Fomento Economico Mexicano SAB de CV (FMX) 2005 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to FEMSA’s third quarter 2005 earnings results conference call. As a reminder, today’s conference is being recorded, and all participants are a listen-only mode. At the request of the Company, we’ll 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 can materially impact the Company’s actual performance.

At this time, I will now turn the conference over to Mr. Federico Reyes, FEMSA’s CFO. Please go ahead, Federico.

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

On the call today we have Jorge Luis Ramos, 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 Hector Trevino, CFO of Coca-Cola FEMSA, and Juan Fonseca, Head of FEMSA Corporate Finance, as well as Alan Alanis and Jose Fernandez from FEMSA and Coca-Cola FEMSA Investor Relations.

Before discussing our third quarter results, I would like to comment on important changes announced last evening to our management team. We believe the changes will maximize the potential of our team and lever us the skills to continue to grow our business for the long term. Jorge Luis Ramos, who in recent years has headed FEMSA Cerveza’s Comercio function as co-CEO will become the CEO of FEMSA Cerveza in January. Jorge Luis has a keen understanding of the Mexican beer industry and will continue to steer our beer operations in the right direction, maximizing the benefits of our new market model. Javier Astaburuaga will become CFO of FEMSA, leveraging his 23 years of experience and his profound knowledge of all our operations, as well as a clear sense of how they should continue to interact, grow and evolve. In addition to his duties as CFO, Javier will also have responsibility for strategic planning, corporate procurement, IT systems and business processes. Both Jorge Luis and Javier I strongly believe will do a superb job in their new roles, and I am sure you will have the opportunity to hear from them in the future as you continue to follow our Company. As for me, after seven years as CFO of FEMSA-- It has been quite an exciting ride. As of this January, I will concentrate solely on seeking and developing strategic opportunities for FEMSA as Vice President of Corporate Development.

With that, let’s move on to the third quarter results. As you saw in our release, the numbers announced for the third quarter reflect a strong growth across all of our corporate operations, enabling FEMSA’s revenues to increase 8.1% and operating income to increase nearly 11%, representing a 15.6% margin, up 40 basis points. This is a quarter of solid growth in all of our core operations that further demonstrates the strength of our integrated beverage strategy.

In terms of balance sheet highlights, net debt at the end of the quarter was $2.6 billion, a reduction of $273 million from the previous quarter, as we continue to deliver at a quick pace. All financial indicators are stronger than they have been in recent years, and our consolidated net debt to EBITDA ratio has declined from 2.4 times a year ago to 1.3 times this quarter. We continue to work on our maturity profile, increasingly being able to extend maturities for as long as ten years and continuing to obtain very low average costs.

Now, let me provide you with some context on our operating environment. Given the recent bout of hurricanes this season, we are reminded that for all businesses, including ours, there are things that are within our control and those that are not. In the realm of things under our control, we continue forging ahead to increase the coordination among our three main businesses. This has proven to be a successful strategy for the last decade, has recently accelerated through an unprecedented amount of projects, such as the joint procurements, use of common back-office services, and the sharing of IT platforms, among others. Obviously, on the flip side of this, are things we cannot control. 2005 set a new record in terms of the number of hurricanes affecting our continent. So far, the main impact of this has been increased prices for some of our important raw materials, such as BT and energy, which we expect to be short term. To date, these increases have been mitigated by the strong Mexican peso, combined with efficiency improvements across our operating units; therefore having practically no impact on our third quarter margins. Furthermore, in the case of natural gas, which is a meaningful input for our glass bottle operation, the federal government has put in place a subsidy which is significantly reducing the impact for Mexican corporate. However, just last week, Hurricane Wilma it our country with a devastating effect on Cancun, a city with FEMSA Cerveza has an important market position and where FEMSA Commercial has around 60 Oxxo stores. Obviously, our first priority has been [unintelligible] and supporting our employees and their families, ensuring their safety and providing them with food supplies. In terms of the impact on our future results, I am pleased to report that we do not expect a deterioration of our profitability. We can make this statement after estimating the potential maximum impact, which is well under our existing business interruption insurance coverage for FEMSA, which includes all of our business units, and in this case will be particularly relevant for Oxxo and FEMSA Cerveza. Our fixed assets and facilities are also properly insured.

Turning now to our beer operations, during our last call, Javier discussed that for third quarter FEMSA Cerveza would focus on achieving top line growth and expense containment. I am pleased to report today that our results reflect this focus. For the quarter, we achieved strong domestic volume growth of 5.5%, reflecting increases throughout all of Mexico, mainly from the Tecate Light, Sol and Indio brands. This was achieved while facing strong volume comps from third quarter ’04. The domestic price per hectoliter increased 1.4% in real terms from third quarter ’04, and 0.6% in real terms on a sequential basis. The price increase from the prior quarter attests to the stable pricing environment, which enabled us to utilize some tactical revenue management. In beer exports, we continue to see the emergence of quality growth and improved placement for our brands. As indicated in our release, export volumes increased 18.7% for the quarter, reflecting better coverage and execution in the U.S. market. Most encouraging for our U.S. exports, sales on the east coast continued to drive a greater part of overall growth.

