Fomento Economico Mexicano SAB de CV (FMX) 2006 Q2 法說會逐字稿

Good morning, everyone, and welcome to FEMSA's second quarter 2006 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 the conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance and it 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 Javier Astaburuaga, FEMSA's CFO. Please go ahead, sir.

Good morning, everyone, and welcome to FEMSA's second 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. Joining me today here are Gerardo Estrada, Alfredo Fernandez, Juan Fonseca and Alan Alanis, all of whom you know well.

I am very pleased to report to you that we have achieved yet another quarter of solid top line growth. All of our core operations - Soft Drinks, Beer and Oxxo stores - contributed to deliver double-digit growth in total revenues, which were up 13%, reaching MXN31.9b or $2.8b in the quarter.

We were able to capitalize on strong consumer demand, particularly in Mexico where Beer volumes grew 7.6%, driven by the effective execution of our strategy, by investments in marketing initiatives such as the FIFA World Cup, and by the favorable calendar effect of the Easter holiday.

As you know, this calendar effect is reversed for our Soft Drink operations, given the annual exodus away from Mexico City. Yet, we were still able to post volume growth of almost 4% in our key Mexico market and for Coca-Cola FEMSA as a whole.

For its part, Oxxo opened in the quarter 152 net new stores to reach 4,366 stores to date, reflecting a significant increase in the pace of soft -– in the pace of store growth versus last year, and surpassing the 700 net new store mark for the past 12 months.

We must also know -– note, excuse me, that in spite of electoral noise in some of our key markets, particularly in Mexico, economic activity has been strong year-to-date, and sales of consumer packaged goods in general have benefited as a result. Mexican real GDP growth in the first quarter was 5.5% and for the first five months of 2006 it was 4.9%, with expectations of approximately 4% growth for the full year.

While we continue to experience important price pressure from certain raw materials, such as aluminum, PET and sweetener in some markets such as Brazil, continued efficiency and productivity improvements across businesses, combined with better fixed cost absorption at FEMSA Cerveza, helped to mitigate most of this negative impact, particularly at the gross margin level.

Despite the growing weight of Oxxo, lower margin and the inclusion of Kaiser in our consolidated results, our solid revenue performance flowed through to the bottom line. In the quarter, we delivered operating income growth of just over 9% with only a slight margin compression of 60 basis points to 15.2% of total revenues.

With that, let's move to our operations. In Beer, for purpose of clarity and following the first quarter, we will report FEMSA Cerveza excluding Kaiser through the remainder of 2006 until 2007, when we will have comparable numbers. Ex-Kaiser, our second quarter domestic beer results demonstrated a robust pricing and consumption environment. In Mexico, we achieved beer volume growth of 7.6% and price per hectoliter growth of 4.8% in real terms. Year-to-date, our volume growth in Mexico has been in line with that of the industry.

Taking advantage of the Easter holiday, the FIFA World Cup and the run up to elections, we focused much of our efforts around these important events and achieved good growth, specifically in our Tecate Light, Sol and Indio brands. The increased real price per hectoliter reflects the full impact of the January price increase, combined with the rational pricing environment, the benefit from our continued increase in direct distribution, and some packaging and geographic effects.

On the innovation front, we leveraged the recent introductions in packaging and presentations focusing on targeted marketing initiatives and continue to have a good innovation pipeline going forward.

In exports, our year-to-date results are in line with our growth expectations for 2006. Quarterly volumes decreased 0.5% as the inventory build-up in the U.S. market worked its way through the channel. However, both our performance based on sales to -– wholesale to retailers and our performance in the market were satisfactory during the quarter.

First half export volumes increased just over 15%, well on track to achieve our volume objectives for the year. Export price per hectoliter decreased 4.2%, mainly on the strengthening of the Mexican peso in real terms, as well as a geographic and mix effect due to a low comparison base in lower price to cut the volumes in the West Coast, including the successful 24 ounce can presentation.

On the costs front, we were able to mitigate increased costs for raw materials through productivity improvements and improved fixed costs absorption. Our gross margin was up 180 basis points, reaching 60.9% of total revenues. Operating expenses increased in line with revenue growth, up 10.3% in the quarter. Marketing efforts, enhancements in our operating structure and costs related to the growth of our direct distribution volume contributed to this increase.

All in, we are pleased with the results of FEMSA Cerveza, ending the quarter with just under 19% growth in operating income and 11% growth in EBITDA. Our operating margin expanded almost in line with our gross margin, growing 170 basis points to reach 23.4% of revenues.

