases that partially offset pricing with a very different structure in terms of implementing. Some brands going up, some brands going down. Trying to adapt to the moral that we think we started to create a couple of years ago in terms of segmenting the brand portfolio. And all in all, moving in the right direction, I think, Lore.

Okay, and just a follow up. One of the things we've seen in the last few quarters is that your domestic mix and returnables have been declining, and yet pricing has still been a bit below inflation. You've made a lot of progress on the innovation front but it isn't coming through fully in the domestic pricing line. As you look out over the next foreseeable future, do you think you can start charging more for that innovation or do you think that we should still continue to see one-way pricing come down vis-à-vis returnables?

I think you can still expect a good share of innovation on our side. As I said, not only in non-returnable but in returnables. And the best example that I can use is precisely Sol Brava, liter or quart, which is a very differentiated liquid packaging price point and proposition to the consumer.

The overall price -- the average price of the overall company not only takes into account the packaging mix but also geographic mix in terms of the mix of the territories being very, very different and the price level of the products all across Mexico being also very, very different.

So all in all, what we're trying to do is to manage the consumer offerings in a balanced way, trying to fulfill those we think unsatisfied needs and at the same time, trying to maximize revenue through the application of the right price in our [indiscernible] group. So we can still say that we have a good battery of innovation going forward into the Mexican market over the year.

Thank you.

Thank you.

We go next to Dan Kwiatkowski with Schroeders.

Good afternoon. I've got a couple of questions on beer and then a more general question for you. In terms of your cost of goods per hectoliter, that was up quite strongly on a sequential basis. Why was that and what sort of guidance can you give us in terms of gross margin for 2005? That's the first beer question.

Part of the gross margin expansion, as I said, is due to the fact that now we are pricing on export products in a higher way but at the same time trying -- needing to compliment that higher gross margin with higher expenditures. So part of the expansion is really basically due to that.

The other thing is, as you well know, the revaluation of the peso against the dollar also helps a little bit in the cost of goods sold. And that has been helpful in contending at least partially the effects of the raw materials price increase. And of course, there's the volume component also, which really increases the gross margin in absolute figures. But as a percentage, those will be the two phenomenons that explains basically the increase in the gross margin number.

Going forward, I think you can monitor as well as we can the pricing of the raw materials. We don't think there are going to be good moves in that front. We think that we have now the pricing levels that we can anticipate are going to be there for the rest of 2005. We are not anticipating increases on top of what we have already been getting, so gross margin would be basically a -- the determinant of the gross margin going forward would be basically our ability to keep up our price line steady, up there, where it is now after the price increase, and having the ability to delivery the volume growth that we have committed for 2005.

Okay, great. The second question is on your cash operating expenditure. You have a brief explanation in your press release, ERP costs and selling costs, due to the new export strategy? Can you give us an idea of the actual impact of both of those and also what we should expect going forward? When will the ERP costs start dropping out or phasing off? I was under the impression that that should nearly be over.

Yes. Without having the ability to really share the different components of it, maybe I can talk conceptually a little bit about that.

Yes, please.

The ERP is basically peaking out during 2005, as a matter of fact. We can anticipate that 2006 is going to be much level, compared to 2005, and it's going to start decreasing precisely at the end of 2006, all the way in two or three more years going forward. And what we can really share is that the numbers for the first quarter are very much in line with the plan that we have set for 2005.

We are pleased to see that the operating expenses for the quarter are basically where we wanted them to be, growing 8%, with the impact of having now to put back into the U.S. market a big component of the marketing expenses that now we share with Heineken USA in that market. And also, with looking at the performance of our competitors, we are very pleased that our number wasn't taking into account these two things. We are very pleased with the performance of the Company for the first quarter.

Okay, great. My last question is one for Federico. It's more a conceptual question. What sort of investments are you looking at? Are you interested in making any acquisitions inside or outside Mexico and what sort of things do you find attractive at the moment?

