Fomento Economico Mexicano SAB de CV (FMX) 2005 Q4 法說會逐字稿

Good afternoon, everyone, and welcome to FEMSA's fourth quarter and full year 2005 earnings results conference call. [OPERATOR INSTRUCTIONS] At the request of the company, we will open the conference up for questions and answers after the presentation. During this conference call, management may discuss certain forward looking statements concerning FEMSA's future performance and should be considered as good faith estimates made by the company. These forward looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties which can materially impact the company's actual performance. At this time, I will turn the conference over to Mr Javier Astaburuaga, FEMSA's CFO. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. Welcome to FEMSA's fourth quarter and full-year 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. Answering your questions today, I have with me Federico Reyes, now FEMSA's Executive Vice President of Corporate Development, and Jorge Luis Ramos, CEO FEMSA Cerveza. We also have Gerardo Estrada as well as investor relation teams from FEMSA and Coca-Cola FEMSA. Let me begin with a few comments on our recent acquisition of the controlling stake in Kaiser. The Brazilian beer market in general, and Kaiser in particular, has significant potential and represents an important avenue for profitable growth for FEMSA.

Our immediate priorities for the Kaiser business are to develop working teams to bring forward with FEMSA managers, to improve sales execution in key markets, to leverage our presence in Brazil, aligning the operations with the Coco-Cola bottler network, and to optimize the supply chain of the business and to manage, through short, medium, and long-term decision-making processes, a balanced and strong brand portfolio. On that front I am pleased to report that we have already taken some important actions. Just one day after the announcement, we immediately held employee workshops in Sao Paolo, where we introduced the FEMSA culture and key management philosophy to our new colleagues and assigned integration teams, one for each functional area that are already hard at work. We closed Kaiser's Sao Paolo sales and distribution center, placing the selling function back in the hands of Coco-Cola FEMSA Brazil. An important part of this effort involved training workshops for the Coca-Cola FEMSA Brazil sales force.

Finally, we also met with the main Coke bottlers in Brazil, as well as other key constituents to reaffirm our plans and commitments to get the Kaiser business on track. We're working full speed ahead building on the foundations of the business with the first objective to stabilize its condition in the short-term. We will continue to report progress as we move along in the future. With that, let's move on to the results. Last year was a strong one for FEMSA and we are pleased with the overall results. Our consolidated revenues were just under $10 billion, increasing 9% in 2005. This year also marked FEMSA's 11th consecutive year of operating income growth, up nearly 10% for the year, reaching a record $1.5 billion. All of our core operations, soft drinks, beer and Oxxo stores contributed positively to this growth. While we experience important price increases in raw material at both our soft drinks and beer operations, the strength of the Mexican peso, combined with efficiency improvements across our operating unit, fully mitigated these affects, resulting in gross margin improvements in all of our businesses.

Despite the bout of hurricanes that hit southeast Mexico in 2005, we were able to open all of the affected regions' Oxxo stores within days and our beer volume growth remains strong for the fourth quarter and full year, despite the related concerns expressed on our last call. In terms of balance sheet highlights, net debt at the end of 2005 was $2.5 billion, a reduction of $1 billion from the previous year. We are now at the robust net debt to EBITDA ratio of 1.2 times. We have also 78% of our debt eliminated in Mexican pesos and almost 90% of our debt has fixed interest rates. Turning now to our beer operations. Our fourth quarter and full year results reflect a strong focus on top-line growth for maintaining profitability. During the first half of the year, [INAUDIBLE] rolling out an unprecedented amount of innovations, which included, among others, the Carta Light in a full line of returnable packaging and Sol Brava in the 40 ounce returnable packets for central Mexico.

During the second half of 2005, we continue to execute on the strategies laid out early in the year, as well as leveraging our innovations to achieve solid top-line growth. All in, we finished the fourth quarter and full year growing ahead of the industry while meeting our profitability expectations. In the domestic market we achieved volume growth of 5.8% in the fourth quarter and 4.9% for the year. The domestic price per hectoliter increased 0.4% in real terms for the full year, attesting to a rational competitive environment which enable us to utilize some tactical revenue management. Well into the first quarter of 2006, we continue to see stable competitive [economics] that should allow the industry to continue to grow in a profitable way. Moreover, in general, we implemented a domestic average price increase of around 3.5% in peso terms, which was employed in all of our volumes as of early February.