At Kaiser, we continued to push ahead with our plan to improve local execution and stabilize the business in the short term. Following the successful [inaudible] of Coca-Cola FEMSA when they acquired Panamco, we are focusing on high-quality volumes and letting go unprofitable channels and clients, leading to short-term pressure on volumes but long-term improvements in brand equity and execution. As we approach winter, second quarter volumes were lower sequentially and therefore fixed cost absorption was lower during the period, resulting in an operating loss of MXN28m but positive EBITDA also of MXN28m during the quarter.

In spite of this, year-on-year volume trends have hit a meaningful positive inflation point, reverting from mid-single-digit negative in the first quarter to mid-single-digit positive in the second. We continue to make progress in the analysis and design of our optimal brand and presentation portfolio, with a view to being ready to invest in it in time for summer.

All in all, our turnaround plans for Kaiser are on track for 2006.

Turing to our Soft Drink business, Coca-Cola FEMSA delivered solid top line growth in the face of very tough year-on-year comparisons in our key markets. Notably, consolidated CSD volumes increased by more than 5% for the quarter. In Mexico, total sales volumes increased 3.8% with brand Coca-Cola contributing approximately 75% of the incremental volume.

The 3% year-over-year real price decline was driven by a shift in our packaging mix to multi-serve presentations in the Valley of Mexico, where competitive dynamics have intensified. Reduced sweetener costs and a slight decrease in operating expenses are contributing to Mexico's margin expansion in the quarter.

Outside of Mexico, Brazil performed well despite tough volume comps and lower pricing due to a shift towards returnable presentations. Central America delivered strong results in the quarter, with renewed signs of volume growth and pricing power thanks to a more stable CSD market and the development of our juice-based product line under the Hi-C brand.

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

At Oxxo, we delivered another solid quarter based on total revenues and same-store sales growth. We added 152 net new Oxxo stores during the quarter, representing an increase of 706 net new stores from the second quarter of 2005, and showing that we are on track to open 650 net new stores for the year.

This quarter also marked another consecutive period of same-store sales growth that reached a robust 9.8% as a result of the favorable calendar effect of Easter, consumption related to the World Cup and improved promotional activity with our main supplier partners. Traffic grew 6.3%, while strong category management drove a 3.3% increase in average tickets.

At the gross margin level, we experienced a 30-basis-point expansion to reach 26.4% of total revenues, driven mainly by better purchasing terms and coordinated efforts with our supplier partners.

We continue to invest in Oxxo's infrastructure in order to build a robust system that fully leverages our store growth. We are developing stronger supply management and IT capabilities, realizing that such investments may curb short-term operating margins but confident that the medium and long-term payoff should be substantial.

During the second quarter, we achieved a slight operating margin improvement as the improved gross margin was partially offset by increased operating expenses, resulting from infrastructure-related investments as well as higher corporate management fees and higher electricity costs in unseasonably warm weather, particularly in Northern Mexico.

Going forward, we will continue to aggressively grow our store base and strengthen our position as the leading convenience store chain in Mexico.

And with that, we can now turn to your questions. Please, operator.

Thank you, Javier. [OPERATOR INSTRUCTIONS]. And we'll take our first question from Tufic Salem from Credit Suisse.

Yes, good morning, everyone. I have a question about your pricing in Mexico. It was a nice increase versus last year. I understand that you are also increasing your direct distribution. So could you first please update us on the percentage of direct distribution last year versus this year, which had a positive impact and the strategy there?

And also if you could segment a little bit how much of the price -- the average price improvement came from direct distribution, how much came from, let's say, a better mix, and how much could have been from lower discounts that you took during the quarter?

Yes. I will answer the first part and I will ask Gerardo and Juan to help me with the second one, because I don't have the numbers here with me.

As we have said in the past, we have been working in terms of redoing the distribution network of the Company, in some cases changing the way the markets are being operated. We are pleased to inform that in the second quarter we basically finalized that redoing of the distribution network. We've acquired during the quarter a couple of distributors, one in Ciudad Juarez and one in Veracruz. So now we are selling through our own distribution network a little bit in excess of 80% of the volumes.

If you do remember, going back maybe four years ago, that percentage was slightly below 70. So now we are, I think, at a point in which we are very pleased with the design and with the way that the distribution, the third-party distribution, the partners that we have all around Mexico, are working pretty much aligned, working with a very basic system on how to serve the market. And that's more or less the numbers that we can share with you.