Well, we have stated in the past, by now our efforts have been concentrating in improving our beer operation in Mexico. I think that's basically our concentration. And we are always looking at possibilities, but I can tell you one statement, our main concentration is to improve our competitive position and our potential of increased profitability in Mexico.

Great. Thanks very much.

We go next to Andrea Teixeira with JP Morgan.

Hi, good afternoon. I just wondered if you could explore more about like this revenue management that [indiscernible] is trying to replicate, if you see -- if you could perceive some part of this increase in volumes that they had, explained by that or that's not really the case at this point?

Sure. We don't think volume growth has a lot to do with that, actually, in the short term. They said increased late February; they have started to increase late February. The 7% plus growth is pretty much based on the results of the first quarter of 2004, which was a decline of 2%, close to 2%. So we are comfortable growing 4% on top of the 6% we grew last year. We can really take with comfort the growth of 7% on top of their decline of 2%.

So all in all, we gained a lot of share last year and now we are going back to what I would call a more normal level.

The fundamental think or the thinking now in Morrell in terms of the pricing strategy is pretty much, we think, following the path that we signaled a couple of years ago in terms of the need of the Mexican market to be segmented. So they're putting, let's say, price points in the portfolio, trying to create different segments to appeal to different consumers. And we think that long term that's the way the beer industry in Mexico should go. We think that provides for a much more competitive position for the two players in Mexico and we think that's the right way to really fulfill and comply with different consumer needs. So that's the comment that I could make on your question.

Okay, thank you very much.

And we go next to Robert Ford with Merrill Lynch.

Good afternoon everybody. I just want to clarify what I think I heard earlier, and that is that in Cerveza the selling expense increase, excluding the additional marketing spend behind the U.S. business, is up about 8%. Is that correct?

No. Increase 8.5%, including the change on the agreement with Heineken USA. So that's why I said we would be comfortable with the performance over the first quarter, Robert.

Okay. In the press release I'm looking at, it says selling expenses are up 10.3%. Oh, you're looking at totals, total operating expenses, excluding admin, but if you look at just selling expenses, right, how much would selling expenses in Mexico have increased excluding the marketing spend?

It's significantly less than the 10%, Robert.

Is it half, is it --?

Well, there are a lot of people smiling here.

I don't know what's significant any more. It's -- because it's interesting. If you look at --

We think -- what I can tell you is that without that, it increased less than the 5% that our competitor increased. That's what I can share with you and that will be it.

Okay, that's very encouraging. And then, if you take out the impact on gross margin of the change in accounting in Oxxo, what would the underlying gross margin have done, if you exclude the impact in both periods?

I think what you should expect to see in Oxxo, Bob, the full year '04 levels in terms of EBIT margin around 4.5, EBITDA margin around 6%. Those levels are, I think, achievable and sustainable going forward. Then we have to do some work in taking the lumpiness a little bit out of the Oxxo numbers, because as you point out, in the past 2 quarters we've had lumps in opposite directions. But I think the 4.5 and 6% levels are something that you could put into your model.

Great, thank you very much.

We go next to Alejandra Marcos with Banorte.

Yes, hi everyone. I'm just wondering if you can give us some update of the offering, public offering, and your starting date for the road shows also?

Unfortunately, as I suggested in the introduction, we are prevented from giving specifics of that -- of the offering by our lawyers and the SEC and some general regulations. What I can share with all of you is basically what we said at the beginning, that we are -- we expect to receive approval from the regulators quite soon and assuming that that is the case, we will be moving forward immediately after. But I am sorry, I cannot provide you with a specific date at the minute.

Okay, thank you.

We go next to Alex Robarts with Santander.

Yes, hi. Good afternoon. A couple of questions on beer. I guess just first of all to drill down into this, the response to the price increase. I just want to clarify, first of all. So basically, it started in April. You began to follow selectively and as I understand, by next week you will have followed in 100% of your domestic points of sale, but not to the extent of inflation? Is that a fair way of summarizing what you are saying?

