Fomento Economico Mexicano SAB de CV (FMX) 2007 Q4 法說會逐字稿

Please stand by. We're about to begin. Good morning, everyone. And welcome to FEMSA's fourth quarter and full year 2007 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 question and answers after the presentation.

During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance and should be considered as good-faith estimates made by the company. These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance.

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

Thank you. Good morning, everyone, and welcome to FEMSA's fourth quarter and full year 2007 earnings conference call. Joining me today are Hector Trevino and Juan Fonseca, both of whom you know well.

As you can see in our results, we closed the year on a high note. We had discussed on previous conference calls that we expected the fourth quarter to be a strong one for FEMSA Cerveza. And it was. With solid volume trends across the business, stable pricing dynamics in the key Mexican market, and contained operating expenses relative to 2006.

Coca-Cola FEMSA continued its solid momentum in the majority of its territories, including Mexico, where operating income grew in real terms for the second quarter in a row, and also closed a good year with a great finish, delivering a strong performance across all key metrics.

Putting everything together, in this quarter, FEMSA Consolidated achieved real revenue growth of 10%, operating income growth of 22%, and net majority income increased 57%.

For the full year, revenues were 8.4% up, operating income grew 6%, and net majority income increased 19%, rounding off a solid year for our company. Just as importantly, every one of our businesses improved its competitive position during the year, as measured by the equity of our brands as well as their market share.

Moving onto our business units, at FEMSA Cerveza, real volume growth of 6% in Mexico, 9.3% in Brazil, and 19.3% in exports combined for 7.7% in total for the quarter, almost 800,000 hectoliters more than in 2006 for the quarter.

For the full year, total volumes grew 5.9%, or more than 2.2 million hectoliters. Pricing in real terms in Mexico was up 1% year on year, driven mainly by three factors -- the positive pricing effect of incremental domestic volume brought under direct distribution during the second and third quarters through several small transactions across the country; a bit more moderate promotional activity ahead of the year-end holidays compared with '06; and a favorable mix effect.

In Brazil, revenue per hectoliter decreased 0.6%, driven by slightly increased promotional activity ahead of the summer as well as by a mix effect.

In our exports, revenue per hectoliter grew 3.9%, reflecting less promotional activity across markets as well as a price increase for Tecate in the Western USA.

Finally, revenues for packaging again fell during the quarter, reflecting the fact that we're no longer making any third-party sales of glass bottles as all capacity is being used to meet our own demand.

On the cost of sales front, we saw an increase of 8.4%, resulting mainly from total volume growth of 7.7% and from higher cost of raw materials, particularly grains, which on average are up almost 30% year over year in Mexico.

Operating efficiencies and a strong Brazilian real helped us limit the gross margin contraction to only 40 basis points.

Income from operations increased 43.9%, and operating margin expanded by 380 basis points to 15% of revenues. Strong top-line growth, moderate pressure of the growth level, and a declining operating expense for the quarter combined to deliver these solid results.

Administrative expenses fell by 3%, while selling expenses showed a decline of 2.7%, largely reflecting the favorable comparison versus last year when we launched our brand Sol in Brazil. Ex-Brazil, selling expenses increased moderately versus a year ago, reflecting significant containment efforts in Mexico.

As you recall, through the first nine months of the year, FEMSA Cerveza had an accumulated reduction in operating income of almost 24%. But the strong results of the fourth quarter helped to significantly offset this reduction. And for the year, operating income fell 11.7%, pretty much in line with the expectations set forth in our third quarter conference call.

In Brazil, operating income was slightly below breakeven, reflecting a step up in marketing spending in our main brands as well as across the industry. But we did generate positive and incremental EBITDA versus 2006.

Here, I would like to reflect for a moment on the first three years of our beer operations in Brazil. If you recall, the Kaiser business had lost approximately 43% of its volume base during the five years prior to our acquisition. We achieved an inflection point by mid-2006. And since then, we have increased that volume by 14%.

We have reverted negative brand equity trends for preexisting brands, such as Kaiser and Bavaria. And we have successfully launched Sol. We are very encouraged by our initial results. But as we have said, we are very much in the middle of a building phase and we will continue to invest a higher percentage of revenues than would be required for a well-established brand portfolio. We are convinced that as we continue to gain scale and grow the equity of our brands, this strength will manifest itself in the P&L in due course in a sustainable manner.