And regarding the pricing effect, I'll ask Juan and Gerardo to help me out.

Yes. I think, being somewhat broad, Tufic, it's almost equal contribution between mix, the very rational competitive environment and the direct distribution component. The direct distribution component, in terms of what changed during the quarter or during the first half, it really comes towards the end of the period, not necessarily from the beginning. So I would say 30, 35% for mix and for the competitive environment, with the remaining coming from the changes in the direct distribution.

Okay, thank you.

Sure.

And we'll take our next question from Jose Yordan with UBS.

Good morning. You just answered my main question, so I'll ask my second one. The results of Kaiser have been –- they've been pretty good so far and now you're telling us that there's going to be more marketing investments down the line that will bring it closer to zero EBITDA for the year. And my question is just is that still the expectation for the year, of breaking even and then positive in 2007?

Yes, it is.

Okay, thanks.

Our next question is from Andrea Teixeira with JP Morgan.

Hi, good morning, everyone. I just wanted to follow up regarding the leveraging situation, if we saw some below-the-line effects of the increased leverage in dollar terms. I know you extensively explained during the Coca-Cola FEMSA conference call. I just want to see if you have any feedback on how much, on a consolidated basis, you'll be paying off the debt and how much will be the mix for dollar-denominated debt going forward. Thank you.

Yes. Juan and Gerardo?

Yes, Andrea. As you correctly point out, the shift in terms of moving a little bit more into dollars really took place only at Coke FEMSA. The debt that is held at FEMSA Cerveza basically remained as it has been for several quarters.

In terms of debt pay down, as you know, we have expectations for the remainder of the year. There is one transaction that we have been talking about which involves acquiring more Coke FEMSA shares from the Coca-Cola Company. We are very much expecting that to take place. And so, if that happens, our debt level, at the consolidated level, would remain stable from last year.

That transaction in rough numbers, it's about a 400m price tag. So, again, if that transaction happens, our leverage levels would remain stable to the end of '05. If, for some reason, it were not to happen, then our net debt levels would look very different.

And how likely, do you think, it's going to happen?

We think it's very likely.

Very likely. Probably in the fourth quarter, not the third quarter yet?

I think so.

Okay, great. Thank you very much.

Sure.

And our next question comes from Robert Ford with Merrill Lynch.

Good morning, guys. Congratulations on the quarter. With respect to your ongoing negotiations with the Coca-Cola Company, can you characterize perhaps the pace and promise of current dynamics? And when do you expect to have a new franchise agreement in place with the Coca-Cola Company?

Yes. I don't think we can comment on that, Robert. What I can say is that we are making progress through a very positive and constructive dialog. And we have been discussing and working in a number of [the nations] with the Coca-Cola Company and we are very optimistic about coming to places in which we can keep fostering the relationship and closing up some of the differences. So we are very, very positive on that. But sorry, but we really don't –- I am not in a position to really comment on the specifics on this. Thanks.

I understand. Could I ask another question then?

Sure.

With respect to Oxxo, can you give us a sense of how you price Oxxo compared to the rest of your average trade and what percentage of sales of Cerveza, domestically, goes through Oxxo today?

Yes. On the second one we -– it's close to 10% already and it’s growing because of the -– both the store growth and the Beer same-store sales growth, which is also very healthy and in line with what we have been sharing in same-store sales growth. So, basically, that's the number.

And the first question, can you help me, Juan?

Sure. Let me jump in there. Hi, Bob, this is Juan. As you probably know, Oxxo is the largest customer of the brewery, like Javier is pointing out, with 10%, so it definitely gets the best pricing. Now, it gets the best pricing, so it actually creates an opposite effect than our main competitor, Modelo, when they sell through the Extra stores. When we sell more through Oxxo, we get pressure on our prices because we account within the prices of the brewery the beer that we sell to Oxxo, whereby it is our understanding that our competitor accounts in the real price per hectoliter how much they sell directly through their own retail stores. Okay?

Yes, and I -– excuse me, Bob, I wouldn't really want to get into the actual number. Just following on the fact that it is the largest customer gets the best price, but we really -– we don't put out the numbers in terms of what exactly is the pricing here.

That's great. Thank you very much.

Sure.

And next we'll go to Celso Sanchez with Citigroup.