Yes, you got it right, [indiscernible].

Okay. What -- and so I guess it leads me to the real question, which is what was behind this idea to lag this price increase? It's going to end up being 45 days plus, similar to what happened last year. In other words, it sounds like -- could we take this as an indication that again, you might be looking for more market share and if that comprises some profitability, then that's okay? I am just -- what was the thinking to really hold back here for almost two months?

Let me clarify this. First of all, the price increase from the competitor was not done on a single day. There was significant marketing, which price was increased in the first day, but there was also some timing that they took in order to really increase pricing all across Mexico.

Second one, as I said, the structure of the price increase was radically different from the ones that they've implemented in the past. Basically, the last one in 2004, which was pretty much straightforward in terms of basically very similar percentages of increase all along products, namely brands and packaging.

What they did this time was a very different story. What they did this time is they are trying to replicate at least in the price to consumers, [mind mainly, not mainly], on a channel-by-channel basis, or at least in the consumer's mind, they are trying to position the brands in very different price points. So we took a number of weeks only to have a good reading on that. And from there then we took some time also to decide which would be the adjustments on the price differentiation that we've started to implement a couple of years ago. And also to capture as much of a price increase in the weighted average that could match the average price increase, which as I said, is not compensating expected inflation. Well at least, partially compensating inflation.

So our thinking is not taking time in order to have a short gain on volume. We don't think that's the right way to precisely grow profitable and sustainable share. It's just a matter of trying to implement a sound, well-designed strategy in a good way. So even though we have, we think, stronger capabilities in terms of reading what's going on in the marketplace and then executing accordingly, we think that we are doing this in the timeframe which is pretty much consistent with the nature of the increase that we saw the competitor implementing.

So what you're saying is that they haven't really, in your perception, and as you walked us in March, they have not gone on an average basis to inflation? Is that right?

Yes, that's right. And we will need to wait a quarter for you to look at their numbers and our numbers, but our reading today is that, yes, I said and I will repeat it, they went into the right direction, we think. We are following accordingly but again, we think we are going to be short of inflation, unless somebody in the Banco of Mexico do something magic around expected inflation for 2005.

Okay. And to round this out then, so with segmentation, which is clearly going to accelerate with these moves that we've seen and with your response and your kind of set up, just thinking out in 2005 in the Mexican beer industry, does this segmentation process which can accelerate, as we are seeing right now, do you think that that implies just an overall general less price flexibility? In other words, are there less possibilities to get inflation in the coming quarters? Or do you think it's just basically a reflection of a more mature beer market and that that really will allow surgical price movements, so that one can through revenue management beat inflation? This is -- maybe you could comment on that?

Well, the way, we think, going forward to get pricing is really to managing the portfolio in the right way. The existing one, the future one, and managing, as I said, not only taking into account the dimension of the brand packaging but also the dimension of channels.

So my belief is that the levels of -- the pricing levels of the beer industry in Mexico presents some flexibility going forward. I don't know if the second quarter or the fourth quarter of this year are going to be the right ones to talk about, because again, competitive dynamics are going to also determine a lot of that. But what I feel very confident about is that we think that the beer industry is going in the right direction in terms of, again, segmenting the market and trying to satisfy needs of people who are not willing to pay a premium on some products and some people which are wanting to have a new offering of products with premium prices and are very, very willing to pay for them.

So instead of talking short term, second quarter, what I would reinforce here is that we think it is a movement in the right direction for the beer industry as a whole.

Okay, that's helpful. And the last question really is on exports. The -- a couple of big changes over at Heineken on the management side, and more interestingly, the Heineken USA Director leaving, that together with the Heineken Light launch. Does that give you a -- does that really change anything as far as how you're thinking about your relationship with Heineken and perhaps just generally, looking out this year, seeing what you've done on pricing. As I understand it, really, you are still keen to build volume. And is it fair to characterize your view this year in the U.S. as a volume-driven strategy as opposed to going for high margin and value?

