Fomento Economico Mexicano SAB de CV (FMX) 2008 Q2 法說會逐字稿

Good morning, everyone, and welcome to FEMSA's second-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 questions and answers after the presentation.

During this conference call management may discuss certain forward-looking statements concerning FEMSA's future performance and should be considered as good-faith estimates made by the Company. These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties which can materially impact the Company's actual performance. At this time I will now turn the conference over to Mr. Javier Astaburuaga, FEMSA's CFO.

Thank you. Good morning, everyone. Welcome to FEMSA's second-quarter 2008 earnings conference call. Joining me today are Hector Trevino, Coca-Cola FEMSA CFO, and Juan Fonseca from FEMSA Investor Relations.

In an environment of sustained raw materials and the inflationary pressure across our markets during the second quarter we were again able to grow our consolidated operating income ahead of revenues and coming close to double digits.

On a rolling 12-month basis we have achieved operating leverage every single quarter, which highlights our team's commitment to growth and productivity gains as well as the sustained benefits of our integrated business platform. All of our operations -- soft drinks, beer and OXXO stores -- contributed to our 7.7% topline growth reaching MXN40.6 billion or $3.9 billion for the quarter.

In terms of the macroeconomic environment, even though we continue to see resilient consumer demand, it is increasingly evident that overall growth expectations for the region, and particularly for Mexico, are decreasing. The central bank has reduced its GDP forecast for the year by over 40 percentage points from 3.8% to 2.7% while inflationary pressures continue to build and, as a result, interest rates continue to rise. We will continue closely monitoring the economic evolution as well as the different market dynamics and we will keep adapting our strategies as needed going forward.

In terms of our results for the quarter, we should highlight that FEMSA Cerveza's positive pricing trends in the key Mexican markets, combined with contained administrative expenses, partially offset the continued pressure coming from grain prices and sustained marketing activity. During the quarter Coca-Cola FEMSA closed the acquisition of Remil, the new franchise territory in Brazil that was already consolidated in our June results, and continued to capture the benefits of integrating Jugos del Valle into its platform.

Meanwhile OXXO opened 215 net new stores to reach of 5,851 nationwide, picking up the pace of expansion and delivering strong bottom-line growth for the ninth consecutive quarter. And thus together FEMSA consolidated operating income growth was 9.4% with a slight margin expansion of 20 basis points and new majority income increasing 12%.

I would like to remind you that beginning this year, according to the Mexican FRS; we have discontinued the use of inflation accounting. For comparison purposes the figures for 2007 have been restated in Mexican pesos with purchasing power as of December 31, 2007 and our results for 2008 are in current pesos.

Moving on to our business units in greater detail -- FEMSA Cerveza delivered solid volume growth in the quarter reflecting still resilient consumer demand trends despite price increases implemented at the beginning of the year and, to a lesser extent, some unfavorable weather conditions experienced during June in central Mexico. Beer volume in Mexico increased 2.9% lapping a 3.2% second quarter last year.

In the US our exports grew 4.4% lapping a very strong growth of 27% in the second quarter of 2007, even as the overall economic in general and the beer import category in particular continues to sputter. In fact, according to the Beer Institute, imports fell 3.1% during the first five months of 2008, so we feel pleased with our performance in this key market.

In Brazil our volume performance was back on track and we grew almost 13%, outpacing industry growth for the seventh consecutive quarter. Incremental volumes of our Sol brand contributed a third of our growth in the period. We continue to be in an investment phase in Brazil, allocating significant resources to the development of our brands, and we continue to be encouraged by the results achieved so far.

In terms of Mexico pricing, the price increase rolled out at the end of 2007 and through the first quarter of this year, together with incremental volumes from the state of Chiapas that were brought under our direct distribution early in the year, as well as some mix effect resulted in almost 3% higher average price in real terms. We must note that the second-quarter figures reflect six months of the incremental pricing from Chiapas, so we can expect the effect from this additional volume to be less relevant during the third and fourth quarters.

In Brazil revenue per hectoliter in real terms was stable in local currency and increased 2.3% in Mexican peso terms driven by depreciation of the Brazilian reais against the Mexican peso. Price increases implemented in the first quarter offset some incremental off trade volumes that were shifted from us to the Coke bottling systems in the beginning of the year. And as for exports, revenue per hectoliter in Mexican pesos declined 7.5% reflecting a strong peso during the quarter while the fast growth of lower price (inaudible) resulted in a slight price decrease in dollar terms.