Hi, good morning. Just wondering on the -– you mentioned three brands that had helped drive volumes in the second quarter, and you mentioned Sol. I wondered was Sol Brava one of the brands that benefited from [inaudible] --?

Yes, it was.

Okay, the events. Was there anything related to, or can you update us on, the shift to the individual size that you have started pushing, I believe a few months ago? How is that progressing and is there anything we can take away from that in terms of learning as to what that might mean for future movements of that expansion for that brand?

Are you saying the movement of Sol Brava into small presentations?

Smaller, well, individual size, yes. Or smaller individual size, I should say.

I'm not sure about going even smaller than 11 ounce, which is now the presentation which is being rolled out to basically consumption centers in Mexico. But, definitely, Sol Brava is still performing very well, both in terms of volume growth, the pricing [inaudible] that it has achieved, and also it has proved to be a very, very specific consumer proposition which has been very, very successful in young consumers in Central Mexico. So the strategy of going to 11-ounce presentation consumption centers also has been proving to be very successful, but I doubt that we will go to even smaller presentations once we launch the 11 ounce.

Yes. I think the big news was going from the 40 ounce to the 11 ounce. I think, on the flip side, another initiative that we're working on is using the 40 ounce for other brands, which has also been successful.

Yes. No, I was actually not referring to smaller than 11 ounce, but rather just more areas of the country where you might have --

And if I could just follow up on the revenue growth side, obviously very remarkable revenue growth. Operating income clearly grew quite a bit, but if we look at it on an EBITDA basis, the margin expansion was a bit more modest. Should we expect to see more leverage in that in the second half of this year, related to some initiatives you've had over the past year cycling through those? Or this is more modest margin expansion on EBITDA, something that should continue?

Juan?

Yes. Celso, what you are seeing here is our asset base is really remaining stable. We are making improvements, for example in -– as related to the [Tide] accounts investment, in terms of that going gradually down. And yet, obviously everything else is growing quite fast, so it's somewhat of an arithmetic effect that you're seeing there.

In other words, you will continue to see margin expansion on the operating income level at a faster pace than at the EBITDA level, Celso.

The way I look at is we're basically being able to do a lot more with the same assets.

Exactly, so we were increasing our ROIC at the same time. I think we're back at the double-digit ROIC at the brewery level.

Okay, thank you.

And our next question is from Carlos Laboy with Bear Stearns.

Good morning, everyone. On exports, I was hoping you could expand on three areas. One is you had a negative mix shift in exports; do you expect this trend to continue through '06 and '07?

Secondly, Heineken Premium Light and Corona Light are growing very fast in the U.S., but you're not participating in the import Light category. Do you expect to stay on the sidelines where import Lights are concerned?

And lastly, on the Heineken relationship, you have a decision to make over the next few months. When are we likely to hear what your decision is on what you're going to be doing with Heineken going forward?

Sure. First, on the Light segment, as you are pointing out, the segment on imports on the Light products are now being much active than in the past. We have a very, very limited distribution of Tecate Light basically in some markets, in Texas. If we would like to do something in the future with a Light product, definitely it will be through Tecate Light in the first stages.

We are not anticipating to do anything at least for the next nine to 12 months. Our programs are pretty much in place and working accordingly to our plan, and so we don't have any short-term plans regarding the Light category. We think that it will be a plain category going forward but not for the first -– for the next 12 months at least, we think.

On the second one, we don't -- in terms of the mix, we think that what we saw in the quarter is not something that we should continue to see going forward. As we have said, we have a pretty robust position in the West Coast. Things are performing very well and that's good. But we will continue to focus a lot on Central and Eastern divisions, so you wouldn’t expect higher growth rates from Central to Eastern, as opposed to West, and that's for the coming quarters, I think.

And on the third one, we are, as you are pointing out, into the second year of the commercial agreement -- of the three-year commercial agreement. What we have discussed with the Heineken people is that we should focus on the second semester, working on both delivering the plan and working to build a very robust and aggressive plan for 2007.

So we have not yet started to talk about what we were going to do after the three-year period. What we have stated to the street is that, as you have been able to see, we have been proving that the moral has been a workable one and that we have been able to really build in a very short term a different dynamic for the Company and for our brands, and also for the European brands, both for the regular and now for the launching of Heineken Premium Light. So we will -- what we will do is we will start to talk about what's next, I would guess at the end of this year, not prior to that, during the fourth quarter and that's more or less the timing, Carlos.

