Fomento Economico Mexicano SAB de CV (FMX) 2006 Q4 法說會逐字稿

Please stand by, we are about to begin. Good morning everyone and welcome to FEMSA's fourth quarter and full year 2006 earnings results conference call. As a reminder today's 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's 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 like to turn the conference over to Javier Astaburuaga, FEMSA's CFO. Please go ahead, Javier.

Thank you. Good morning everyone and welcome to FEMSA's fourth 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 are Gerardo Estrada, Hector Trevino and Juan Fonseca, all of whom you know well.

2006 was a year of important accomplishments for FEMSA, both strategically and operationally. On the strategic front we accomplished several key transactions that will leverage our distinct business model, while our enhancing our growth opportunities, namely, the acquisition of Kaiser Beer in Brazil, the new cooperative framework between Coca-Cola FEMSA and the Coca-Cola Company, and the announced agreement to jointly acquire Jugos del Valle with the Coca-Cola Company. The combination of these agreements provide us with the ability to create new revenue streams and new categories and product lines to grow our businesses or bringing them more closely together and to focus on investing in the future.

Operationally, 2006 proved to a year of strong top line growth following positive macro trends and the success of consumer focused strategies in our main markets. All of our corporations, Soft Drinks, Beer and Oxxo stores contributed to deliver double-digit growth in total revenues which were up 13% reaching MXN126m, or [$11.6m] for the full year. We were able to capitalize on strong consumer demand, particularly in Mexico, where Beer volumes grew 5.6%, lapping the prior year growth rate of 4.9%. Certainly, the FIFA World Cup and the elections contributed to our volume growth but even controlling for these events the growth trends observed in Mexico in the year were remarkable.

At Coca-Cola FEMSA, despite pricing pressure, Mexican volumes grew a healthy 4.5% and at Oxxo, ahead of our expectations, we opened 706 to reach 4,847 nationwide. The top line of our GDP growth rates are indicative of the success of our innovation segmentation and improving expectation capabilities.

On the cost front, we continue to experience important price pressure from raw materials at both our Soft Drinks and Beer operations, notably, sweetener costs at Coca-Cola FEMSA and aluminum costs at FEMSA Cerveza. The accelerated growth of Oxxo, a lower margin business, and the inclusion of our Brazilian Beer operations also weighed in on the consolidated gross margin. However, we were able to mitigate a significant amount of the raw materials pressure with increased fixed costs absorption, efficiency and productivity improvements across our businesses, which effectively lessened the gross margin contraction for the full year.

Consolidated operating income reflected the contraction of the gross level growing 6% for the year while, net income increased 7.3%, and net majority income was up 14.8% for the year, partially reflecting the impact from the acquisition of an additional 8% stake in Coca-Cola FEMSA carried out early in the fourth quarter.

In terms of our debt position, consolidated net debt at the end of 2006 was $2.9b, which is an increase from the previous quarter and reflects our acquisition of an additional 8% stake in Coca-Cola FEMSA which took place in the fourth quarter, as well as new bank debt, as opposed to tax related debt in our Brazilian Beer operations. However, we are still at a conservative net debt to EBITDA ratio of 1.3 times. 75% of our debt continues to be denominated in Mexican pesos reflecting our business structure and over 80% of our debt at fixed interest rates.

And lastly, before moving onto our business units, I'm happy to report that on Friday the Board of Directors of FEMSA approved a 3 for 1 stock split and a payment of an ordinary dividend of $135m to 2007. Both are still subject to approval at our Annual Shareholders' Meeting next in March. In terms of the dividend, this amount represents a 44% in dollar terms over the amount paid in 2006 and a 125% increase over the amount paid in 2005.

As you can see, our priority in terms of cash flow utilization continues to be the building and growing of our business through investment in high return value-creating opportunities. This focus goes hand-in-hand with prudent balance sheet management and a dividend policy that allows us to share the growing cash flow generation with our shareholders.

Now moving onto our business units. In Beer, for purposes of clarity we will first discuss FEMSA Cerveza, excluding Brazil, followed by a separate discussion of our Brazilian Beer operations. Excluding Brazil our full-year results reflect unprecedented top line growth, another year of improved competitive position and increased profitability with almost stable operating margins.

In Mexico the fourth quarter in particular demonstrated the robust pricing and consumption environment and we capitalized on this with focused strategies that resulted in Beer volume growth of 6.6% and price per hectoliter growth of 1.7% in real terms. In terms of innovation, 2006 was an important year, particularly in two categories. The Light category, which is the main area of focus and the developing category of flavored alcoholic beverages.

In Lights we completed a full line presentation in Tecate Light with its launch in a non-returnable glass bottle. Tecate Light now clearly leads the Light segment and has been our fasting growing brand for the past three years in a row. Additionally, we also launched Sol Light in selected regions where the brand is growing rapidly. In these categories we launched Sol Secret, our first flavored alcoholic beverage. Both of these initiatives are helping drive our top line and improving our connection to consumers.

On the domestic pricing front we continued to see a generally irrational pricing environment and, subsequently, increased prices at the beginning of 2007. At this time we have increased in line with expected inflation in a number of different markets and will continue to roll out these increases nationally as competitive dynamics permit in the months ahead.

In exports a result for quarter and full-year 2006 finished well ahead of bullish volume growth expectations, increasing nearly 15.3%. In pricing, export price per hectoliter decreased 5% due mainly to the year-over-year strengthening of the peso in real terms and a channel package mix affecting the U.S. as our 24 ounce presentation of Tecate continued to grow in the [off-premise range].

