Fomento Economico Mexicano SAB de CV (FMX) 2005 Q2 法說會逐字稿

Good afternoon everyone and welcome to FEMSA’s second quarter 2005 earnings results conference call. [OPERATOR INSTRUCTIONS] During this conference call management may discuss 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 certain available data. Actual results are subject to future events and uncertainties which can materially impact the company’s actual performance. At this time I’ll turn the conference over to Mr. Federico Reyes, FEMSA’s CFO.

Good afternoon ladies and gentlemen, and welcome FEMSA’s second quarter 2005 earnings conference call. As always, we will be brief with our prepared remarks and spend the majority of our time focusing on your questions.

I am pleased to be joined today by Javier Astaburuaga, Co-CEO of FEMSA and Gerardo Estrada, CFO of FEMSA Cerveza, who will discuss our performance in beer. Also with me on the call is Hector Trevina, CFO of Coca-Cola FEMSA and Juan Fonseca, head of FEMSA Corporate Finance; as well as Alan Alanis, and Jose Antonio Fernandez from FEMSA and Coke FEMSA Investor Relations.

A couple of months ago at its customary equity offerings, we conducted an extensive road show across Mexico, the US and Europe. For us it was an excellent opportunity to share with you not only what we are achieving in our operations, but also to better understand your perceptions about our company. We were pleased to discover your receptiveness and favorable sentiments to our strategy for FEMSA’s evolution into a world class beverage company. we were able to share with you how FEMSA Cerveza’s new business model has become an effective competitive advantage in Mexico; how Coca-Cola FEMSA is uniquely positioned for further expansion across Latin America; and why Oxxo’s extraordinary potential for growth represents a key component of our beverage model.

With the support of our investors the equity offering was a great success as demand exceeded supply by more than four times at the issue price. Now we can focus on continuing to execute on our business strategy and delivering value creating results. With that I will get back to our comments on our second quarter results.

As you saw on our release this morning, the numbers announced today reflect strong top line growth across all of our corporations, enabling double digit growth in revenues and operating income, driven mostly by our soft drink and retail operations.

At Coca-Cola FEMSA our team did a fantastic job growing its volumes through revenues while expanding its margins across most territories. Revenues and profitability increased at double digit levels, with increases of 11% and 23% respectively. Moreover, and increased of level of [inaudible] income growth over total revenue growth resulted in 180 basis points of operating margin expansion, reaching 18% of sales.

As evidenced by the results our efforts to improve profitability are making headway with the second quarter showing stable pricing, good execution and our improving ability to respond to our customers’ needs. We also benefited from good weather and currency appreciation against the US dollar.

In Mexico we continue to focus on delivering the best execution and the right brand portfolio to our consumers. For the quarter our Mexico sales volume increased 8.4% compared to the second quarter of last year with CSB sales volume increasing almost 6%. In pricing the 0.9% increase in the average price per unit case resulted from price increases implemented late in the first quarter of 2005, and a shift in our packaging mix to our single serve presentations that have a higher average price per unit case.

On the cost side, Mexico’s gross margin increased 60 basis points, due to a decrease sweetener costs and the appreciation of the Mexican Peso. Operating margin increased 200 basis points to just over 22% of total revenue resulting from strong top line growth and operating efficiencies achieved during the quarter.

We are also glad to report progress in the rollout of new non-carbonated products discussed during the road show, one of our key avenues for growth, with the recent launch of the Ciel Aguario [ph] family of flavored waters. The remaining 43% of our sales volume comes from our operations outside Mexico. The team in Columbia Venezuela has come out with 30%, 11% and 3% respective increases in sales volumes for the quarter. The team delivered a near two fold increase in its operating margin, growing from 7% last year to almost 14%.

Many of you listening who acted on Coca-Cola FEMSA’s conference call earlier today, you can access a replay of the web cast if you need additional details on their results.