Thank you.

You’re welcome.

And our next question comes from Steven Barret with Thames River Capital.

Good morning. I just had one question on Cerveza. Do you have a sense of where inventories are now on the export side? Your earlier guidance of export volumes of 10 to 12% this year implies a very weak Q3, so I was wondering if you could just give some guidance on that. Thanks.

Yes. Inventories are now -– are leveling, which they should continue to be. Of course, inventory levels depend on a number of things, but you should assume that inventory levels are at a point in which our export volume growth should follow very much the depletions.

So does that mean you're still guiding towards 10 to 12% for the full year?

Yes, we are. Yes.

Thank you.

And our next question comes from Lore Serra with Morgan Stanley.

Yes. I just wanted to clarify the first question. In response to Tufic's question about the pricing, you talked about a couple of things, 30 to 35% was mix and direct distribution, but you said it came on the end of it. You took pricing at the beginning of the year and that was reflected in the first quarter. So, I'm trying to understand what drove the 3% growth sequentially. I guess it was mix, is what I'm understanding, and I wondered if you could talk a little bit more within mix. Was that because you sold more in the north, because of the weather? Was that more on premise? It's a big movement.

And then, secondly, you mentioned that you’re getting a lot of leverage on your fixed asset base. If we’ve done the math right, your capacity utilization was obviously very high in the quarter, but -- and a reasonably high level for the year. So, as you think about your plans, are you assuming volume growth is slowing down? Are you assuming you can get to much higher levels of capacity utilization than maybe what you’ve done historically? Thanks.

Sure. On the pricing, I think it’s what we’ve said. You just didn’t mention the third factor, which we think contributed a lot to the growth in the quarter, which is a very different competitive dynamic. Still in the second quarter of last year we saw some promotional activity which in some cases we needed to match and in some cases, to tell you the truth, we were the ones which were taking advantage of some of the opportunities.

So, it’s -- as Juan was saying, it’s a geographic effect. Basically, it’s again a little -- a slight growth, higher in the north, which is a higher price per hectoliter as opposed to central, and also a little bit of a packaging mix going to non-returnables, specifically to cans not to bottles also, what -- which is contributing to the growth in the price per hectoliter. So, all those effects are behind the increase in the price per hectoliter for the quarter.

Yes. Just adding on the capacity, Lore - this is Juan. You’re right. We did see levels of utilization higher than certainly I’ve seen since I’ve been at FEMSA.

Rather than expecting the volume or the demand conditions to slow down, we are obviously taking provisions from our production side to be able to accommodate growth so that we -- obviously, as you know, we have to accommodate higher peaks and deeper troughs than our competitor by virtue of where our volumes come from. We are very actively monitoring our debottlenecking and investments in additional capacity across our six plants at this point.

Just to complement that, as we speak, we’re expanding a couple of breweries on a marginal investment basis. And we feel pretty sure that, again, not at the level that we saw the first semester demand growing, close to 7% or 8%, but we’re very well prepared to accommodate with future marginal expansions, at least in these two breweries, for future growth on Mexico and the exports.

Okay, thank you.

And our next question comes from Reinaldo Santana with Deutsche Bank.

Yes. Good morning. Congratulations on the result. Most of my questions have been already answered, but one last question. If you can elaborate on your direct distribution increase? You mentioned you bought some of the third-party distributors in Ciudad Juarez and Veracruz. Is there anything left to do, that you expect this direct distribution to increase further than the 80% that you currently have? Thank you.

No, we don’t. We think, as I said, that we’ve done pretty much most of the job, if not all. If there may be some additional or pending territories, those will be very, very insignificant. So, I think we’re where we want to be now.

Great, thank you.

Thank you.

And we’ll go next to Victor Galliano with HSBC.

Hello, good morning. Yes, most of my questions have been answered, but just on -- if you could give us some CapEx guidance for the Group, and for FEMSA versus specifically, for this year and if possible for ’07 as well.

Juan?

Yes, Victor. The numbers have not changed from what we’ve been saying for -- really for all of this year, which work out to $350m for Cerveza, $250m for Coke FEMSA, and $150m for Oxxo.

$150m.

Yes, one five zero.

Okay.

Just to clarify there - this is Gerardo, Victor - the $350m do not include the Kaiser acquisition.

Okay, so that’s --

The Kaiser acquisition will come on top of that and, again, these numbers are still very much in place. I think for modeling purposes you can assume similar levels of investment for ’07.