Cost of sales increased 9.0%, well ahead of revenue growth. Higher fixed cost absorption, favorable aluminum hedges, and a strong Brazilian reais supplied to our dollar cost partially offset significant grain price pressure experienced during the quarter resulting in a 4.2% increase in average cost of goods sold per hectoliter. The gross profit increased 5.8% for the quarter; however, gross margin declined by 90 basis points.

Finally, income from operations increased 0.6% to MXN1.7 million in the second quarter. Selling expenses increased 11.5% driven mainly by the increase in our direct distribution volume coming from Chiapas, as I mentioned, as well as by sustained marketing and distribution channel investments.

Isolating the Chiapas effect, selling expenses would have grown more in line with revenues. As was the case in the analysis of the unit price, these figures reflect six months of the Chiapas operations. Conversely, administrative expenses declined 2.3%. As a result of these operating expenses added only 20 basis points to the gross margin interaction with the operating margin decreasing 110 basis points to 15.7% of total revenues.

Wrapping up our remarks on Cerveza, we can say that we again made progress on our main business initiatives. We continued increasing our brand equity and the availability of our products across our main markets while managing to balance our objectives with a challenging environment and delivering a set of numbers that is consistent with our short- and long-term goals.

Turning to our soft drinks business, Coca-Cola FEMSA increased its operating income 8.9% lapping a 10.5% increase in the second quarter of 2007. In spite of some operating disruptions and unfavorable weather conditions in certain markets, this was a tremendous achievement we think.

Cost benefits resulting from lower sweetener prices, mainly in Mexico, and depreciation of the local currencies in the largest markets, combined with operating leverage in most markets resulting in 40 basis points of operating margin improvement to 17.1%. Price increases implemented across the operations in volume growth, mainly driven by our non-carbonated beverage portfolio, resulted in 6.7% growth in revenues to over MXN18.5 billion or $1.8 billion.

In the key Mexican market, as we anticipated in the first quarter, the addition of Jugos del Valle to our portfolio in the traditional channel delivered 60% of our incremental volumes in the quarter, while the majority of the balance came from the growth of brand Coca-Cola.

In Mexico average prices were stable including our fast-growing jug water business and grew 0.8% ex-jugs. Volume growth, stable pricing and some operating leverage resulted in a moderate increase of 1.2% in operating income during the quarter. However, our balanced geographic portfolio continues to deliver results with Latincentro and Mercosur contributing the majority of the operating income growth in the quarter, in particularly pricing in Mercosur combined with tighter expense control and Latincentro and operating improvements across the different markets to achieve these results.

If you were unable to participate in Coca-Cola FEMSA's conference call last Wednesday, you can access a replay of their webcast for additional details on the results. And at OXXO, strong traffic growth for the quarter of 14.3% offset the reduction in the average ticket of 12.2%, this on a non-comparable basis, resulting in a slight improvement 0.3% in same-store sales in the quarter.

As I have indicated in the fourth quarter 2007, the reduction in the average ticket is being driven 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 airtime purchase from 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 in the low single digits during the quarter.

In terms of new store openings, we accelerated the pace adding 215 units during the second quarter for a total of [754] net openings in the last 12 months, slightly ahead of our 2008 target of approximately 730 stores. Revenues increased 11.2% during the quarter reflecting strong growth among most product categories. Gross margin improved 300 basis points, largely driven by the change in the way we book prepaid cellular airtime, as I just described. Helped as well by implementation of improved pricing strategies and promotions and by strong performance from high-margin categories such as coffee and alternative beverages.

Operating expenses increased above revenues due to higher operating costs at the store level, mainly energy and maintenance related, as well as expenses related to the strengthening of OXXO's organizational structure that are being carried out through 2008 as laid out in our plans for the year. Despite the rising operating expenses, OXXO's operating income increased a little bit over 40% contributing half of FEMSA's consolidated growth and expanding its operating margin by 140 basis points to reach 6.5% of revenues.