In beer exports, 2005 was our first year with Heineken USA at the helm of our U.S. exhorts. It was a successful first year where, thanks to the good coordination between the FEMSA Cerveza and Heineken USA management teams, we saw the emergence of quality growth and improved availability for our brands, particularly in the east coast and in line with our plan. This focus allowed us to deliver robust volume growth of nearly 10% for the quarter and 9% for the full year. On the cost front, despite increased costs of raw materials, we achieved a gross margin improvement of 70 basis points for the quarter and 90 basis points for the full year. In the fourth quarter, our gross margin reached just under 60% of sales, setting a new record for our beer business, reminding that part of the expansion is relating to the new commercial terms in place for the U.S. market. Anyway, I would like to point out that the appreciation of the Mexican peso combined with the operating efficiencies achieved, duly compensated for price increases in aluminum, energy, and steel.

Continuing in the third quarter trend, operating expenses remain slightly below total revenue growth for the fourth quarter, as we kept fueling investments behind our brand, building efforts, our sales and promotional activities, and our transformation initiatives. For the full year, operating expenses grew slightly ahead of revenue growth, mainly due to increased costs related to the Heineken agreement and increased marketing expenses during the first half of the year. However, despite these increases we still finished the year with a 9.2 increase in income from operations representing a 40 basis point margin expansion. This is the tenth consecutive year that we expanded our operating margins at FEMSA Cerveza. So all in, a very strong year in 2005, where we delivered on our key strategic objectives of growing the top-line, maintaining profitability levels, strengthening brand equity and order advancing our transformation initiatives. Moving now to our soft drink operations.

At Coca-Cola FEMSA,despite the challenging environment, our team again delivered solid top-line growth and bottom-line results across most of our territories. During the quarter, revenues increased 2.9% and operating income increased 4.5%. For the full year, revenues increased 5%, reaching a record 50 billion pesos and EBITDA increased almost 9% to surpass 11 billion pesos. Mexican Brazil accounted for the bulk of our top and bottom-line growth during the quarter and full year, more than offsetting profitability declines in Central America and Venezuela. In Mexico in 2005 we leveraged 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 on the right brand portfolio to our consumers is evident in the results.

In the fourth quarter, our Mexico revenues increased 3.7% resulting from a 3.5% increase in sales volume, with stable year-over-year pricing in real terms. Brand Coco-Cola kept its momentum in the fourth quarter, contributing over 70% of our incremental carbonated soft drink volumes and the majority of our growth in single serve presentations. For the full year, Mexican revenues increased 4.2%. On the cost side, Mexico's gross margin expanded 30 basis points during the quarter and 50 basis points for the full year, due to a decreasing sweetener costs and the appreciation of the Mexican peso, which fully compensated for increased PET prices. In the fourth quarter, Mexico's operating margin decreased slightly, reflecting higher SG&A expenses directed towards improving our sales and distribution practices. However, for the full year the operating margin improved 30 basis points, reaching 21.3 of sales.

Outside of Mexico, most of the remaining top and bottom-line growth came from our Brazilian operations. Brazil revenues measured in pesos increased 6.6% for the quarter and 12% for the full year. Even more impressive was the operating income growth of 41% for the quarter and 72 for the full year. Less than three years after taking over a money-losing Brazilian operation, we are now making 1 billion pesos EBITDA per year in that market. These strong results are a combination of our re-designed, go to market strategy, the reintroduction of returnable packages and better coordination across the Coco-Cola system. All said, Coca-Cola FEMSA has truly established a strong platform for growth that delivered strong results in 2005. If you were able to participate in Coca-Cola/FEMSA's conference call last Friday, you can access a replay of the webcast for additional details on the results. For its part, offshore delivered a stellar fourth quarter, topping off a very solid 2005.

During the year, we added 675 new Oxxo stores, making this the tenth consecutive year that we opened more new stores than ever before. In order to reach this record number of new stores, we continued aggressive store expansion through the entire month of December, a month normally dedicated to focusing on existing store sales. This extended focus enabled us to open 375 new Oxxo stores during the fourth quarter, a tremendous effort that exceeded expectations. As of year-end, there were 4,141 Oxxos throughout Mexico. Oxxo's growth is not only coming from new stores. Same-store sales grew 8.6% for the quarter and 8.7% for the year as a result of strong [INAUDIBLE] management and improved promotional activity with our main supplier partners.

On the profitability front, Oxxo's operating margin grew 6.6%, up 130 basis points in the quarter, and 4.4% up 40 basis points for the full year. In the fourth quarter, Oxxo's profitability improved, as we achieved our supplier's sales targets ahead of schedule, resulting in early payment of supplier incentives, as well as our growing ability to leverage scale in SG&A expenses. Going forward, we will continue to aggressively grow our store base, while investing in the business through increased technology deployment, store upgrades, deepening [INAUDIBLE] management all across the organization, and the implementation of direct 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 deliver solid results. With that, I would like to ask the operator to please open the call for questions. Operator.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Bob Ford, Merrill Lynch.