Let me also reflect briefly on the recent performance of our export business, particularly to the United States. As you have seen, we are delivering double-digit growth in the context of an industry slowdown, evidencing strong momentum for our brands as well as solid execution in the marketplace.

In the U.S., as the equity of our brands continues to increase, incremental distribution is also developing accordingly. We are confident that we are on the right track also in this key market.

Summing up the year for FEMSA Cerveza, we can say that while 2007 was clearly not a satisfactory year for our Mexican beer business in financial terms, we made good and solid progress in the strengthening of our competitive position and our brand equity across our portfolio in the three main markets where we operate.

We are encouraged by the fact that the industry was able to take some pricing at the end of the year and into early 2008 and that so far the momentum for volume growth is still there, recognizing the lower comparison base of 2006.

Certainly, the potential for further cost pressures from soft commodity remains. And we cannot know at this juncture what impact the U.S. economic slowdown will eventually have on our business. However, we are confident that we are properly managing the variables that can be managed, such as hedging aluminum, natural gas, and foreign exchange. And we also like the fact that our brands continue to gain strength across our markets, continuously improving our competitive position.

Turning to our soft drink business, Coca-Cola FEMSA delivered a solid quarter, where the Mexican operations once more showed improving volume and profitability dynamics, while most operations outside of Mexico again delivered strong results. Total revenues increased 8.6%, and income from operations increased 12.6%.

Full-year figures were very much in line with the fourth quarter with total revenues up 8.1% and operating income 11.7% in real terms. In the key Mexican market, revenues increased 4.4%. Real pricing was up 0.8%, including our fast growing jug water, and grew 1.1% ex-jugs. Brand Coca-Cola continued to drive high-margin growth with volumes up 3.6%.

Better CSD pricing and lower PET resin costs again offset pressure from higher sweetener costs, and operating income grew by 3.7% in Mexico. Operating income generated by our operations outside of Mexico continued to represent a growing share of the total. And for the fourth quarter, it reached 47%, up from 42% in 2006.

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

Turning now to Oxxo, same-store sales maintained a positive trend and grew 5% for the quarter in real terms, reflecting strong traffic growth of 8.6% and a reduction in the average ticket of 3.3%.

It is important to note that the reduction in the average ticket is largely driven by a migration from consumer purchases of cellular prepaid phone cards, for which we book the full sale price as revenue, to the new and fast-growing electronic air-time purchase.

Electronic air-time recharges are done at the Oxxo register, and we only book the amount of our commission as opposed to the full amount of the recharge. The customer can purchase as little as MXN30 worth of minutes. And we're encouraged by the initial customer response to this new concept. For comparative purposes, if we booked the full amount of the electronic recharges, Oxxo's average ticket would have remained flat versus 2006 levels in real terms.

In terms of new store openings, we opened 326 units during the period for a total of 716 net openings in 2007, ten more stores than last year. As a result, revenues increased 15.6% during the quarter.

Gross profit improved 20%, driven once more by the implementation of improved pricing strategies and promotions as well as by a strong performance from high-margin categories, such as coffee and alternative beverages.

Operating expenses again increased slightly below revenues and helped us grow income from operations by 37.2%. As a result, operating margin expanded by 130 basis points to reach 8.2% of revenues.

Full year figures were in line with the quarter as revenues were up 14%, and operating income was up 39%, with operating margin expanding 100 basis points. However, we must note that as Oxxo continues to strengthen its organization and build its infrastructure backbone, growing out the next generation of its point-of-sales solution and improving its replenishment capabilities, the level of spending will increase during 2008.

In terms of our competitive position, 2007 was a great year for Oxxo. We were able to substantially increase our scale and improve our value proposition to our consumers while also improving our profitability. And if we combine our net store additions with some store rationalization on the part of other players in Mexico, it is clear that we consolidated our industry leadership by a meaningful margin.

So Oxxo closed the year with great momentum and continued to execute our strategy ahead of plan across Mexico. Meanwhile, we continue to make progress in our analysis to determine the right geographies and entry models to take Oxxo international. And it is likely that we will be able to establish a beachhead maybe this year.

Summing up and in line with our long-term message, in spite of challenging environments, our integrated beverage platform delivers results while we stick to our strategy, including the strengthening of our brand portfolios and the evolution of our business models, gradually developing the capability to operate multiple beverage categories across multiple markets.

And with that, I would like to open the call for your questions. Operator, please?

Thank you, sir. The question and answer session will begin at this time. (OPERATOR INSTRUCTIONS) We'll take our first question from Reinaldo Santana with Deutsche Bank.

