Fomento Economico Mexicano SAB de CV (FMX) 2006 Q1 法說會逐字稿

Good afternoon and welcome to FEMSA's first quarter 2006 earnings results conference call. As a reminder, this conference is being recorded and all participants are in a listen-only mode.

At the request of the company, we will open the conference up for questions and answers after the presentation. During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance and should be considered as good-faith estimates made by the company. These forward-looking statements reflect management expectations and are based upon currently available data.

Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance.

At this time, I would now like to turn the conference to Javier Astaburuaga, FEMSA's CFO. Please go ahead, Javier.

Thank you. Good afternoon, everyone, and welcome to FEMSA's first quarter 2006 earnings conference call. As always, we will be brief with our prepared remarks and spend the majority of our time focusing on your questions.

I am joined today by Federico Reyes, Gerardo Estrada and Juan Fonseca, while Alfredo Fernandez will participate on the phone from Mexico City.

What you saw in our release this morning is that the results announced today reflect consistent growth across our core operations, in soft drinks, beer and in [inaudible] source. Our total consolidated revenues and income from operations increased at double-digit pace, up 15.5% from 14.5% respectively.

Once again, our results benefited from the increased geographic diversity of our business, with strongest results coming from our three main markets, Mexico, Brazil and the U.S. Mexico grew 8% in soft drinks volume and 3.6% in beer volume. We also opened 73 net new Oxxo stores in the quarter to reach over 4,200 nationwide. Brazil was up 9% in soft drinks and U.S. beer exports were up over 42%.

While we continued to experience important price increases in certain raw materials, the strength of the Mexican peso, combined with continued efficiency and productivity improvements across our business [purely] mitigated this effect. In the quarter, our strong top-line performance flowed through to the bottom line, despite the rapid growth of Oxxo and the inclusion of Kaiser, which are both lower-margin business, our consolidated operating margin remained stable relative to 2005 levels.

With that, let's talk about the business. In our beer operations, for purposes of clarity, we will report FEMSA Cerveza, excluding Kaiser, through the remainder of 2006 until 2007, when we will have comparable numbers.

Excluding Kaiser, our first quarter results reflect our continued focus on top-line growth and improved profitability. In the domestic market, we achieved volume growth of 3.6% during the first quarter. This resulted from solid growth throughout most of Mexico, despite a difficult comparison base due to Semana Santa sales, which took place in the second quarter of this year instead of the first.

Domestic price per hectoliter increased 4.5% in [group] terms, driven by a 3.5% nominal price increase implemented in early January this year, combined with last year's price increase, which was implemented near the end of the first quarter. For the full year 2006, we intend to keep our domestic prices in line with inflation.

On the innovation front, we continue to make progress, broadening out packages and presentations we brought to the market in 2005 in new sizes and new regions. We are also very actively working through the innovation pipeline of products that are being introduced this year, such as Sol Brava in 12-ounce returnable glass and the 40-ounce [inaudible] Tecate and Tecate Light in select markets.

In beer exports, we are pleased to report that our first quarter results continue to reflect the benefits of a well thought out and executed brand portfolio approach in the U.S. market, such as the one we now have in place with Heineken USA. Our export volumes increased 42% for the quarter, reflecting increased demand for Tecate and Dos Equis in the U.S., as well as a lower comparable base from first quarter '05. While you see a 12% decrease in export price per hectoliter, this does not reflect any changes in our strategy for the U.S. market.

Also, this decrease is driven by the continued appreciation of the peso on our dollar-denominated sales. The remaining decrease comes mostly from a mix effect. The west coast still represents the large proportion of our U.S. volumes and the region delivered very strong growth over [inaudible] comparison in 2005, with Tecate 24-ounce cans playing a meaningful role. Finally, promotional activity was moderate during the quarter, but higher than in 2005 when we had just transitioned to Heineken USA.

On the cost front, despite significant increased costs for raw materials such as aluminum and energy, we achieved a gross margin improvement of 180 basis points in the quarter. The continued strength of the peso, productivity improvements and improved fixed cost absorption more than made up for the raw material pressures. At just under 60% of sales, the gross margin is at an all-time high.