At Oxxo we delivered another solid quarter based on total revenues and same store sales growth. we added 97 net new Oxxo stores in the quarter, an increase of 644 new stores from the second quarter of 2004. we are on track to surpass 600 new stores for the year, particularly since the greatest number of new openings takes place toward the end of the year. These mark another consecutive quarter of same store sales growth that reached 6.3% as a result of improved promotional activity with our main supplier partners, evidenced by the 7.1% increase in traffic and a relatively stable average ticket.

At the income from operations level, we achieved a 40 basis point increase, driven mainly by the absorption of fixed expenses resulting from our scale and increased sales growth. going forward we continue to see tremendous opportunities to improve our direct distribution in order to enhance our [inaudible] offerings, while at the same time rapidly grow our store base. However this is just a glimpse into the future as we are only starting to develop these initiatives. At the moment we are busy opening new markets, adding new stores and investing to improve our merchandising capabilities. 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 strong domestic volume growth of 4.1% during the second quarter for FEMSA Cerveza. It was achieved with positive growth throughout Mexico, but specifically even higher in Central Mexico, due to improved weather as opposed to last year. Facing top comps as last quarter where we outgrew the industry, had a positive benefit from the Easter holiday.

The domestic price per hectoliter reflects a price increase that was executed by brand package and point of sale in the month of April. As we said during the last conference call this was a price increase in the neighborhood of 2% on nominal terms. So on a sequential basis our results in the second quarter shows a price per unit with an increase of 2.7% in [inaudible] terms. However this number is still 1% below last year’s same quarter.

On the innovation front we continue to make progress on the rollout of packages and presentations brought to the market in late 2004, as well as our new marketing efforts to promote different productions during this year. During the quarter we carried out carefully planned investments to build our brand equity, implementing an unprecedented level of marketing initiatives for Sol Brava in Central Mexico, Tecate and Tecate Lite all over the country, in its various returnable presentations mainly; including the introduction of Tecate Lite in the 32 ounce returnable presentation as well as in the 7 ounce returnable packaging presentation in Northeastern Mexico and Coors Lite.

It was an intense quarter of marketing efforts compared to the second quarter of 2004. due to the increased level of innovations that we’re leveraging as we continue to improve our revenue management capabilities. We are developing a balanced portfolio of brands that continues to emphasize the returnable format, while providing consumers the products and presentations they want.

In beer exports, although it’s too early to commend achievements, specific achievements in the US market were already seeing the emergence of quality growth and improved development of our brands. As indicated in our release, export volumes increased 9.4% for the quarter on very tough comps of 17% growth in the comparable period of 2004, reflecting better coverage and execution in the US market, as well as the fact that we’re leaving most of paths that needed to be addressed during the transition period behind us. This starts to reflect the stockholder changes that we have been brining into the agreement with Heineken USA.

The 24% increase in the unit price of our beer exports, as we have said in the past, reflects in a way the stockholder change brought about by the new commercial agreement with Heineken USA. The unit price was slightly lower than that of the first quarter 2005, due to the strong appreciation of the Mexican Peso.

On the cost front the appreciation of the Mexican Peso was not enough to compensation for increased raw material prices for cans and crown caps and bottles, resulting in a 40 basis point decline in the gross margin. However, our gross margin is still up 50 basis points for the first half, and we do not anticipate significant additional pressure from these raw materials for the remainder of the year.

Our profit margin was impacted in the second quarter, as expected, by the sale and marketing expenses related to intense promotions for our new brands and packaging in addition to the increased cost of sales and the lower price for hectoliter as anticipated.

For the quarter income from operations was 92.5% representing a 210 basis point decline from the second quarter of 2004. overall the Mexican market is facing positive momentum and we will leverage these opportunities to maximize growth and penetration for our new product innovations.

Moving into the second half of 2005 we are fully focused on top line growth and expense containment, and anticipate some benefits on operating expenses due to the timing of our initiatives. This was from the beginning of the year, a factor in our business plan for the year.

So all in all a good quarter for FEMSA Cerveza we think with a clear path to growth for the top line and expand our operation margins for the full year 2005. With that we can now turn to your questions. Operator.