On the cost front, we achieved a gross margin improvement of 160 basis points for the quarter. The appreciation of the Mexican peso, combined with operating efficiencies, fully compensated for price increases in aluminum, energy and steel. For the remainder of the year, we anticipate some continued pressure from raw materials, which should be partially offset with the strength of the peso. As we indicated in our last conference call, operating expenses remain slightly below total revenue growth as we maintain the level of investments behind our brand building and sales efforts. These resulted in a 16.6% increase in income from operations, representing a 160 basis point improvement for the quarter. Overall, the Mexican market is facing positive momentum, and we will leverage this opportunity to maximize growth and penetration for our new product innovations. In summary, great quarter for FEMSA Cerveza.

Moving onto our soft drink operations, at Coca-Cola FEMSA, our focus on the development and implementation of multi-segmentation models, best practices, and continuous [unintelligible] of the value chain, resulting in good results during the third quarter. Consolidated revenues increased 5% with operating income in line with revenue growth and EBITDA up 6.6%. Mexico and Brazil accounted for the bulk of our top and bottom line growth during the quarter, fully offsetting profitability declines in Central America, Columbia and Argentina. In Mexico, we continue to lever the strength of the Coca-Cola brand, while simultaneously rolling out many new beverage products and presentations as part of our multi-segmentation strategy. This continued focus on delivering the best execution and the right brand portfolio to our consumers paid off again in the third quarter. Our Mexican revenues increased 4.6%, resulting from a 2.3% increase in sales volume and a 1.9% increase in the average price per unit case, which resulted from incremental volume from the Coca-Cola brand in single-serve presentations that have a higher average price per unit case.

The non-carbonated beverage segment while still representing less than 2% of our volumes grew 33% as a result of volume growth in Ciel Aguadios and PowerAde. We also introduced new products during the quarter under the Ciel, Dasani and Minute Maid brands, which should create new opportunities to play in the rapidly growing non-carb segment, a key avenue for future growth. On the cost side, Mexico’s gross margin expanded 150 basis points due to a decrease in sweetener cost and the appreciation of the Mexican peso. Operating margin expanded 40 basis points for just over 22% of total revenue. Outside of Mexico, most of the remaining top and bottom line growth came from our Brazilian operations. Brazil sales volume increased 7.1% during the quarter, delivering 410 basis points of operating margin expansion, reaching 15.1% of total sales. These great results are a combination of our redefined go-to-market strategy, the reintroduction of [unintelligible] packages, and better coordination with the Coca-Cola system. All said, Coca-Cola FEMSA has truly established a strong platform for growth and continues to deliver strong results in the third quarter.

Now let me comment on a relevant development at Coca-Cola FEMSA. The Coca-Cola company has informed us that over a three-year period it will gradually increase concentrate prices for carbonated soft drinks in Mexico and Brazil. We are highly confident that we can offset higher concentrate costs by reducing corporate and marketing expenses during the fiscal years without affecting the execution capabilities of the business. We believe the incremental effect of year three can also be offset. We have communicated to the Coca-Cola company that it’s our intention to move in this direction.

If you were not able to participate in Coca-Cola FEMSA’s conference call earlier today, you can access a replay of their Webcast for additional details on their results.

At Oxxo, we delivered another solid quarter based on total revenues and same-store sales growth. We added 122 net new Oxxo stores during the quarter, an increase of 523 new stores from the third quarter of 2004. We want to emphasize that we remain on track to open approximately 600 new stores for the year. As our stores become more reliant on our ERP and point-of-sale systems, we have significantly enhanced the recruiting process and expanded the training videos for new store operators. This required a slight reduction in the base of new store openings during the quarter, but we expect to derive important benefits from better trained store managers going forward. In same-store sales, we achieved another consecutive quarter of mid to high single-digit growth, reaching 7.4% as the result of improved promotional activity with our main supply partners, evidenced by the 6.9% increase in traffic and a relatively stable average ticket, which increased 0.5%. Even with the lower level of sales growth achieved during the quarter versus third quarter ’04, expansion-related incentives from suppliers also decreased, resulting in increased cost of sales and 70 basis points gross margin contraction. However, thanks to better absorption of fixed expenses, the operating margin remained virtually flat to third quarter ’04, reaching 4% of total sales. It is very important to mention that Oxxo’s profitability has remained stable to slightly increasing, despite its rapid base of growth and continuous investment needs. Going forward, we will continue to rapidly our store base while investing in the business through technology deployment, store upgrades and implementation of the [unintelligible] distribution.

In summary, the combined performance of our operations in soft drinks, beer and convenience stores reinforces our confidence that we have established a solid platform for growth that continues to generate solid results.

With that, I would like to ask the operator to introduce our first question. Operator?