Yes. Good morning, everyone. My question is related to the pricing environment for beer in Mexico. You mentioned that the volume or demand in Mexico has reacted well after the price increases. Could you comment a little bit more on that and if price increases are sticking in the marketplace? And also related to that, do you see room for additional price increases on a selective way in 2008 for the beer side?

Sure, Reinaldo. If you recall at the late of last year, some pricing adjustments started to take place in the Mexican market. And I can say that I would say by the end of January I think we have reached a new level of pricing. And from what we've seen during January and February, we are looking still, as I said, at solid volume growth. We think that has a lot to do with momentum. But also, we recognize that we had a very low comparison base in 2006, when as you recall we had terrible weather. And that has not been the case now this year.

So all in all, we think pricing is there. And of course, it is still very soon to tell if pricing is going to stick at actual levels for the full year because, as I said, we are still not aware -- we have not seen -- not in Coke, not in beer, not in retail -- numbers that tell us that the Mexican economy is suffering some of the effects of the U.S. slowdown in the economy. But we are not sure on that front what the next months is going to happen.

So far, I think pricing is sticking. Volume is still there against, again, a lower comparison base. And I think that, as in any other case, there may be some room for adjustment more in the tactical sense for pricing going forward, doing it by geography or channel or brand package. But all in all, I think that the price increase that the industry took I think is good enough, I think, for full 2008. But of course, if we see an opportunity, we'll go for it.

Okay. Thank you.

Thank you, Reinaldo.

We'll go next to Andrea Teixeira with J.P. Morgan.

Yes. Hello. Good afternoon. Congratulations on the results. I just wondered if you can explore a little bit more on the grain side. I understand that you were expecting, as you were saying, on average was 40% up in 2007. And going forward, I understand that you're doing negotiations with the local producers. And they're looking at around 25%, 30%. If that is still the case and if that is also being offset by your hedges in the aluminum side, so if you're still seeing a benign environment if you do net-net your impact on margins -- in other words, if you're still expecting some margin expansion in the FEMSA Cerveza business in 2008. Thank you.

Sure. First, the pressure on the grain side for 2007 I would say is more between the 25% to 30%, basically in Mexico. That's basically what we've been experiencing. We had good timing in negotiating the barley crops for Brazil at the very early '07 and some of that even at the late '06. So we didn't feel that much of a pressure in '07 in Brazil. But we did in Mexico.

And for '08, we are comfortable with something like maybe 60% to 70% of our needs with an incremental of about 25% for Mexico. But in Brazil, we will be suffering the incremental on the price of grains of two years. So Brazil can easily be double of that. And I would say that in Mexico, again, we have a good hedge in terms of price fix for 60% maybe for the volume. And in Brazil, also that's the case.

In terms of hedging aluminum, it's not going to be able to compensate because of pricing in the marketplace at the time in which we did the hedges, which is substantially lower than the ones we are now in the last couple of weeks looking at in the market. And we are comfortable that we're going to be able to acquire aluminum needs for '08 at a lower price than '07, but not enough to compensate for pressure on grains.

So all in all, we will still be looking at pressure on grains, both in Mexico and in Brazil, substantially higher in Brazil than in Mexico, but with a comparable with having hedged our own needs of aluminum in favorable terms as opposed to '07.

That's great. But then, can you quantify what is your margin pressure now at this point for 2008 if you put all these moving parts together?

The bottom line -- this is Juan -- is that we would expect stable margins, assuming -- let me caveat that -- assuming demand trends similar to what we're seeing now, assuming the pricing or the competitive dynamic continuing to be as rational as it is today. We would feel comfortable talking about perhaps stable margins for the business with maybe an upward bias. But again, things have to happen in a certain way for that to materialize.

Just to recap what Javier mentioned in terms of the barley price, the blend once you put Mexico and Brazil together probably comes somewhere in the low 30s. In terms of our expected growth, I'd say 25% in Mexico and obviously much higher than that in Brazil.

Okay. Okay. But then -- and also if you can comment, Javier or Juan, in terms of the export, you're still looking at double digit growth in exports for 2008?

Yes.

Okay.

Yes. I mean, so far into the year, we're still looking at good numbers, both on shipments and depletions. And as I said, I think that's a little bit a reflection of the momentum of the brands and increased distribution also as we create more brand equity in the brands.

But price should be flat in dollar terms, right?

Excuse me?

Price should be flat in dollar terms, right?