[OPERATOR INSTRUCTIONS]

Joaquin Lopez with Deutsche Bank.

I was going to ask you on Oxxo, if you’re still planning to open the 600 stores initially announced at the beginning of the year, and if so, would you expect any kind of pressure from pre-opening expenses in the second half of the year?

Definitely we will continue opening stores on a very fast basis. We don’t feel there is going to be a problem in exceeding the 600 stores number this year. As we have stated in the past this is a process that has to be carried out in a very organized manner, not just looking for the numbers of stores open but also to the quality of the stores being opened. So yes definitely we will be exceeding that number.

And also Joaquin in terms of additional expenses, if you look at the number for the comparable quarter of last year it’s not that different. It’s usually back end loaded in terms of the new openings. The pipeline is full as it should, and we don’t anticipate any additional pressure on margins from the back heavy pace.

Thanks. In terms of the third quarter, I know it’s early to say, but due to the fact that you had pretty bad weather in the Northeastern part of Mexico at the beginning of July, did you see any significant decline in volumes so far in July? The beer side?

All in all the trend before the bad weather started in Northeastern Mexico was pretty much a continuance of what we have been seeing during the first six months. Yes bad weather is going to have an impact but it’s, we think, limited to precisely that region of the country.

Thank you very much.

We’ll go next to Jose Yordan, with UBS.

Good afternoon. My question was just about the shortfall on the gross margin. I just wanted to understand, because your sale to third parties of packaging products was a lot higher, I mean, significantly higher than I expected. And because that business, back from when you used to track it separately, that has a much lower gross margin, of about 20% or something like that. To what extent does the decline in the gross margin just, is due to, just to a higher mix, let’s say, of just packaging sales to other parties? And, how much is really sequential increase in the price of the metals to produce your own beer? If you can give us any color on that, it would be great.

Hi Jose, this is Gerardo. Certainly, packaging does have an impact, but I shall say that the most important impact was, the first one was the reduction in real price [inaudible] actually so that little that it amounts to about 30% of that reduction in the gross margin.

Also, the impact in the costs of the aluminum and the [inaudible] that we mentioned, now with the division of the packaging parties is not only the cans that we sell with beer inside but also the cans that we sell empty. So, I shall say that was the most important part in the reduction of the gross margin.

Also, there is a little [inaudible], but not as big in the operating expenses. It’s more something related to the [inaudible] of the expenses in [inaudible] of expenses for the whole year. We are not managing that, taking care of the quarter, but just the strategy in the whole year.

I saw that, but I mean, the percentage of sales to operating expenses were in line with what I had. It’s just a question of higher top line, therefore higher absolute numbers. But, I mean, my question was more on the gross margin, but thanks.

We’ll go next to Celso Sanchez, with Citigroup.

Hi, good afternoon. First on the Comencio- side, can I just understand the number of store openings was significantly lower than I thought, but also the base of comparison you presented this quarter was very different from the one that was presented last year in the results and I’m not sure, was there a re-calendarization or something of the number of stores? And, I appreciate the back end of the year has generally a higher number of openings, but I’m just trying to figure out what the shortfall was. Last year, I think you reported 189 for the quarter and now it says 119. Could you clarify that?

Yes, it was a mistake last year. [Inaudible passage]. It was a mistake with the report of last year. The correct number is the one that we’re reporting right now in the present release.

OK, but the last year’s total didn’t change. It was just a [inaudible].

The total didn’t change. The total is just over [inaudible]. That’s correct.

So, the number is 97 this quarter, vs. 119 [inaudible]. And again, the pipeline is full of new stores in different stages in production. The confidence is very high that we will not only reach but comfortably exceed the 600 number for the year.

Right, and then if I could just follow up on the operating expense growth in--or selling expense growth specifically in the end-of-year division. Is there any color you can offer us, help us a little bit, in the first quarter to understand that a certain percentage of the real growth was related to the Heineken agreement, to get a sense for how much of these sort of one-off marketing launch expenses in the second quarter of May, if not disappear, dissipate in the second half of the year? Can you offer us some color on that, that 12% selling expense growth?