However, in the fourth quarter the export price increased 0.6% in dollar terms. Despite this negative mix effect, we have already begun to increase prices in the U.S. in the range of Wine to 2% nominal for 2007. Aside from pricing we have several new initiatives planned for the U.S. in 2007. During the coming months you should expect to see us launch Tecate Light in selected markets in the U.S. together with a stepped-up campaign for DOS Equis, particularly in the East Coast.

In terms of FEMSA Cerveza's gross margin, despite important increased raw material pressure and a 40 basis points contraction during the fourth quarter, for the full year we achieved a gross margin improvement of 50 basis points. In 2006 our gross margin reached 60.2% of sales. I would like to point out that through ready management, productivity improvements and improved fixed costs absorption we were able to compensate for important price pressure in aluminum and other commodities as well.

Continuing the third quarter trend, operating expenses increased 10.6% in the quarter, slightly ahead of revenue growth and driven mainly by increased selling expenses. This increase is related to the same key focus areas we disclosed during the third quarter. Mainly, the strengthening of our distribution network, increased marketing efforts for our brands, activation efforts at the point of sale and enhancements in our operating structure. For the full year, operating expenses grew 11.5%, resulting in a slight decline in the operating margin, which was down 40 basis points to 19.1% of total revenues for full year. Overall, our income from operations grew a healthy 7.1%.

All in, FEMSA Cerveza had a very good year. We exceeded our top line expectations, an advance on our strategic plan, continuing the reinforcement of our competitive position while maintaining the operating margin and growing overall profits. Our increased focus on brand building is yielding results on the top line and, more importantly, our brand health indicators have improved significantly.

Building better brands for the long term is imperative to better segmentation, revenue management and price realization. Going forward we expect to see continued raw material pressure easing in the second half of 2007 and our volume growth will face extremely tough comparisons throughout the year but, more specifically, during the first semester. However, we will continue to build our capabilities and execute on our strategy.

Moving on to Brazil. I think I speak for the entire team when I say it was a terrific first year. We achieved literally all of the objectives that we set for ourselves in terms of fixing the operating model, understanding the market, and developing the right brand portfolio for sustained long-term growth. Specifically, in the fourth quarter as promised, we significantly increased our level of investment behind both the Kaiser and Sol brands. I am pleased to report that the progress with both brands in the past four or five months is very much on track with our expectations. Initial market feedback has been very positive and we will continue to apply a consistent approach to the resources needed to develop the brands and execute accordingly.

Today, our Brazilian Beer operations are achieving margin and volume growth improvements. We reverted the trend of substantial multi-year market share loss in the month of July and, [consequently], we [gained] 120 basis points of share to December reaching 8.6% of the market. Despite the intense marketing initiatives and ramp up to the summer we managed to close the year achieving MXN110m of EBITDA, ahead of our expectation of breakeven EBITDA for the year.

In light of these achievements I want to stress that our Brazilian Beer business continues to be a long-term initiative. In addition to our brand-building efforts, in 2007 we will strive to increase our alignment with our bottling partners across Brazil and focus to [improve] the execution and the availability for our brands. We are [conscious that] we are very early in the game and that we face formidable competition but we're excited by the opportunity and the challenges it poses.

Turning to our Soft Drink operations. Coca-Cola FEMSA delivered solid top-line growth through all its territories with revenues increasing 7.1% in the fourth quarter and 6.9% for the full year. For 2006 Mexico and Brazil accounted for the bulk of its top-line growth and, to a lesser extent, the other territories contributed positively.

Despite strong volume growth, the fourth quarter Beer did [experience] specific challenges that we are facing in some of our markets, particularly in the Valley of Mexico where, due to competitive dynamics, much of the growth is coming from multi-serve presentations and jug water. We are working to address this [reducibility] to take pricing and we believe that we are best suited to succeed in a more complex competitive environment.

However, pricing pressure in Central Mexico will continue to impact our results in the short term. New avenues for growth, such as our new non-carbonated portfolio, in combination with the Brazilian growth potential of brand Coca-Cola and our well designed commercial strategies position us to produce solid bottom-line growth in spite of cost pressures in the majority of our markets.

If you were unable to participate in Coca-Cola FEMSA's conference call last Friday you can access the replay of their webcast for additional details on their results.

At Oxxo our top-line results were solid; up 15.1% in the fourth quarter and 18.7% for the full year. In 2006 we added 606 new Oxxo stores making this the eleventh consecutive year that we opened more stores than ever before. In the fourth quarter alone we opened a record 363 new Oxxo stores and we now have 4,847 Oxxo stores throughout Mexico. In terms of same-store sales, we were up 6% in the fourth quarter and 8.2% for the full year. Improved promotional activity with our main supplier partners and category management practices continue to enable Oxxo to be able to drive more customers into the store. Traffic was the main driver of same-store sales followed by an increase in the average customer ticket.

During 2006 we signed several agreements that will benefit Oxxo's level of store traffic and provide marginal incremental revenue streams. Most notably on the fast food category, our own proprietary brand of coffee, [En Latte], as well as other extension products. And in the service category, Televisia's Lottery product [Mutli-Juegos] and, to a lesser extent, our new ATM rollout. These new products and services complement the growing fast food and service components of our total offering, representing an important step to enhance the equity of brand Oxxo and enhance our value proposition to our customers.

