Fomento Economico Mexicano SAB de CV (FMX) 2008 Q4 法說會逐字稿

Good morning, everyone, and welcome to FEMSA's Fourth 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 Javier Astaburuaga, FEMSA's CFO. Please go ahead, Javier.

Thank you. Good morning, everyone, and welcome to FEMSA's Fourth Quarter and Full-Year 2008 Earnings Conference Call. Joining me today are Alfredo Fernandez and Juan Fonseca, both of whom you know well.

As you all know, 2008 was a challenging year across geographies and industries and as we anticipated back in October in our previous quarterly conference call, the second half of the year turned out to be different from what we experienced in the first half.

Consumer activity across our markets softened and the data coming from our three businesses during the fourth quarter, while not completely uniform, increasingly pointed to a deteriorating consumer environment. That, obviously, has made us cautious about 2009.

In Mexico, GDP growth expectations were revised downward by the central bank as the year unfolded. The fourth quarter, GDP growth came in at minus 1.6%, and for the year, it came in at 1.3% versus the original expectation of 3.7%. For its part, inflation also crept above 6% for the year, furthering pressuring consumers' purchasing power.

However, in spite of the challenging and volatile economic environment, FEMSA again managed to deliver solid results. Our consolidated operating income grew in the double digits for the quarter and for the year. These results reflect our ability to achieve good results even in difficult times, driven by the benefits of our integrated beverage platform, together with our continuous improvement efforts at every stage of the value chain. For the quarter and the year, double-digit operating income growth at FEMSA Comercio and Coca-Cola FEMSA more than compensated for a decline at FEMSA Cerveza.

In terms of business highlights for the quarter, Coca-Cola FEMSA's integration of Remil and Jugos del Valle have so far exceeded our expectations and has made Coca-Cola FEMSA the largest producer of still beverages in the region. Meanwhile, FEMSA Comercio opened 286 net new stores across Mexico, to reach 6,374 stores, while once again delivering strong earnings growth.

For its part, the competitive environment in the beer industry in Mexico continued to be rational through the holiday season, allowing us to partially mitigate the pressure of general and specific industry inflation on our costs through healthy pricing, which also positions us well on that front as we start the new year.

Consolidated operating income grew 15% for the fourth quarter and for the full year, marking a solid operational performance for our Company. However, below the operating line, our net majority income fell significantly for the quarter, 78%, mainly reflecting non-cash charges caused by deprecation of the US dollar against our local currencies, as applied to our liability position, as well as a mark-to-market valuation of certain financial instruments.

Let me spend some time on this. As you saw in our press release for the quarter, we recorded a loss of MXN3.2 billion below the operating line, of which MXN1.3 billion are recorded on the financial instruments line. Most of the time, the derivatives we use meet the accounting criteria that allow us to account for them as hedges, such as aluminum forwards that eventually flow through the income statement as part of the cost of goods sold.

However, some instruments do not meet the accounting criteria to be considered hedges and in those cases, we must mark them to market or the effect of their unwinding on a separate line of the income statement. For example, if we contract debt in pesos and then buy dollar forwards to convert that peso liability into a dollar liability, the gains and losses generated go on that line. So, the way to look at this is basically that [over] percent of the losses below the operating line are really foreign exchange losses, but they show up on two different lines in the quarter.

On the balance sheet front, our position remains quite strong. As of December 31st, 2008, our net debt-to-EBITDA coverage ratio was 1.1 times and our interest coverage ratio was 7.3 times. Approximately 77% of our total debt was denominated in local currency, mainly Mexican pesos, and approximately 55% of our debt carried a fixed interest rate. As of today, as you may know from Coca-Cola FEMSA's press release and conference call yesterday, they already have in their cash balance most of the dollars needed to repay their dollar maturities for 2009.

Finally, before moving on to our business units, let me remind you that beginning in 2008, according to Mexican FRS, we discontinued the use of inflation accounting. So 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.

Let me first comment on the results at FEMSA Cerveza. Softening consumer trends across markets were partially compensated by healthy pricing in Mexico and Brazil. In terms of volumes, we faced tough comparisons versus the fourth quarter of 2007 across our markets. During the quarter, in Mexico, we saw a small contraction of 0.7%, while volumes in Brazil decreased 3.5%, representing price increases we rolled out ahead of the industry and, to a lesser extent, to poor weather in key territories. However, in our exports, we continued to buck the global trend and grew our volumes by a strong 12.3%.