Good afternoon, everybody, and thank you again for separating the conference [sets] of results. I really appreciate that and I'm sure others feel the same way. I was tremendously impressed by the innovation calendar in 2005. And I'm just curious how do you follow that up in 2006 and what initiatives do you pursue to maintain this momentum behind your volume growth?

Talking about innovation as you already mentioned. I would say that for FEMSA Cerveza, that's one of the main approaches that we have been following in the past years. This coming year, we are going to be very active in running out some of those success stories that we had during '05. And also we are in the process of deciding some way of expanding our brand portfolio with new initiatives for the consumers, particularly for those segments where we recognize and we have right now a low market share. So innovation has been on place already in FEMSA Cerveza and we continue in the coming future in the same path that we have been involved recently.

And just one little follow-up. What percentage of your [volume] is now going through the Oxxo chain?

It's going about 8% of the total volume.

Great, thank you.

As you are aware, right now, Oxxo has the more balance grow in terms of geographic areas. Right now, they have divided expansion between the northern and the central and southern areas of Mexico and that caps a lot, the beer division, because in those places where we have low market share, Oxxo is a very good way to merchandise our brand portfolio. And, as a matter of fact, we are pretty sure that we are developing our brands to this Oxxo platform.

To add to what Jorge mentioned, Bob, this Juan. To the innovation question, I think also part of it is, as Jorge was saying, some of the successful innovation that we launch in certain geographies or certain segments of the market that we are testing and deciding whether it would make sense to roll out the successful innovations in different parts of the market. That's also going to be coming this year.

Thank you very much, Juan, and congratulations again on the numbers.

Our next question comes from José Yordán, UBS.

Good afternoon. Jorge Luis, I just had a quick question about pricing in the industry. I noticed that both FEMSA and Modelo had a sequential decline in pricing in real terms of something like 1.7%. Obviously your volume growth, at least, had something to show for it. But in any event, can you explain what was happening in terms of pricing dynamics that led to this result? I'd noticed cans were also growing significantly, so it should have gone the other way around.

According to our numbers, Jose, we had a decline of 0.2% in sequential terms. You have to imagine that those numbers that we are showing is a [INAUDIBLE] figure in the sense that we are facing a lot of geographic mix affects and also a lot of SKU mixed affects. And, also, I could say that some channel mix affect. We have not had recently huge promotions as the ones we had during '04 when we were facing a very aggressive environment because of Modelo events. So I would say that that's just a matter of a number that comes because of this mixed affects.

Okay. Thanks a lot.

We'll now go to Tufic Salem, Credit Suisse.

Good afternoon, everyone. Congratulations for the results. Quick question in regards to the hurricane impact. I just wanted to -- if you could help segregate where we could have seen any better numbers if it wasn't for the hurricane. And then if you can go through the volume and then some of the profitability lines in respect to this?

Maybe during the quarter, we could have a maybe a one additional percent of growth during the fourth quarter if we had not faced the [INAUDIBLE] affects. But we're quite surprised that the temporary labor that we recognize in the peninsula after hurricanes overcomes some of the affects on the tourist market segments. So I would say that right now, everyone in Cancun is organized to receive the spring breakers for this coming spring season, so I would say that everything is going to be fine for the remainder of this '06.

Okay. And anything particular in terms of profitability?

Can you get that field? What we already are -- I would say that it's shown already nowhere P&L numbers have a minor affect sometimes of profitability and we are still on the process of finishing our claims with the insurance company. So maybe during the first quarter of this year, we want to keep the end of the story, I don't know you could add something to this.

The input in the profitability was not that big. But we are [pending] is to collect basically the damaged parts and that has not been provided in the income statement and will not be reflected in the income statement.

Okay, great. Thank you.

We'll go next to Renaldo Santana, Deutsche Bank.

My question is related to the beer market. What has been the reaction of the competition from the market share gains that you have had presumably in central Mexico and from the conversion of some of the soft [INAUDIBLE] to mixed point of sales? And second, if you could expand a little bit on your implementation of the [director] solution for the Oxxo chain, thank you.

I would say that we are facing right now, a very rational environment. Both companies are in the process of channel segmentation and differentiation. In that sense, we think that we are ahead of the competitor in terms of the IP platform that we have been installing. Right now, 95% of our direct sales have been new business systems in place. And we are very active in the process of training the local management teams to take advantage of that new platform. So we are not foreseeing right now a very rational competition. In terms of Oxxo, I'm not quite sure that I understood well your question, but in terms of direct sales, we are serving each Oxxo store, delivering their sales orders that are placed two times or three times a week.