Yes.

Okay.

Yes. I mean, this year, obviously, we are in the double digits. I would say for '08, maybe 10% is the number I would put into a model as opposed to the 13% that we delivered this year. But it's still in double digits.

Okay. Perfect. Thank you so much.

Thank you.

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

Hi. Good afternoon, everybody. And congratulations, Javier. I had a question with respect to depreciation and amortization in the period in Cerveza. Depreciation was down 13.7%. Amortization was down 16%. And I was wondering as to why.

Yes. Amortization has to do with changing the estimate we were doing during the year on the exclusivities. Amortization both and the reduction on depreciation has a lot to do with this year FEMSA Cerveza finalized the study and the implementation of the control procedures in the marketplace that allows us to depreciate refrigeration equipment using the same useful life that Coca-Cola FEMSA implemented last year. So we had a benefit in the fourth quarter because of that.

Okay. Great. Thank you. And then one last question with respect to Oxxo -- what are the latest thoughts among senior management and the board with respect to the possibility of an equity carve-out of Oxxo?

As we've said in the past, my position here would be we cannot rule something like that, I would say for the long term, [out]. But the probability for, I mean, either spending time or thinking about that in the short term is zero. So we're very clear about that. I mean, if you're listening somebody or whatever, I can tell you we're not thinking of doing anything like that for the immediate future.

Okay. And what time horizon is the immediate future? Is that like -- ?

Instead of a time horizon, it has a lot to do with looking at how the whole business evolves and how the retail landscape evolves and what the performance of the business and if we're successful in doing things like international expansion and really creating an unassailable advantage in the Mexican market. So I would say it doesn't really have a time horizon on it. It more brings to the table a number of things that should happen within and outside of FEMSA's reality.

That's very clear, Javier. Thank you very much.

Thank you, Bob.

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

Yes. Hi. First, I just want to follow up on a prior question. You lengthened out the number of years you depreciate refrigerators and amortization of exclusivity? I guess I just wanted to clarify that. And second, I just want to understand the whole restatement is booked into the fourth quarter '07? So if we think about the year, we've got the right level of D&A, but the fourth quarter is understated? Is that the right way to think about it?

That's exactly right, Lore. You should look at the full-year numbers. And the reason why we did this in the fourth quarter had a lot to do with, again, building the internal procedures that would make us confident that we can use an additional year for useful life of this equipment, as was the case in Coca-Cola FEMSA. But looking at the full year will give you a good sense of what '08 should look like.

Okay. I understand the depreciation part. Can you just explain again what the change was on the amortization part?

Yes, it was pretty much using criteria which will now reflect in a much better way the timing of which some of the exclusivities, which are based on volume growth, are amortized.

Okay. Okay. And just in the U.S. -- and I think you mentioned some of this in your opening comments -- we saw the revenue per hectoliter of exports jump up to about $98 from what had been sort of $92, $93, something like that. Can you clarify what pricing actions you took in Tecate -- you mentioned you increased your pricing on the West Coast -- when that was made, and help us understand what drove that kind of pricing?

Yes, I would say that I'm not sure what percentage of that jump is attributable to this. But we are not only not doing pricing in the U.S., but also we have changed the way that we ship some products to Heineken USA in terms of -- some markets in which it does make sense, we're starting to work on a collaborative basis by which we take charge of some part of the freight. So that translates a little bit into pricing. But again now, we incur the freight cost.

So I would say my guess is more like half of the price increase may have to do with that. I may be wrong with the importance of it. It may be a little bit lower than that. And the rest is in not only pricing, but also mix effect. As long as we still see Dos Equis growing between, I would say, three and four times the growth rate of Tecate, which is a lower-price brand, you will see some benefits on that.

And I would say that fourth quarter, because of what you see on our P&L in shipments, you see not only the reflection of the actual growth trends today, but also an anticipation of what we think are the appropriate levels of inventory at the wholesalers going into 2008. So I would say it's a combination of that.

The main message is this jump is not attributable for us increasing the pricing of Tecate in the Western USA by that much.

Okay. And I wonder if I could just ask a question on Brazil. I mean, the way you've described Brazil, it'll be a bit more -- well, a lot more -- challenging on the raw materials front. And I know the industry has also taken some pricing there. I'm not sure you have. Can you talk about -- I know you don't want to get into guidance. But if you think about the investments you'll make in Brazil, are there certain guidelines that you think you will hold yourself accountable to? For instance, will you maintain a goal of being breakeven on the EBITDA level in Brazil in '08? Or is there any kind of guideline like that you can help us think about in terms of gauging the investment you'll make in that market in light of the grains pressure you just talked about?