Yes, separating the answer - Heineken is a fairly large competent and professional organization. We are very fond of Frans van der Minne, the CEO, the departing CEO of Heineken USA. He's proved for the last five years that he knows his business, but we think they made the right choice in terms of bringing in an American that is knowledgeable about the U.S. market, the company and the Heineken philosophy.

And let me again rephrase that both organizations are very pleased with the way things are going in terms of the transition process and the alignment on the objectives going forward. So we are not concerned. We are very busy taking care that the transition process is well done and we have a number of months to do so, something like six months ahead. So that's not a concern at all and we're very pleased with the way Heineken is managing its restructuring.

The second part is - as we said when we announced the agreement - we think these are complementary organizations, complementary portfolio brands, complementary geographic fits. So we don't think the Heineken Light launching mid-summer this year is going to be something that is going against the Mexican brands.

We are approaching the U.S. market as we have in the past, in the right and balanced way, trying to build volume, yes, but doing it in a profitable way. And we are now under an agreement which provides for the best of anywhere you can think of. It's a more profitable world for us, but still is leaving more flexibility for us to put money back into the U.S. market in terms of personnel and marketing, in order to secure growth. And we still think that we have the right portfolio and the right strategies to grow above -- a factor above the industry growth for imports in the U.S.

So we are very, very confident that we have the right strategy and the right line with Heineken USA to achieve that.

So you would like to beat the volume expectation of the import category?

Definitely, yes. Definitely, yes.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS] We go next to Timothy Ramsay with Bear Stearns.

Hello, this is Carlos Laboy. Federico, in the press release today on the front page, you talked about a total beverage strategy, leveraging core operations, working closer together, the businesses. Last quarter you talked about integration as well and assured service organization. How do you see beer, soft drinks and Oxxo integrating? What type of integration have you seen so far? How much work do you have to do and more importantly, how do you convince [Neville] [indiscernible] it's a good idea?

Hi Carlos, how are you? You put a very difficult and complex question. You talk about the elements. I think the Oxxo element, we have been very clear about it and it has been stated that Oxxo is a very essential part of our beer strategy in Mexico. And we have proved that it's a very effective way of going to the markets and being able to influence with the prices and the way the market works. So I am not sure that I can add more to that relative to Oxxo.

The issue of beer and soft drinks, you have put it, it's one in which we believe that there is not one single solution for every country, for every division, for every competitive environment. You know probably better than us that this is -- that there are significant differences between the markets and how the different players react. There are -- we can look at the spectrum of players in all of Latin America and we can find beer producers not having to do anything with soft drinks, all the way to beer producers being fully integrated with soft drinks.

So we -- this is a subject that has been and is presently being very closely analyzed by us and by everybody. We are very conscious that this is a very sensitive issue to all of the players. We realize that -- it is very present in our minds that the Coca-Cola company is a key partner for us. The relationship with them is extremely important. At the end of the day, if we were to do anything anywhere, which I am not sure that [indiscernible] expect to have anything happening soon. If we were to do anything anywhere again, we would definitely do it always in agreement and in full synchronization with the Coca-Cola company.

We may have different perspectives of the issues; I am not saying we do. But I -- if we look at the trend in different regions, we may have, but that doesn't mean that we cannot have a very productive dialogue with them. Is the door open? I cannot say it's open. Is the door closed? I cannot say it's closed. Again, we have stated in the past and this is -- there is no general solution for that. There is no unified strategy or policy. It has to be a situation that is started depending on the individual competitive environments of each region. And it's not region; sometimes it's not by region, it's sometimes by individual country.

I should not be speaking at all for the Coca-Cola company. You have direct access to them and you can ask them what they feel about it, and you probably will get a better answer than what I can tell you. But we respect them very much and we appreciate the way the partnership has been going. It has been an extremely profitable partnership for FEMSA and for its shareholders. Part of that is, I think, is due to the very strong communication and very good understanding among the parties.

