Fomento Economico Mexicano SAB de CV (FMX) 2008 Q1 法說會逐字稿

Good morning, everyone, and welcome to FEMSA's First Quarter 2008 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's expectations and are based upon current available data. Actual results are subject to future events and uncertainties, which can materially impact the Company's actual performance.

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

Good morning, everyone. Welcome to FEMSA's first quarter 2008 earnings conference call. Joining me today is Juan Fonseca and Genaro Estrada, both of whom you know well.

Our strong performance for the first quarter was driven by double-digit growth in all our business units. FEMSA Cerveza's operating results were driven by solid volume trends, stable pricing dynamics in the key Mexican markets and contained operating expenses, combined with an easy comparison base from first quarter '07.

Coca-Cola FEMSA continued its positive momentum across its divisions, with Mexico accounting for half of the incremental revenues and more than a third of the incremental profits during the quarter. And, finally, Oxxo continued delivering strong growth in almost every key market after citing a strong first quarter 2007.

Altogether, FEMSA consolidated revenues grew 8%, operating income growth approached 20%, and net majority income increased [13]%. I would like to remind everyone that beginning this quarter, according to Mexican FRS, we have discontinued the use of inflation accounting with the exception of Argentina, Venezuela, Costa Rica, and Nicaragua.

For comparison purposes, the figures for 2007 have been restated in Mexican pesos with purchasing power as of December 31st, 2007, and our results for 2008 are in current pesos. Moving on to our business units, FEMSA Cerveza delivered a solid quarter, reflecting resilient consumer demand trends, a favorable comparison base, a generally mild winter in Mexico and improved pricing dynamics versus the first quarter of 2007.

Beer volume in Mexico increased 7.1% and our exports delivered strong growth for nearly 13% against a backdrop of a softening U.S. economy and a declining imported beer category. In Brazil, the year was off to a slow start, but picked up during March, growing 2.9% for the quarter. Cool weather and the fact that the Easter holiday took place early, unusually close to the Christmas season, impacted volume growth across beverage categories in that market.

However, our Sol brand again drove the majority of our incremental volume, continuing on the right track with the rest of the brands also performing well. In terms of Mexico pricing, we were allowed a broad price increase at the end of '07 and through the first quarter, representing approximately 4.5% on average. Unit price in Mexico increased by 1.2% in the quarter, on top of a 1% increase achieved in the first quarter of last year, when the rest of the industry lost significant pricing.

In Brazil, revenue per hectoliter decreased 3% as price increases were implemented late in the quarter and the sales of some incremental off-trade volumes was shifted from us to the Coke bottling system. As for exports, revenue per hectoliter in Mexican pesos declined 4.5% as a strong peso more than offset unit price growth of 0.9% in dollar terms.

This growth was driven by a positive mix effect in the U.S. as higher-priced Dos Equis contributed approximately a third of our incremental sales in that key market. Other income from operations increased 6.4%, reflecting an improvement in packaging sales, as well as the first portion of the distribution of rights payment received from Heineken USA in relation with our new 10-year agreement.

Cost of sales increased 6.4%, in line with volumes. Increased prices for grains were offset by [varied] fixed-cost absorption, a strong Brazilian real as applied to our dollar cost, our aluminum hedges and lower costs associated with glass bottles as compared to last year, when we have one furnace down for maintenance and therefore had to buy larger amounts of our bottle requirements from third parties.

Gross profit increased [72%] for the quarter and gross margin improved by 10 basis points. Income from operations for beer increased 35.7% to MXN673 million in the first quarter. Selling expenses were stable as a percentage of total revenues, while operating expenses declined, driven by lower administrative expenses, mainly.

Higher amortization was largely driven by higher volumes and the amortization of expenses related to our direct retail distribution. And operating margin expanded by 160 basis points, to reach 7.4% of total revenues.

Summing up the quarter for FEMSA Cerveza, in spite of the adverse raw material environment and the slowdown of the U.S. economy, our continuing efforts to strengthen our competitive position and our brand equity across our portfolio and across our markets are helping us deliver results in a challenging environment.

Turning to our soft drink business, Coca-Cola FEMSA delivered another quarter of double-digit growth at the EBIT level, lapping a high comparison base. Cost benefits resulting from lower sweetener prices, mainly in Mexico, combined with operating leverage driven by a strong top-line resulted in 15.7% EBIT growth and an expansion of 130 basis points in the operating margin.