For the quarter, operating expenses grew slightly ahead of revenue growth. Most of this resulted from increased selling expenses due to marketing initiatives taken during the quarter in order to strengthen the equity of our brands and our competitive position in Mexico, including the continued innovation and increased availability of our beers. All-in, we are pleased with the results of FEMSA Cerveza in the quarter, with over 18% growth in operating income, 18% growth in EBITDA. Our operating margin reached 50% for the quarter, representing a 100 basis points increase from the first quarter of 2005.

Regarding Kaiser's results, obviously, it is very encouraging for us to see positive numbers in the income statement, but we must be very cautious and stress that most of the hard work is yet to come. We quickly identified opportunities and developed a short-term action plan to capitalize on them, while at the same time we are analyzing and designing our long-term business strategies with an emphasis on developing an effective brand portfolio.

Therefore, investment levels will increase later in the year and you should also expect to see some pressure on Kaiser's profitability in the coming months, particularly as winter approaches. Our main challenge for this year is to stabilize our market position and the economics of the business around the breakeven point. So far, we like what we see, but we are still in the first inning of the first game of a very long series.

Let's turn now to our soft drink business. At Coca-Cola FEMSA, our team delivered strong top-line growth of 8% in total revenues, with the strongest growth coming from Mexico and Brazil. Mexico total sales volume increased 8%, and CSDs volume increased 7.7%. The unseasonably warm winter months and the favorable calendar effect of Semana Santa in the Valley of Mexico helped drive increased demand for our beverages, while better focus and execution of CSDs resulted in significant growth for brand Coca-Cola as well as [inaudible] and Fanta multi-flavors.

We know that during Semana Santa, the exodus of holiday travelers away from Mexico City puts pressure on Coke's volume, a reverse effect of what happens in our beer and retail operations, which are spread nationwide.

In Brazil, sales volume excluding beer increased 9%, driven largely by 7.2% growth in CSDs. This key market continues to perform very strongly, and at the consolidated level income from operations increased 8% over the first quarter of 2005, resulting in a stable operating margin of 15.2%.

Many of you listened to Hector Trevino on Coca-Cola FEMSA's conference call yesterday. If you were unable to participate, you can access a replay of the webcast if you need additional detail on the results.

For its part, Oxxo delivered another solid quarter based on total revenues and same-store sales growth. Coming off of a very busy fourth quarter, we added 73 net new stores during the first quarter, which was slightly off of 2005 levels. For 2006, we expect to open around 650 net new Oxxo stores.

The negative calendar effect of Semana Santa did not curtail our strong same-store sales figure, which increased 7.4%. This resulted from an improved promotional activity with our main supplier partners, evidenced by the 6.4% increase in profit, as well as strong category management, evidenced by the slight increase in the average ticket.

At the gross margin level, we experienced a 40-basis point improvement to reach 26% of total revenues, driven mainly by improved processing terms and coordinated efforts with our suppliers to provide the right promotions and the right products for consumers. During the quarter, Oxxo experienced increased operating expenses, partially due to the continued development of our direct distribution infrastructure, such as the closure of some existing distribution centers that are being replaced by larger and better facilities.

Also, higher electricity tariffs combined with warm weather to put additional pressure on selling expense, and, lastly, we were impacted by the rapid expansion of our store network through increasing salaries and performance-based compensation, as well as an increase in personnel for new [places] and expansion of existing ones.

Oxxo's operating margin was negatively affected in the quarter, down 40 basis points to 2.4% of sales, but we continued to build the system that will enable us to achieve further growth and strengthen our store network. On a full-year basis, we still anticipate stable margins.

The relevance of Oxxo in our overall beverage strategy will continue to grow. It already represents nearly 9% of our total domestic beer volumes, with over 38% of Oxxo's sales coming from beverages. And going forward, we will continue to aggressively grow our store base and strengthen our position as the leading convenience store chain in Mexico.

So, to sum things up, the first quarter was strong across all our businesses and represents a good start to achieve our goals for this year. Our team is focused on continuing to deliver growth and I am confident that we are in the best shape ever to face the challenges and opportunities ahead.