Once more OXXO made progress on both its strategic and the operational fronts in the quarter. The accelerated store growth and the continued deployment of the processes and the technological enablers that will allow OXXO to take its competitive position to new levels are being achieved while profitability targets are met and sometimes exceeded. OXXO continues to grow as a unique and formidable element of our integrated business platform.

And so, so [many are up] and in line with our long-term message, once again our team was able to make progress along our key business objectives while delivering good results in a challenging environment. And with that I would like to open the call for your questions. Operator, please.

(OPERATOR INSTRUCTIONS). Tufic Salem, Credit Suisse.

Good morning, Javier. My question is regarding price increases in beer in Mexico. If you can -- your competitor mentioned this morning that they are taking price increase up to about potentially 4% as we speak. And I was wondering if you could give us a sense of what you were seeing in the market and also what your strategy is regarding this price increase.

You remember we've said that we started rolling out prices at the end of last year in the first quarter. In the end we were able to pass something like maybe 4.5% price increase at the beginning of the year. And we said that during the rest of the year we will be very attentive to the consumer purchasing power and the economic performance overall to look for opportunities in terms of being able to pass a little bit more of the high cost inflation that we were suffering basically on the grain side to consumers.

And on our part what we have been doing I would say since maybe last month, the month of June, we have been identifying also some market product package kind of presentations in which we feel strong consumer demand still presents us with the possibility of also applying some price increases; we have been doing that consistently for the last, I would say, 45 days.

So far what we've seen is that the market has been able to take those increases. We are trying to manage both dimensions of the business, both the profitability of the business considering the pressure on the cost side and also looking at, again, demand from the consumer base. And that I wouldn't dare to say a total number in terms of what the opportunities for price during the next month or couple of months would end up to be, but what I can ratify is that we are willing to still take advantage of those opportunities in price increases that we see in the market considering the situation we have on the cost side.

3% to 4% to my personal belief seems doable. We will need to take the next maybe month, month and a half to look if this is the case. But we feel confident that the market dynamics and the reasons behind the industry doing this kind up exercises on the pricing front are good reason for being positive about this possibility. So we are basically doing what we've said which is managing the business under the circumstances of the year and we have been taking advantage of some of those windows of opportunity in some markets and we [pretend] to continue doing so.

Thanks. And can you just expand a little bit further, if you can give us more sense of this price increase. How is it different, maybe in terms of regions, packages, from what we saw -- from the price increase we saw at the beginning of the year? Is there anything that strikes you or is there a highlight of this difference?

Any price increase looks very different one from the other both in terms of timing, channel, product brand architecture. And I would say the only comment that I would make is that we think we have gained a lot of knowledge in terms of how to do these things in order to maintain as much as we can at the customer base without any affect.

So we're looking at places in which we feel we have strong brand equity going into the right direction, good strength in terms of our competitive position and managing price gaps against the competitors so we can, again, manage the business both for the long- and for the short-term. So that would be my comment.

Lauren Torres, HSBC.

Good morning. I guess as a follow up to the answer you gave to the previous question, and also hearing Coke FEMSA last week talk about some softness in Mexico, I was just hoping you could be a bit more specific. Over the last month or two what are you seeing with respect to consumer purchasing activity, be it at that your beer business or just looking at the flows at your OXXO store business, are you seeing a slowdown here?

Yes. Let me try to separate this into basically three concepts. One, yes, the month the June and the beginning of July didn't seem as favorable as the performance of the businesses had until May. But still it's I would say too soon to tell to be sure about what's been going on in the last 45, 50 days. There's definitely a weather affect in Central Mexico and also in Southern Mexico because of weather precisely.

The performance of the different geographies still doesn't really tell us a story by which we can attribute the performance to, for example, the price movement we've been making because we have still some very good performance in geographies in which we moved already pricing. And in some others in which we haven't, maybe the volume performance is not as good.

And the overall performance of the economy, I just mentioned that technically we're looking for a second semester in which growth should now adapt to the new circumstances of the economy overall. So I would say that it's still a little bit too soon to tell. As I said, we will be very careful managing pricing opportunities, looking at consumer demand going forward.

And of course if you compare performance in beer from the first to the second quarter -- well, first year, the first quarter grew about 7%, but that had a lot to do with the performance in the first quarter of 2008 and '07 which you'll remember was a very, very difficult quarter for us. So all in all I would say June and July presenting I would say a little bit of a quite different behavior from comparing numbers to May. But still I would say a little bit soon to tell. Nevertheless, of course, second-quarter perspectives being not as strong as the first semester.