At the gross margin level, Oxxo experienced an 80 basis points expansion in the quarter and 60 basis points expansion for the full year to reach 27.1% of total revenues. At the operating line, Oxxo's operating margin reached 6.9%, up 30 basis points in the quarter, and 4.5%, up 10 basis points for the full year.

Oxxo's profitability has consistently improved, despite an important number of ongoing initiatives such as direct distribution and systems implementation. These initiatives will enable for better inventory management, store segmentation and enhanced service offerings, contributing to the continuing improvement of our store proposition. Going forward, our focus remains the same. We will continue to aggressively grow our store base and build the capabilities required to strengthen our position as a leading convenience store chain in Mexico.

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

Operator, please.

Thank you, Javier. [OPERATOR INSTRUCTIONS]. We're go first to [Andrea] Teixeira of JPMorgan.

Hi, this is actually Andrea Teixeira. Hello, good morning everyone. Basically my question is regarding this agreement with Molson Coors when you bought additional stake with Kaiser. The question is regarding the liabilities, what else do you have in the off-balance sheet you have for Kaiser?

And also a follow-up question, actually, on the meeting I had with you guys. Regarding this new investment with Televisia, when do you expect to have the results with this and can you share a little bit the economics of this machine? Thank you.

On the first question, Andrea -- this is Javier Astaburuaga. As we've just shared Molson Coors exercise I put that they had on the remaining 15%, but that doesn't change the fact that, since the original agreement, they still are responsible now for 83% for all non-disclosed contingences that may arise in Kaiser in Brazil.

So contingences which were identified, disclosed and have been forming part of the balance sheet of the Company since the acquisition they are contingences that are in charge of the business. But any contingences which arise and were not disclosed or revealed will still be responsible Molson Coors for those. And that's basically the term of the way they exercise, they put last December.

The vast majority -- this is Juan, the vast majority of contingences, as Javier mentioned, have already been settled. As we reported in the third quarter we arrived to settlements with the State of Sao Paulo and with the Brazilian Federation and took care of the vast majority of the contingences that we had on the books.

Thank you, great.

The second part of your question, Andrea, on the Televisia lottery. They have begun operating so they are now doing drawings. They've done a few of the different products that they have. However, we have not yet started selling tickets. The reason for this, as we discussed when we were with you in New York, we took longer in getting started in the deployment of the machines.

We are now probably somewhere around 600 stores, of our stores, have the equipment. We are shooting for a number of about 1000 by the end of the first quarter. And our expectation is that, by that time, we would begin to participate in the selling of the tickets. So it's going to be a very gradual thing. Obviously, the rollout we expect to include the majority of our stores by the end of '07 or perhaps even '08. But we have not yet started participating.

In terms of the economics what we shared is there is a fee that comes in that's a percentage of the overall revenue from the product. We haven't disclosed what that number is, but it's very much in line with common practice in the U.S. and in other countries where the vendor of the ticket gets a single-digit margin, let's leave it at that.

Okay. And, lastly, just on the FEMSA -- I'm sorry, the Kaiser rollout of the new brands and everything, what is -- from the results that you were ahead of expectations, what do you think is, like 2007, the message will be the new brands are in line with your expectations or it was mostly on the costs side that you were able to detract more on the costs side or was more on the top line. So what should we expect for Kaiser going forward?

As I said, the perspective in the first year is very positive both in terms of, not only capturing the cost of reduction opportunities by integrating in a much better way our operations, but on the performance and on the very basic stability that we were looking for Kaiser brand in some markets, not in all, but in some. We're very happy about the performance of the brand which is reacting very positively. And also we tend think that the Sol brand launching in Brazil has also been very, very, successful when we compare to our initial expectations.

Into 2007, as I said, we are committing resources to the market the ones that we think we need to continue to build the right portfolio for the long term. We are now working in a very, very close move with the bottler network in terms of aligning, not only general objectives for the long term, but also mechanisms that we could use for improve the alignment and to bring incentives to performance during the year and for the long term also.

And in terms of the brand, again, we are looking to have a full portfolio offering that allows us to compete in the different segments of the market which was not the case in the past for Kaiser. So, all in all, we are looking for a better financial profile, an improved performance of both the brands and the volumes now for the full year. As I said, we have still very rough first semester and a great second semester. So we will have easy comps on the first semester in 2007 and more tough ones going into the second one. But, all in all, that's ahead of our perspective for Kaiser in Brazil, Andrea.

Thank you. We'll take our next question from Robert Ford with Merrill Lynch.

Good morning everybody. I was just curious when it comes to the way you run-off on a systems platform, do you have the source code or do you have a black box on Oxxo?

Sorry, do we have a source code for the --

Do you have the source code. My understanding, Juan, was that with respect to the lottery ticket sales that you're set up to take revenue and not to pay it out, and one of the delays was the changes you had to make to your systems platform in order to distribute winnings right in Mutli-Juegos. Is that correct or am I misinterpreting something?

With the compatibility of the Juegos platform is 100%, that's not the limitation so far, Bob, it's more like a rolling out the machines into the stores and having the right training for the guys in charge of the store. But there is not a systems issue here at all.

I think, Bob, that there has been more of just a logistics issue in terms of having the dishes set up on the roofs and getting crews to install. We understand that Televisia was using even crews from their Sky operations to get this thing moving faster but, as Javier mentioned, it's not a compatibility issue.

Okay, great. That's good to know.