What we are doing right now is serving those stores, most of the cities of Mexico during the night. In that sense, we are taking advantage. If we mean that we have in each place in the [INAUDIBLE] during the morning, they are serving the regional retailers and during the night they are serving the Oxxo stores. So we have a better use of those assets.

Thank you very much.

We'll now go to Lore Serra, Morgan Stanley.

I wanted to ask two questions, both about the beer side, please. It seems like 2005 was a very positive year for industry, volumes up around 4.5%, as you said, you're up a bit more than that. I'm wondering if you think that's a number that's sustainable. I know that you don't like to give tight volume guidance, but I'm wondering if you think that is sustainable, because it's been based on better segmentation, better promotional strategies or if you think there were things that caused the growth in 2005 to be above what you would think of as what we might see in the next year or so?

I would say that before 2002, the Mexican beer industry was very boring. Everything was sold at the same price, no [INAUDIBLE] packaging, no product innovation. We think that we have been able to increase the consumption per capita. And obviously, bringing new novelties to the consumers, we think that it's still enough room to improve the per caps. So in that sense, at least from the FEMSA side, we're going to be very active on that field.

Okay, great. And then the second question, I guess, goes back to what Jose or Don asked, and maybe let me try to ask it in a different way. If we look at the year, you had pricing per hectoliter up domestically 0.4%, even though your returnable [Mecks] went 340 basis points against you. So I guess, there's a couple of questions there. I guess one is, isn't that a form of discounting. Isn't there -- shouldn't your pricing be a bit more resilient in light of that mix shift? And then I guess, in that vain, it's impressive, or very impressive that you were able to increase your gross margin in light of that trend and in light of the raw material pressure that you spoke of. So has something changed in the supply chain that you can have, in effect, a price increase less than inflation if we do it on a mixed neutral basis, yet still in light of higher aluminum and bottle cost, have a gross margin increase?

We expect we comment regarding returnable and nonreturnable. You have to remember that the number shows not only domestic volume but also exports volume. So it's hard to figure out trying to follow our different charts that we provide to you, how are the numbers all tie on. So in that sense, let me go back to what we have been telling you during the last quarters. [INAUDIBLE] segmentation is a very good way to improve our revenue management. In that sense, what you have said -- we think that is true that we have right now taken advantage of the new way of doing business in this industry in Mexico.

As an example, in the supermarkets and convenience stores, we are very active in terms of number turnovers. In those stores we are right now offering the consumers [INAUDIBLE] packaging as a way to increase the per caps and also, at the same time, we are providing them with some discounts in terms of the additional volume that they are taking home. So, it's very hard for us to, right now, in this conference, to follow the numbers, but be sure that when we have enough time with you, we can do that and try to be more specific than I'm able to do right now. Okay. But I mean, just to make sure I understand your reporting. If I divide your returnable volume by your domestic volume, I should be able to get an accurate read of what your mix is domestically. Correct? Yes, you are right.

Okay, thank you.

The next question comes from Sohal Ameer, Bluesight Research.

My question was more with regards to Oxxo stores in terms of over 2006, how many you plan to open, and over each of the quarters how will they be distributed. Also, with regards to the capital expenditure that will be associated with these stores. And finally, just to get some understanding in terms of as to your number of stores open, how does that affect margins overall for FEMSA as more of your products are sold through your own stores? Thank you.

Hi, this is Juan Fonseca, let me take a stab at that one. In terms of how many Oxxos, I think you can model 650 new stores for 2006. Again, we will try and strive to always exceed the number of stores that are open in previous years, but I think 650 it's a reasonable number to expect. In terms of how their [calendarized] throughout the year, we tend to be back-end heavy and normally '05 was another example. We're trying to smooth it out, but we still have the largest number of openings in the fourth quarter. I think you can assume there will be some back-end loading again this year, although we will try to make it smoother. There are also other considerations. I mean, the margins at Oxxo, there's a small component that is tied to the openings of stores.