(OPERATOR INSTRUCTIONS). Robert Ford, Merrill Lynch.

Good morning, everybody. I had a question with respect to the admin expenses, they're down 3.4%, but part of that is the elimination now of the amortization of ERP. And I was wondering what that number was. And as you move forward to upgrade your systems platform and consolidate your systems platform with Coke FEMSA, when and what kinds of new charges can we expect going forward?

I don't have the precise number here with me and I'm not in the same room as the rest of my colleagues. So if Juan can help me out with the first part of the question, please, Juan, go ahead. And on the second one I would say that the project in which we are trying to upgrade and (inaudible) the platform we'd start to roll out the bulk of expenses I would say into the second part of 2009.

And I would say that the incremental spending would be not material considering the net effect of the finalization of the amortization of the first phase of the ERP and now this second project. And also by the fact that most of the expenses incurred in these kinds of projects are going to be capitalized and then amortized in like a four-year period. So the real affect to the P&L I think would start to flow into the P&L in 2010 and 2011.

Just to understand that correctly -- so when you upgrade finally and the numbers begin to hit the income statement in the second half of '09, the amortization schedule, plus you're sharing the platform over a much larger revenue base, as you share the cost for that platform is it materially lower than the amortization schedule you had for your previous ERP system?

I'm not sure about if it's going to be substantially lower. What I can share with you is that we don't think it's going to be a substantial impact as it starts to go through the P&L on an amortization basis for the next four years starting in late 2009, early 2010, depending on the time and rollout the project starts to kick in.

And our next question --.

Let me just finish up on the previous question, Jennifer. Bob, on the amount of the ERP that was being amortized, we had talked in the past about something like a $20 million per year number. And so it was about MXN50 million per quarter. So very consistent with what we said before.

Alan Alanis, JPMorgan.

Good morning. Two quick questions, the first one has to do with beer in Mexico and the second one has to do with beer in Brazil. Beer in Mexico, we continue to see very solid growth of OXXO and that is very good. Could you tell us how much beer is being sold right now through OXXO and what's happening with the other channels where FEMSA Cerveza is selling their beer?

Because this morning Modelo reported and we continue to see similar trends of growth between Modelo and FEMSA; however, FEMSA has OXXO growing so fast. So I wonder what's happening with the other channels, mom and pops, on premise. Any color that you can give us to understand better would be very, very valuable?

And the second question regarding Brazil, it's a clarification. You mentioned that prices in reais were stable. However, when we use the exchange rate that you provide in the press release we see a 12% price decline from the second quarter of '07 to the second quarter of '08. So I was just wondering what explains that decline in prices and beer in Brazil. Thank you.

Juan, I will ask you to help me with the second part of the question. In terms of Mexico, if I recall correctly OXXO should account for something like 12%, a little bit in excess of 12% of the beer that FEMSA Cerveza in Mexico sells. And you're right; in the quarter Modelo basically just informed a growth for the quarter which is basically pretty much in line with our growth for the quarter also.

If you look at the accumulated figures up to June that's a different story. In a quarter-by-quarter basis this is, I would say, a difficult thing to measure because competitive dynamics and volume performance throughout the regions having to play with very different market share positions in the country make it very, very hard to really have a good read on a quarter-by-quarter basis.

We tend to look at this more on the last 12 months rolling or at least up to June kind of figures. And looking at those we feel pretty comfortable about making progress pretty much in line with our short-, medium-term objectives of growing slightly above the industry in the Mexican market. And of course, just keeping in mind that a lot of the OXXO growth is not necessarily connected in a direct way with a market share gain because a number of stores are pretty much open in places in which we have dominant positions.

Once we put all considerations together we still feel pretty comfortable that we're making progress in -- again in our short- and medium-term strategy of outgrowing the industry. And Juan, if you can help me out with the Brazil question, please.

Sure, Javier. Alan, in terms of the price per hectoliter in reais, we have 101 for both the years, 101 reais per hectoliter. So that's why we refer to it as stable, basically the exact same price second quarter '07 versus second quarter of '08. So what we can do is maybe off-line go over with you in terms of the exchange rate and whatever glitches there may be in either our model or yours. But definitely the price in local currency is the same levels as last year.