My real question was with respect to some of the some of the tied accounts or subsidized third party retailers. I was curious as to what was happening because you see some selling expense pressure. Javier had referenced POS activations. I think that's related, I'm not sure, I wasn't sure what that term meant. But also on the other amortizations you see some growth that's in excess of sales and I was just curious if you'd expand on those line items please?

Sure. I can refer to this conceptually only, Bob. We are trying in some cases and, I think successfully, to -- by some revenue management techniques being able to grab some margin which in the past used to reside in some retailers. But there's a consequence in some cases for doing so. So what we're trying to do is, again, grab a little bit of margin in some cases for some products or packaging lines. And we are making commitments to some retailers also to compensate for that lost margin in the form of equipment or support for activating the point of sale to increase volume growth.

So it's kind of an equation in which we are making efforts to grab a little bit of margin, but increase sales per retailer and, by doing that, we are now having to put some commitments into the retailer for precisely driving volume growth in those. And, again, this is not a massive program because it has to do a lot with identifying which are the potential retailers that have the characteristics that tells us it's a good idea to do so.

So when you look at the P&L part of the increase in revenue per hectoliter is driven by a number of things, as we have said; increased third party distribution and better needs etc. But also part is this effort that we're trying to highlight and direct the efforts to the development of specific retailers with a combination, again, of grabbing a little bit higher margin on our side, but making a commitment to develop those point of sales in a much faster and effective way. So that's basically the explanation that I can offer you.

Thank you. We'll move next to Reinaldo Santana with Deutsche Bank.

Good morning. In terms of prices in Mexico for Beer, although they were above inflation, they were slightly below what you have been reporting in the last two quarters, because of the positive effective of the acquisition if the independent distributors. What has been the reason for this?

And also if you could expand on the effect of your price increases in early 2007 in volumes, especially considering your main competitor did not follow suit yet.

Hi, Reinaldo, this is Juan. Yes, on your pricing question in Mexico in the quarter, there's a couple of things at play here. One is that we did see some promotional activity during the quarter, largely driven by our competitor but, at the end of the day, we need to engage and so we did see some selective promotional activity during the quarter.

The second part of the reason really is more structural and had to do with the fact that the fourth quarter -- if you compare, for example, the third quarter versus the fourth quarter, the third quarter includes two months which are still pre-warm, in terms of we will sell more volumes in the North of Mexico and regions that have generally a higher price per hectoliter.

When you move into the fourth quarter where you have more a holiday-type consumption you have -- we have in relative terms more volume being sold in Central Mexico or in parts of the country where our price per hectoliter is lower. So just, structurally, you will see a sequential decline, third quarter versus fourth quarter, and that is also at play in 2006.

Can you remind me the second part of your question, what it was?

Yes, the second part had to do with what has been the effect so far on volumes from your price increases in early 2007, especially considering your main competitor has not followed suit yet?

Besides the effect on volume, what I would focus my answer, Reinaldo, would be that, as we have said, we have only increased in very selected markets. Just to give you an idea, markets in which we had not only a good dominant position, basically, but also good trends in volume growth and brand health indicators. So we feel very comfortable and we have seen what we could consider a normal performance of volume in those markets, taking into account that we've increased our prices in selected ways and the competitor has not.

We've also increased, but only in one market, in which we do not dominate and, all in all in the past 45 days, we've been not only increased prices but also we have been putting in place some promotional programs to support the price gaps that were created since our competitor hasn't moved. So we feel that we're managing the situation accordingly to us moving in some markets and the competitor still not doing so.

Thank you. [OPERATOR INSTRUCTIONS]. We'll go next to Tufic Salem at Credit Suisse.

Yes, good morning everyone. My question's related following up here on the pricing in the domestic market during the quarter. If you could just give us an idea of what was specifically related to the thickening distribution in-house of the improvement?

And also, the second question would be related to the SG&A expenses which have increased. If you could give us a better split on what was related to distribution and then POS or marketing. If you could give us a better sense of the breakdown there. And also if you could give us an idea if any of those are expected to begin to dilute towards the second half of this year, or if it's more of a two to three year project?

Hello Tufic, it's Juan. I think the breakdown is very similar to what we've discussed in previous quarters, certainly in the last quarter, meaning, it's about a third really you can allocate to the different components, so very balanced in that sense. Third coming from the increase in direct distribution, a third the change in practices of the -- what Javier was mentioning in terms of the new way to interact with some points of sale. So there is no real reason that outweighs the others. We're very in line with what we've discussed the last couple of quarters.

Thank you. We'll go next to Lauren Torres with HSBC.

Good morning. I was hoping you could talk a little bit about our cost outlook for this year. Obviously, raw materials was an issue, be it sweetener cost or aluminum cost last year, but if you just give us a sense of what you're thinking about for this year and what your primary offsets are?

For Beer, it's kind of a different story but similar in some sense due to the fact that, even though we're expecting for second semester of 2007, a decrease in the aluminum price we don't think and, so far, we haven't seen that happening in the first part of the year. We will ease off some pressure from aluminum basically in the second part and nothing so sensational. But at least we will have some room to breath in terms of [comps] 2006/2007 full year.

We are, on the other hand, experiencing, and we will continue to experience, I think during the rest of the year, pressure on also two now different products. One is bottles, because we have problems of re-hauling and marginal capacity expansions in finalizing one furnace and starting with the second one in our glass operation. So we will need to go and acquire bottles in the open market at, of course, higher prices. So that will put some pressure into the beer operations in 2007.