As you know, when we open a new store, we get everything that fills the store, all the merchandise for the first load, if you will. It's usually provided by the suppliers and so, there is that margin effect in terms of how many stores you open in a given quarter. If you look at the third quarter numbers, for example, of last year, the margins went down because in large part the number of stores that we opened went down. Same is true for the fourth quarter in the other direction. Overall, Oxxo, as you know, of the three different businesses that make up FEMSA, it is the one with the lowest margins, obviously retail by design is a lower margin business, and so to the extent that Oxxo continues to grow faster than the core beverage businesses, you will see that effect in FEMSA's consolidated margin. It will continue to trend down, but we believe for the right reason. Because as you say, more and more our businesses are integrated and Oxxo is sort of the perfect example of how the three parts of FEMSA come together.

Great. And finally, with respect to capital expenditure, how much do you expect for the whole year for Oxxo and that, I assume, will be divided proportionately to the number of stores you open in each quarter?

Yes, if you can put down a number of 175 million for Oxxo for this year, but just keeping in mind that it doesn't go 100% towards stores. Oxxo is also working very hard on its direct distribution efforts. They have opened a number of distribution centers. They now have -- yes, and information technology, those are the two -- . There are actually three components in addition to the stores you have you have to consider. One is the direct distribution, two is the IT and systems platform that continues to be deployed, and three would be the overhead or the regional offices that they base their growth on a regional strategy, where they open a new region and then slowly saturate it with stores. As they continue to open new classes, which is what they call them, some of the capital expenditures goes towards that.

Right and that would be $175 million, correct?

$175 million, that is correct.

And just finally, is there any plan to enter new regions in FY '06?

New regions within Mexico?

Mexico and outside.

No, the potential for growth within Mexico for Oxxo is still very, very substantial. We have spoken about perhaps reaching or tripling the size of Oxxo over the next decade and so the focus is put squarely on Mexico and this is its main market and so for the foreseeable future, that's what we're going to focus on.

Thank you very much.

Our next question comes from Alex Robarts, Santander.

Two questions just on the beer side. If we look back, I mean back in June, I think both you and the competition were looking to trying to get flat margins for this year, 2005. And I think for very clear reasons, that everyone was basically going through, whether it be currency or input costs. You guys have both fell short of that goal and I think just trying to take a look at that, you've obviously done better than Modelo here in the second half, but on a currency neutral basis, we have to look at some of these selling expenses I'm just trying to get a sense of you mention it, interestingly, in the fourth quarter, that we see the selling expenses for beer up about 11% and that's faster than the top-line growth, and you talked about Heineken, and you talk about advertising in new products.

When I look back actually for the whole year in '05, three of the fourth quarters you actually had this faster growing selling expense for beer than sales. I guess the question I have is when you guys look out in '05 -- I'm sorry into '06, do you think that that's going to continue? And if so, is it really because of the advertising expense or something? And related to that, how does the Kaiser expense that we understand will fall into FEMSA beer, how does that incremental Kaiser marketing expense affect that and is that the reason why this is the final part of this large question, is this kind of the reason why you guys tended, I guess last month, to be guiding for relatively flat margins again in beer this year? I know that's kind of a three-in-one question, but it would be great if you could help us out with that. Thanks a lot.

Talking about the margin for this '05 year that we just closed, as a matter of fact, we increased our margin in 40 basis points. Regarding the Kaiser affect for '06, we are not able, as we speak today, to be as specific in how we're going to be affected our business results, but we are anticipating that maybe for -- at the end of the second quarter, we're going to be able to expose to you how it's going to be measured in terms of financial, that new investment for FEMSA, the beer side. Talking about the fourth quarter regarding marketing expenses, some seasonality there, but not a big affect on the end numbers. So I'm not quite sure that we are following the number the same way you are doing, Alex.

Just to add on top of that, I'm -- I think that 2005 was not a, what you would say a [beigh] year in terms of a growth of selling expenses. As we have said in previous conference calls, close to half of the increase in the selling expenses are due to the new commercial terms on the agreement with Heineken USA in the United States due to the fact that now we are able to collect a higher price, which that in turn helps gross margin expansion a little bit, but also at the same time, we have commitment, contractual agreement and discretionary decisions in terms of putting money behind our brands in the U.S. to fuel growth. So the reason -- the most important reason why in 2005 the selling expenses grew ahead of revenues are due to the new commercial agreements that we have in place with Heineken USA. Going into 2006, that would be not the case because now we have a comparable 2005 as a base.

Okay. So selling expenses should in fact -- you expect them for beer to trend and grow slower than the top-line?

Right.

That's what we're aiming for 2006, yes.

And when I was referring to the margin, I'm referring to the beer EBITDA margin, just to make sure. It was down for the 12 months 50 basis points, to 32.5%. And then in the fourth quarter, the EBITDA margin for beer was down 50 basis points as well to 30.6. We're looking at the same numbers?

You're right.