The effect of the Heineken agreement is more or less that the same percentage of them in the first quarter, almost half of the increase in the selling expenses is related to the different structure of the Heineken agreement. And, certainly what we are expecting for the whole year is that the operating expenses line should grow in real terms less than the volume, the percentage of volume growth.

Below volume growth? Is that what you’re saying, as opposed to lower revenue [inaudible]?

Yes, that is correct below the volume growth for the whole year.

OK, and the assumption still is that you won’t, if inflation is 4%, then you might not quite sweeten prices before year-end to get that?

Yes, we still, we are expecting a smoother, let’s say, climate in the sense of prices in the industry. If you compare that our quarter’s [ph] prices with the average of the second half of last year, this second half shouldn’t show a reduction in real prices as it was showing in the first half.

So, both of these things will help to recover the gross margin, not the gross margin but the margin [inaudible] on sales that we lost in the second quarter.

Thank you very much.

We’ll go next to Laura Sera, with Morgan Stanley.

OK, let me just follow up on that question then ask a second question. You’re saying that almost half of the increase in selling expenses was the Heineken agreement, and the rest was the base business. And so that half, that is, the Heineken agreement, will recur, obviously, for the next couple of quarters. You’re saying for the year that the operating expenses will grow less than volume growth. Are you talking about the operating expenses if I strip out the Heineken agreement? Or, the Heineken additional expenses that the underlying operating expenses will grow less than volume?

You’re right. Eliminating the Heineken effect, the operating expenses show growth less than the volume. We actually eliminated the Heineken effect.

OK. And, I guess, sort of a bigger picture question. With the announcement, I guess, I don’t remember if it was last week or the week before, of the SAB agreement, I guess the issue of you guys entering beer markets outside of Mexico becomes, maybe, more of a near-term issue, possibly, than it was before, as well as having somebody who’s interested, or if we’re talking openly about talking to Coke bottlers, so you know, you talked this morning about, you know, [inaudible] down 30% in Sao Paolo, which is a big number, as you think about recent developments, how does that change sort of your strategy? How important is it for you to be in beer markets outside of Mexico?

Hi, Lore. I don’t think that right now that we can share with you any change in our thinking. I mean, our thinking is still the same. I mean, where we permanently evaluate the developments of the market. But right now we have, basically, the same position that we have last year in that sense. We see opportunities for continuing growth in the soft drink business and Latin America. And we are constantly and permanently looking at possibilities and we will continue doing that.

And here, as we have said in the past, we will be watching, very closely, the development of the soft drink markets in South and Central America. If we see there is a requirement to adjust our strategy, I mean if there’s very definite and clear need for us to consider the inclusion of some other product like this.

OK, thank you.

We’ll go next to Andrea Teixeira, with JP Morgan.

Hi, good afternoon. I just want to follow up on the Oxxo question. Can you give us some color regarding same store sales, if there is any deceleration going forward? Thank you.

Same store sales have continued to really outperform pretty much any industry norm that you look at. I think you should expect us to do, you know, mid to high-single digits same store sales growth, which is what we’ve been delivering, driven mostly by increased traffic. We are, as we’ve said, we’re doing a lot of new promotions with our [inaudible] partners, driven specifically at increasing traffic.

The average ticket should remain fairly stable, but no, you should not expect any marked deceleration in same store sales.

OK, thank you.

We’ll go next to Bob Ford, with Merrill Lynch.

Good afternoon, everybody. I have a question with respect to expense opportunities and I was a little bit surprised by the excess levels, but I have tremendous anticipation for the potential you have, now that you’ve removed kind of this obstruction in the pursuit of synergies between Coke FEMSA and FEMSA. Can you give us a better idea, now that you have some time to kind of explore opportunities in terms of a shared services center and perhaps the acquisition of not saleables or, I don’t know, common vehicle, motor parts and what not, where do you think those opportunities are right now in terms of the magnitude of the impact that they can have?