And also in some grains, not in all, but in some grains, we have seen very late into the year a pressure that, all in all in 2007, will also put pressure on the costs side. So, the COGS picture for 2007 is I think still of continued pressure, not as the one that we had in 2006, so a little bit lower than 2006 but still continued pressure going into 2007.

And sweetener expectations?

Sweetener had been increasing, Lauren. The phenomenon that we see on the Soft Drinks side is that price of PET resin has been coming down, but the price of sweetener has been going up. I think on Friday, Hector and Phil mentioned the cost year over year of fructose in some cases as much as 30%, if I remember correctly Hector.

That's correct Juan. In general, the environment for us is that we have [certainly seen] some of the reductions of PET prices and, certainly, during the first quarter we do have pressure on high fructose. It's not the case with refined sugar and raw sugar, that are coming down slightly so. When we took the three types of sweetener that we use we are experiencing some pressure in the first quarter. Of course, this will have a -- what we are anticipating, and what we mentioned on Friday, is that we would expect a lot of volatility of that front during this year.

Thank you. We'll go next to Lore Serra with Morgan Stanley.

Hello. I wanted to ask a couple of questions also on the Brewery. First, could you just clarify the price increases you took at the beginning of the year, what percentage of your volume roughly does that account?

Secondly, I wanted to understand, last year was a remarkable year in terms of volume growth, both for you and for the industry, and the past couple of years of terrific volume performance. I wonder if you could give us a sense of what range of expectations you have for 2007. Do you think 2007 a similar year to what we saw in '05 and '06?

And, lastly, if you do have a bit more gross margin pressure because of the some of the factors you decided, can you tighten the SG&A trends that we've seen in the last couple of years, and have SG&A grow at or below inflation until '07? Thanks.

Sure, hello Lore. First, on the price increase I think it was something a little bit below of 30% of our volume. So, as I said, it's a mix of very strong dominant markets with dominant positions and volume growth trends higher than the competitor and very, very, good short-term brand health indications. And a couple maybe of those not so dominant markets signaling for the price increase and that's the first part.

On the second one I wouldn't expect -- I think if you look at 2006 and go back 10 years this would be the highest growth at least for CCM in the Mexican markets, achieving close to 6% -- I mean 5.6%, it was great. And we have to take into account the extraordinary events such as the World Cup, elections and very, very nice weather across the year.

We're still very, very positive about the developments of some of the things that we started four or five years ago, in terms of bringing in new dynamics to the marketplace, both through innovation and execution. So we are still very confident but, no, the short answer for what we are expecting in 2006 -- for 2007 is not another 2006. Also, growth in the Mexican economy is forecasted below growth in 2006. So for a lot of reasons we're still very comfortable that the dynamics in the category are very, very good but, again, not as positive to say that we're going to surpass growth in 2007 as opposed to 2006.

And the last question has a lot of to do with the basic task that management has, in terms of making what's good for the business long term, and dealing with short-term pressures. If you put together, again, a perspective of still healthy growth, but lower than the one we had in 2006 with, again, smaller pressures on the cost side, but still higher prices for 2007 as opposed to 2006. And you go to the SG&A line you are facing very hard dilemmas in terms of really dealing with a tough year but, again, doing the right thing for the long haul.

We think that we have some initiatives in place that try to, again, bring productivity and efficiency to the table while, at the same time, we are putting projects on the table that are aimed towards reinforcing competitive position, and long-term value creation.

So, all in all, that would be my comment. And, of course, we will need to be very, very careful at monitoring what's going on with both the Mexican economy, and the pricing front in the beer industry in Mexico. And I think that will sum up the year in about 10 more months, and then we will see where we are. I think, and I am very positive about that.

The main effort that we have shared with you, and that we are very focused on is to still keep reinforcing the competitive position of the Company as a whole, both in terms of the business model capabilities, and the strength of the brand portfolio that we have for Mexican consumers. And that's what we will stick to.

Thank you. We will go next to Jose Yordan with UBS.

Good morning. My question was more about if you can share your outlook for the Oxxo business, and any margin expansion? I know that there has been a lot of additional cost added to that system over the years. But when do we begin to see a better absorption of those costs? And I am interested in your outlook for top-line growth, in light of the fact that it seemed to take a 2 or 3 point slow down in the fourth quarter numbers.

And then the second question would be about the stock split. I think we had spoken about this in the past, and you had mentioned some issues related to the conversion of voting rights for the stock next year. Does the split have any -- are there any issues involved with the split now, ahead of that conversion or not?

Yes, Jose, Javier Astaburuaga again. I think Oxxo has done a terrific job. Its a very, very difficult balancing act, growing at the rate these guys are growing, adapting the value proposition the speed that they are doing and, at the same time, building the whole infrastructure for the business.

And you are right, in the last two to three years we have put a number of investments and expenses in the creation of that infrastructure. We have shared that we basically re-did [up] all distribution centers, [10] of them all across Mexico. They are brand new basically in the last [30] months.

But, at the same time, investments in information technology have been very, very important. And I think that we are looking at an Oxxo which is permanently adapting is value proposition. So you are looking at categories -- emerging categories, some of them with low margins such as maybe services in the generation in which we are today which are basically traffic builders, are not margin generators yet.

But, at the same time, we are making very good progress in high [growth] categories such as fast food. And -- so the mission for Oxxo is to keep growing as rapidly as we can. We have also shared that we are very comfortable about a long term perspective of a high number of stores opening with adequate quality.