Thank you, Federico. [OPERATOR INSTRUCTIONS]. Our first question comes from Tufic Salem with Credit Suisse First Boston.

Yes. Good morning, everyone. I have a couple of questions. The first one is related to the hurricane impact in Cancun. If you could just go through more detail about your assessment on the potential impact on volumes and the damage to infrastructure. How long do you think that’s going to take to recover. And, just a bit more on your assessment of the impact. The second one is related to the commercial business. But, I’ll wait for the first one.

Jorge Luis, do you want to comment on FEMSA Cerveza, and I will do the Oxxo part?

Sure, Federico. Talking about the Cancun effects because of Wilma, right now the electricity is coming back for Cancun and Cozumel in around 50% of the local city areas. We are seeing that the federal government and the local government are working very rapidly, trying to rebuild those hurricane-impacted areas that were hardest hit by the hurricane. We are foreseeing, obviously, an impact on volume, but at the same time, we have the experience of other previous years, where after the effect of the hurricane, we see a lot of spending in terms of investments and also in terms of temporary jobs related to rebuilding efforts that comes after a tragedy like the one we faced. We think that during the quarter probably we are going to have an effect. It’s hard to be precise at this time. We also want to share with you that our facilities in terms of warehouses and delivery trucks are ready to serve the market, but particularly in Cancun and in Cozumel, the local authorities have not allowed us to sell beer because of those effects when electricity is not available in the whole city. We are foreseeing this coming Monday to be able to sell beer again. In terms of insurance, we have what we call full-risk policies, so profit wise we think that we are not going to be affected. Let’s see how the government spending and also in terms of private spending related to the hotels flows through those touristic areas. But, we are confident that everyone is putting their efforts to help. Again, in December, probably around 60% to 80% of the room capacity will be available for the tourism again.

On the Oxxo side, as I mentioned, we have 60 stores there. Four of them were basically totally destroyed by the hurricane. They will have to be rebuilt from scratch. Of the remaining stores, we will have by this weekend 18 already functioning and the remaining 38 will be operational within the next three weeks.

Okay. And, can you remind us again the percentage of your sales, approximately, that you had in that region where the hurricane hit?

The percentage?

Of your volume sales for beer.

It was around 4.5%.

About 4.5%.

But, that’s a-- It’s a broader region than just Cancun and Cozumel. No?

Yes. It’s for the total Quintana Roo state, so maybe it’s close to 3%.

Okay. Thank you. Then, just moving to something specific about Oxxo, first you mentioned that your gross margin was impacted because of the lack of start-up subsidies from suppliers. What would be--? If you were to take out those benefits from the suppliers, what would be a reasonable level of gross margin - a definable level of gross margin? And, also, if you can comment on what you’re seeing in terms of finishing the opening of the Oxxo stores by the end of the year. And, what do you think about Soriana entering the convenience store business in Mexico?

Hi, Tufic. This is Alan. In terms of the gross margin, it will be basically stable with previous quarters. But, you have to keep in mind that the inventory that’s in the store for the first time is a standard practice that is given for free to all of the Oxxos. So, that plays an important part in terms of that gross margin. Federico, you wanted to comment?

Excuse me. Just very briefly on that. I understand it’s common practice, but do you have what would be a reasonable level if you’re not growing Oxxos? What would be the equivalent of your gross margin if you were not growing stores?

You would have a net effect in that case. If we would stop growing our Oxxos, what would happen there is that the ones that have not reached maturity, in other words, the ones that have not reached 18 months of operation, would still be increasing their sales on a monthly basis? So, it will depend on the time frame. On the short term, like a quarter like this one, you would see a margin decline. But after, I would assume, four to five quarters, you would start seeing not only a stabilization of that gross margin, but we anticipate, and we discussed this with investors before, that you would see an expansion.

Okay. Is there a number that you would have, like the equivalent, let’s say today, if you were to take out those benefits from suppliers?

No, Tufic. We don’t have a number. I think, really, for modeling purposes you should assume 4% even margin. It’s constant, it’s predictable, and, in the long-run, that should expand gradually. We really don’t have a number breaking it out because the pace of growth is expected to continue for the foreseeable future.

We feel very comfortable maintaining those stable margins going forward for terms of valuation, Tufic. We’ve said it before.

Okay. That’s fine.

On the Oxxo side, the tremendous space that Oxxo has been able to maintain in opening new stores is produced by extremely well integrated system or processor for growing new stores throughout Mexico. This is a process that we are very proud of, which ensures not just the right location but the quality and the standardization of everything that controls the success of an Oxxo store. We have what we call-- Using manufacturing terms, we have an inventory of in-process stores that is extremely large. I can tell you that probably the number of stores that are in the middle of our full process are more than 600 stores. These are ready [unintelligible] ready identify either negotiated or starting construction or getting permits. So, a new entrant in this segment we don’t believe will affect significantly our base of growth because exactly the reasons that I am commenting.