In terms of pricing, in Mexico, price per hectoliter grew 10% in nominal terms, of which approximately one-third is explained by volume brought into direct distribution and mix effects, with the remaining two-thirds reflecting actual price increases slightly above yearly inflation taken in the marketplace.

In Brazil, pricing in local currency was up almost 6%, as we selectively increased prices ahead of the industry. In the US, pricing in dollars has decreased slightly, driven by package mix, but in pesos, we saw an increase of 16.7%. All in all, total revenue increased 8.6% for the quarter.

On the cost side, raw materials pressure continued. Cost of sales increased 13.5%, again, ahead of this 8.6% revenue growth. Cost per hectoliter increased a little bit over 14%, reflecting significant grain pressure experienced across our brewing operations, combined with higher aluminum prices and the depreciation of the Mexican peso against the dollar as applied to our dollar denominated costs.

The impact of the depreciation was mitigated by dollar forwards we contracted at attractive levels for a significant portion of our dollar requirements. Gross profit increased, nevertheless, 4.6% for the quarter. Other gross margin contracted by 200 basis points.

Here, I would like to elaborate on the subject of our hedging policy a little bit. As we have mentioned before, we view hedging as a way to reduce volatility from our cost structure and to mitigate external risks to the extent possible. As such, we contracted raw material hedges, mainly aluminum, before commodities tumbled late last year and, therefore, we will benefit only marginally from the lower price environment in 2009 and partially in 2010.

On the flipside and consistent with our policy, we contracted dollar forwards at attractive levels, as I just mentioned, in order to mitigate the foreign exchange risk of our dollarized input, and this is providing us with some relief today. Along the same principle, the vast majority of our long-term debt is denominated in pesos, in line with our risk management policies. We intend to continue managing our risks going forward in a manner consistent with our policies.

Now, coming back to our results, income from operations at FEMSA Cerveza decreased 9.3% to MXN1.4 billion in the fourth quarter. Selling expenses increased 15.8% versus 2007 in nominal terms, representing 31% of revenues, pretty much in line with recent trends. Once we strip out inflation out of the 15% growth in nominal terms, the increase is explained by a high level of marketing activity, split more or less evenly between Mexico and the United States in this quarter, with the other pressure from the depreciation of the peso on the US component.

As was the case in the second and third quarters, we also had some distribution channel investments, as well as incremental expenses related to volume taken over from third-party distributors, mainly in the state of Chapas. As we stand today, our direct distribution stands at 91% of our Mexican volumes.

Here, I would like to mention that the combination of distribution improvements achieved in Mexico in recent years, the higher leverage we are beginning to realize from larger volume bases both in Brazil and the US, and the very significant rationalization efforts that are being put in place across the business should result in a change in the growth trend of selling expenses that becomes evident as 2009 unfolds.

For their part, administrative expenses declined 6% in the fourth quarter. As a result, operating expenses added 50 basis points to the gross margin contraction, with the operating margin decreasing 250 basis points to 12.7% of total revenues for the quarter.

Turning to our soft drink business, Coca-Cola FEMSA delivered almost 34% growth at the operating income level, lapping a 12.6% increase in the fourth quarter of 2007 and reaching almost 20% growth for the year. This robust growth was driven by price increase implemented across markets, together with incremental organic volumes and the integration of Jugos del Valle and Remil. Operating leverage in most markets more than offset raw material pressure coming from PET and sugar prices and from the depreciation of the Mexican peso against most of our local currencies.

Higher average prices in Mercosur and Latincentro, combined with volume growth driven by brand Coca-Cola and our noncarbonated beverage portfolio, together with moderate growth in Mexico, resulted in strong 24% growth in revenues and almost 20% for the year to close to MXN83 billion in 2008.

Through Jugos del Valle, we have strengthened our still beverage portfolio with a number of products and formulas aimed at different consumption locations and this category more than doubled its size during the quarter, but still accounts for a very small piece of the business, just around 4%.

And for its part, our newly acquired Remil operations helped brand Coca-Cola grow more than 7% in the quarter, contributing approximately 60% of incremental volumes. In Mexico, average prices excluding the fast-growing jug water business improved 1.7%, in spite of incremental soft drink volumes in multi-serve presentations.

Volume growth, stable pricing and tightly controlled operating expenses more than offset cost pressures, driven mainly by higher concentrate prices and the depreciation of the Mexican peso as applied to our US dollar denominated costs, resulting in a 0.5% operating income margin improvement in the quarter. If you were unable to participate in Coca-Cola FEMSA's conference call yesterday, you can access a replay of their Webcast for additional details on the results.