So I wouldn't send the message that high margin expansion, short term, is the story for Oxxo for the coming two to three years. It's still a lot of building infrastructure. It's still a lot of saturating some cities, entering into new ones. We are going to enter this year in at least five more cities. So -- and building the business model that will continue to make Oxxo the leading convenience store chain for the future.

So, still a growth story in all dimensions but a balancing act in terms of still building infrastructure and capabilities. Growing the store base and expanding as much as we can the gross and net margins but, again, within this balancing act that I described.

Let me add to what Javier is pointing out Jose. This is Juan. If you look at what we've been putting on the table in terms of the growth algorithm for Oxxo, we've talked about 650 new stores last year, 675 for this year. We've actually been delivering a little bit north of those numbers. And we've also talked about same-store sales growth in around the mid to slightly high single digits in real terms. What that works out to is about an 18, 19% real revenue growth, which is pretty much what we are reporting today. So, even though we don't give you the guidance of the actual revenue growth, you can do the numbers and pretty much get to where we are.

Going forward, we would expect to open slightly more stores every year than the previous year and that should show you how we think in terms of revenue growth.

In terms of the profitability, I agree that we talked a lot about when does the big bang come, when does the big expansion come? The truth of the matter is we are consistently expanding those margins. And, again, if you look at today's numbers, we are seeing a margin expansion, both for the -- certainly at the growth level, but flowing down to the operating line, both for the quarter and for the full year.

So it's really remarkable that the Oxxo folks are being able to grow this thing the way they are growing it and yet scrape 10 basis here or 20 basis there, to the tune that you see in today's numbers. And Gerardo is going to talk about stock split.

Hello, Jose, this is Gerardo Estrada. Assuming that the shareholders assembly approves the stock split, we anticipate that that could be implemented during the month of April.

In respect of your question of the what will happen in the next year, when the [GBDs] get unleashed, basically, that is a situation just for the Mexican marketer in the trading. Because for the ADR instead of the 10 GBDs what will happen is that you will have [30 B] shares and 20 [L] shares.

So, assuming that you have more than 76% of the GBDs trading in the New York Stock Exchange, what we see is that this situation that we will have to review with the Mexican authorities, of how can we implement something that will maintain the comparability of the trading in the U.S. market, so that we will have the transparency and clarity in both markets. But we have not decided yet what shall be done with the situation.

Thank you. We will take our next question from Matthew [Chan] of Neuberger Berman

Good morning, how are you?

Hello.

I have a question about -- I wonder if you could share the CapEx plan for the Cerveza business and for Kaiser business. In particular, for Cerveza, just wondering much of the CapEx has been for maintenance [just] the foreseeable future, or do you expect a major spend for new plants and, if so, at what point in time?

And for the Kaiser business, just wondering if the spend in 2006/07 is representative for -- of the spend going forward? Or do you see additional infrastructure spend in your Brazil business?

Hello Matthew, this is Juan. Let me take first the CapEx question. Our expectations for 2007 is comprised as follows. We believe about MXN400m at Cerveza, so it's a slightly lower -- a slightly higher number than in previous years. MXN30m at Cerveza Brazil. MXN300m at Coke FEMSA and MXN160m at Oxxo.

So the numbers are slightly higher than we've had. We are carrying out projects that have to do with some capacity expansion in beer, in soft drinks and in packaging. Javier already mentioned the refurbishing of two of our glass furnaces. So this will be a somewhat more of an investment year vis a vis the recent ones.

In terms of the Kaiser numbers, what we talked about is taking the business to breakeven EBIT in 2007. So the difference will be -- we have talked about breakeven EBITDA for '06. We have -- you saw it in the numbers, we achieved that and managed to eek out about MXN10m in EBITDA. In 2007 we expect EBIT breakeven.

And so, in terms of the marketing spend, we will spend everything we can, everything that the business throws out in terms of cash flow. This is a long- term project. The brands -- for all intents and purposes the Sol brand was born in October so, clearly, we need to continue to invest in it for a long, long time. The Kaiser brand was re-launched in September; a significant amount of spend going behind Kaiser as well.

So, the way to think about Kaiser is, its not going to throw out net income in a long, long time but that's okay, because we don't need it just yet. We just want to build a bigger business for the long term and stronger brands for the long term.

Thank you. We go next to Alex Robarts with Santander.

Hello everybody. Two questions, one on Beer and the second one on COGS. Thinking just more the big picture in selling expenses, and operating leverage or the chance to get to some operating leverage. Looking back, at seven of the last eight quarters, we see the selling expenses outpacing the sales growth. And in consumer companies we tend to get used to the idea of, given a certain amount of top-line growth, EBIT or EBITDA can outpace that growth. And I can appreciate the reasons that you are going through on the direct -- on the new initiatives in terms of your distribution and some of the marketing.

But its been -- as you look out in the next year or two '07, '08 do you think there comes a time when we can get some operating leverage out of FEMSA Beer, in the sense that selling expenses grow lower than sales growth? Or is it really something -- you talked about this being an investment year. Do we wait, or does it not happen in that structure the issue here, where we just have OpEx in line or maybe higher than sales growth out looking for the next couple of years?

Yes, [Renaldo], just looking at this, operating expenses line without going into details. And in some cases I am very much aware that you cannot go into the detail that we are able to do, because of working here. But, again, there are a number of things that are driving the performance of that specific item or line in the P&L. A lot of it has to do with a radical transformation of the structure of the Company, just to highlight the change that we have made in terms of direct distribution.