Okay. And, have you seen any decline in returns on the new stores? Is it harder to find-- to grow at the same pace with the same returns, or has that been sustainable-- the returns from the new stores?

No. You are right. As more people tries to participate in this segment sometimes it’s harder and it’s a little bit more expensive to get some of the sites. We are trying to maintain the same criteria for profitability that we have used. But, depending on the competitive environment in each city, we might be able to adjust or to be more flexible. But, up to now, we have not seen a significant impact that we should mention to you.

Okay. Great. Thank you.

We’ll take our next question from Joaquin Lopez with Deutsche Bank.

Hi. Good morning, guys. Congratulations on a very good quarter on the beer division. I wanted to ask in terms of the pricing for beer. On a quarter-on-quarter or on a year-over-year basis, we did some increase. I was wondering how much of that is coming from the change in mix towards one-way presentations, and how much is really technical price increases?

This is Hector. It’s a combination of different effects. First of all, we have to recall that during the third quarter from last year, the prices went down because of the high degree of bribery in the Mexican beer industry. Also, we recognize that during this quarter we have what we call a favorable geographic effect because the northern states where we have good market position have a very good growth. Also, we recognize that the numbers [unintelligible] representations of our growing. So, I would say that it’s a combination of those three effects, and there is regional [unintelligible]. We are very active in terms of taking advantage of our IT infrastructure and also the [unintelligible] that we already have in terms of market segmentation and use of revenue management techniques. So, I would say that every plaza right now has the opportunity to gain additional margins in the process of [unintelligible] segmentations and broad differentiation.

In terms of what to expect for the fourth quarter, you obviously have even an easier comp given the fact that the bulk of the discounting happened in October and November last year. But, would you expect the sequential price per hectoliter, meaning moving from 3Q ’05 to 4Q ’05, to show an additional increase, or would you expect it to remain more or less at these levels?

Talking about the perspective for the full year of ’05, we are still with the objective of having the same operational margin that we had the previous year. Obviously, we are very conscious about the effects of Wilma. At this point in time, we are taking some particular positions to taking care of our [unintelligible] with some marketing expenses trying to overcome those effects of Wilma. So, we are still committed to get the objective of sustaining our operational margins.

In terms of the margins I understand, but in terms of the pricing for beer, would you expect the quarter-on-quarter revenue per hectoliter to more or less stay at the same level at which it is right now?

Yes.

Perfect. Thanks so much, guys.

We’ll go next to Robert Ford with Merrill Lynch.

Hey, good afternoon, everybody, and congratulations on the quarter. My question has to do with cost of goods performance. In the press release, you attribute the gross margin improvement to the stronger peso, but it seems to me that-- As I recall, you’ve been hedged [unintelligible], you’ve had tremendous pressure with respect to natural gas, which has [knock-on] impact on glass, I would assume. In your non-returnable packaging sales, glass was 10.3, cans were at 17.9. What else, in addition to the stronger peso, seems to be at work here?

Gerardo, could you comment on this, please?

Yes. Basically, certainly part of the benefits were based on the improvement in Mexico peso, but in the sense of the cost of gas, with a subsidy of the government, we are now expecting that the impact will be beyond, let’s say, $8 per million BPUs. That will be our maximum price that we will be seeing in the, let’s say, next three months. The aluminum this quarter-- the price of this quarter is getting closer to the one that we already saw in the last quarter of last year.

In the stock market, I’ve got aluminum up about 70% in dollar terms year on year. But, I was under the impression that you were hedged for the last year, so you were below [inaudible].

Yes. Last year, we hedged, but the hedges were effective, really, during the first quarter. In the last quarter, those hedges were out of the money, so more or less the prices that we were seeing in the fourth quarter are at the level of the prices that we are seeing in this fourth quarter.

What you’re saying is you don’t see any additional pressure in glass or aluminum packaging, at least as far as the short-term, foreseeable future is concerned. Is that correct?

That is correct.

Okay. And, then, one other question. Maybe, Federico, in your capacity as the new guru in terms of new business opportunities, is there a contractual agreement which constrains Mundet to its existing territories, or do you have a fantastic opportunity given the better visibility profitability for that part of your portfolio to sell this internationally in your Oxxo chain?

We have seen Mundet as part of the portfolio for Coca-Cola FEMSA. That has been our vision for the past-- We have respected the agreements that Mundet has with other entities, which is franchise. That’s the position that we have. We have not changed that original [inaudible].

And, I’m just curious. Have you received any written communications that might alter you to reconsider your vision?

No. [Unintelligible.] Again, we have seen this as part of Coca-Cola FEMSA’s portfolio, but I don’t know how to answer your question, really. Right now--

Let me give you an idea; just send me a letter. How about that? That’s hugely popular these days.

Come on, Bob.

I think if I know where you’re coming from, Bob, for those of you that have been here listening to Hector this morning, we spoke, and we can talk about it further in this call in terms of the portfolio at Coke FEMSA and the measures that are within our controls. Mundet has really no bearing on that at this point.