Brand Coca-Cola accounted for more than two-thirds of our incremental volumes. The top line was driven by an increase in average prices across all three divisions during the quarter. In the key Mexican market, beginning in February, we started distributing Jugos del Valle in the traditional channels and so far we are very pleased with the results. The Jugos del Valle portfolio contributed 25% of our incremental volumes with better pricing than the rest of the portfolio.

In Mexico, average prices were up 1.8%, including our fast-growing jug water and grew 2.1% ex jugs. Volume growth with price improvements, combined with lower raw material costs and stable operating expenses resulted in an 11% operating income increase in the quarter.

Our balanced geographic portfolio continues to deliver incremental profits, coming from all three divisions. Mexico accounted for approximately 40%, while Latin Central and Mercosur each contributed approximately 30%.

If you were unable to participate in Coca-Cola FEMSA's conference call on Friday, you can access a replay of their webcast for additional details on the results. Finally, at Oxxo, same-store sales maintained a positive trend and grew 5% for the quarter, reflecting strong traffic growth of 14.5% and a reduction in the average ticket of 8.2%.

As we anticipated in the fourth quarter of 2007, the reduction in the average ticket is being driven mainly by a migration from consumer purchases of prepaid cellular phone cards, for which we book the full sale price as revenue to the new electronic card time purchase, for which we only book the amount of our commission, as opposed to the full amount of the recharge.

For comparability purposes, if we booked the full amount of the electronic recharges, Oxxo's average ticket would have grown more in line with past quarters' performance. That is, in the low single digits.

In terms of new store openings, we opened 73 units during the period for a total of 698 net openings in the last 12 months, and we are confident that we will close the year with more than 700 net new stores in Mexico.

Revenues increased 16.4% during the quarter, reflecting strong growth among all product categories. Gross margin improved 100 basis points, driven in part by the change in the way we book prepaid cellular airtime, as I just described, as well as by the implementation of improved pricing strategies and promotions and by a strong performance from high-margin categories, such as coffee and alternative beverages.

Operating expenses increased slightly above revenues due to higher operating costs at the store level, mainly energy and maintenance related, as well as the initial expenses related to the strengthening of Oxxo's organizational infrastructure that will be carried out through the year. Operating margin expanded by 60 basis points, to reach 3.5% of revenues.

Summing it up and in line with our long-term message, we begin the year with conviction that our integrated beverage platform once again will deliver results in a year that is expected to be a challenging one. And, with that, I would like to open the call for your questions. Operator, please?

(OPERATOR INSTRUCTIONS). We'll take our first question from Lauren Torres with HSBC.

Good morning. Beer volume in Mexico increased just over 7% in the quarter. Can you give us a sense of how much of this growth came from healthy demand, rather than favorable weather and the Easter shift? I'm just trying to get a sense of consumer sentiment right now in Mexico.

It is very hard to put specific numbers on that, but just by looking at the performance of the beer business in '07 and the relative numbers for the whole industry, our sense is that definitely the quarter was helped a lot by the easy comparisons of '07. But, at the same time, we were cautious at the end of last year, since the industry started taking price and also the concerns of any effect on the slowdown of the U.S. economy, and I would say that in both fronts we feel comfortable so far.

We think that the way the pricing increase was executed, taking care with the price increase on the most price-sensitive SKUs and also taking into account the strength of our brands in the different regions, we feel that the consumer has been accepting very well the price increase. Nevertheless, again, the terrible weather last year now was very different and we have a very mild winter, so we are definitely seeing some of the volumes that we were able to sell on the first quarter being driven by that weather effect.

So I wouldn't dare to put a specific number on that. We are confident that, looking at the rest of the year, we will also be able to have a good performance for the industry as a whole and we have reiterated that we think that volumes in the industry should perform at least slightly above GDP growth for the whole country, once we implemented a price increase which is slightly ahead of inflation.

So, all in all, whether this year is good news as opposed to last year, which was bad, but we will have to continue looking at the performance in the coming months, Lauren.

Is your pricing so far, though, all in place, or there's more to go with respect to pricing this year?

The pricing that we took, it's pretty much what we think is good for the whole year, but we will continue to monitor all aspects of the business, competitive dynamics, raw material pressures, acceptance of consumer for the price increase we just put in place. So, as any time, we will look for more tactical opportunities going forward, but I would say that the big one is already in place.

All right, thank you.

Thank you.

And we have a question from Andrea Teixeira with JPMorgan.