Sure. Sure. Of course, we are aiming still to keep on being above breakeven terms of EBITDA. That's a clear objective also for '08 as it has been for the last two years. And my comment here would be if you look at our '08 budget and compare that with our initial estimates of where we should be, I would say that you take aside the cost pressure on the grain side, I would say that we're pretty much there.

Of course, the grain pressure is going to be substantial. And I mean, we're talking several million dollars here in terms of that. But all in all, I would say that '08 still should be a year in which we continue to be the volume base very aggressively. And we continue to create the brand equity required so in the future we are able to spend less on the brands once they are in a more stable mood. And of course, that continues to be our long-term objective being the second sustainable player in that market.

Thank you.

Thank you, Lore.

And we'll go next to Tufic Salem with Credit Suisse.

Yes. Good afternoon. Congratulations, again, for the results. In terms of the pricing in the domestic market in Mexico, can you break that out as well, if you can give us a sense of how much of that is actual pricing that took place before the year end and how much rolled over into January? And also how much was mix? And how much was from direct distribution? Just want to get a sense of how much will go into the first quarter of 2008.

And then also if you can speak about Oxxo and if you were to exclude the additional sales from the electronic air time, where would same store sales look like for the fourth quarter?

For the fourth quarter.

Yes, and for the year. I mean, if you--

Yes, let me start backwards. For the fourth quarter, it would be 8% instead of 5%. And the full year, it would be pretty much flat. That's for Oxxo.

In terms of pricing, I would say that in our case you will see, because of the timing of the price effect, something like 80% of the pricing rolling into the first quarter. And maybe our competitor will be higher than that, maybe 90%, 95%. I'm not sure. But the majority of pricing took place very late in December or very early to mid-January. So the majority of the price increase will be there for the fourth quarter for the whole industry.

Just to clarify, the same store sales numbers for the full year would be at similar levels as what you're seeing because the air-time phenomenon is really happening at the tail end of the fourth quarter.

Okay.

We'll take our next question from Elan Gore with Suffolk Capital Management.

Hi. Congratulations on the quarter. You cited some improved operating efficiencies in Cerveza as an offset to the raw materials pressure in Q4. And I was wondering if you can discuss some of the initiatives you put in place, maybe discuss a little bit of further opportunities that you see there. I know there was some discussion in the past about the potential for significant synergies from a consolidation of Cerveza and KOF distribution capacity. And I don't know if you guys have completed some studies of that option. But can you comment on the viability of that option as well? Thank you.

Sure. As we've said, we have focused in the past basically on creating synergies which are more related to either support functions or things that through the leveraging of the scale of the businesses makes a lot of sense, such as global procurement for some categories or shared services center. And those are on a continuous improvement basis. So there are efforts in terms of, for example, shared services increased the scope for some of the functions that are performed for the businesses, and in terms of procurement, the same case.

In terms of the capability to extract synergies from, I would say, activities or processes which are more linked to the businesses, I would say, addressing the marketplace in a combined way, we are limiting those efforts basically to Brazil, as we've shared. And we still continue to make our own analogies in terms of models of entry and timing to some other Latin American markets in which there is some interest.

At the same time, we are capturing benefits both in Brazil and in Mexico utilizing breweries to also bottle CSDs. We do that in Brazil, and we do that also in Mexico, in one brewery in each case. And that's basically pretty much the scope of what we've been looking at, as let's say part of kind of either cost cutting, efficiency-driven kind of initiatives.

There are a number of other initiatives by which the two businesses -- and there I would put also with them together -- in which they're basically working just exchanging best share practices and creating in some cases kind of the best practice for certain processes by which each business is going to benefit from. But we are not talking about anything that deals with combining sales forces or distribution or things like that on the very late part of the value chain. So that's pretty much what we're doing, and that's pretty much what we're not doing.

We'll go next to Alex Robarts with Santander.

Just before, Alex, before you ask your question, just wanted to clarify on Tufic's question a few minutes ago. Tufic, you had also asked about when the price increase had taken place and how much of that was turning into the first quarter. And then you were cut off by the following question. I would say a good two-thirds of the price increase actually took place in January. So the majority of the benefit of that price increase has yet to flow through the P&L.

Hello?

Mr. Robarts?