At FEMSA Comercio, finally, strong profit growth more than offset the reduction in the average ticket of 10.7%, resulting in slightly better same store sales than the fourth quarter of 2007. As was the case throughout 2008, the average ticket was impacted 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 purchases, for which we only book the amount of our commission as opposed to the full amount of the recharge.

Therefore, average ticket figures are not comparable to 2007 figures, but they will become comparable during the first quarter of 2009 as we have lapped the full rollout of this new service last December and as physical prepaid cards continue to decline in the mix of airtime sales.

For comparability purposes, if we booked the full amount of the electronic recharges, average ticket would have grown in the high single digits during the quarter. As traffic and ticket figures become fully comparable in the coming months, the performance of our same store sales will revert to a normalized trend.

In terms of new store openings, we exceeded our objective for the year, with 811 net openings, and this number is well ahead of our initial expectation of a little bit over 750 stores for the year. Revenues increased 11% during the quarter, reflecting our ongoing store expansion, as well as increased foot traffic to the store.

Gross margin improved 410 basis points, largely driven by the change in the way we book prepaid cellular airtime, as I just described, as well as by a strong performance from high margin categories, such as fast food and coffee and, to a lesser extent, by better commercial agreements with our suppliers.

Sequentially, operating expenses increased slightly above the previous quarter, reflecting the accelerated number of store openings and higher operating costs at the store level, mainly energy, as well as to expenses related to the strengthening of FEMSA Comercio's organizational structure in line with our plans for 2008.

Despite the rising operating expenses, operating income increased 27% in the quarter and more than 30% for the full year, for the seventh consecutive year. In the quarter, Comercio expanded its operating margin by 110 basis points to reach 9.3% of revenues, the highest ever achieved in our retail operation.

Let me now take a moment to reflect on the current environment and perhaps offer some thoughts on the year ahead. As macroeconomic conditions took an accelerated turn for the worse back in September and October, most notably evidenced for us by the sustained weakness of the Mexican peso and by the rapidly eroding growth estimates for the economies where we operate, decisions were made to implement major costs, expenses and investment revisions across FEMSA.

Even though our products are very defensive in nature and we expect to be less affected by the downturn than many other industries, we are not immune. And so, careful not to jeopardize the long-term strategy, every manager at every level of our organization is adjusted for lean times ahead.

Clearly, the fourth quarter results do not capture even the earliest effects of the measures being taken. The adjustments were begun through the fourth quarter, but are being carried out now, and will continue to be carried out as the year progresses. We expect the aggregate effect of these adjustments to provide some relief to our 2009 results.

However, the environment continues to deteriorate. After hanging in there for a long time, manufacturing data in Mexico is showing clear signs of deceleration. Construction continues to slow down as expected, and therefore, real GDP forecasts for 2009 have quickly shifted from flattish to ranges of minus 1% to minus 2%, while the Mexican peso has continued to weaken.

Such volatility in our key forecast variable prevents us from providing any granular expectations for our performance in 2009. But we can share with you some broad directional considerations. We're assuming a moderate contraction in demand across our products and markets, partially offset by pricing activity, with exception of the US.

We're expecting a reduction in our capital expenditures of approximately 30% in dollar terms, bringing the levels below those of 2007, and we are already engaged in a broad and profound exercise of cost and expense reduction at every level of our organization.

Having said all that, we are convinced that our operations today enjoy a stronger competitive position in more markets than ever before. We have a better understanding of consumer behavior, as well as time tested tools for use in difficult times such as this that allow us to micro-segment the market base on particular consumer needs.

We also have a management team that is committed to driving efficiencies across our organization, adjusting our spending levels in a manner consistent with the evolution of our markets, and maximizing the return on every dollar spent. And all these give us the conviction that we will emerge from these difficult times stronger than ever and more competitive than we are now.

And with that, I would like to open the call for your questions. Please, operator.

Thank you, Javier. The question-and-answer session will begin at this time. (Operator Instructions)

Our first question comes from Antonio Gonzalez with Credit Suisse.

Okay, good morning. I would like to ask you a couple of questions, if I may. First, with respect to the hedging losses, we saw already MXN2.3 billion in hedging losses in yesterday's results from KOF regarding the debt denominated in dollars. However, the additional MXN1 billion loss that you recorded, I would like to see if you could give us some color on where is it coming from, if it's not from the aluminum hedges, and if you could give us some guidance as to how the FX losses will be looking like during the first quarters of this year.