If you remember we are coming from something like 34% third party distribution, now to less than -- or close to 15%. So, that really changes a lot the way the P&L should be read on one side. On the other one, and this is very important, it's that our basic bet here is to create a capability within the business that is able to drive top-line growth on a consistent basis for the long term. And that is a very costly exercise. And also you have to be very consistent in doing so a long time.

And the strengthening of the brands also is something that we have stated in the past, very importantly, as I would say the final element to really have a consistent strategy for the business.

And there is not either rocket science here or a mystery. This is a business which is -- it is not the leader in the Mexican market. It has had its ups and downs in the past. We are very, very comfortable that we are on the right track by looking at our performance in the last three years in all dimensions.

So in the end the leverage of the business by leveraging the structure, for a volume growth story, is something that has its place within the whole strategy of the business to where we are looking at, but its just one element. So in the next, I would say, year I don't think you should assume that you are going to find in the P&L of the brewery leverage being able to grow the expenses below the top line.

We are still with a lot of things ahead of us that will demand resources. And we are not going to hesitate to assign goals for the good of the business going forward. And that's, I think, what I can share with you about your concerns.

The one thing I would add, Alex, is just keep in mind that these are all conscious business decisions. It is not a situation where the costs are out of control, or we don't know where they are coming from. These are conscious decisions to invest and initiatives that will make this a stronger, better Company going forward.

Fair enough. And just more specific on the 4Q Brazil spend. We definitely have heard you talking about investing heavily in the market. Just that selling expense line in 4Q in Brazil with Kaiser, it's north of $50 in one quarter, and I think of the Heineken thing, Light launch this year in the United States, which was driven during the full year by about $50m.

I am wondering, you talk about your are comfortable with the way the progress is going with the brand -- or the Kaiser and the Sol rollouts. Specifically on Sol, I was just surprised to see that market share numbers stay around the 0.9 or 0.8% vis a vis [Nielsen] in the November and December ratings.

Should we be reading this kind of heavy $50m plus spend as something that's driven, or financing a lot of merchandising, stuff that we are not able to see in that Sol market share number? Should we be looking at that -- at the return on that in a different way? And is this the kind of level that you might think about in the next quarters, of 30 to 40% of your sales getting put into selling expenses?

No, no I would just remind that we made a lot of haul back on marketing expense in Brazil for the first six to seven months, which we ran the business. We were, again, doing the full assessment of the situation, as opposed to the one that we did when we were not owners. And also we were fixing the very basic problems of managing that business.

You can use fourth quarter as one time in which a lot of things happened, some of the ones that you just mentioned. We needed to invest a lot not, only in the launching of the brand, but in the creation of the infrastructure, of studies, campaigns and also materials for the point of sale. And, to tell you the truth, it was a quarter that we have not had in the Company in the past, of that level of spending.

Going forward that I can reiterate is that we are going to keep investing very heavily in the brands, not only in Sol, but in the brands of Kaiser. And, all in all, if you look at the full year for Kaiser, I think that's a good reference to look at when trying to find out what the level of spending is going to be going forward.

But taking the fourth quarter on its own and trying extrapolate from that would be mistaken. I think it really [obeyed] to a number of circumstances the level of spending on the quarter, a number of reasons which are structural for the long term, a number of goals that are only for the quarter. But, again, the level of spending for the full year is a much more better reference for our perspectives going forward than the fourth quarter only, Alex.

Thank you. We go next to Thomas Russo with Gardner, Russo, Gardner.

Hello, good day. I am wondering what you might do with your -- what seems to be very under-leveraged balance sheet. You -- I think you referred in the call to that 1.7 times total debt to EBITDA. That gives you enormous amount of financial flexibility. I am curious how you prioritize what to do with that financial strength.

Yes, the number is 1.3, as we speak, end of December 2006. And I think that we have shared, and I think it has been the foundation for the success of this Company, at least in the past 10 years, is that we have been very, very focused and disciplined. In, first, having the ability to have businesses which are able to compete effectively, and to prepare themselves for growth. And I think that in the past we have at least three examples.

The Panamco acquisition by Coca-Cola FEMSA, the recent acquisition last year of Keiser in Brazil, and the organic growth of Oxxo which, if its not demanding additional resources, its basically consuming all the resources that its generating.

So, the first part of the decision making really starts with being very, very sure that we are able to really take some assets and really create value with them. And we have shared this in the past. This was not the case for the Beer business in the early 2000s and late 90's and I think we are now in such a position.

So, combined with that, the discipline to look permanently at alternatives, to have a constant activity looking and getting the network of relationships that we need to be very close to a lot of people. And to wait for the right moment. It's not like we are going to pressure somebody to do a transaction if we don't -- because we are un-leveraged or whatever. We will find ways to have a healthy and adequate financial structure a long time. And we don't feel desperate about it today. We are at a, what I would say, a reasonably but still a lot of room to, if the case may be, take advantage of opportunities that may present.

So we need to be ready when those opportunities are in front of us. We will need to pursue those. But, again, we need to be very disciplined in the way we approach them. And the most important thing, again, is to be prepared to really make acquisitions a long time, but really crating value by managing effectively those assets.

And if you look at the past three years, obviously, there are cycles. These opportunities come along few and far between. If you look at when we did the Panamco acquisition our net debt to EBITDA ratios -- well we did two large acquisitions very close together, the Panamco acquisition and then we purchased 30% of our Beer operations back from Interbrew. And when we did those two acquisitions we took our ratios close to 3 times. The thing is our de-levering ability is very fast so we are now back to close 1 times. But its very -- it comes in -- it's more of a step function than a smooth curve obviously.