Yes, Alex, sorry about that. Now go ahead with your question.

No problem. Hi, everybody. Yes, no, I mean, I guess I wanted to -- intrigued to see the growth in Brazil volumes. You note that for the year you've posted above industry growth in Brazil. And where do you think you're sourcing this growth regionally and kind of among your competition?

Yes, regionally, I would say we have been experiencing the fastest growth rates in Northwestern and Northeastern maybe also Brazil, also Sao Paulo. We're still struggling with Rio maybe -- not maybe -- we're still struggling with Rio. And also Southern Brazil, basically, in Parana, the State of Parana, we have been experiencing good solid momentum.

And when you look at, I would say, the footprint of the geography and the strongholds of our players, you very easily find out that we're taking share in Northwestern Brazil. We're doing that (inaudible). But Northeastern or more Central Brazil, we're, I think, taking some growth from the other two players, Schincariol and Petropolis.

So it's a little bit different from region to region. And of course, we are using the whole portfolio to address different segments of consumers basically from the price-point point of view and also from the positioning of the brands point of view. So I think we're competing with the strategy that we have been sharing, which is not trying to increase the size of the below-mainstream portion of the volume we do sell in Brazil. But with the launching of Sol, we're trying to address consumer needs which we don't think are being addressed these days. So it'll be a kind of a mixed picture from one place to another.

We'll go next to Sohail Ahmer with Lusight Research.

Good afternoon. My question was more with regards to Oxxo Stores. You mentioned, I believe, that you had hit some sort of a beachhead this year in terms of opening new stores. If you could talk a little about that and give some sort of an idea in terms of what the new store openings are likely to look at going into the next year.

Sure. When I talked about the beachhead, it was in relation with some analysis. Now that the business has gotten to not only this scale in Mexico but also that we think we have mastered some of the core processes and now be in a position that we think we can replicate those with the proper adjustments and fine tuning to certain market circumstances. And the beachhead has a lot to do with, again, trying to start Oxxo openings outside of Mexico.

We're still in the process of selecting the right market and selecting the right, I would say, value, the right consumer value proposition, adapting the format that has been very successful in Mexico to some different characteristics in different countries. And that's basically what I'm saying. '08 could be the year in which Oxxo again opens I don't know how many stores and I don't know where. But it may be the case. And I just wanted to give you that information.

And the other one, we're still aiming for '08 to grow to open more stores than the ones we opened in '07 or around that number. So if you put something like 700 and something there, I don't think you will miss it by that much.

And just to add to what Javier just said, I mean, in terms of the beachhead, obviously, the likelihood is very high that this would be in a market where we already are present through Coca-Cola FEMSA, obviously leveraging all the people and the knowledge that we have on the ground already.

We'll go next to Lauren Torres with HSBC.

Yes, hi. Industry-wide, there's been a trend or at least a slowdown in Mexican beer exports from Mexico to the U.S. I was just hoping you could talk about this trend. How do you combat it? What are you doing differently versus your competition, and any framework you could put around your intention for marketing investment behind your brands in 2008 in the U.S.?

Sure. I mean, when you have the Mexican industry exports to the U.S. comprised by us and our competitor and our competitor being that large, then the explanation for the Mexican imports to the U.S. really has a lot to do with what the performance of the big guys are.

So I'd rather not talk that much about what's been going on. But I do recognize that '07 was a year of transition. As you recall, we were very happy about our performance in '05 when we transitioned our brands back in those days from Interbrew to Heineken. And we were successful of growing that near 8% if I recall correctly.

So my sense is that the pricing, the transition, the scale that they have reached I think all, I mean, are part at least of the explanation of what happened during '08. What I can tell you is what I just said. I think we have been building strong momentum behind the brands through a combination of a very well targeted incremental spending behind our brands, fostering relationships with wholesalers, using the scale of Heineken USA, and managing the brand portfolio as a true portfolio. And I think that really explains why we have been able to maintain the trends. And that's also why we are still optimistic about our perspectives for '08. So that'll be basically my comments.

And on the last part of your question, as you'll recall, when we signed the ten-year agreement with Heineken, we said this is an agreement that has in place the right mechanisms to align both parties and incentive both parties and commit both parties to create a volume base in an incremental way, in an aggressive way, and also brand equity. So I would say that, yes, we are increasing our investments into 2008, I would say, at a pace which is similar to what we did in '07, of course, the majority of that being brought in by the incremental volume that we are achieving or trying to achieve in '08. So that would be my comment for the second part.