Carlos Laboy, Credit Suisse.

Good morning. Javier, how is your strategic thinking or how are your strategic imperatives different today from what they were maybe a quarter ago given all the changes we've seen in the global beer landscape? Specifically on a number of areas -- four, five areas. One is on share buyback, if you can give us an update on what the Board's thinking is on share buybacks.

Two, on your Brazilian beer exposure; you've managed that business for profitability rather than for major market share moves. Do you see a need to reset your objectives of market share footprint in Brazil? Three, M&A maybe of Coke bottlers. And four, of accelerated integration of beer and soft drinks.

On the share buyback, I would say we're basically where we were last time we discussed it. We still think that's the best way to create value for shareholders for the long term. At this point and juncture of time share buybacks is not something that we're thinking to do. We would like to remain with flexibility within the balance sheet and managing the business, still on growing as much as we can organically.

And connecting that with the M&A question again, we think that we have a number of opportunities that, again, we would like to keep fostering relationships and trying things and I think in the last year the Remil and Jugos del Valle businesses you put together, it really basically presented a very good opportunity for FEMSA to allocate a little bit in excess of $500 million in very good investments we think for the future. So share buybacks is not an option as we speak, but it's always a thing that we keep looking at and that we will be willing to do if we think that the more convenient use of resources for shareholders for the long-term.

In terms of the Brazilian beer exposure, I think maybe we have not been conveying this message in the right way, but I want to convey the message saying that we are managing Brazil in terms of looking at a short-term profitability [threshold] to be achieved. I think within management discussions, everything is centered around what is good for the business and at what pace it is reasonable for us to continue taking cost out of the system, managing our business agenda in terms of developing the right portfolio and working in a very collaborative environment with our bottler network, distribution partners of Coca-Cola in that market.

And if we had in the past conveyed the message that we were looking for let's say EBITDA breakeven last year and this year, let me tell you, as a matter of fact, because of the slow start of the year and because of the price commodity pressure that we're suffering in that market in 2008, and because our very strong commitment for basically, as I said, being the second viable player consistently for the future in the Brazilian market, this year we may be off that target which in the end was the result of the strategies that we thought were good for the beer business in Brazil for 2008.

So if market conditions for the first quarter and commodity pressures arise in the first quarter also for the Brazilian business, we are not saying, well, we had a financial metric to be pursued in 2008 and we're going to do crazy things there in Brazil for 2008. So we're taking advantage of or as much opportunity that we see in the Brazilian market. And I think that if you look at our performance, basically growing 15% and 13% the last couple of years and now this quarter again, being up there at the 13% level, we are as aggressive as we can be in terms of managing the development of our business in Brazil.

But at the same time, we are not -- I would say not doing what we think is reasonable in terms of spending behind the brands. We could spend maybe double what we're spending in the brands and -- but I don't think the result will be twice as good as we are looking today. So we are giving the brands what we think is good for them in the proper timeframe and that's the way we're basically managing our beer business in Brazil.

And in terms of accelerated integration, we have also conveyed the message in the past, and I don't think this has changed a lot in the last three months as you started your question with. We are doing a lot of efforts. When we talk about integrated models in Mexico, we have learned that we have a number of opportunities on different levels of integration and that the two businesses, Coca-Cola FEMSA and FEMSA Cerveza, continue to work very, very closely in a number of efforts.

And not only between the beverage businesses in OXXO, we are very, very successful also in bringing OXXO much more closer to both beverage businesses to, on one side, work on a more and more efficient basis on both order taking and delivery products from Coca-Cola and Cerveza to OXXO, but also at the same time we're -- and we shared this is the past -- we're taking advantage of consumer knowledge we are gaining in OXXO to precisely fine-tune our commercial propositions to consumers in OXXO on our most important product lines which are soft drinks and beer.

So I would say that with my comments I hope I covered the four basic dimensions of your question, Carlos. And I would be happy to expand later on this with you also.

Lor Serra, Morgan Stanley.

Good morning. Just a couple quick follow-ups in beer. I'm not sure I fully understood your opening comments about the Chiapas direct distributor. Were you implying that some of the revenue and costs for the full six months were in the second-quarter numbers?