Thank you. One other question. The Oxxo same-store sales growth was quite dramatic. I wondered if you could look behind the number, the overall Oxxo division numbers at 6% and speak about what the same-store sales growth might have been, for that class of store that has been around for more than three years. When you grow so quickly there is the lift that comes from the start up of new stores. I wonder if you could isolate that lift and look towards the more ongoing same-store sales growth?

Well, the same-store sales, lets say, the sample is of the stores that are at least a year old. That's the standard for the industry. We have seen an additional ramp up between month 12 and month 18. But at the end of the day you are talking about stores that have been opened at least one year.

What we've done is we've been pretty successful at driving additional traffic to the store. The vast majority of the same store sales growth is driven by traffic. And a lot of what we are doing, in terms of the services, we talked about the Lottery Televisia, the ability to pay utilities, a number of things that just keep bringing more people to the store. We have over 1b people shopping at Oxxo every year. So that's the main driver for same-store sales growth. But it is indicative of mature stores.

Thank you. We go next to Carlos Laboy with Bear, Stearns.

Good morning. Javier, I was hoping you could expand on various comments you've made about brand health indicators, having improved significantly. Can you expand perhaps on the magnitude of improvement on any brands that stand out, any regional insight you can give us?

And maybe make a comment on how you might expect these indicators to make themselves evident in the P&L?

Sorry to disappoint you on the first one, but it -- we are not used, and I don't think we will, in terms of sharing very basic indicators or drivers of brand health indicators.

What I can share with you is that we monitor close to 50 cities in Mexico on a permanent basis. We monitor more than 25 indicators for the brand health, depending on the stage of development and the role that each brand plays in each portfolio. And what I can share also with you is that, our short-term results are, in terms of brand health, are very encouraging and above our expectations and our objectives for the year.

And one clear driver for that, in terms of brands, have been, in the past, Tecate Light, number one, but also Sol performing extremely well through the innovation, both in [inaudible] stations, and in packaging that we have been making in the past. And, again, those two brands represent the bulk of the effort, the investments and the intentions for the Company going forward.

And, again, rolling back brand preference into the P&L it's not a short-term resort. We just showed that if things are done properly in some cases, and I think at least second semester of last year, was the case in Brazil as we saw it, both in terms of share and brand preference. And we were reviewing it, the P&L, showed the opposite direction of where the brand health is going.

So, brand health connection within P&L, I think it's a more medium to long-term case. And, again, for a Company such as [CCM], which [are] a formidable competitor here in Mexico with a very, very strong brand in Corona here as well as in the U.S. these things take time, Carlos.

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

Hello, good morning. I just wanted to get a little bit more detail, a better understanding of the pricing in Mexico in the fourth quarter. I know a couple of people have raised the question, but a couple of the explanations offered were the promotional activity as well as a warm December.

Can you help us understand regionally, or by channel, that promotional activity in terms of what it influenced? Because my understanding in previous years, 2004 as an exception, was that seasonally there wasn't that dramatic change in the fourth quarter versus the third. So, sequentially, I was a little curious to see the pricing come down. And if you could just elaborate on what promotional things we should be thinking about, and regionally? And also if that coincided with the warm December, and what region that affected? Thank you.

Yes, [Celso] so, in the first part of the question, the promotional activity was pretty much focused to [off-premise], but it was very, very wide in terms of geography. And, as Juan mentioned, it was more a consequence of having to react to some initiatives from our competitor, in terms of -- the ones that had the opportunity to be around the fourth quarter in Mexico, I am sure saw a very heavy promotion on the leader of Corona and some other brands.

So, it was very much into the off-premise almost nationwide, a couple of months almost. And directed to the consumers who prefer liter returnable presentation as opposed to non-returnable individual sizes. And that was basically the promotional activity.

On the other, we talked about how sequentially the fourth quarter pricing will come down, given the nature of where the volume comes from in the sense that the third quarter has more of the high, let's say the north, high temperature markets, where we tend to get a higher price per unit. As opposed to December which is usually more centered around the holidays, and where really the weather and the temperature have less of an impact on the consumption of beer. So, the average price per hectoliter, again, sequentially third to fourth quarter, does tend to dip a little bit. Those would be the two main reasons.

Okay, thanks. And if I could just follow up on the glass furnace in terms of the costs side. Can you -- I'm not sure if I didn't hear, or maybe you didn't give the detail in the call. But can you remind us of what the timing might be for the capacity expansion of these furnaces and how long we think this open market purchases might have to last for?

I think it would take some months of the year. I think that by mid year we will be almost there. But, again, the purchases on the open market will remain for the rest of the year, due to the way demand behaves and the supply that we are going to be able to produce here.

But in terms of having the ability to come back to the full capacity of our own operations, I think mid year we will be there, Celso.

Yes, and I think that, on that related point, it's not that we are refurnishing both furnaces at exactly the same time. We are finishing one and beginning another one. Obviously, we loaded up on bottles before starting the refurbishings but the volume trends have been such that, as a consequence, we just need more bottles.

Thank you. And with no further questions, I'd like to turn the conference back over to Mr. Astaburuaga for any additional or closing remarks.

Just in summary we are pleased with the full-year results. As I said, our team is focused on contributing to build the business for the long term while delivering profitable growth and I am confident that we are in the best position ever to face the challenges and capture the opportunities ahead. And thank you very much all of you. Goodbye now.

Thank you.

Thank you 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 the pass code of 7599994. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.