Thank you very much, and congratulations, again, on the quarter.

We’ll take our next question from Andrea Teixeira with J.P. Morgan Chase.

Hi. Good afternoon. I just wanted to follow up in terms of the Wilma impact on the indirect impact, if you may. I just wanted to clarify the 4.5% you’re are just considering the FEMSA Cerveza business and not the Oxxo business. Right?

Yes. What Jorge Luis mentioned is that that percentage is the percentage of the volume-- It’s a percent of that region from the total domestic volume. That doesn’t mean that that’s the impact in our domestic volume.

No; I understand that. But, that excludes the Oxxo exposure. Right?

Yes. What Jorge Luis mentioned is what’s only the beer division. But, what is important to consider is that even as we will have that impact in volume, the economic impact will be compensated through the all-risk insurance that we have. So, even though you will see less volume, that shouldn’t affect at all the profitability of the Company.

And, also, can you elaborate a little bit more on the cost side? I understand that you were saying [unintelligible] subsidy on the natural gas, but you expected to have increased prices for the glass, at least in the packaging division, where your sales on the glass-- I know it’s linked to the dollar. Perhaps if you have further evaluation of the [unintelligible], you might have a positive impact there. But, you have any, like on the cost side--? I understood that you don’t have at all any impact in the fourth quarter?

What we are saying is that the impact on the cost-- We are not expecting any different from the one that we’re already seeing. What I’m saying is that in the case of aluminum, we have more or less similar comparables, certainly because it is-- When I’m talking about $8, it is much higher than it was last year. But, that effect is very similar to the one that we already have in the third quarter. It will not be an additional impact in the fourth quarter.

That’s perfect. Okay. Also, in the fourth quarter in terms of perspective on the Heineken and on sales on the export side, have you seen any increased competition or anything else that would decelerate the growth in exports?

I would say that we are right on track with the plan that we started for this year. As Federico mentioned at the beginning of the conference, we are very pleased with the good balance of the growth. The eastern states are growing in a double-digit figure, and we think that the coming quarters are going to be showing good numbers. So, the Heineken build is working fine for us and also for such [informational] partnerships.

Okay. Great. Thank you, Jorge. Thank you.

We’ll take our next question from Jose Yordan with UBS.

Hi. Good afternoon. Going back to the Coca-Cola price increase a little bit. Federico, I’m just interested-- Does this in any way change the philosophy how FEMSA looks at the KOF business? Specifically, can this decision revive the bold debate about whether to spin off Coca-Cola FEMSA or not, much in the same way that people debate separating the food and tobacco businesses of Altria and other companies like that to take the risky cash flows on one side and put the other cash flows on the other side? Does it change any of that at all? If you do get an opportunity to buy the 5% block of KOF Coca-Cola at a lower price in coming weeks, which judging from the conference calls today, you may well be able to, are you going to finally pull the trigger on that and in that way signal to the market that you do not, let’s say, see the cash flows of KOF as impacted as the market may think they will be?

Hi, Jose. No. Let me start with some very basic thinking. We are convinced that Coca-Cola as a company that owns branch and that manages branches is a tremendous company. We see the power of their brands in the market in the day-to-day operations selling to the consumers. The fact that the economics of the relationship have been modified by them notice of increasing the incident cost, that’s part of the relationship. Everybody knows that that kind of thing happens in the--

Yes, but it hasn’t happened in Mexico for twelve years, so it was kind of a dormant risk, let’s say.

I agree.

So, you guys are as surprised as anybody.

Well? I mean, whenever you’re enjoying something that is nice, fine. You just enjoy it. But, when that disappears, then the way to address it as professionals is to see what is the right reaction for us as managers of the Company. That’s what we have communicated to the corporate company, and that’s what we have shared with you. We believe that we can that we can compensate, I would say, all or a very substantial part of this increase by means of reducing our-- The support of marketing activities are all directed towards supporting the brand. The Coca-Cola company-- We feel confident that they will continue supporting the brand in a very strong fashion. I would dare to even say that probably some parts of these increases would normally be channeled through our activities that support the brand. They are firm believers of the strength of brands, and that’s what has made them a very successful company in the past. I think we don’t see any basic change from that position. Again, us as bottlers, we have the duty to see how we compensate, how we can review that effect, and we have to take a hard look into this. I think Hector commented this point in a more expanded fashion. We believe that we can continue-- either compensate some of those incremental [unintelligible] by savings in some of the marketing activities, but at the same time maintaining a very good dialog and a very good relationship with the Coca-Cola company. There is an expression that we have used indirectly in some conversations that we have had with them when we have met personally with their top people. We believe that the right relationship between us as bottler and them is what we’ll describe as creative tension. They having a bottler that always says yes to everything that they propose? I don’t think that’s very healthy. Also, I don’t think it’s very healthy that we say yes to everything that they say. This dialog is the one that makes the relationship more richer. It makes it a little bit tougher to manage, but I think at the end, it’s very good for both. We see this episode as part of our relationship. We feel like we are with the right [unintelligible].