And then, secondly, with respect to the selling expenses in FEMSA Cerveza, are you planning to increase, in particular, your marketing expenses budget for '09 in the US? And how could the potential savings at the selling expenses line in terms of Cerveza could be -- could there be any -- could you give us some color on the split of those savings?

Sure, sure, Antonio. First, as I said in the opening remarks, if you look at the P&L in FEMSA, we're showing a foreign exchange loss of MXN1.9 billion and basically, that is the foreign exchange loss on the dollar denominated liability position, both financially and operationally. And what I said is that out of the MXN1.3 billion that we're showing in the unhedged derivative instrument loss, 80% of that MXN1.3 billion is basically foreign exchange loss.

The way it works here in terms of the accounting principles that we have to follow is that, for example, if we have contracted peso denominated debt and we bought cross-currency swaps to convert that peso denominated debt into dollars, the foreign exchange effect on that dollar liability position needs to be reflected in this unhedged derivative instrument loss, not in the foreign exchange loss. That's an accounting treatment, but in reality, that is a foreign exchange loss. That's the way we should look at it.

The rest of the amounts that are in the unhedged derivative instrument loss line in the P&L of FEMSA are as a result of hedges which, because again of accounting criteria, we cannot account in the traditional hedge way, that is, going through the asset that it was originally hedged and then flowing through the P&L in the future. But we have to reflect them in the quarter that it takes place, because it doesn't fulfill the accounting requirements to do it any other way.

So, I hope I'm being clear on this. But again, the simple way to look at it is just taking close to MXN900 million out of the MXN1.3 billion unhedged derivative instrument loss line in the P&L and put that as part of the foreign exchange loss.

The most important thing on that line, once you take out what is a foreign exchange loss, is basically a hedge that was done on the wheat as a reference for the barley program purchased here in Mexico, that, again, because of accounting treatment, we need to reflect in the P&L as opposed to bringing it to the cost of sale as inventory is bought and consumed.

And on the other part, on the other question, we are in 2009 still increasing accordingly to our commercial agreement with Heineken USA our marketing investment in the US, and we are very confident that those dollars are working very, very well in terms of the growth profile that we have been having in the last two to three years with the Heineken relationship, and that we will continue.

On the rest, on the territories, we think we're going to have the possibility to rationalize marketing investments as well as selling expenses, both from the operational point of view, as well as from the commercial point of view, that is, terms and conditions that we manage with groups of retailers, and as well as from the marketing point of view.

Once we have come to a point in which we have provided good amounts of funds to the main strategies of the Company towards Tecate Light, just recently Indio, and the super premium category, we feel confident that we will have some room there to maneuver and rationalize a little bit marketing dollars. So, that's kind of our going position for 2009.

Okay, thanks. So, regarding the FX losses -- sorry. Just other than the losses related to the US dollar denominated debt, should there be more losses related to the hedging strategies in the first half of this year?

On the first half of this year, we basically didn't have anything, because --

No, sorry. The first half of 2009, sorry.

Oh, for 2009, what we can expect is basically an effect again of the foreign exchange depending on how the peso ends up being at the 31st of March. That would be basically the numbers that we will be looking at.

Okay, thanks.

Thank you.

We'll now move on to our next question from Robert Ford with Bank of America.

Hey. Good day, everybody. Bob Ford from Bank of America/Merrill Lynch. Javier, if you could just help us out and maybe walk us through the volume decline in Brazil, some of the brand health indicators that you're seeing there, and then perhaps, also, give us a little update year-to-date in terms of what's happening with FEMSA Cerveza Mexico, please.

Sure. Hi, Bob. Volumes in Brazil were down for the first time in the last, I think, 10 or 11 quarters for our Company. And we attribute a lot of it, a lot of the performance, and, of course, we will need still to wait for numbers from the rest of the industry, but we attribute a lot of it to a price increase that we implemented ahead of the rest of the players, I would say, in a significant way, in some SKU channels and regions, in order to close price gaps once we started to get a good feeling about the brand health that would provide precisely for that gap closing.

We anticipate that, as we speak and basically at the end of last quarter, some of the players have also started to move pricing a little bit because of, again, just the cost pressure on everyone, a little bit, also, because of the introduction of the new tax regime in Brazil, that even though it doesn't have a big impact on our Company, it does on the leader of the industry down there. So, that's basically what we can sense about the volume decline, but still we are very, very confident with the brand health indicators for the full year and for the fourth quarter.