And, with that, I'd like to ask the operator to please open the call for questions.

Thank you, Javier.

[OPERATOR INSTRUCTIONS].

Our first question, Andrea Teixeira with JPMorgan.

Hi, congratulations, again on the quarter. I just wanted to, if you can, please explore more about the export side. We saw that the continuous trends with the brands, and you said about the California and the western side of the U.S. being strong. Can you give us a sense of how continued strength you see in April and towards the end of the year?

And also on Kaiser, if you can, elaborate more in terms of the marketing expenses you foresee towards the end of the year. Thank you.

Sure, first, on the export side, again, we saw a very healthy number for the first quarter, some of that because of the favorable comparable basis. And if you remember, at the beginning of the transition, the places in which we suffered the most at the beginning of last year were precisely in the west, in which a larger number of people needed to be hired, because there is where our volume base is and where Heineken USA did not have a large organization base. As opposed to the East, in which the transition was a little bit more smoother.

So even though we saw very good growth all across the U.S., due to the lower comparable basis in the West, we saw a stronger growth rate now in the first quarter of 2006 in the West, and that was part of the mix effect. Because, of course, the price base for the California market basically is lower than the rest of the U.S. due to the proximity and to the mix of products that we sell there. But, anyway, we saw a tremendous quarter all across, both in terms of the shipments and the actual sales made by wholesalers to retailers. And in terms of Kaiser, what I could mention is that, again, in the first three months, once we feel we have clear short-term action plans put in place, most of them aimed at streamlining the operations and managing in a much better way the supply chain and the sales force in the Sao Paulo region, we are also making what I would call tactical adjustments in terms of the amounts that we are spending in marketing behind the brands.

But we're making most of the changes in terms of the different marketing and mix components that we're using to promote our brands, and also there is, I would say, significant also changes in terms of the geographies in which we're applying those resources. Going forward, we have a full-fledged plan in order to study with detail what the medium to long-term strategy in terms of the brand portfolio evolution, and we are in the process also to fine-tune our preliminary estimates of what the investments will be in terms of amounts going forward.

I can anticipate that we will be, again, as I said, prioritizing during 2006 to stabilize the business from a volume and competitive position and to have real road maps going forward, looking long term in order to have a clear portfolio definition and to tell you the truth, we're not prepared to share numbers on the required investments on marketing that we will be applying to the business. We will have a much clearer picture of that into the third to fourth quarter of this year.

Okay, that's great. But in terms of just like talking about the past, let's say the first quarter, I noticed that you probably changed a bit of the mix towards more of the on-premise as opposed to the off-premises so that you can sort of extrapolate a more value from the hectoliter. Can you tell us, like, if that is correct and give us a sense of what you have done in terms of varying the mix, improving the mix? It's pretty much done already because of the exceptional - and congratulations for the results in Kaiser for that short period of time. Can we expect better mix or it's going to be more towards when you have the marketing plan in place?

Well, we, Andrea, should expect better mix. There's, again, the transition of the sales force, which used to handle the Kaiser brands in Sao Paulo specifically, from Kaiser to Coca-Cola FEMSA was done very rapidly and very efficiently I should say also. We have now a good control of the marketplace in terms of having the ability to increase the coverage to the traditional trade, and that is already provoking changes in the right direction, which is selling more returnable 600 ml in botecos and in the traditional trade as opposed to just cans in the supermarket.

So we are heading in the direction that you are mentioning, we are making progress and we intend to continue doing so. And also we're increasing, of course, the customer base of specifically the Sao Paulo region due to the fact that now we have what I would say a much better sales force organization behind that task. And, at the same time, we are engaged in a different model of interaction which is a much more frequent one and I should say more aligned, I think, with bottlers all across Brazil in order to precisely align the different strategies to increase our coverage and at the same time trying to fuel the growth of the brands that we're trying to promote into different areas.

And just to take the opportunity also, in terms of the transaction with the 5% Coca-Cola's FEMSA stake that Coke owns, is that any impact in terms of the timing?

Hello? It went off, operator.