Hi, good morning, everyone. Congratulations on the results. I just want -- my one question would be regarding the amortization, you commented on the FEMSA Cerveza results that you had a positive impact of reducing the amortization of the ERP system, but at the same time the amortization goes up one year after the other. So can you just comment how we can reconcile that and how much of an impact that had in the gross margin? And, if you can, elaborate also on the grain impact. I would appreciate it. Thank you.

Sure. Yes, first off, as we've informed in past quarters, we basically ended the amortization of the ERP and the increase in the amortization for the quarter, which is slightly above the I would say more stable level, which would be maybe 6% to 6.5% of revenues now that being slightly above 7%, a part of it has a lot to do with the mix of volumes and the high growth of volumes we had for the quarter because, as you know, some of the contracts we have with some retailers, we amortized a component of the help or support we give to some retailers, driven by volume. So as volumes grows, also that line starts to grow.

And, also, some of it has to do with the kind of support, special support we give in terms of fixed support to some retailers, the ones which are more collaborative to FEMSA Cerveza's strategy. And the thing with grains, the question regarding grains, we have stated in the past that we have been, as anyone in the industry has, been looking at severe, high prices, increases all across the board, and we have stated that we feel comfortable with levels within Mexico of around 25% to 30% and in Brazil something slightly above 50%. And we think that as the year progresses, we will be able to manage, I would say, slightly above those levels and maybe 3%, 5%, 6% above the numbers I just mentioned.

We are not concerned, looking at the perspectives of supply in terms of having problems with supply. We have guaranteed supply for basically all our needs for the rest of the year and we are already working, also, longer term into 2009 and 2010 in some geographies. But, so far, if the perspective on grains has changed, it has changed a little bit to the negative in the last couple of months, but still nothing that changes in a dramatic way the numbers we've been sharing with you in the past, Andrea.

Okay, and regarding Brazil, we saw on that increasing prices and then I believe you guys also followed and volumes were very timid and I believe also it's going to happen with AmBev. Can you comment on if the other -- you see like the competitive environment getting better if the other brewers are also increasing prices, following pricing, after the summer? Or if you're going to take additional pricing in Brazil, given that your cost pressure is even higher?

We've increased prices late in the quarter in Brazil and, again, it's a little bit too early to tell if consumer acceptance is there. As I said, Brazil was due to a low start for the year and a number of reasons for that. So I think it's going to take at least a couple of months to really have a good read on what happened on the first quarter in terms of the different elements that put pressure on volumes.

But most of the price increase that we were thinking of taking in the industry, I think we've done that in the late first quarter, but as in Mexico we will continue to monitor any opportunity that we may have. And in respect to the pricing dynamics on the rest of the competitors, I mean, competition is as intense as ever, but I think that we are so far looking at kind of a rational behavior of the other competitors also in terms of trying to compensate on the pricing lever partially, at least, some of the pressures that everybody is experiencing, at least on the grain side.

Okay, thank you very much.

Thank you.

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

Hey, good morning, everybody. Javier, I just wanted to get you to kind of expand on that amortization question. My understanding is that increasingly you've been moving some of the amortization of exclusives into selling expenses to provide more support with the [training]. And to see the big increase was kind of surprising.

What's the specific number in terms of the amortization of ERP in both periods? And, am I correct in my understanding that you are providing additional selling support, which you expense, and there is a component which is capitalized? I'm curious, what other marketing expenses are also capitalized?

Hi, Bob. This is Juan. On the amortization thing, you're right, we have been shifting, as more of these points of sale are being opened and we have talked about how rent actually is playing a bigger role, because in many of these cases we are paying the rent for these outlets, and that obviously flows through the income statement in real time.

But, at the same time, it's the incremental that has been affected, but there are a lot of points of sale with whom we have more conventional agreements. And, to Javier's point, the amortization component of let's say the upfront discounts that are given and then are amortized over an average life of three years is that continues to be a big part of the way that we interact with the trade that sells our brands on an exclusive basis, in some cases.

So I think this quarter, it shows a little bit of a jump, but you shouldn't expect this to be a new level of amortization, I think is the main message. We can follow-up up I think offline, if you want, in terms of exact numbers for any one of these on past quarters, but generally the message is this is not a new level. It has to do with a volume peak, it has to do with the fact that a lot of these relationships are still based on the let's say more traditional agreements, and that's pretty much it.