Will you consider pulling the trigger on the 5% any time soon?

That is a more long-term decision. Since the Panamco acquisition, we stated publicly to them and also we disclosed to the public that our intention was to go back to the pre-Panamco shareholding percentages. We have stated that we want to do that. We will probably do it before the term expires, which is next May. If we want to do it next month or two or three months from now, I don’t know. Again, our vision is-- this is a long-term vision. We are not buying those shares to take advantage of opportunities if the market went down a little bit or not. We want to increase our shareholding of Coca-Cola FEMSA because we believe it’s a very good business. We believe that FEMSA should take that opportunity.

Can I ask a quick follow up? Is the decision to split the CFO job in two a factor of the job just becoming bigger than one person or a factor of you wanting to work on your golf game a little bit more and that kind of thing?

I think the fact-- I personally believe that Javier is going to a much better job than me as CFO.

Thanks a lot.

We’ll take our next question from Carlos Laboy with Bear Stearns.

Hi, Federico. This is your last conference call with us?

Well, if I’m invited, I will be happy to join any future calls.

Thanks for putting up with us these years and for advocating really great disclosure when you could have cut it back so easily so many times. It’s helpful. Federico, could you speak geographically to what regions and drivers you attribute the operating improvements that we’re seeing? Is there a region that’s carrying a disproportionate level of the improvement that we’re seeing?

Carlos, you know that’s kind of a very sensitive question that we try to avoid for competitive reasons. Is that a good answer?

No. I tried to butter you up with the disclosure, but it didn’t work.

Yes; I noticed that.

Well, could you speak to the improvements that we’re seeing geographically? Are they generally even across the board, or are there some areas that are doing better than others? Even if you don’t want to get too specific into numbers--

Carlos, as we said in the press release, this is basically all across Mexico. We are improving, and we are doing different things. [Unintelligible] applies everywhere. I shall not point in a specific region to give it the benefit of the average improvement. Improvement is all across the board and different aspects in different areas.

Okay. Thanks.

As a reminder, we are asking everyone to limit themselves to two questions initially. We’ll go next to Lore Serra with Morgan Stanley.

Okay. Let me ask one question on beer and then one question on soft drinks. On the beer side, I just wanted to double check that I understood correctly. In terms of the business insurance you have, does that cover the glass bottles I assume you lost on the beer side as well as lost sales, or does it just cover the physical assets that you’ve lost?

It covers the physical assets of all losses, plus the profit that you lose in the volumes of whichever you produce or the base of sales in the case of FEMSA Comercio. The respective income-- or the interrupted business, I think, is the expression in insurance.

The loss of the profitability derived from the hurricanes would be compensated to both businesses, both Cerveza and Oxxo. That’s included in the coverage that we have.

And, presumably, that will just be built into the administrative costs in the fourth quarter, or how will that be reported?

We’ll have to take a look at the timing.

We’re internally trying to synchronize the cost and the benefit received from the insurance company. [Unintelligible.]

From an accounting point of view, I’m not so sure how we-- I do not have a doubt that it is part of the EBIT, but I don’t know exactly in what role. Sorry. I need to review that. Let us get back to you the specific accounting of that.

That’s fine. And, on beer, just one other thing. I assume from the comments you made earlier that you’re continuing to see a stable, competitive environment going into the fourth quarter?

Definitely we do expect that.

And, on the soft drink business, I appreciate your comment, Federico, and Hector’s this morning, I guess it is a bit of an unusual business situation to be in. I also understand Hector’s point that you’ve some time between now and 2009 when the ramp gets really bad. But, that also sets up sort of an extended period of time when you’re not completely sure of what the economics of your business is. With all due respect, it doesn’t seem perfectly logical to me that you can just cut marketing costs as much as you say. This is an awfully funny way of going about changing system economics. You guys can all save yourself a lot of publicity by just doing this offline. So, my question is as the head of sort of strategic planning, how can you think about the strategic dialog with Coca Cola over the course of the next 12 to 24 months when it’s probably going to be kind of cloudy? And, how can you think about value in the bottling business when you don’t know the underlying economics?

Which was the last?

How do you think about value--? You talk about wanting to acquire other bottling businesses, but how to you value a bottler right now in Mexico when you don’t know what the economics are going to be?