Okay. And these are dollar figures?

Yes, sure.

Thank you.

[OPERATOR INSTRUCTIONS]. And we’ll take our next question from Alex Robarts with Santander.

Hi, everybody. I guess my question is on beer and just a couple of parts. First of all, looking at the first half industry showing very strong growth overall, in the second half do you expect similar growth rates to the extent that the Presidential elections helped or not, or whether as well, helping or not, just maybe getting a sense of where you’re looking for volumes to be in the second half.

And I guess still on beer, this distributor that you bought in Ciudad Juarez, we understood in other conference calls that there was a -- the fellow also owned some retail stores. And I guess I wanted to get a sense of whether that was part of the deal. If you could shed some light on what type of investments might be needed, if any? And did we see this initial payment come in during this quarter, or will it be in subsequent quarters?

And specifically with the Veracruz asset or distributor, where are you -- you’ve given us the number of today, but where were you compared to, let’s say, at the beginning of the year? That would be helpful.

Yes. Juan and Gerardo, please?

Yes, Alex. First, in terms of beer volume expectation for the second half, the comparisons are very different in the second half. We’ve talked about -- we said 3 to 4% at the beginning of the year volume growth expectation. I think 4% is a reasonable number to expect.

As you know, GDP expectations for Mexico have also been moving towards the 4% number, so that’s a number that we feel comfortable with. It certainly means that the second half we will not see 7.6% type of growth, but still close the year with a very robust number that will resemble 4%.

In terms of the direct distribution, we really can’t get into the specifics of the transactions in Juarez and Veracruz. Roughly, the shift with these two transactions is in the order of 5 to 6% of our volumes. So, we went from the very high 70s to being now in the low 80s. But, again, these transactions are confidential in terms of the detail. Suffice it to say that the amounts involved are not material from a disclosure point of view.

And to your question on the convenience store chain in Juarez, that did not -- that was not part of the transaction. So, it was basically the beer operations that were involved.

Great. Okay, thank you.

Sure.

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

Great, thanks, round two. You’re now five years into this turnaround of Cerveza and I was hoping you could rank for us in order of point some of the accomplishments that are moving the needle on volume and earnings growth when you think of the different things you’ve done, like the penetration of Cerveza in Mexico City, the changes in direct distribution or the growth you have been able to get out of the northern part of the country.

Do I have to pick up only of those three, Carlos?

There was much more [inaudible] than that.

I don’t want you to squiggle away into others.

No. I think my own sense is that now you have a company which is pretty much based on an operating model which really lets it think in a different way in terms of how to address consumer needs. And that is something which is very, very general as a statement, but I think it is very true.

I think that now you have a company which can launch products knowing what consumers are looking for, but not only that you have the ability to execute that. I wouldn’t say that having been successful in Mexico City in the last four or five years is one of the biggest accomplishments. I think that finding a way to -- or being able to find a way to be successful in some markets, very tough markets for us, has been one of the successes. But, again, I will keep my own success definition of having an operating model which is pretty much able to really execute what you now know consumers are looking for.

So, if you look at our product portfolio structure today, as opposed to the one we had five years ago, I think there is a radical change, not only in terms of a much better concentration, much better brand equity and [help] measurements, but also a much diverse offering for consumers. So, I will stick to that.

Thank you.

Welcome.

We will go now to Celso Sanchez with Citigroup.

Hi. Just a follow up, actually, on Commercio, if I could. The average ticket growth in the quarter was about as high as I can remember for quite some time. Were there any one-off items with respect to the different events in the quarter, whether it was the elections or the World Cup, that would have driven the ticket higher? I would have thought that, if anything, that you would have focused on traffic there. Or is there something we can start looking to for some benefits from the merchandising efforts that you’ve been undergoing over the last several quarters and on into the future?

Yes, Celso. This is Juan. I think there were some one-offs that related mainly to the World Cup, some promotional material, some collectables. The fact that the events, when you gather to watch a Mexico football game, normally involve a lot of people and a lot of consumption, and rather than going to the Oxxo five times, people - myself included - would go and just buy a lot of stuff at the same time.

So, very anecdotal but again, from a modeling perspective, as much as the category management is working, the improvement in the ticket should be much more gradual than what you saw this quarter. So, in short, don’t really expect this type of growth and the average ticket to be here to stay, let me put it that way, starting this quarter.