We'll take our next question from Celso Sanchez with Citi.

Hi. Good afternoon. On the beer side and obviously talking about '08, it sounds like a pretty likely year to see some international expansion on the Oxxo side, which is obviously very encouraging. What about potentially beer in other markets than Brazil and Mexico and Latin America, specifically Argentina? Is that something that really one big strategic initiative in the year within the portfolio business is enough? Or is it something that might also be on the table if the situation is right?

Yes, I'll comment on that, Celso. My message here would be that we continue to look in a very close way different models of entry into different markets. Timing is a tricky thing here. I've said in the past that we had been looking in Brazil for maybe three, four years before we had an opportunity to get into the market. And I think it was the right one.

But in the other markets that you mentioned, we just continue to do our own work and looking for different alternatives. And it is very, very hard to me to say when that will happen if it will happen. So the main message will be we think that if we find -- I mean, we're sure that if we find the right model of entry into any of those markets, we will do it if we think that's a value creation avenue that would be good for the company.

Did you have another question, Celso? I mean, basically, this is in terms of the Argentina, Central America additional expansion. But did you have another question?

I think that was it.

Okay. Thank you, Celso. Next?

We'll go next to Carlos Laboy with Credit Suisse.

Yes. Good afternoon. Javier, I was hoping you could expand more into Lauren's question. Are you seeing a slowdown in the U.S. on beer sales to retailers so far? And are you concerned about a slowdown? How does a slowdown in the U.S. concern you or not concern you?

Yes, so far, Carlos, we have been looking, I would say, not the more stable numbers on both shipments and depletions. It is not still that dramatic that tells me there is a significant slowdown. There are still numbers that intrigue us a little bit, but nothing that really scares us. And that's why we're still bullish on maybe achieving a 10% growth rate for the U.S. for '08.

And is it a concern? Yes, it is. Of course, anytime the economic environment is not as benign as you would like it to be, it forces management to make tough decisions on, again, adjusting maybe tactical things that were good to have while the economic environment was there. But now that takes you to a place in which you have to make tough decisions on, again, short-term, long-term perspectives.

So it is an area of concern, yes. It is still, if you look at our business much more important for us to really be consistent among time, grab the opportunities that we are looking today. And the size of the U.S. business when you look at the total overall business of FEMSA Cerveza is still a fraction of it. And of course, we would like it to be huge, not only a fraction. So that would be my comments, Carlos.

Thank you. And just a follow up on Brazil -- are you still looking to grow in Brazil on the beer side via the M&A route? Or are you done with that?

I would say that we are never closed to that route. We are still very, very focused on, again, strengthening our business. And I would say that we will continue to focus on our business. But we will be an observer of dynamics in that regard in the Brazilian market. And we will react to that the way we think it's more convenient.

Go next to Sohail Ahmer with Lusight Research.

Hi, just had a follow-up question. This one was with regards to Coke FEMSA. I noticed that receivables for FY'07 were significantly higher than '06. And these are over and above what the growth in sales was. So I was just wondering what aspect of receivables has increased? What's the reason behind this?

Hector, are you there because part of that has a lot to do with the Jugos del Valle --

Let me explain that, Javier. This is Hector Trevino. The main reason for that increase is, as you have probably heard of through the press, we did the acquisition of Jugos del Valle for a total of basically $470 million, including debt. And we paid half and half together with the Coca-Cola Company.

We have registered as a receivable from the bottler that have confirmed that we participate in this joint venture which is all the bottlers in Mexico. The corresponding part of that -- the end picture is that Coca-Cola FEMSA will end up owning close to 20%, 21% of this new joint venture, the Coca-Cola Company 50%. And the other 30% is what we have registered as receivable. In the end picture of the year of 2007, we did receive some payments from some of the bottlers. But we were still missing, I would say, that early half of the remaining bottlers that not at that time paid their corresponding amount. But that's basically the estimation for the increase in the receivables in year end.

Right. I'm just wondering now that, I mean, in terms of receivable days, it's gone up from 17 last year to about 23 this year. So going forward, what would you consider a stable level of receivable days to be at, say, for FY'08 and then going forward?

Yes, we'll go back to basically the 17 days that you mentioned.

Is that achievable for FY'08, do you think?

For 2008 you mean?

Yes.