I thought you had said something earlier, so what I'm trying the get at then is three, four weeks ago, you guys talked a little bit about the general trend in the margins for '06. And the message seemed to be pretty clear that you, and your competition is doing the same thing, guiding for flat margins in '06. And I guess I'm trying to understand, then, if the selling expense, as you say now, into '06 is going to be trending slower than top-line, then is it safe to say then that really the conservative kind of posture that you and your competition are taking on margins this year, as per three or four weeks ago, is a kind of an energy in raw material base, or is it -- and specifically, I am interested in just how are you going to integrate this incremental Kaiser related spend in Brazil. That would be really helpful.

Alex, this is Juan. When we spoke a few weeks ago, as you said, we talked about stable margins and I think that we stand by that statement in the sense, that yes, sure, you look at one line item or another and we were saying right now that we expect selling expenses to trend down. We don't know what exactly is going to happen on the raw materials side. We have yet to breakdown to you how the spending will come in for Kaiser. So definitely, we think we're comfortable with a stable margin outlook for '06. Without really getting into the nitty-gritty of how we get there, we're comfortable with that. Whether it was expansion or contraction in '05, I think we're looking at different lines, we were looking at the operating income line, you are looking at the EBITDA line. So the difference really coming in the DNA. But, again, we were aiming for flat, we actually expanded a little bit on the operating income, operating margin, so we're definitely happy with that.

Now that's fair, stable margin guidance. And just the last thing, if I may, on this interesting kind of Heineken launch of Heineken Light, which is, I guess, is expected next month and it looks like what they're talking about this year in the volumes is about 20 -- they hope to get Heineken light up to about 25% of your total export sales for the year, how are you guys kind of -- I guess, is this something that changes a little bit your outlook for the export growth? Are you guys still kind of looking in the kind of mid-single digits, high-single digits for your export growth this year? That would be helpful. Thank you.

We have been fully aware of this Heineken Lite launch. I would say that both organizations are committed to having double-digit growth for this year, '06. Obviously on the lower side of the double-digit numbers.

Okay.

Thank you.

We'll now go to Andrea Teixeira, J.P. Morgan.

Congratulations on the quarter. I just wanted, Jorge Luis, if you can explore more on these -- a little bit more on the launches, on the product launches in 2005, vis a vis, what you expect to do in 2006 and also if you can talk a little bit of what you have been doing with Kaiser so far in terms of merging the two distributions, that would be great. Thank you.

As you recall, Andrea, during '05 we launched the 40 ounces returnable bottle for an extension of our Sol brand, we call it Sol Brava. It's already on 16 states of Mexico, close to 15,000 retailers sell right now offering this product to the Mexican consumers and during this '06 year, we are going to be expanding these new SKU to another states. And also, we are going to be considering the possibility of having another SKUs for this Sol Brava line extension. Also in terms of the Tecate Light, as you are aware, we have been very active on that new way of approaching the new consumers in Mexico and we think that it's room enough to keep rolling these whole family of SKUs for the extension of Tecate.

I was just like following up also on Cluster. You don't expect that to be growing? You're not going to put money behind that brand?

No, Cluster was designed as a [INAUDIBLE] and right now it's offered mainly on the supermarkets. As I wait to put an offer to the Mexican consumers that are willing to pay a small amount of pesos for a six-pack. As a matter of fact, we have been very pleased because the big supermarket chains right now are not using the capital [INAUDIBLE] to make promotions discounting our premium brands. In that sense, we would say that most of it has been performing well in the role that was originally designed.

And in terms of Kaiser -- that's perfect -- in terms of Kaiser, you expect to -- how much you could like merge and how many people you could actually replace using the current Coco-Cola FEMSA adwork down there. Right now, we are in the diagnostic phase. Javier mentioned at the beginning of this event. People from Coco-Cola FEMSA and from FEMSA beer operations here in Mexico have been assigned to have a full diagnostic of the operations. After that, we are going to be setting a new set of numbers and goals for the management group that is in charge of Kaiser.

Let me add to that that it is important for everyone to remind that Kaiser has been a money-losing operation. And that we were able to acquire at what we think a reasonable price and that we are in the very early stages again of making the right things we think from the operational site point of view. The first one, the first decision we took and the first action we implemented was to close the Sao Paola sales center of Kaiser and him back sales force into the Coca-Cola FEMSA Brazil Sao Paola operations. That just single move involved something like 500 people being laid off and made the recruiting a little bit less than 100 to do the same job they were doing, but now within the Coca-Cola FEMSA sales structure. And again, we are concentrating on every synergy and efficiency regarding either back office or supply chain at the very early stages of the work programs that we have now in place. Nevertheless, it was a money losing operation.