I’m not sure that we should mention specific numbers, of the kinds of things that we are looking at. Definitely, there is a very strong and concentrated effort to try to maximize all of the synergies and possible benefits that we can have within the group. Many of those have already been selected in our present numbers and we have made tremendous savings in joint-offices of a number of items over the last 18 months. Those are already there.

We continue to feel very optimistic that we will be moving on toward [ph] those possibilities. Things like the ones that you mentioned, joint offices, shared services, yes, definitely. We have been running programs that are targeted to obtain those. Those are things that are being developed presently and we are being very careful to structure them in a way which we will be making the right allocations of costs and benefits to the different.

I mean, I’m talking specifically in Coca Cola-FEMSA and the rest of the FEMSA complex. But, I’m not sure that I am at liberty to give any specific numbers on the benefits that we have been able to achieve on the ones that we made. Let me think about it and maybe we can share some of that in the future.

OK and I’ll just give you fair warning, then you’re going to license my imagination. The other thing, maybe I can ask this a different way.

Has there been an initiative that you proposed to the Coca Cola Company, short of a complete merger of the two distribution networks, which has been vetoed?

No, let me be very open. First of all, every dollar that we have in the Coca Cola company, it’s always region-by-region. I mean, we are not dealing with issues, we do not discuss with the Coca Cola Company to be applicable to all of our operations in Latin America. Again, it’s region-by-region.

Right now, I don’t think that we can mention any initiative that we have put to them that has been vetoed by them. Not one single one. We have a section, I mean, we have our [inaudible] that are in the Coca Cola FEMSA where we report all of these initiatives. They are reported in great detail and they are basically, all of them, they have been basically approved by all the members of the board, including the Coca Cola Company format.

I think they have been very understanding. They are aware that the potential for benefits and cost efficiencies is there. They are very happy to see them materialize in the Coca Cola family.

Brilliant, Federico, thank you. Oxxo’s SKU counts, I know I’m only limited to one question, but year-on-year, what’s happening with the number of SKUs you have in Oxxo, and that’s my last question.

That’s been stable, Bob. There hasn’t been much change in the number of SKUs.

Hi Bob, this is Alan. It will eventually increase as we increase our direct distribution there, but we’re still in the process there of starting. Right now, it’s pretty much stable.

And what’s the actual number, Alan?

It’s around 2,000 SKUs. It’s reported there in our 20F [ph].

Just 2,000. Thank you.

We’ll go next to Tufig Sahlem [ph], with Credit Suisse First Boston.

I have a couple of questions, mostly on the domestic market. I wanted to get a feel first on the evolution of the volume growth by region, if there’s anything you can give us on that. Also in terms of the relaunches that you have been doing, in terms of the growth how much that’s been accruing to the volume and how much of that is going to continue to stick going forward?

According to our estimates on market research the growth in Central Mexico has been higher than in the rest of Mexico, even though there’s been growth all over the country in what we could say healthy figures. Weather has been a good positive impact for volume development in Central Mexico. So we’re gaining volume all across the country with good growth, but more precisely we’re seeing the industry a little bit more hot, as the weather has been, also in Central Mexico.

On the second one we have been doing two different things with SKUs, we have been launching some new products such as the ones we’ve been talking about in the past year like Sol Bravo 40 ounces or now Tecate Lite in 32 ounces and 7 ounces, or Tecate returnable in Northeastern Mexico, and that’s one thing. The other is we have been rolling out some of the existing packages into new geography. So the way we like to look at this is incremental volume from new initiatives on one side, yes it’s an important measurement for us. But the other one is how healthy we are building portfolios on a market by market basis.

In some markets we’re trying to stay with more the portfolio brands, in markets in which we are heavily dependent on just one or two very big brands in which maybe dominant positions. What we would like to take place in those markets is to have a much more segmented portfolio, one that addresses different consumer needs, different price points and different consumer locations. In some of the markets it may be the other way around. We may have not such a competitive market position and way too much fermented portfolio, and what we’re trying to achieve in those markets is to concentrate on having a bigger base and healthier base of brands in certain markets.