Please go ahead, your line is still open.

Hello, sorry. Hello? Can you listen to me now?

Hello?

Sorry, can't hear.

I'm just going to repeat the question, sorry. In terms of the transaction with Coca-Cola FEMSA, is there any in the 5% increase in stake, any setback in terms of the timing, any...

And we have lost our connection with the speakers at this time. Please stand by.

Again, ladies and gentlemen. We have lost our connection with the speakers. Please stand by.

We have regained our connection.

Hi, we apologize. Probably some technical difficulties. We got cut off for a few minutes. Andrea, you were, I believe, in the last part of your call. Do you want to rephrase?

Oh, yes, sure, I'm sorry. In terms of the Coca-Cola FEMSA transaction, if there is any timeline for that transaction to take place, the 5%?

The repurchase of the shares from the Coca-Cola Company?

Yes.

Hi, Andrea, this is Rico. We have not finalized our position regarding those shares. I mean, we are in conversations among ourselves and with the Coca-Cola Company, and presently I would say that the May deadline is not going to be applicable. I mean, that's not in the minds of anybody, neither us nor the Coca-Cola Company. So besides what I said, I don't think that there is anything else that we can share with you.

Yes, I think to follow up on Federico's point, the May deadline, which I know was in the mind of some of you, it will in all likelihood not be met, but that has no meaning, the agreement stays and the conversations are ongoing.

Okay, that's perfect, thank you very much.

And we will go to our next question from [Ronaldo Santana] with Deutsche Bank.

Yes, good morning, everyone. My question is related to beer in Mexico. What's the outlook in terms of SG&A expenses here in terms of - because we have seen in this quarter, and the last quarters as well, an increase in terms of percentage of sales in this line, so I would like to know what's the outlook for the rest of the year, if possible.

Yes, we have our plans based on managing the year according to what we think are the most important events that we need to take place. So somehow the first quarter is a little bit of a continuance and an anticipation of major activities that we have been implementing around the soccer World Cup to be taking place during the summer. So, the first quarter has some of those upfront loading investments that we are applying precisely to some of those activities.

And we have also in the first quarter some effects on rolling out new organizations in some of the key markets at which we feel we needed to reinforce. That will mean that we will increase somehow our expenses in that regard. What we're trying to manage, as we have said in the past, that through the combination of growing the top line and managing costs internally to have the ability to grow our operating income above the top of our sales, which we were able to do in the first quarter and we will continue doing so.

Managing the different components of the P&L through the year will be as always has been, one of the key areas of focus of management, so that would be my comments on your question, Ronaldo.

I think just to follow up on Javier, there's one issue that we mentioned in the release that has to do with innovation. Javier mentioned in his opening remarks the launch of small presentations for Sol Brava in returnable glass, as well as the launch in some selected markets of the 1.25 liter, the 40-ounce returnable presentation for the Tecate Light and Sol [Clara]. And obviously some of those expenses are also showing up, the launch-related expenses showing up in the first quarter.

Great, thank you very much.

Sure.

Our next question, Lore Serra with Morgan Stanley.

Okay, I wanted to also stick to beer for a second. I guess I wanted to start just by asking a couple of questions about the market growth. We just saw your competitor report and I think it's a pretty strong set of industry numbers, given the difficult comparison base with Easter and the fact that you sort of had two price increases in the quarter.

So could you comment on some of the factors that you think drove up sales in the quarter that might have been –- I hate to use the word one-time -- but temporary, or should we expect this kind of high industry growth for the rest of the year based on some of the things we talked about before, more segmentation, more innovation. And I wondered if you could also talk about regional growth within Mexico in the quarter. How did you see the different regions grow during first quarter '06, please?

Sure, Lore. On the first part, we've said in the past that we thought that applying a much more innovative and full-driven strategy in the beer industry in Mexico was going to be something that was going to be a heavy influence in terms of the dynamics of the industry, and we still think the same way. It is very hard to assign a specific number to what portion of the growth has been led by that, what portion of the growth has been led by warm weather during the quarter.