Yes, and as I said, Bob, also, depending on how the mix of not only volume geographically and SKU, but also in terms of the performance of the retailers -- and of course we have been more successful, as I have stated in the past, in order to align interests with some of those retailers of volume growth in those challenges are higher than in the rest.

But if you look at amortization as a percentage of revenues and if you look at, I would say, a couple of years, or three years, 8% levels. And then as the ERP amortization finalized we went down to something like 6.5%, maybe, the quarter is slightly above that. It's a little bit above 7%, but, as Juan is saying, this is not like this is going to start to pick up going forward in a significant way. I would tell you that within the year, I would say that we will go back maybe to the 6.5% to 7%, tops, percentage once the year progresses.

Okay, that's helpful. And then I'll look forward to getting a [little bit] of detail offline. Thank you.

Absolutely.

And we'll take our next question from Reinaldo Santana, with Deutsche Bank.

Yes, good morning, Javier and everyone. My question relates to your comment when you talked about the selling expenses at Oxxo that is partly related to the strengthening of Oxxo's organizational structure. If you could expand a little bit more on this initiative, and also if you could comment on the magnitude of the price increase that you implemented in Brazil late in the quarter. Thank you.

Yes, Reinaldo, how are you? We have also shared this idea in the past in terms of Oxxo having a lot of projects in the pipeline not only for '08, but also for '09, and we have described some of those. One, which is going to demand some incremental headcount, has a lot to do with developing the capabilities and the competencies at the region and [plaza] city level in terms of the replenishment capabilities. We are in the middle of rolling out an IT solution, combined with new processes, in order to streamline replenishment capabilities all across the supply chain.

So that is a project that will demand a number of people working head to head with the central office and the city plaza level guys in order to precisely build that infrastructure and those capabilities. That's a good example of what do we mean by saying that we're going to strengthen the organization and bring more people into the Company.

Another big initiative also, which is now in the still phase of development and going into the testing, is the new point of solution infrastructure, the new IT solution for what's going out at the store level. And that is going to be a new generation solution and it also will require by the end of the year to have onboard a lot of people knowledgeable about the solution and with the right training in order to implement the solution in a speedy way into 2009.

So those are only two examples of what we mean by strengthening Oxxo's organization and why we're doing that? We're basically doing that because we think that we need to continue to reinforce the very basic backbone of the business in terms of IT, technology infrastructure and capabilities of the whole organization. And I will ask Juan to comment on the Brazil piece.

Hey, Reinaldo. On the pricing in Brazil, as you know, we basically are price takers or price followers in Brazil. We follow very closely the activities of the industry leader and then we adjust based on that.

In this case, we perhaps took a little bit longer in terms of getting a read first of what it is that they were doing. Obviously, in some cases, they moved one of their leading brands, but not the other, or not both, and we have to determine our price gaps, what they are and what they should be, vis-a-vis both of these brands.

But I think you can generally assume that it's inflation, basically, that we've taken, that we have now moved late in the quarter and that we're basically going to be following the trends of the industry leader.

Thank you.

(OPERATOR INSTRUCTIONS). We'll go next to Tufic Salem with Credit Suisse.

Yes, good morning, everyone. Congratulations on the results. I wanted to ask about Brazil, if you can give us a better sense on how to read this volume. I understand it may be a little bit too early to get a sense of what's going on with the volume performance, but I wanted to get a sense whether, when we look at the KOF numbers and when we look at these overall numbers for FEMSA, if you can comment a little bit on how we should read this and also if you're seeing in April a significant change of what you saw in the first quarter to try to get a better sense of what's going on in the industry.

And, finally, if you can just follow-up on the comment of the additional expenses at Oxxo, if you see this as reinforcing the infrastructure development that's going to take more people, is that more expenses on a one-time basis for this year, or is that just more people on an ongoing basis?

Sure, Tufic. First, on Brazil, as I said on the opening remarks, it's still a little bit of, I would say, too little time to tell because of things which are making numbers not pretty much comparable. Weather had an impact, the timing of the Carnival had an impact. Price increase of the industry was deployed in a different way.

We're looking at the phenomena in Brazil which tells us that consumers are having now, I would say, more options to, for example, buy durable goods, as opposed to immediate-consumption consumer goods. We are cautious still to make a statement there in terms of if immediate-consumption consumer goods are being hit by that or not. Definitely, the quarter had numbers which were below our original estimates and that's very clear and I'm sure not only for us but for everybody down there.