So all in all, we like to look at markets from a very different perspective in terms of the objectives that we’re trying to pursue. What I can share with you, without sharing specific numbers, is that we feel confident that we are making progress at the half of the year, according to the business plan that we set ourselves for 2005 as a full year, both in terms of volume growth, market share position at the middle of the year, penetration of our new introductions and rolling out of products, and profitability standpoint in terms of exercising the marketing and sales [inaudible] for the first half of the year, which as we anticipated was initially the uploading part of the year.

OK thank you.

Paul Korngiebel of Seakin Advisors.

Just to clarify on the rationality, we want to make sure we understood the definition of the Central region. We’re understanding that as the nine northern states and then may Oaxaca and Vera Cruz as constituting the south, southeast. Then could you maybe give us some sort of order of magnitude of how much higher the growth is in the center? And then maybe a little understanding of what effect, we’ve heard about the portfolio effect, but also then what effect we’re getting from presales, and then was there a tilt in the Oxxo store openings? Is Oxxo helping share gain as well? Thanks.

On the regionality we would rather not share specific numbers. I’m sure that’s very sensible information competitive-wise. Just being in Mexico during this quarter would have proved to you that there were weather reasons and we let you know that there was better performance for that part of the region.

On the second part, we are seeing – even though the opening of the Oxxo stores in the second quarter was slightly below last year, 110 versus 90 plus, the opening of the stores are not precisely the timing where the stores are much more productive. On a running basis we’re still seeing very strong productivity on the Oxxo stores all over the place. Of course in the places in which we have covenant positions Oxxo comes and it substitutes a lot of the volume that is being managed by the traditional retailers.

But in Central Mexico, yes, it helps much more than it does in Northern and Southern Mexico. So the slowdown in the second quarter we are not seeing any sign that it’s impacting the volume growth of the Oxxo stores. Beer, important as it is in the mix of an Oxxo store, the moment you see same store sales for Oxxo growing you can be sure that we are contributing to that growth. So we’ve very, very comfortable in terms of the development of our velocity of beer being sold in Oxxo throughout all Mexico.

OK thanks.

Alex Robarts with Santander.

Two questions on beer if I may. I guess it’s really on the cost and the expense side. First of all, you talk about the can prices and the crown caps, what is the price levels of these inputs right now, and how do you see that evolving for the second half of the year. And were there any price issues on the input side from glass?

What I can tell you in the case of cans, specifically in aluminum, what you are seeing in the numbers reflected the effect of almost two years of price increasing in aluminum. Last year we had hedging that lasted at least for the firs three quarters of last year. What we started to experience in the fourth quarter of last year, and are now experiencing is the consumption of that hedging. In the case of glass, as you know we are integrated to the manufacturing of glass and what it has impacted in that case is basically the gas that we have reported in the past. But increase in the gas prices is not a matter in this quarter it has been for several quarters. So we are not having an impact on the glass side, specifically for the numbers in this quarter.

But so right now can prices and crown caps are how much higher than they were last year?

Well one of the things that are [unintelligible] the cost structure at the beginning of 2005 is that we were able, during most parts of 2004, to hedge significantly against the increases of aluminum, so both aluminum and can prices were both very competitive prices in 2004. So now in 2005 we’re not only getting the increases in aluminum, the 2005 increases, but also 2004. So what I can tell you is those are significant because we’re comparing against costs that we’ve been facing since 2003.

So you’re not hedging this year, is that right?

We were not hedging because the prices went too high, now they are starting to come back. If you wanted to do some predictions going ahead, I will say that for the rest of the year we are not expecting any important movement in the prices of raw materials, aluminum and steel. In the third quarter we will have an impact in the sense of percentage of increase for the comparison with our third quarter of last year, and that will not happen in the fourth quarter.

OK so fourth quarter is where you see this more stabilized year-on-year on the cans and crown caps, is that safe to say?

That is correct.