It doesn't mean that we necessarily would do anything, but at the end of the day, the balance of the relationship has been extremely positive for everybody, for all of our shareholders. And we believe that that outlook can be sustained with a very productive dialogue and being very attentive and close to what is happening in different markets.

How high a priority is this integration for you and can you speak to where you have already gotten some integration going?

No, Carlos, [really]. This is a name you can -- you can look at our numbers. This one is a case in which we can say that that is dramatically affecting our operations, but I don't think that we can say that. I think the main thing for everybody to consider is how the market will evolve in the future. I think that [defeats] the issue, I don't think present operations are being -- [I don't know if any]. You just saw what we are doing in Brazil. In Brazil we are competing with a very integrated player and you can -- you're looking at what we are -- what are the results of our position, that is basically concentrated on soft drinks.

We are improving our profitability. We are increasing market share. We are increasing penetration. We are improving the delivery of our products. There are many things that can be done with the present models. I am not discounting the possibility of us evolving into something, but it does not -- my point is that it does not necessarily follow that not being integrated, you are -- that you don't have any weapon to compete effectively.

So I don't know if this comment's useful or not but it's a tough issue, a tough issue. I think there is a lot of -- there is probably more noise about the [indiscernible] in many cases than what you see the realities of the market. And again, I am not discounting the need to anticipate the evolution of the market. I think everybody, also in the Coca-Cola company and everybody, we are looking very carefully at that evolution. And we feel very confident that at the end of the day, both organizations are going to react in a manner to defend its market positions and to improve volumes and profitability.

Thanks, Federico.

Thank you, Carlos.

And for our next question we go to [Lovan von Reddit] with [Harkey] Capital.

I had a real quick clarification. In terms of the pricing strategy and products differentiation that you are looking for in this '05 period, were you looking for volume gains? I don't think that that was clearly expressed in terms of any answer for one of the callers previously.

Well, what we're looking with the pricing architecture in place, is to be competitive in every market and in any consumer segment and in any channel. And the objective of the business is to grow the base of consumers, to increase the per capita of our products. All in all, making more money than we were making in the past.

So it is a -- we think the right approach. It is not -- this is not a strategy which is volume or market share driven. This is a strategy, which is consumer driven and then aligning all the business in order to really gain the favor of the consumer in a profitable way. And that's what's driving our decisions every day.

And do you think that that increase in consumers, as you are looking to gain, or gain the mind share of the consumer, do you think that that will happen in '05 relative to the pricing strategies which you plan to implement throughout the year?

When we talk about the beer industry in Mexico and people to take -- start trying to configure the idea of what could be the outcome of the process of a change -- a radical change, like the one that the beer industry is going through, we need to still take into account that most of the volume in Mexico is still sold through exclusives, to the [indiscernible] houses.

So all in all, a lot of the gains that you do are mainly -- are not comparable with, again, that in an open market or a niche market could be. So what we are, as I said, saying -- doing is, to really fulfill consumer needs with the right price points, with the right line of products for the Mexican consumer. But all in all, we have to recognize - and I think that you can look at the history of the competitive positions of the companies in the last five to ten years, I think, that tells you that in order to really gain half a point of market share is a very, very tough thing to do in the Mexican beer market, due to the nature of the structure of the channels that sell products in Mexico.

But again, the pricing strategy is what's trying to fulfill these differentiations in a profitable way.

Okay. Thank you.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Reyes, I will turn the conference back over to you for any closing remarks.

Well, let me thank you very much for joining us. We hope that we have provided you with the information that -- the kind of information that might be helpful for your understanding for the Company. And we thank you very much for being with us this afternoon.

[OPERATOR INSTRUCTIONS]. This concludes our conference call for today. Thank you for your participation and have a nice day. You may disconnect at this time.