And what I think, it's still a little bit too early to tell, because, again, it is very, very tricky trying to put numbers on consumption of people because of timing issues on Carnival or on weather. So I think we will need to wait a little bit more going into the next two to three months to say if there is something going on down there different to what we are just describing.

But as you are pointing out right, there is kind of a slowdown on volumes, at least for the main categories of beverages in Brazil for the first quarter, and hopefully we are going to look at that rebounding in the next months.

In terms of the additional expenses for Oxxo, these are projects -- what I've been describing is basically projects which are aimed, as I said, to reinforce the capabilities and the infrastructure both in process and in IT solutions for the business. These are not projects which are defined and programmed to take place on a one-year basis. These are basically projects that go all the way from 24 to 36 months from conception to really deploying it over the close to 600 stores in Mexico.

So we tend to look at them as incremental for the next couple of years and we're going to build a base during the rest of the year and I will hope to maintain maybe that level into 2009. And then I don't have really a visibility to say if this is going to be a slope which we will be coming down in 2010. And that will depend a lot on the amounts of projects that we would like to put out there. Given the confidence that, of course, we are very, very comfortable with value added and in terms of the value generation or creation that these projects are going to have for the business for the long term, we wouldn't be doing that if we didn't think that way.

So it's not like a one year and that's it, it's more like a two to two and a half on basically the two projects I just described, plus another two or three which are not as big and that would be my comments on that, Tufic.

Okay, thank you. And is there any way you can give us a sense of what the performance of beer was between the KOF territories and the rest of the system?

The split in Brazil that we tend to look at is not that. We follow that, but we look more in terms of competitive dynamics. We like to look at the business compared with what's going on in the beer industry in Brazil, so we may have some one or two territories of Coca-Cola FEMSA which are performing better or worse.

I can say that there is not a significant performance which can be explained by we being the distributors at KOF or having some of another friend bottlers doing the job. It's much more driven by competitive dynamics, the strength of our brands, and things like that

We'll take our next question from Carlos Laboy, Credit Suisse.

Good morning, Javier.

Hi, Carlos.

Javier, your operators are doing a great job of creating shareholder value. My question is, how are you and the Board of Directors evolving your thinking about the other levers that create shareholder value. What are the merits, for example, why a very aggressive share buyback program that would obviously be beneficial to the voting trust members, as well as shareholders? Why wouldn't that be more aggressively pursued?

Yes, sure, Carlos. We have gone to the shareholders meeting -- I don't recall for how many years -- just to get authorization and to be ready to execute share buybacks programs if we thought it was convenient for the Company for the time being, and we have concluded that this has not been the case.

And if you look at the Company at some point in time, and I will use 2002 maybe as a good example in which the Company basically did not have any debt on the balance sheet, but, all in all, in the next 12 months we've basically got something like 4 billion in debt because of the acquisition of Panamco and the 30% buyback of the beer assets.

So today we are basically at one time net debt to EBITDA, which is, I would say, conservative, but still not so inefficient that they [will tell] us that because of financial structure considerations it will be a good idea. We have been having a revaluation, I think, of the share and that is very good news, I think, for all shareholders, because of the performance of the business and some of that rerating we tend to believe because of more people understanding the special story of FEMSA, being a different company.

And, for the time being, what we have also, as in the past, just assured, is that we have some flexibility to execute share buybacks, if that is the case that we think would be more in line with creating shareholder value for the long term. And that has a lot to do with potential opportunities that we keep on looking from time to time and that we try to develop and foster. And, of course, we do not have the capability to say if some of those opportunities are going to materialize, and when. So we will have to, again, keep some of that flexibility, even though in the short term some people can think that we should be doing something else.

Believe me, we are taking into consideration things like share buybacks as a way to create shareholder value, but, again, we are much more focused on having the financial flexibility to address market opportunities that we may have in terms of acquisitions going forward. So this is kind of a moving target. What I can reiterate to you, as we have said in the past to most of our shareholders, is that we are we are not a Company which will go into a highly inefficient financial structure for the medium term.

If we find ourselves in a situation in which we cannot find good value opportunities for the long term and we are getting into territories in which the financial structure of the Company gets to a highly inefficient point, of course share buybacks is an alternative. There are some other alternatives, special dividends, or whatever. So that will be my comment, Carlos.