OK. I guess then the second thing is really on expenses for beer, and that was a surprise for me. I can appreciate that a fair amount of this is really toward some of the brand extensions and such in Mexico. But I’m just wondering how you are looking at this big marketing program in the sense that is this something that is really part of the segmentation strategy that you’re doing, and ultimately trying to get some price at the end of this? Or is it something that’s kind of more volume driven where you’d like to stimulate demand, get volume and perhaps stabilize a little bit what we’ve been seeing in beer market share?

With my numbers we’ve been seeing four quarters of consecutive year-on-year market share decline. I realize that market share doesn’t necessarily have to be the end here, but I’m just wondering whether you believe that the marketing spend that you’ve been doing domestically might have a chance to help you more on the volume side going forward, or on the price side.

Looking at the last fourth quarter can be a little bit not doing it the right way, or at least looking just at the numbers without really remembering what were the main reasons behind that performance. If you remember the second half of last year there was very intense price activity within the Mexican beer market. We were very, very cautious and rational I should say, in terms of managing that environment. Of course we took advantage of having the benefit of being 5.1% market share ahead until the first semester of 2004.

Again now first semester 2005 both domestic companies are facing very different comps. We’re facing very tough ones which we outgrew significantly the industry pace; our competitors are facing much easier ones I should say. So I think in terms of development of the market share picture we should look at the broader picture, understanding what’s been causing the movements. This is not, as you can imagine, a very straight line to follow, it’s much more of a bumpy road than anything else. But all in all, what I can tell you is the main purpose of the initiatives that we’ve been undertaking in the Mexican beer market, both in terms of launching new products and segmenting in a much different way not only the positioning of the brands, but also the pricing architecture of the industry, is to really have the basis for a much more healthier and sustainable competitive model going forward.

We are truly believers that the better we address very different segment needs of consumers, and we address them in the right way, we will be on one side, stimulating the industry in the proper way, and on the other hand, creating those bondages and linkages with consumers that will make them prefer our products long-term. The main thrust of the company continues to be, to, within a healthy industry, grow the top line, but still grow the bottom line more than the top line. We are sure, we are in a consumer packaged product goods industry in which we need to make it through developing a profitable, sustainable business, by being able to sustain our competitive position. The only way to do that is precisely to reinforce the equity of the brand and to satisfy the consumer needs in different ways. So, the whole game plan, or the whole strategy of the business is pretty much based on that.

So, all in all I should say that we’re pretty comfortable in how we’re doing the things that we’re doing and we’re very, very optimistic about the results that we should continue to get; growing in a profitable way, building our competitive position also, through innovation and through the strengthening of our brand.

OK, so the first half, you’ve seen the contraction of about 130 basis points, in the EBITDA margin I guess. And, I’m just wondering, do you think it’s fair to assume that for the full year, FEMSA beer could kind of be in the area of flattish EBITDA margin?

Definitely yes. Our sense is that, with the industry’s coming to a point in which, again, price activity during the second half of last year had a lot to do with short-term quick, I should say a little bit desperate reactions on trying to change the course of a year, which was, let’s say, not the typical one that you should expect, in terms of huge swings of market share between domestic players.

So that [inaudible] we don’t think is there. We think, as we said a couple quarters ago, that we are looking in a positive way, the development in the [inaudible] beer industry in the process of segmenting the market in a much more appropriate way. We think we made some points in [inaudible] the way that that is the way for the industry to start [inaudible] going forward. And, we are looking in a positive way that the way the game is going to be played is precisely looking to address consumer needs through a portfolio of brands, which are significantly different from one to another.

So, going forward, our position is under a rational behavior on the industry side, on competitors, which are focused on building the business in a profitable way, through the brand development, yes. We are very, very confident that we have the proper mechanisms of cost containment, revenue management, brand development into the marketplace to achieve the business results that, in the end, should express, as you were saying, with coping up with the EBITDA margin reduction that we suffered in the second quarter.