And another, I would say, impact would be on the fourth quarter, Bob, the weather. We basically had not as good weather in fourth quarter '08 as opposed to '07. Once you have started with -- we are looking at better volume performance, so we are confident that we are getting our track again in terms of growing the volume base down there in Brazil.

And in terms of the Mexican market, as I described in the opening remarks, what we're looking is, again, still -- if you look at the performance for the quarter, taking into account that we implemented a couple of price increases during the year in Mexico -- a very small contraction of the volume base. Looking at GDP for the quarter coming down still makes us very optimistic about the resiliency of our products and of our brands. So all in all, price-taking, promotional activity being in a very rational way, and, again, consumers sticking up there on consumption levels, we feel good about that part of the equation.

Again, as I said, the cost side pressures continue and will continue going into 2009. So, we will need to manage the business accordingly in terms of, again, during 2009, being able to transfer some of those pressures into our cost structure, into pricing, and rationalizing the business cost base as much as we can without jeopardizing the long-term prospectus of the business because of the cost pressures that we will continue to experience due to the fact that we're not going to be benefiting from the declining commodity prices due to the hedging decisions we took in 2008.

So all in all, we feel, under the circumstances, pretty good about the prospectus of the business and the performance for the fourth quarter of the business.

Javier, I thought the pricing was extraordinary and I've got to believe that what's, in part, mitigating some of the raw materials pressure in the quarter were your dollar forwards. Can you expand a little bit on that just to let us know? I mean, do you continue to have protection on the dollar for the full year 2009? Or will these run out and then perhaps force some additional pricing increases in order to maintain your current levels of profitability?

And I guess I'm trying to understand. The reason why I'm asking for a little bit of an update in January and February is I really want to get a sense for how volumes are reacting to these price increases. Because as you've said, the employment environment, whether it's manufacturing or construction or other areas of the economy, they're continuing to erode. And I'm just looking for some -- the latest view in terms of the volume metric, if you could provide one there, too.

Sure, sure, Bob. Yes, for 2009, we will still have some relief and I would say an important one in terms of the exchange rate decisions we took, basically, for most of the deficit we have in terms of foreign exchange for the cost structure of the beer business. But also, at the same time, we won't have almost any benefit of the declining commodity prices for 2009. Some of those benefits will start to roll out in 2010 and almost fully in 2011, definitely.

But for 2009, we will still have some of the protection on the FX, but some of the not being able to obtain the benefits of the decline on the commodity.

And in terms of the volumes, what I can maybe share on the start of the year is, again, it's a little bit, I would say, early to tell, because as you've said, the deterioration has been very fast and very steep in the last three months maybe.

So, volume performance for the fourth quarter, which was sensational, I should say, due to the fact of the weakness of the economy and the price increase that took place in August and September, I would say that still January was a month in which we had good weather. So, it's hard for me to tell how much of the good performance we still had in January, which was good, just to leave it there, was due to the weather and how much is it hiding weakness on consumer demand because of that effect.

So again, we will need to wait. I think we will be able to show -- to be more clear on this regard in a couple of months when we have our April conference call and have at least 3.5 months of 2009 already there. So, still a little bit too early to tell, but not that bad at the start of the year as the macroeconomic numbers and the feeling about the weakness on consumer demand could make a lot of people imagine.

That's great. Thank you very much.

Thank you.

In the interest of time, we do ask that you please limit yourself to one question at a time in order to allow for the maximum number of callers to ask their questions.

We'll now move on to Lauren Torres with HSBC.

Good morning. As you spoke about pulling back on investment spend for this year, I was curious how this is going to impact your convenience store rollout this year. I assume maybe we're not going to be as aggressive as we've seen in the past.

And also, too, if you could just talk a bit more, too, about trends within the convenience stores with respect to store traffic and consumer spend, any update on that for this year would be helpful. Thanks.

Sure, sure, Lauren. Our aim for 2009 in terms of opening of stores remains very high, I would say close maybe to the numbers that we were able to achieve on 2008, maybe a little bit less than that. But we are not changing our going-in position for the year in terms of opening up stores.

So basically, the amount of resources that we are or the capital we are allocating to the growth strategy of OXXO is not, at the beginning of the year, changing that much, maybe a fine-tune here and there, but not directionally anything there. But most of the projects we are now relooking are either capacity-driven or efficiency-driven and just being more demanding on the returns from the projects that we are putting in place.