Javier, when you look at InBev, for example, trading up, what, 15% in two days after announcing a more aggressive buyback, or, this quarter, Anheuser-Busch getting all its EPS growth from share buybacks, or even Modelo now talking about share buybacks, I mean, it seems -- or all the food companies in the U.S., for that matter. It just seems that it's a very aggressive theme and a way of adding shareholder value and you're staying away from that. Does it worry that you may need to look at this a lot more closely?

No. I mean, I respect a lot what other people are doing and you're putting in the same basket, I think, companies which I would say have varied and quite significant differences in terms of managing shareholder value creation and using financial levers to do so. I couldn't think of a more diverse universe of people as the one you just mentioned.

But what I'm concerned, really, Carlos, is again to have a good read on the probabilities to be able to allocate capital in shareholder value creation opportunities for the business. That has a lot to do with acquisition. That has a lot to do with using the financial structure of the business to have a good cost of capital and to return value to the shareholders. And if you look at the whole history of FEMSA, at least in the past 10 years, I think, or more recently, in the past three to four, I think that we have found a good balance in doing so.

Our challenge going forward is to keep in mind I would say the concerns that you are expressing and, at the same time, putting them and facing them with the opportunities that we have still to make this a bigger and more profitable Company. So we're very carefully looking at what everybody is doing, but still we're playing our own game here.

Thank you, Javier.

Thank you, Carlos.

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

Good morning. Yes, I wanted to go back to the beer company. One clarification, you mentioned in the opening comments and I think I might have missed it, that there were some Heineken payments in the other revenue. Can you just confirm that and tell us what they were and whether they'll be recurring in 2008?

Yes, Lore, yes. The payment that we have got from the 10-year commercial agreement, which has a couple of payments all along those years, we will be reflecting those on a quarter-by-quarter basis, so the amount that we have reflected in the first quarter will also continue to flow on the second, third and fourth and then it will lap going into 2009.

I'm sorry, in 2009 it ends?

We still get it, except you won't see the incremental, right? It's smoothed over the five years and then there's another payment equivalent, so basically you can assume that for the next 10 years that will be in place, except you will only see it make a big difference this year during the four quarters. The exact amount is something that we haven't really disclosed, Lore.

Okay, understood. And in terms of the raw materials pressure that you've described in Brazil and Mexico, how much of that is in the first quarter numbers and how much of that is yet to be seen into the second, third, fourth quarters?

Maybe half of that has already been seen in the first quarter. That's the best guess I can have on the top of my mind, Lore.

Okay, so then the other question I have, and my last question, is we saw higher pricing for your competitor domestically this quarter. And, sometimes, one quarter can have wrong trends if there are mix differences, et cetera. But it was a pretty big difference, so I'm wondering if you intentionally took a price increase below your competition, and, if so, would you sort of tap it up? I mean, some of it I guess may be timing, because maybe you did it a bit later than them, but if my math is right, they did 8.5 and you did 5. That's a pretty good gap. Can you give us your perspective on that?

I mean, the price increases we took on average and we monitored markets in order to make these statements, is pretty much similar to the competitor. It's bigger in some cases and it's smaller in some others because of competitive dynamics. But the numbers on the quarter tend to be radically different for the two companies, as they were in first quarter '07, in which our competitor's pricing took a severe dip of around 4% and we grew 1%.

So if you see those comparisons, taking those numbers out of the first quarter and going into second quarter, my guess, because of what we're looking at the market, both performance and -- I mean, the performance of both companies in terms of the price, front line, is going to be very, very similar.

Okay, so what you're saying is there are some differences in terms of the comparison to first quarter, but, as you see it, both you and Modelo have put through something like 5%, and that's what we should see going forward?

That's exactly what we're saying, yes.

Okay, thank you.

And we'll take our next question from Alex Robarts with Santander.

Hi, everybody. Just back to the beer assets. One of the trends here is obviously Brazil pricing and you've made it clear that you are a taker and have lagged some of the AmBev movements, but I guess it was the other piece that I was interested in, which is the sale of the off-trade volumes going to the Coke system. Can you give us some color behind that, please?

Sure, sure. We're still two years after acquiring the business, and this is something very similar to our experience when we bought the Coca-Cola FEMSA franchise in 2003, we're still doing some, I would say, fine-tuning on both pricing architecture and the go-to-market footprint. And the explanation on the price change is due to change of sales coming from us, going to bottlers, has a lot to do with changes that we're still implementing in terms of how to serve better the [modern trade].