Whatever the numbers go during the year, of course, we will be now consolidating some sales with basically no EBIT on those sales being made for the first year. And again, we are in the stages in which we are now making decisions in the very short-term on how to manage the brand portfolio in Brazil, but also we are working on the analyses that would tell us which would be the best way to take advantage of the existing facilities to really again develop a much more balanced and strong and able to grow brand portfolio going forward. I will just make sure that everyone understands what kind of business we acquired in which early stages we are in terms of taking charge of the operation. And again making sure that the numbers that we're going to start reporting in the first quarter will include again a company which has some sales in it, but as you may anticipate, not a lot of profits in it, and significant demands on bringing resources to the table in order to really push this business going forward.

So the idea -- that's very helpful. But the idea in the beginning is not to do any major investments in marketing yet, just do the distribution side and trying to get these operations straight and then do the analysis in terms of marketing. So we should not expect huge investments in marketing until towards the second half of the year, probably?

I wouldn't say -- I wouldn't use the word significant at all, but again, the priorities of the business is to really get as much efficiency we can from the system, leverage our existing capabilities and operations in Brazil, and stabilize the business all over in terms of economics and in terms of brand performance and share volume. And we have not -- we are not now in the position to say how much money we'll need to put into the marketing resources that the brands will need and we will start to comment on that in the next conference calls going forward.

Okay. Perfect. Thank you.

We'll now go to Celso Sanchez, Citigroup.

Good afternoon. My question has to do with Oxxo's margin evolution and expectations with respect to -- I think the question was asked before, I'm not sure I heard the answer -- with respect to centralized distribution, if you have targets in mind, if you have a percentage level now, a percent of the total sales that go through the Oxxos, to help us understand sort of where you are, how you think you can progress, what kind costs we should expect broadly speaking in terms of IT platform and so on and so forth. In other words, should we continue to expect some margin expansion from here over the next couple of years or do you think there is going to be a period of investment where stable margins will be the goal?

Celso, hi. This is Javier, again. The business is, as you can see, still in a very high expansion mode and that creates all sorts of needs. The most important ones I should highlight being on the deployment of the IT platform and on the training of a big number of people not only due to growth, but also to the normal rotation of the personnel in charge of the stores. And at the same time we still are looking at very good growth on same-store sales, basically driven by traffic and basically as a consequence of a much better, well-managed [INAUDIBLE] management all over the place. Scale, we think, are still going to provide some leverage in order to facilitate margin expansion.

But at the same time, the requirements that the high growth model, which the business still is, and the need for having a world class information technology platform also create the demand for resources to be applied to the business. So going forward, we are still targeting margin expansion at moderate one and we feel very comfortable being able to solve out all these requirements of the business with a good performance. And by good performance, I mean stable margins, but, nevertheless, we are still targeting for moderate margin expansion.

If I could just follow-up with a semi-related question just to get into my one shot of questions here. Is there any way to relate the selling expense increase in the beer division to the unexpectedly strong expansion in stores. You talked about supplier credit and obviously beer being a supplier. Is there a certain amount of credit that the Oxxo division benefited from in its margin but maybe cost the beer division in a noticeable way with respect to a higher selling expenses? Is that where it would be booked, even?

We usually measure that on the nano basis. I would say there is not effect because terms have been there and they are very comfortable '04 versus '05. But once you look at a quarter, yes, it may have some impact because of, again, volumes and opening of new stores which play some part in the terms and conditions that the relationship is being worked out. So there maybe an affect on the quarter, but not on an annual basis, which I think is a number to look at, Celso.

Okay, thank you.

Our next question comes from Paul Korngiebel, Deakin Value Advisors .

Could you please comment on Extra as a competitor to Oxxo. Are there any signs that Modelo is becoming a more or less able competitor in this area? And has there been any competition and particular overbidding for sites? Thank you.

What I can comment is that they've expanded heavily in 2005, opening a good amount of stores at a big rate, considering the size of the chain and the time they've been in the business. We have seen mixed performance. We have seen, in some cases, yes, a little bit of a fight for a certain outlet, but the game is much more complex than just fighting for a good location and we are just following very closely. We don't like really to comment a lot on the competitors performance. So what we're doing, and I can tell you very surely, that we are monitoring their developments, we are pretty much focusing on expanding our capabilities and within we're doing a heck of a job with our business and we're just monitoring very, very closely what the competitor is doing in this other arena.