Yes; right. Let me-- A factor of management in the conference call where we received the letter-- There has been some dialog between the two sides. But, at least, I personally believe that over the next-- We still have 15 months for this increase to materialize in Mexico. I think that much earlier than 2007 we will have the opportunity to sit down with the Coca-Cola company, and derive a strategy on the right new balance that we would like to achieve with them. The fact that we received a letter that changes the incidence cost doesn’t mean that we will stop talking to them. That would be extremely illogical for us to do. We intend to continue our very good dialog. We would like to get to know more of what are the plans for the Coca-Cola company to continue supporting the brand. As I said earlier, I think we have some indication that some part of the increased incidence that they might receive they intend to support in the markets in a stronger fashion in the markets. So, I don’t know. I don’t see this as something that may end up being completely wrong for the system. I don’t believe that the system has been-- is breaking because of this. The system is a very powerful system. The value will change? Yes. Definitely. We will be more complicated. It will be a little bit more stressful. It will require new balances between the two sides. But, I don’t know. I think that we might be pleasantly surprised two years from now to see that maybe both sides ended up with something very positive. At the end of the day, the moral that we have is one in which we are able to grow the capital and volume, and we were able to get price increases on real terms, we both benefit. That should be the objective for the discussions on both sides. We strongly believe that the model that has been working in Mexico for the last 12 or maybe more years is the right one. The fact that it’s being tipped a little bit more to one side; well, it will require some motion on our side - on the side of the bottling system - to try to confer that or to rebalance that in a way that is profitable for everybody. We like to have increased volumes? Yes! We love higher volumes. Do they like more volumes? Yes! They definitely love higher volumes. I think we have a lot of things in common. It’s just, again, I want to use the word-- We need to get to a new balance between the two sides. How will that be achieved? I think we will have a lot of opportunities over the next month to try to reach that.

Okay. Thank you.

And, we’ll go next to David Sachs with Hockey Capital.

Yes. That last question was mine. Thank you.

Thank you. We’ll go on to Alex Robarts with Santander.

Hi. Two questions, then. Just before, to clarify one item, in terms of the beer, you are standing by the flat EBITDA margin in ’05 versus ’04. Is that right?

Yes. It’s not flat; it is very close to flat.

Okay. I guess kind of going along with the strategic discussion, I’m assuming Federico got-- there’s also a lot of strategic elements to look forward to in FEMSA going forward. I thought it may be opportune to pose the question that we’ve discussed several times. As you think about the model going forward, and, obviously, there are a couple of beer assets in Latin America that are for sale - the Bavaria brand as well as the [Keyser] assets-- Is there any kind of update that you can share with us as to how you might now think about looking at that and whether the Coca-Cola company might just end up seeing both in Argentina and Brazil the total beverage model is what has to happen to go to the point of sale and might that just kind of be something that allows you to negotiate maybe a more kind of situation where you can acquire some of these assets and just put more beer on the Coke trucks?

You’re touching on an extremely complicated subject. I’m not sure that I can share with you our thinking on those issues. I’m very sorry, but those are-- At the proper time when we have a Company position, we’ll sure disclose them. But, right now, I think we will be pretty much [inaudible].

Okay. How about the current contract, I guess, with Keyser has officially expired. How long is this transition period, or is it kind of indefinite? And, you can kind of keep going on with the Bavaria and Keyser brands indefinitely without a contract? Is that the way to think about that?

No. Again, that is an issue that is kind of in motion. The contract is being discussed, and the Company-- Both sides are reconsidering [unintelligible] of that agreement. We have been very successful in our soft drink operation in Brazil, despite the fact that on the beer side Keyser in our territory has not done very well. Our people have done a tremendous job just by themselves. Does that mean that in the future we’ll not need beer? No; it doesn’t mean that. It just means that we are concentrating on things that we want to try to do as best as we can. But I think that probably as soon as we have a clear picture of how that commercial relationship might go, we’ll be happy to share with you. But, right now, it’s very tough for us to put out any comments.

Okay. I guess the second question is on [unintelligible] and a little bit something separate from this concentrate price hike. I guess I got the impression from that call that there were some pending or intentions to do some price actions in soft drink in Mexico in the short term. I just wanted to clarify - was that because you had seen some price actions from your competition - Pepsi and Big Cola and such - and that you wanted to kind of follow that? Or, was it the price actions would kind of reflect more trying to pass on some of the energy costs and specifically anything else about what you meant by that? Would that just be in value of Mexico, or would it be very tactical and such?

Hector, do you want to--?

Yes. I‘ll take that one. Alex, good afternoon. The ideals that we have in the context of most of our competitors are based on close to 100% ET bottles and one-way presentations. Certainly, all the brands are 100% in the market. We’ve seen that there is some space to start moving a little bit the price, especially in Mexico, during this quarter. We have already started in the last weeks to tweak a little bit the prices in some of the presentations. The effect that we have accumulated so far in this fourth quarter is around 0.5 a percentage point of that [unintelligible] movement of 50% or 1 peso in some presentations and not movement in some of the other presentations. But, we will continue in those movements, and we feel that we have the activity-- As we move the prices, our competitors or the buyer to the competitors will follow with increases because of the [unintelligible] prices, obviously.

Okay. So, you’re basically leading the charge here, I guess.

Yes.

Thank you.

[OPERATOR INSTRUCTIONS] And, we’ll go next to [Sausa] Sanchez with Citigroup.

Hi. A pretty simple question. Not to split hairs, but given that on the beer division you’ve talked about pricing that should be relatively similar in the fourth quarter to the third and given your margin performance so far this year to date, when you say near flat to flat, I imagine you mean near on the positive side versus last year as opposed to the negative side. Is that fair to say?