And, again, in Mexico in the first quarter, my sense is that if you look all across businesses, consumer good products, modern trade format, you're looking at a solid, wealthy consumption pattern during the first quarter. And the environment in Mexico is, even though we're in the middle of political campaigns, it is positive, I think. So we're very encouraged by the beginning of the year, but again recognizing that some of those factors were key, I think, for the strong growth rates for the first quarter.

On the regionality of growth in Mexico, I'd rather not comment on that. I think it's my general comment on that would be there is not - we do not see a significant trend in the different regions. By that, I mean larger regions in the country that call our attention signaling a change in trend of what we've been seeing in the past. So I what I would comment is I don't see anything changing in the first quarter that tells me that there's an inflection point of any kind at all.

Okay, and just to understand your comment before when you said we expect pricing to be in place with inflation. Given that you started the year with pricing up 4.5 and I assume some of that's mix that we can't completely see, but are you saying you expect pricing to go down in real terms through the balance of the year so that you end up net flat, or are you saying from here you expect pricing to be relatively stable?

As time progresses, inflation will do its job and we are intending to just keep our nominal prices where they are today so our best estimate for the full year would be that prices will remain stable in real terms.

Okay, and just one question on cost. I mean, you mentioned the importance of the strong peso in helping you nullify some of the COGS pressure, but in the quarter your costs went up 6% while your volumes went up 6.5 with a shift towards the exports that was pretty important and your packaging sales went up a lot. So I'm trying to understand how in light of that you contained the gross margin pressure or you grew a gross margin, I should say.

Were there significant hedges in place? Should we expect to see higher raw material costs as we progress through the balance of 2006?

We did not have any material hedges in the first quarter, and that wouldn't explain anything at all, and we are still seeing pressures, specifically in the aluminum side, so that's what I'm referring mostly going forward that could represent something to deal with, but, no, we don't have significant hedges now, built into the COGS.

I think what you see here, Lore, is some fixed-cost absorption just by virtue of the volume increase, which as you say is very healthy at over 6%.

Okay, and my last question, I guess, is for Federico. I mean, I suppose given your comments on the additional 5% stake, nothing with Coca-Cola seems to progress very fast, but this issue of sort of the opportunity to buy assets in Argentina, is that something that you think Coke is supportive of, or is that something that's still sort of on the table?

We do not know. We have not discussed it with them.

Okay, thank you.

Our next question, Jose Yordan with UBS.

Hi, good afternoon, Juan. Just wanted to follow up on the debt question that I had for you earlier. I guess when I was looking to calculate the debt for the quarter, considering your debt assumption in Kaiser, as well as the purchase price you paid and on the other hand all the free cash generation that you should have had for the quarter and that you had at the KOF level, I still came up something like 150 million short of where your actual net debt level was reported. And I guess if you can elaborate on where the difference comes from, I would appreciate it.

Yes, let me very briefly go over the calculations, see if it sheds some light. At the end of '05, we had 2.5 billion in net debt consolidated, and at the end of this quarter we have pretty much the same 2.5 billion. However, Coke FEMSA reduced its net debt by about 100. So we come to the same 150 million difference that you come to, and that is really Kaiser. I mean, if you think about it, Kaiser was about 70 million of the acquisition price. It had some $60 million in debt and we've taken on a little bit of additional debt, which gets us to about 150.

So that's really the difference. I don't know, if it doesn't tie up, we can certainly revisit it. But we come to the same 150 delta which is explained by Kaiser, Jose.

Okay, and how much is the additional debt in Kaiser.

Sixty.

After the takeover.

Yes, by the end of this quarter, the debt on the books of Kaiser is $80 million.

Okay, no problem, yes. We'll talk offline.

Thank you.

Our next question, [Alex Wilbur] with Santander.

Hi, everybody. I guess I wanted to start off first just on Kaiser Brazil. I mean, interesting to see how you broke these numbers out for us, and thanks for that. I guess is there any way you could give us a sense of what volumes you guys posted? I know you got it in the middle of January, but any sense of what the industry was growing like and where the Kaiser volumes ended up in the quarter? And just to kind of revisit this idea of can you give us kind of a sense - obviously, the winter quarters are coming up, but for the full year, do you think that breakeven at the EBITDA level this year is something that really could be a goal, or is this really too early for you guys to make a call there?