So, in some cases, we have been serving directly and, that is, Kaiser has been serving directly some chains in some geographies, basically on the modern trade. And, as time has been progressing and we have been creating products, also, how to better serve those customers, we have been transferring some of that volume and now to be taken care of directly by the bottlers, as opposed to by Kaiser.

And that creates the effect of now having a lower price per hectoliter, but, again, now we're not incurring some of the expenses that we used to in order to serve those customers. So that's basically the explanation behind the comment of the volume change, Alex.

And do you feel like you're at the end of the process, or perhaps in the middle? I mean, do we take this as kind of maybe there's going to be a slight downward shift in the selling prices?

No, we're basically in the last stages of it. I mean, we started as we took the business with very, very small actions there and we have taken in the last couple of years, but again, in this first quarter we took some decisions that I would say not ended the process, but we are in the final stages of that. I would say in the next couple of quarters, maybe, we'll be ending that strategy, Alex.

Thank you, and just to understand what I assume will be an interesting, let's say, rollout or new push into Minas Gerais, as you have the infrastructure set up with Coke FEMSA in that state, have we seen some of the spend related to a Kaiser, Sol push there? Will there be one, or will it just kind of be something that you'll go to and handle on kind of on a rolling basis?

You're saying in terms of will Remil represent an increase in selling behind the brand? Is that?

Well, I mean, perhaps specifically, will we see some spend associated with that whole territory and the brand rollout? That's right.

No, I think the levels of spending behind the brand in Brazil, as you know, have been high for a number of quarters. We are very consciously deploying a good chunk of resources to both of our brands -- well, to the whole portfolio, but obviously Kaiser representing still a big part of the volume and, of course, Sol being the flagship to be. The levels of spending are high, but there's really no special amount that is being allocated to Minas Gerais.

We do have high expectations for that territory this year in terms of bringing it into our own hands, but, no, you [shouldn't see] any change in the trend of SG&A in Brazil because of that.

Yes, we have not held back any dollars or reals of investment in Minas Gerais because this was not our operations. On the other hand, because of the incorporation of Remil, we're sure that because of the focus that we're going to have on that business in the short term, even though we're going to have to make a lot of adaptations and changes to reflect Coca-Cola FEMSA's best practices and to capture the obvious synergies that exist in the territory, just because of the focus that we're going to have on the territory because of this, we're confident that we may have some short-term boost of performance on volumes, but not due to the fact that we're going to put more dollars in terms of marketing or distribution capabilities on things like that.

Great, and just the very last thing is the admin expenses, sorry, in the beer assets, noticing that 5% drop year on year, interested by that and maybe could you give us some color behind that?

Well, we talked about the ERP system, amortization being done and just general efficiencies. I mean, the idea, Alex, is to continue to spend behind the brands, but we need to fund that with efficiencies in different parts of the value chain and the admin is one place where we're being able to get some of that.

And some of that also, Alex is we talked about that last year being a very tough year because of pricing, raw material and competitive dynamics and the results of beer were not the ones that we at the beginning of the year imagined. So some of the efficiency programs that the beer business put in place last year, some of that is rolling into 2008 just because of the timing of circumstances on when those efficiency programs were put in place.

As additional ones are also put in place, that is basically -- some of the reduction in admin has a lot to do with streamlining parts of the organization at the beer business during '07 and now in '08.

So you think these levels as a percentage of sales might be the more indicative going forward in beer?

The levels, if you look at absolute terms, you may be looking at -- there are some expenses which have something to do with seasonality also, but definitely the trend of the expense would be coming down or at least growing significantly less than the volume or revenue line.

Okay, thank you.

Thank you.

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

Good morning, everyone. A quick question on Oxxo. You had been sort of guiding to -- despite the fact that margins have been rising over the past year 100 basis points or so, you had been guiding to maybe half of that for 2008, and I was just wondering if that was consistent with what you were telling us, if that already reflected the expectation of these additional projects and so forth? Or do these projects we're talking about this morning lead you to be even more cautious on the expansion of margins for Oxxo?

And then just a follow-up question on barley. You had been guiding up your expectations for barley costs at the same time that wheat prices are sort of tumbling down, and if you could just reconcile that for me, that would be great.

Sure. Sure. On Oxxo, the answer is definitely yes, Jose. We're again factoring in in our comments not only the effect of incremental spending because of the strengthening of the organization and we're also explaining the effects on margin, so changing the way we register the new airtime, electronic airtime, for phone cards. It's also we are looking still at very robust performance indicators at Oxxo, so we're continuing with our guidance of margin expansion at a fraction of past years, and we think that we can still deliver incremental margin for Oxxo in '08, even though we're going to put a lot of money behind some of these projects that I just described.