Okay, thank you.

Next we’ll go to Claudio Brocado with Batterymarch.

Hi, guys, and congratulations on a very strong set of results. Understanding that you probably won’t be able to go into too much detail, could you comment on whether there’s a lot of reports in Argentina about the [Lujam] plant and the grants there, about being ready to be sold. Are you going to participate in that process?

And if you do, there have also been press reports about maybe you’re not distributing beer and soft drink together. Is that something that you would do or not, if you were to get those outlets?

Yes, Claudio, we’d rather just stick to what we’ve said in the past, which is we will look at any business opportunity that makes sense for FEMSA, and Argentina definitely does. So, I will stick to that only. We’re really in a position in which we cannot comment much more than what I just said.

Okay, thank you very much.

Thank you.

We will go back to Alex Robarts with Santander.

Thanks. Alright, my follow up is really on Kaiser. Obviously this has been a big transaction for you guys this year. And I just wanted to first of all clarify something that you said earlier, that the breakeven guidance which you’ve been talking to us and mentioned again right now, it’s on just -- it’s on the EBIT or the EBITDA? So, I just wanted to clarify that.

But just, if you could tell us a little bit about how that’s going. You’re basically six months into the process. You say it’s on track. Interestingly, we’re seeing obviously some double-digit declines. We understand in Sao Paolo, that main area, and you talk about like the Panamco transition that you successfully did with Coke FEMSA in Sao Paolo. Could you compare and just contrast how it’s been versus that Panamco transition?

And again, I’m just trying to think, if you’re still saying breakeven for the year based on what you’ve seen first half and you’re coming to the fourth quarter summer months, it seems to me that you’re looking for not having EBITDA positive, or EBIT really positive in that key fourth quarter, or am I missing something there?

Yes. First, what we have been saying is that we would like to be EBITDA neutral, breakeven for the year. And that’s having a lot to do with the first semester activities, which had to do a lot with capturing some of the cost opportunities that we analyzed at the beginning of the year, and also being able during the second semester, more specifically on the fourth quarter which is the summer there, to now invest on a [profit] way behind the brands, both behind the existing portfolio and for the launching of the new initiatives that we will bring to the market.

Our sense is that things are going, as I said, pretty much on track according to the plan. And if you look at it three years ago, I think we’re looking some of the same things we did when we acquired Panamco, specifically in Brazil, which started with bringing the operation into control and then working all the way through the channel to the consumer, changing the way we were approaching consumers through the different channels.

So, as I said, we’re working a lot with the way we address the different channels, and we’re changing the pricing architecture. We’re changing the discount structure that we were using to serve the market. And if you look at, as you were saying, the pretty direct numbers in the Sao Paolo operation, which is the only one that was still in the hands of Molson Coors when we acquired the business, we’re facing very similar trends to the ones that we experienced when we acquired Coca Cola Pepsi -- I mean Panamco, which is very not so good numbers in the beginning. That’s having a lot to do with the fact that some of those volumes were pretty much unprofitable and not really doing what’s best for the business long term. But, as I said, the second quarter numbers makes us optimistic of the prospects of the business.

The main difference that I would point out when looking at the Panamco success story against now Kaiser is that back in those days, of course, we had the Coca Cola brand, which once you put in place your working model then the brand started to do the job. In this case, we will need to do the job with the brands because, as we have said, the brands are not in a general pretty good shape. There are some pockets in which the brand is performing very well, growing very healthy. But again, this is, like a puzzle in which we will need to really look at the different markets and come up with the best solution for each market.

So, what I can summarize is that things are evolving the way we were anticipating. We will be ready for the summer to put some money behind our brands -- our existing brands or our new ideas that we would like to bring to the market. And that should lead us to a full year in which, again, we’re aiming to have EBITDA at the breakeven with significant resources behind marketing for the brands for the year.

Okay. And does the consideration include, in the second half, perhaps a new brand or would it be focused really on the existing?

I wouldn’t say new brand. What I would say is definitely some initiatives that will go to the market on the second semester, yes.

Okay, thank you.

Thank you.

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

Yes, thank you very much, everyone. In summary, we achieved, I think, a very solid second quarter, reflecting consumption strength in our markets and a good execution of our strategy. So, I think it’s very much focus on continuing to deliver profitable growth and I’m confident that we’re in the best shape ever to face the challenges and capture the opportunities here.

Thank you very much. Bye.

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