Yes, yes, we are basically -- these receivables will come down certainly by the end of March to basically to zero, since most of the bottlers will already -- or 100% of the bottlers in Mexico will participate. The only remaining thing is we still have a small collectable because of the USA bit of the business that is going to be sold to the Coca-Cola Company and the Brazilian participation in Jugos del Valle, which should also be taken care of by the end of March. So next quarter, starting April, we'll have the level again to the same levels that we had before.

And we do have a follow up from Celso Sanchez with Citi.

Yes, hi. In fact, I actually did have a follow up before. Just to clarify the -- and then I have a second question. The follow up from before was to clarify the discussion about Argentina structurally within the management structure of FEMSA. The determinant as to whether or not you go into Argentina would not necessarily be in the expansion plan you have in Oxxo. Is that correct?

Not at all.

Okay.

Very different things, yes.

Thanks. The second question is from the Coke FEMSA call actually I was wondering the Brazil, the Remil closing, I guess I was expecting perhaps those happened already. And I recognize it's very close to being completed. I wonder, though, is there more to it than perhaps just the Remil acquisition? And is this going to be finally the opportunity for the agreement I guess that expired in '04 if I'm not mistaken between the Coca-Cola Company and yourselves to be more comprehensive and more finite or more definite in its length.

Hector, you want to comment on that?

Yes, Juan. No, no, it's basically -- the delay, again, as we explained in the third quarter conference or before that that the Coca-Cola Company asked for closing this transaction at the beginning of the year because of some tax considerations. And we had been working since on some of the documentation of the contingencies that, as you know, in Brazil are very difficult to manage. And we have what we believe is a very reasonable agreement with them. And we are in the documentation of that process now.

Basically, we're understanding that on those contingencies where we -- that have been discovered and that we have not agreed in the price to be deducted -- an amount to be deducted from the price, we are basically -- the Coca-Cola Company's basically staying with the responsibility going forward. And we just have a small skin at the game so that we work together in the same direction now.

But the documentation of that process regarding the contingency work has been delaying the process. But we are probably, I'd say, 30 to 40 days behind in schedule in that respect. And we should be closed in this probably by the end of February or the first two weeks of March.

And just to clarify, though, on the bottling agreement with Coca-Cola Company, as I understood it, that still has not been renewed. Is that correct? And if it is correct, is there any update you can offer us on that as well as any potential acceleration of whether it's investment or product launches that might go along with that?

No, we have an agreement with the Coca-Cola Company that we need to work towards agreeing on this bottling agreement. So we have not signed the bottling agreement in some of the areas where [it's expired]. And we know that we have a pending issue in terms of the two companies agreeing in some of the very few issues that are developing on that. But that is not going to jeopardize anything in our relationship. It's very clear. Both parties have very clear where the issues that we still have pending. And I don't think that there is any problem in the relationship of the two companies. We just have that on the backburner because we have so many things to be working with, launching of (inaudible) and the juice-based products.

Okay. Thank you very much.

Thank you.

We'll go next to Alex Robarts with Santander.

Hi. Thanks. Just my follow up really relates to the guidance. I guess, Juan, you were mentioning the relatively stable beer margin guidance for this year. And I appreciate kind of the caveats of stable demand. The commodities are a question mark. But I guess, kind of just to get the final bit, which was on the beer selling expenses, they've come off nicely in the fourth quarter year on year. Full-year beer selling expenses, we saw obviously growing at several times the inflation rate.

And I'm wondering what kind of guidance you can give us on that selling expense number this year. I understand that there's going to be some incremental spend in the U.S. as far as this new agreement with Heineken USA. It looks like Minas Gerais has got some kind of work to be done in getting the beer assets organized there. And then as you move your kind of excess capacity in Brazil to maybe some of these northern states and such, could that also be a source of selling expenses? So just kind of just maybe a sense of guidance on that selling expense line.

Yes, Alex, I think you should assume in line with revenues, which is something that for maybe eight quarters, if you look at ex-Brazil, the rate of growth of selling expenses have been converging with the rate of growth of revenues. I think for '08, you can assume for the whole FEMSA Cerveza to be in line with revenue growth.

Selling expenses?

Yes.

Okay. Thank you.

Sure.

And if there are no further questions, I would like to turn the conference back to Mr. Astaburuaga for any additional or closing comments.

Yes, thank you very much for your participation, everybody. As you can see, as we go into 2008, we'll build momentum. Certainly, we will face some challenges along the way. But we remain as confident as ever in our long-term strategy and in our ability to execute. Have a good week, everyone. Bye.

Thank you, guys.

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