You're exactly right. We used to be minority shareholders on the Chiapas with a very influencing family in the Chiapas state together with another partner. And we acquired the majority of the shares of that operation, which on a normal basis Chiapas would represent something like 2.5% of the total volume of our business. And we consolidated into the second quarter of the year the full six months because of some mechanics of the transaction.

So even though it's only 2.5% of the volume we, in the quarter, basically included the effect of the six months. So on the quarter that 2.5 would be more like in the 4.5% to 5% because of the seasonality. But going for what my comment was, the effect going forward would be more in line with the 2.5 number that I just mentioned.

Jose Yordan, Deutsche Bank.

Good morning. My two main questions were answered, but maybe a follow-up as well on Brazil. Clearly your market share over the past year in Brazil according to Nielsen has gone down, but it has clearly come up. And I was just interested in your -- maybe in your internal studies as to what your market share has done over that time and who have you sourced the market share gains from? Is it all AmBev or is it the other two guys as well? Any color you could give us here would be helpful.

As you just mentioned, Nielsen shows -- I mean numbers which makes us hard to believe that could be right because of the growth rates we have been experiencing and sharing with you guys. So we think it has a lot to do with the way these guys take their samples both in terms of geographies and channels and that would be my comment relating to the Nielsen numbers.

In terms to where do we think we're making most of the progress, I would say that instead of looking at a competitor base, we think that we're doing good progress basically Northeastern, Northwestern and Central Brazil. We think that if you look at the growth rates which are published by the only player that really publishes reports we may be taking some share, I would say small percentage or tens of percentage points from the leader in the market. And we still think that the bulk of it is coming from the second and fourth player in the Brazilian market, that is [King Cariola] and (inaudible).

And we think that this is being done in the right way which is managing pricing in a very reasonable way, but expanding distribution for our brands, working together with the Coca-Cola bottlers in terms of doing this work. And also at the same time restructuring the portfolio and, as I just mentioned, a bulk of the volume is coming from the Sol brand which is good in terms of the structure of the portfolio we're trying to build in Brazil. So that would be my answer.

(OPERATOR INSTRUCTIONS). Alex Robarts, Santander.

Thanks. Just still on beer, thinking about your guidance and I guess it's currently for the year in '08 it's flat EBIT margin. And looking at 2Q and, as you said earlier in the call, with the growth expectations decreasing here in the second half in Mexico, how confident are you about achieving this guidance, assuming that you're sticking with the guidance of flat EBIT margin growth or flat EBIT margin this year? I mean, how do we think about this price increase vis-a-vis the guidance.

I wanted to clarify -- or as clarification as well regarding Chiapas, could you give us a sense of what was organic Mexican beer volume growth without that affecting the quarter if that's possible? And then the final thing is just our research suggests that last week -- you've made a solicitation I guess to register some of your Brazilian beer brands in Peru, I guess Kaiser and Bavaria Summer Draft. Is that correct and what's attracting you to Peru? Is this an export concept? Is it a local -- do you plan to actually brew the brands in the country? Thanks.

The first part of the question I would say that we are still confident that we can manage on the second half of the year the business in such a way that we will be able at the end to maintain margin as opposed to '07. Of course the degree of uncertainty, I would say it's a little bit higher because, again, the question remains of how strong consumer demand is going to remain on an environment in which economic growth is coming down.

But at the same time we feel confident that, again with the right level of leverage on pricing for the next couple of months together with adequate measures in terms of promotional activity in order to support that price increase, we'll get there. Of course, the comments I just made in terms of the pricing opportunities and how, I would say, confident we feel that we will be able to implement some of those in order to pass along to consumers some of the commodity pressure on the cost basis we're suffering.

I think we feel comfortable because of the main reason we've been sharing in previous conference calls which is we still feel that our brand equity numbers are moving in the right direction. So whatever is feasible to do in the marketplace in terms of pricing power for consumers not hurting a lot their purchasing power, we don't feel we're going to be left behind. We may be a little bit ahead or at least up there at the same base that our competitor is moving prices.