As Gerardo was explaining, a number of phenomena are behind what’s been going on in the second quarter, and the first half of the year, a little bit of price reduction, a little bit of cost pressure, on the cost side, on the cost of sales and our own program of deployment of the initiatives on the marketing side, that uploaded the expense of the business on the first semester.

OK. Thanks, that’s helpful.

[OPERATOR INSTRUCTIONS] Our next question is from Lore Serra, with Morgan Stanley.

OK, thank you. I have two quick follow ups. I guess, back to Cerveza, the administrative costs seemed to rise a bit sequentially, and I know in the press release you talked about ERP expenses. When do you think you’ll be at a point where these expenses are starting to stabilize, in terms of your results?

We think that, by the end of this year, in the fourth quarter it should get to the peak of that [inaudible].

OK, and my last question, I guess, is a follow on to the question that was just asked in terms of the competitive market environment. Both you and your competitor went to a segmentation strategy, you know, sort of mid-to-late first quarter, or early second quarter, so I know it was very initial results. But it does seem like you got a little bit more pricing than you were sort of guiding the market to, when you talked about the price increase that you made, and I’m wondering if, you know, what’s the initial results in terms of, or thoughts in terms of how consumers are reacting to the brand segmentation that’s going on in the market?

Lore, this is Javier. Our results in the second quarter really are pretty much consistent with what we said, in terms of the size of the price increase that we are aiming to get. We mentioned, back in those days, around 2%. We are slightly higher than that because of the improvement of the mix. On the mix side, of course, that helped. But on the geography side, as you can imagine, it’s cost a little bit because of, I mean, central Mexico has lower prices than the northern and southern.

But all in all, what I can tell you is, we’re convinced that segmenting the market is the right way to develop this industry. Not only because it addresses, in a much better way, consumer needs. It also prepares the domestic competitors in a much better way to address the risks and dangers and challenges that [inaudible] has put to us, a possible new interest going into the future.

So, all in all, consumer reaction to innovation, consumer reaction to let’s say more dynamics in the promotion side, consumer reaction to segmentation, is making them much more able to choose from a wider selection of alternatives that they used to have in the past.

We think, of course, that the first stages of the development of the segmentation and, I should say, as fast as I think it’s taking place in the Mexican beer industry. Of course, at the same time, creates some pressure and creates some stress, in terms of managing the level of intensity of how the fight is fought. But in the end, we think, this is the right way to go.

Thank you.

Our last question will be taken from Celso Sanchez, with Citigroup.

Yeah hi, sorry, I just want to follow up a little bit on the direct distribution initiatives in Comencio, sorry. I know it’s early days still but, it does sound like you’re getting some operating leverage from that as early as it is. And, I know the question was addressed before, in the sense of, is there back end loading of store [inaudible], it sounds like there won’t be. So, should we start thinking about just a structurally more profitable business now, as you gradually manage your promotional partnerships better, and so on and so forth? And, if that’s the case, can you give us a sense of the order of magnitude of what that might be, certainly, using last year’s basis of reference in terms of profitability?

I think there are two things there, Celso. This is Juan, I mean, we’ve said in the past, in the last couple of quarters, in quarters where Oxxo opens a couple of new [inaudible], you notice that on the margins, a little bit of pressure. Quarters where you step up the promotion on activity, you also notice that in the market. But, in the medium-term, the levels of 4% at the EBIT level and 6% at the EBITDA level, as long as we continue to grow at this pace, I think you can expect those to be, I mean, that is why I would put it into a model.

Yes, in the medium to long-term, you should expect expanding margins. Definitely, the direct distribution is one of the initiatives that holds the greatest potential. And, we’re only scratching that surface, as you correctly point out. But, I mean I would hesitate a little bit in terms of, in the short-term starting to model greater margins than the ones we’ve mentioned.

OK, thank you.

At this time, there are no further questions. I will now turn the conference back to Mr. Reyes.

Thank you very much for joining us, and we hope to speak to you next time. Thank you very much.

[OPERATOR INSTRUCTIONS] This concludes our conference for today. Thank you to all participants and have a nice day. All parties may now disconnect.