First, on the volume performance, our intention, as I said, for the full year is to have a stable, let's say, market share level, being able to stabilize the fall of almost two digits or more than two digits decline that the portfolio brands of Kaiser has had in the past and we feel that the volumes as we reach in the first quarter which represent the market share loss for sure are pretty much in line with this objective that I am mentioning.

We were anticipating that, again, prior to the sale. The management of the sales force, specifically in Sao Paulo, were not as orthodox as we would have hoped. And, of course, the transition is also a factor and we are competing, again, with a first quarter of last year in which, again, the company was in desperate needs of sales volumes as much as they could.

So we're more than comparing ourselves to actual previous year numbers. We're much more looking at two things, our customer base, the mix of that customer base, traditional as opposed to modern and the mix of the products. And we're looking at incremental, month-by-month with the seasonality taken into consideration to keep making progress. And since the month of mid-January that we took the operation to February to March to now April, we think that we're getting in the right direction in order to accomplish that goal of having a stable competitive position during the year.

And, again, on the intention of having a breakeven operation for the year, we feel comfortable with that and we will fine-tune at that objective as we get closer to the end of the year. As I said, we are now working on programs that should demand marketing investments behind the brands that could be started to be deployed I would say during the last quarter of the year. Maybe in a significant way, and maybe in not much more of a significant way, and that would depend a lot on the strategy that we will utilize in order to start developing the right portfolio brands into the long term.

Okay, great. That's helpful. I wanted to secondly just kind of go back on the selling expense number here in beer, and I know we talked about it last quarter. And I just didn't quite fully understand the answer, but just to kind of clarify, we're looking at the beer selling expenses, we're seeing - we had Heineken in it last quarter. I guess when I was looking at five out of the last six quarters, selling expenses are growing faster than your beer sales, and I guess I'm wondering, do you think that that's something that is going to be - when you talk about the product innovation and the packaging innovation and these are things that it seems to me that are going to be ongoing.

But is there going to be a time that maybe we can see these selling expenses moderate maybe into the second half so that they are really - so that you're getting some leverage in the sense that they're going slower than sales, or is it just kind of - it's something that you are - I mean, in other words, is it something that you have as an objective?

Yes, Alex. As I said, the business has a business plan which is executing and we feel we are right on it. And it implied that during the first quarter we will front-load some marketing expenses related to both rolling out of products, investing in processes of innovation to the same products going forward and also heavily into world soccer campaigns.

I can give you an example. We were the first company to use a world soccer promotion campaign that really started last year and it went a little bit into the first quarter and now we just launched the second campaign also at the end of March, which also impacted some of the pre-promotional expenses. So what you're looking at is what are the perspectives of the growth rate of the selling expenses for the first quarter? That is not a rate that we, according to our plans, are going to be sustained.

We will manage, again, the whole P&L, volume pricing and COGS, and we will execute our war plan, our business plan for the year, taking care that we are able again to deliver growth on our profits, which are ahead of our growth in sales, which is basically what we have been saying that is our main focus.

Okay, all right. And the final thing is just kind of on the raw materials. I know you kind of talked a little bit about it, but just can you give us a sense on malt, glass and aluminum, and I guess mainly aluminum, how are you guys looking kind of at '06 versus '05? Is there - can you give us a sense of where aluminum is? Year on year I know Hector and such had talked a little bit about Coke FEMSA's cost of goods sold and such, but can you give us a sense of what '06 will look like, versus '05 in those three elements, please?

Yes, I can maybe comment on general terms. Malt, we are not worried because of how we structure our purchasing of that material for the next eight to nine months. The rate of need that we will have will depend greatly on the movement of pricing on an international basis, but we're not anticipating a major effect or problem on that regard. Same with glass.

We think that our estimate for the price of the gas, which is the cost component that could be more volatile also is something that we think on our numbers is already factored in. And our main concern, to tell you the truth, is aluminum. I mean, we've just seen a rise in the price in the last months which we were not really expecting. I'm not sure if somebody did, and still we are concerned on that regard, so that is the cost component that we're looking at in a more and more closely fashion.