And in terms of barley, at least for '08 and as the year progresses, of course, we will have much more certainty about the specific numbers, but by the way we negotiate prices, we feel pretty comfortable about the guidance that we've been sharing. Also, we tend to have at least in Mexico a couple of times at which we can secure the pricing and of course the supply also.

So we feel pretty comfortable that the agreements that we have gotten, even though we're going to suffer a very, very high price increase on this very important raw materials, we are now coming to a time. And I would say that the end of the second quarter will let the rest of the story to be for sure, 100% sure, that what the price increase effect is going to be in terms of the size of it.

So we feel that the guidance that we've been providing to you is the one that we're going to be reflecting in the income statement for the future months.

Okay, thanks a lot.

Thank you.

We'll take our next question from Celso Sanchez from Citigroup.

Hi, good morning. I just wanted to ask a little bit about the traffic growth at Oxxo and help us understand a little bit that better. Obviously, there was a big divergence in traffic and ticket. You helped us with an explanation on the ticket side, but in traffic can you give us a sense for how much --?

Yes, again, some of the effects that we've been looking and we're sure of that, Celso, just because of looking at the statistic of how many transactions we do to sell some products and what's the mix of those products, we're definitely sure that some of that traffic is being driven by now the ability of consumers to buy as less as 30% in electronic airtime as opposed in the past of having to buy -- not 30%, MXN30, but as opposed to the fact that in the past consumers had to buy at least MXN100 phone card.

So we are looking at a phenomenon in which people are coming more frequently to the store, but they're acquiring, at least when they buy time for their cellular, they're buying less in terms of the amount that they're now buying, because of now having the availability of a MXN30 transaction. So some of the traffic has been driven by that definitely.

And we'll take our next question from Sohel Amir with Lucite Research.

Could you talk a little bit about CapEx for FY '08 and the first quarter of '08? Also, if you could go into where you see most of this CapEx being implemented and what percentage of it is maintenance and what is exactly expansion?

Yes, the first quarter for CapEx was at least, basically, always a slow start. We invested, if I recall correctly, something like $150 million for the quarter and we have shared that we have a program for something like $1.2 billion for the year. We think -- I'm not sure that we're going to be able to exercise all of it. I'm sure that we're going to be able to exercise the majority of it.

Basically, all the projects that have been put into the CapEx for the year are projects which we feel very comfortable at exercising, but there may be some things during the year that would make us to defer some of those, or in some other cases to anticipate some of those. So the whole idea would be to exercise those, taking into account specific conditions through the year.

And that is the way the projects are being deployed and the timing of the currency exchange situation and negotiation with suppliers of machinery and equipment, which is huge. And so I would say that our intention for the year would be to exercise, if not all, most of the CapEx programs that we put in place.

And the number that I've just been told here is $180 million for the quarter, which is a fraction only of $1.2 billion, but, again, first quarter being all of the times the slowest one.

Right. Could you also go into where do you see most of this CapEx being implemented? And I'm trying to get a sense of what your level of operating leverage is and at what point would you need to implement expansion CapEx?

A number of these numbers, if you look at, I would say, with the actual size of the Company, the more stable number for CapEx would be maybe in the $900 million. If you look at the incremental spending or investing in CapEx, a lot of that has to do with capacity expansion.

And I'm not only speaking because of the new factory -- I mean, the new brewery and the new glass factory in Chihuahua, that we are just starting to invest as we speak, but also we have capacity expansion programs in Coca-Cola FEMSA, in Jugos del Valle, in also some of the distribution in Mexico, so I would say that a good chunk of the CapEx for 2008 is pretty much destined to either break bottlenecks at some of our existing facilities or to build brand-new breweries and glass factories as the one we just announced on the fourth quarter of 2007.

Great, thank you very much.

Thank you.

And it appears there are no further questions. At this time, I'd like to turn the call over to Mr. Astaburuaga.

Well, thank you very much. As you can see, we had a strong start in 2008 and we're hard at work and we're confident that the combination of the strategy and business model, executed with excellence across our very dynamic markets will allow us to deliver in this challenging environment and well into the future. Thank you very much, again, and have a good week, everyone.

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 pass code 3892624. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.