It’s nearing both sides, Sausa.

You had a price war last year. You have business continuity insurance and packaging costs that are similar to last year’s, if I understood correctly.

A lot of things happen between sales and EBITDA. All of them are moving that. I’m saying that the flat is plus/minus a small amount.

Right. Okay. The bigger picture on an earlier question about the interest in the Coca-Cola stake in Coke FEMSA. You’ve clearly expressed that FEMSA would have an interest in that, but what implication does that then have on the potential for the liquidity of Coke FEMSA stock in the medium to longer term? I know it’s an issue that’s been discussed before. I’m never quite sure what the long-term vision is for that, given where it is now.

Yes. The shares of the Coca-Cola company [unintelligible] Coke FEMSA are not the ones that are traded publicly. We are not really stopping the possibility of increasing the liquidity of the market. Definitely, you bring a very good point. If there is a direction in which we would like to move, it’s one in which we’ll increase the liquidity of the shares of Coca-Cola FEMSA. Definitely, if there are ways in which we can do that, we will do-- We have that as one of our objectives to be achieved. When and how, probably will have to be related to expansions or things like that.

Is there a minimum stake for FEMSA at the holding level that you have in mind that helps determine what kind of liquidity possibilities there are?

Again, we are limited by the structure of Coke FEMSA. Again, the shares that FEMSA has also are not the ones that are traded publicly. So, we could not just put our shares to the market [unintelligible] because those are not the right shares. We will-- As I mentioned, those would have to be probably related to a capital expansion. We would like to-- There is still a number of shares there that [unintelligible]. We would like to have them available, either for possible acquisitions or maybe to put them on the market just increasing liquidity. But, we have not made any decision on that.

And we’ll take our next question as a follow-up from Joaquin Lopez with Deutsche Bank.

Hi, guys. Just a couple of quick follow ups. The first one is on Oxxo. Are you still on track to open the 600 stores per year? That would put you basically on-- You’d need to open almost three stores per day during the fourth quarter.

The answer is yes.

Okay. And, then-- Sorry, Federico. Go ahead.

No. No. No. It looks like a great number of stores expanding from now to the end of the year. But, we just met with these guys, and they feel quite confident that they will get them in place.

And, not only that, Joaquin, but the idea is to have them ready in time for the holidays. So, the count is somewhere in mid-December - they expect to have 600 so that they’re all ready to go for Christmas.

Then, just briefly, my other follow up is on the selling expenses on the beer division. At the end of second quarter, you mentioned that you expected a decline, which you delivered on. I was just wondering of the decline-- not the decline, but the slower growth on the selling expenses - how much of that is related to your export business, and how much is related to the domestic part?

In the export business, there has not been a decline. I think the former two quarters are more or less increasing in the selling expenses in the export. It’s more or less [unintelligible] all the four quarters of the year.

Okay. Do you characterize the level of selling expenses for the domestic side to be more front loaded than back loaded, or is this an intentional decline in the support of some of the brands? Is it less product introductions and less special campaigns during the second half of the year?

As we said, the timing of the calendarization we call of the selling expenses for this year was since the beginning we were expecting to be different from the last year. Specifically because the last year was very-- a lot of concentration of new lanzamientos - new launching of different products in different cities. It is not that we at all reducing any support to our brands. The way that we are controlling our costs is not through diminishing the support to our brands at all.

Perfect. Thanks. That’s very helpful. Thank you so much, Gerardo.

We’ll also take a follow-up question from Sausa Sanchez with Citigroup.

Hi. I just want a little more color, please, on the ERP training that’s behind the Oxxo stores now. If you can specifically talk about what’s changed in terms of how you train people - if it takes three more weeks than it did before and what kind of things, either broadly or, obviously, specifically speaking?

The average training for the operators is about two months now. It has to do not really with additional weeks but more fairness in the selection of the people and then ensuring that they come out of there completely fluent in managing the systems that they now have. It’s not fully online now that automatically it will detect when you need to restock an item. You still, obviously, need the operator to be on top of things. They’re being more careful and taking longer in releasing these guys out into the world. I don’t have really a number if it takes them now two more weeks or three more weeks. It’s really just been a more thorough effort. They’re taking things a little bit lower.

Broadly speaking then, we could sort of think about this as a productivity improvement on a per-store protocol basis going forward.

That’s the intention; absolutely.

Thanks.

There appear to be no further questions. I now turn the conference back to you, Mr. Reyes.

Thank you for joining us today and for your interest in FEMSA. We have lived through the ups and downs of business cycles, proving that we can successfully manage complex operating environments and demonstrating the strength of our combined beverage platform. I personally believe that the best is yet to come, and I’m confident that the new management changes we have put in place create the best team to grow the Company and exceed what we have already accomplished. Thank you very much.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1 (888) 203-1112 or (719) 457-0820 with an ID number of 7655455. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.