Is it double-digit, Javier, or is it less than that, the increase in aluminum?

Aluminum is definitely high double digits.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]. Our next question, Robert Ford, with Merrill Lynch.

Hey, good afternoon, everybody, and congrats on the quarter. I had a question with respect to Oxxo, a couple of questions. And I'm really interested in fresh coffee and I'm curious as to how that's proceeding, particularly where you rolled it out in Monterrey and particularly given the warm weather.

Hi, Bob. The first quarter was great. Again, it helped a lot not being that hot and as of course the year progresses the significance of coffee reduces its importance with the seasonality which is typical for the product. But what I can share with you is the whole project of launching the [Andati] brand coffee in Oxxo, I can tell you it was a huge success. We were able to increase significantly the sales of the product with very good margin and also to make the competitor here in Monterrey to really change its strategy, pricing strategy, and we think we inflicted some serious damage there also.

But, most importantly, I would say that the project itself really helped Oxxo to create some of the platforms that would be now used to keep on improving our performance in the fast-food category, which is from my point of view much more important than the margin that we're generating or the traffic that we're generating through the coffee project.

So we're very pleased with the project. The importance that I put to that is much more strategic going forward than the results, economic results, for the first quarter. Being a success, what you can anticipate also that you will see, we're rolling out the product in he strategic markets that we think this product has a role in terms of managing the competition in terms of where this product is important from the competition point of view, but also from the consumer point of view.

So we're being very, very cautious in terms of where this product makes a lot of sense and where maybe in the short term it doesn't.

And, Javier, just on the back of that, in what percentage of your store base is this product available, when was it made available and what do you think the relevant market might be?

As of now, it's basically just in Monterrey, basically, which I would say in terms of sales a little bit more like 12%, 13% maybe. And we will be rolling out to strategic cities, Bob, I would say something like seven to eight cities in the next six months. I wouldn't like to share the names of the cities because I'm afraid somebody could be listening. So I'd rather not share the names of the cities.

It's fine. And then when it comes to the distribution centers and you started to touch on my next question, and that was how will they facilitate your expansion into new SKUs, whether it's fast food or your ability to better manage categories? And then, additionally, what kind of procurement savings do you ultimately anticipate generating once you kind of get them all under your belt at the end of the year?

The first just to mention, when 2006 ends, we will have basically all our distribution centers having been built in the last I think 4.5 years. So it was not only a modernization, it was a full redesign and build of new facilities in the distribution centers to really allow us to really create the backbone of what we think the distribution capabilities of Oxxo should be to really be - put the business where we would like it to be.

The main components of the redesign of the distribution centers have to be in some cases the facilities that we were in were not properly designed at its time and were not of the sufficient size that now we need according to now our size and our projected size in the next 10 years. So we really redid everything around the distribution centers. And the way the layouts and the processes on how we operate on those distribution centers now allow us to really have differentiated distribution processes to the store, which we think will allow us - the main element that we'll look in in order to connect all the distribution centers to the stores is to have the ability to visit on a more frequent basis the stores, to have a higher rotation in the store through the utilization of the same space in a much more efficient way.

And we're now accomplishing some successes, for example, in terms of now having the ability to have trucks which have three different compartments in terms of now having the ability to deliver both dry products, humid products and frozen products at the same time to a store, which really helps us to now have, let's say, much more power or leverage with some suppliers in order to convince them that using the distribution centers of Oxxo is something that is convenient for both parties.

So I would say it's a whole set of variables that we are thinking we're going to be supported by this new generation of distribution centers that we're just in the process of completing this year.

I think to add to what Javier is saying, the technological component of the whole infrastructure is also very important, the fact that by the end of this year we will be finished, or very close to finishing, setting up the pipeline so that the supply chain management and the inventory management will be linked through the system so that stock outs are much less frequent, eventually perhaps disappear, so that the rotation becomes much faster, as Javier was saying.