Maybe in a very different way in terms of geographies and packaging and channels, but all in all we don't think we will need to really move pricing in a substantial different way than the competitors -- that our (inaudible) competitors in Mexico are doing. As a matter of fact, we feel as in the past both in '07 and now in '08 that we are basically leading the industry in terms of signaling the way ahead in terms of inherent price movement.

And the second part of your question, I don't think Peru is the exception in terms of having some markets in looking for some opportunities. I wouldn't really sign out to those as very important ones. I will tell you that the thing we do you should very much focus on what we're doing in our three core main markets -- Brazil, US imports and Mexico. So that I would say is a much more tactical thing than anything else, Alex.

Alex, this is Juan. I'd just like to touch on another part of your question in terms of the Chiapas effect. There are implications for price, because when we consolidate this we get the margin. So the price per hectoliter is impacted and there are implications on the selling expenses because also we now have to assume those as are own. But there are no implications for volume. In other words, the 2.9% number that you saw includes Chiapas. It includes all of the territories whether they're under our direct distribution or through third parties. So like I said, this has no implication for volume, all of the growth is organic in Mexico.

Celso Sanchez, Citigroup.

Just a question on the Brazilian beer situation. We've heard a lot of noise in the market the last several weeks about the potential for tax increases and formulation still seem to be pretty unclear. I don't know if you have any update on that at all. The only understanding I think we have is that January 1st is when they'll be implemented, but in terms of how it might impact your portfolio. And then the second thing is the (inaudible). Are you seeing any impact so far in July as a result of the changes in these drinking and driving laws?

On the first one, there's nothing really new. I would say that of course the industry presenting its case to the authorities and, again, the wide range of platitude that the authorities have to decide in the next months how to implement the new structure of taxes, I don't think we will be expecting something quite radical. I think we have a good number of arguments and rationale of why that wouldn't be good for the industry and the country as a whole.

So even though we would assume that there may be some affect on both our businesses, beer and soft drinks, we are at least confident so far that we will be able to present our case in order for the effects not being as radical as some people may think. But there's nothing new, just the fact that we're very close trying to present our case to basically the authorities down there in Brazil.

The second part of the question -- so far it's very, very, I mean, hard to -- from the overall numbers and looking at the channel performance, look at a clear trend. We think that in the next six months we may have a much more precise impression if this is having some affect and of what magnitude. But so far it is very hard to say still.

Thank you.

Lor Serra, Morgan Stanley.

Just quickly, on the outlook -- two questions, same theme. When we look at the beer results in the second quarter should we have the view that most of the raw materials pressures that you've spoken about, are they fully reflected in the 2Q or will they get more intense as you get into the second half? And then if you could just tell us looking out to 2009 any preliminary thoughts on the raw material outlook in your various businesses for '09 versus '08? Thanks.

I would say that most of the price pressures on commodities for '08 are already reflected in the growth rate of the beer business, at least in Mexico, a little bit differently in Brazil. There may be some additional pressures on the fourth quarter, basically Mexico because of the way we buy barley. But that wouldn't say something which should be substantially different than the effect that we've had until the second quarter.

In 2009 we still are looking at big pressure on grains which in our case is a little bit hard to hedge against. Nevertheless, we will find some indirect way in order to hedge using maybe some other grain prices in order to be able to do something there. We still see some pressures on aluminum going forward, maybe not as huge as the ones we suffered until '06/'07, not this year but the last couple of years. And we have hedged I would say maybe a little bit in excess of 50% of our needs into '09 of our aluminum needs.

And Juan, I don't know if you want to help me with the rest of the question in terms of soft drinks or the factories around -- also he can share some of his comments on Coca-Cola.

I would leave Hector just to elaborate a little bit on the sweetener side in terms of Coke FEMSA because that has been the big story, the fact that we have gotten kind of a break on the sweetener side. Hector?

Good morning. What we were commenting last week on this front is that our expectation is that sweeteners related to corn, basically high fructose corn syrup, we expect some pressure on that. And at the same time we are expecting some reductions in the prices of sugar, cane sugar.

And with respect to [BD], what we mentioned is that it's really hard to set a target for that because of the volatility that we are seeing on the oil prices. Given the last two weeks on the oil prices we might expect some reductions on that front. But the general sense is that we will still have some pressure on BD for the second half of the year.

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

Thank you very much for your participation and have a good week, everyone. Bye now.

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