Could you give us a little idea of the 4141 stores about maybe the regionally. How many are in your traditional northern stronghold. How many would be in Modelo's central stronghold and then how much in the south/southeast.

Broadly speaking, this is Juan again, you could talk about maybe 50/50 in the north, central and south. But we've said before that Oxxo is a useful way in combination with Cerveza to grow and so obviously a lot of Oxxo is coming up in central Mexico, but you also see a lot of Oxxo coming up in Monterrey. So it is very balanced. Yes, there is some focus on central and southern Mexico, but we're not putting one region ahead of another. It's really a very balanced strategy.

The last time -- just one last one -- is a possible new entrance, we had looked in -- if you look at the U.K. where you get a very good grocery chain might put in, yes, Tesco. The Tesco Express model seems to offer an alternative to a pure convenience store. Is there any rumblings out of Walmax or do they have their plate full just opening the formats that they have?

That would be a question that you would have to ask Walmax. We're very cognizant of other retailers experimenting with different formats. Obviously we've been at this game for 30 plus years and there is a learning curve to it, but we welcome the competition. Remember though, Paul, that the competition for Oxxo is not just a convenience store as such, the competition for Oxxo is the mom and pop that operates in Mexico, because that's what Oxxo is, it's a very well setup mom and pop, it's a mom and pop on steroids, as I've said before. There are a million, literally a million points of sale across the country that you could consider to be competitors of Oxxo. In that respect we think there's room for everyone to come and play.

Great. Thank you.

The next question comes from Randy Salac, Mortar Rock Capital.

Hi, guys. Two questions. One, I was just wondering what you view the potential of Kaiser. And two, and I'm not talking necessarily this year, but in a few years, what do you think it can be when you decide to buy it back. And two, what is the potential of your new distribution agreement in the U.S. What are you thinking in terms of increased penetration for your Cerveza division?

The line cut off, we didn't get the first part of your question, Randy. Can you go again?

What are your goals a little bit longer term for Kaiser? When you decide to buy this back, what are your plans, what do you think the potential is for Kaiser. And then the second question is the potential is for the U.S. this year and then the future as a result of your new distribution arrangement and potentially increased penetration in the U.S., what are your goals?

Can you clarify when you talk about buying back the Kaiser business?

When you bought Kaiser from Molson.

Okay, okay.

I think that the intentions for the Brazilian market, again, is -- it is very clear that we have a presence there in which we have been able, through the redesign of the business model on the Coca-Cola side, being successful. So the potential of the country is pretty well known for everyone, in terms of the perspective. The microeconomic perspectives of the country. The not so well-developed or the per capitas on the business. And the opportunity that there is always for a second good player in the market.

We recognize there is a clear leader in the marketplace, but, again, there's a lot of room to grow and I think that the background of Kaiser itself proves that a well-run managed company with the right brand offering for the consumer with the right economic structure and partners in the distribution, it makes a clear profitable equation and proposition for us. So, again, going into Brazil and really acquiring a company which is roughly 9% share today and losing money, our intention is to really grow the business in a profitable way. And within that can be done through the operational efficiencies that we need to capture and again doing the job with the consumer in terms of really presenting him with a wide offering of products and really gaining his favor for our brands back.

What about the potential in the U.S.?

The potential in the U.S. We are very clear, as we said when we did the commercial relationship with Heineken about a year and a half ago, that we think that we have a complimentary platforms and the footprints of the two company looks very nice together. The portfolio offering do not overlap each other. And, again, we have a clear set of objectives, both in terms of the availability of our products that we would like to grow, the volume performance, the economics within it. And those are precisely the foundation of the relationship that we have established with Heineken U.S.A. All those objectives have a clear set of metrics, which on the volume side, take into account the growth of the import segment as a whole in order to set the objectives for the business. As far as Jorge Luis, he is saying what we can comment is that into 2006, what we're looking at is to have a low double-digit growth rate for our volume in the U.S. with a geographic split which favors the east coast and with a product mix split which favors high margin of products as opposed to a much lower margin products.

Okay. And would you expect that double-digit growth to be sustainable for the foreseeable future?

We expect, again, a relative performance against the import industry, which is clearly a much better one for us.

Okay. Thank you.

and at this time, we have no further questions. I'd like to turn the call back over for any additional or closing remarks.

Well, five years ago, we set ourselves the goal of doubling the size of FEMSA by 2005 and today we've done just that. We have doubled our revenues and operating income while maintaining a strong balance sheet. We are excited about the future as we continue to build FEMSA into a leading total beverage company. We thank you for being on the call today and for the confidence you have placed in us. Thank you and good afternoon.

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 2210423. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.