And, Javier, when you mentioned the three different zones, am I hearing you say you're going to get into the produce business? You're already in the produce business in León. You have those hard discount stores, right? But my sense is that you're going to make that assortment more broadly available, too, to try to drive or add to the frequency of visits to your stores.

We're not in a significant way in the produce business within the Oxxo stores, but we have a number of stores, which really do sell those products as a traffic builder more than as a margin builder.

Great. Well, thank you both and congrats.

Thank you, Bob.

Our next question is Celso Sanchez at Citigroup.

Yes, hi, good afternoon. Just following up on -- Some of my questions were just answered, but a lot of that stuff sounds quite exciting and certainly forward thinking. Does your flat operating margin guidance for this year, please clarify this if I'm wrong, it doesn't seem to mesh with some of the good things it sounds like you're doing. I recognize there's an investment period and there's some front-end loading of --

You're talking about Oxxo, Celso?

Yes, yes. If you're starting on the process on a bit of the very early stages of high rotation, more efficient distribution network and so forth, did I hear you correctly in saying that the operating margins would be stable, i.e., flat this year?

You did hear correctly, Celso. What happens with Oxxo is that because the margins are thinned by the nature of the business itself, very minor changes from quarter to quarter will actually impact the profitability. I mean, you've heard us talk about last quarter reaching sales targets ahead of time and then your margin expands by 100 basis points. This quarter comes along, we get hit by rice and electricity tariffs, unseasonably warm weather and that flows down to the bottom line.

So we think the conservative thing to do is to forecast stable margins. All of these projects really have us very excited, as you say. These are good things that are going to happen at Oxxo, but they're going to happen over a number of quarters and obviously we look at the business long term, and we like to play it conservative.

On that, I would add also that we think the requirements for building the capabilities, the infrastructure and the competitiveness of the Oxxo organization are also hugely demanding, not only in terms of effort of the people, but also in terms of economic resources that would need to be applied to that.

We think Oxxo is, again, on a very solid route to success or higher success than the one that we've achieved in the future, but at the same time, the strength of the business today we think is going to be heavily reinforced by the level of sophistication and the building of those capabilities. And, again, the business needs to keep investing ahead of it in order to keep precisely driving the agenda. We are now much more aware that a number of actual and potential competitors are trying to play a catch-up game against Oxxo, and it is Oxxo's [precisely] leadership, the responsibility of leading the agenda.

So a number of big, huge projects in terms of keep building those capabilities with the business are also a source of the need to keep investing in technology, in training and increasing the number of people we are applying, or putting in the marketplace in order to have a better sense of what's going on and also to keep helping us expand in a number of cities.

As you are aware, once we go into new markets, or we go with stores around main cities in which we are already present, we have to put in place organizations so we have to, again, some steps that we have to put people in before we have the growth and before we have the margins on our side. So I agree with Juan. Our perspective long-term is to have the stronger participant in the industry based on the stronger capabilities and with the higher sophistication in order to manage this format.

But, short term, with all the things put into the equation, the tremendous efforts and improvements we're making, but some of those are incremental resources applied to the business, our perspective is to have a stable margin 2006 also for Oxxo.

Okay, thank you, and then ...

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

I just had a very, very quick question that's more sort of technical. In the beer division, your depreciation fell year on year by, I don't know, 6.5%. I noticed deprecation was also down in '05. Is there any reason for that? And also, amortization was up. I thought client sort of exclusivities were stabilizing. I don't know if that's ERP spending, or if you could just clarify that, that would be great.

Basically, the results in [depreciation] is due to the exchange rate, Lore. It's not only the exchange rate from the comparable quarter, but also the way that you capitalize changes in your value of [inaudible]. The most part of the reduction is due to the exchange rates.

And this would be because a significant portion of the fixed assets are in dollars, right?

Right. And the part of amortization, yes, it's a little bit of the ERP amortization, but also the volume increasing is - it should be that growth is also related in amortization part.

Because the amortization of exclusivities is linked to volume in most cases.

If there are no further questions, I will now turn the conference back to Mr. Astaburuaga.

Well, thank you very much, everyone, and we'll see you next quarter - or we'll hear you. Bye now.

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