So, we're deferring some of those, which even though are profitable, are not as profitable as to engaging them in these times in which we are maximizing the effort to produce as much cash flow as we can and deleverage -- I wouldn't say as much as we can, but just to maintain a healthy balance sheet profile for the business. So, the OXXO capital allocation is not really being driven these days by that fact.

Having said that, we will be very cautious and we are monitoring that very, very closely on a month-by-month basis. And when I'm speaking about having a year kind of number, shooting target for the CapEx for the year, the truth of the matter is that we're reviewing that on a quarterly basis. So, we're approving projects basically on a quarterly basis just looking at the overall conditions of the economy, the performance of the businesses, and the different geographies and the projects. So all in all, that's kind of our going-in position for 2009 in terms of CapEx.

And again, for the beginning of the year, what we can share, as I just said, on the volume side for the beer business, the same history I think repeats for the OXXO figures for the start of the year. Still, January is not showing something which is radically different from what the trends were in the past months, but still we are still thinking that, again, weather could be a good lift up for the month.

So, we will need to wait for, I would say, between February and April to have a better read on what's been going on with Mexican consumers to really get a good sense of where this is going into the summer.

Yes. So, you're still seeing ticket, as far as average ticket purchases, you're seeing a decline, though, this year?

Once you make it comparable, we're still looking at growth in ticket per customer, Lauren.

Okay, that's great. Thank you.

Thank you.

The next question will come from Celso Sanchez with Citi.

Hi, good morning. I wondered if you could characterize for us the spending initiatives that you have and how those might differ from past, sort of presumably ongoing vigilance on the cost side. Are there any targets? And if I missed that, I apologize. But are there any targets specifically that you have in terms of the percent of revenues or absolute peso amounts?

And I'm talking specifically about the beer business here. Maybe you can give some anecdotes as to how this might be different from past efforts and if there's any relationship with compensation or performance metrics internally. If you could give us some color on that, please, that would be great.

[Of course], Celso. I should start by saying that the program for rationalization of spending and cost in the brewery for 2009 is, I would say, the biggest one we have had in the last, I would say, at least six to seven years. This is not only a part of the, I would say, management reaction to the crisis, but also a part of an ongoing process of building capabilities that would allow us to achieve that. And I will use maybe two or three examples just to give you an idea of what I'm speaking about.

But, also, to complement the idea, the program pretty much involves all areas of the Company from the way we go to market, from the way we are organized within the Company in terms of layers, areas of supervision, number of executives, all the way, also, to still initiatives in the value chain in which we are now looking at that -- the whole value chain all the way from the procurement at the breweries all the way to distribution at customers, basically, under the supervision of one organization, which has been a long journey which started four years ago.

But as we speak, we are moving to an organization which now takes care of the whole supply chain, which now having in place systems and protocols that allows us visibility all along the supply chain, we're aiming at a lot of savings involving working capital and the operating expenses, managing the supply chain of the brewing business, for example.

But -- and in terms of marketing, and I also described that, we think that the build-up of incremental spending, and we have talked a lot about this in the past, both in Brazil, the US and in Mexico, we have defined that the different stages of development of the brands called for a step-up in incremental spending, very, very clear reasons in the different markets.

I mean, we are looking at the results and I hope you are in agreement with us. We are looking at the results of growing double-digit in the US on an average for the last three years. And I think that has a lot to do with the way we have been working with Heineken USA, but also because of the amount of resources and marketing dollars we are putting into that market, as well as in the Brazilian marketing, which we have been growing steadily across all geographies above the industry, and also, increasing brand health.

So in 2009, we are pretty comfortable that we have some room to maneuver in terms of reducing marketing dollars in Mexico and Brazil, not necessarily in the US, as I just said, and putting in place cost initiatives all across the value chain.

A couple of examples, more specific, would be route to market. We are now in what we call alternate ways of making calls to the retail network. We are aiming to be close to 50% of our way of doing calls on the retail base based on telesales instead of visits to the store. So, that helps a lot in driving costs down and, at the same time, allows people which are visiting stores to focus on developing the accounts.

We are also simplifying the structure on how we take care of the retail base, segmenting on premise and off premise, specializing our sales force and decreasing the frequency of visits, but increasing the effectiveness of the visit, because of now having basically 90% of the time being used to precisely develop the accounts instead of just requesting how many cases of beer there will be and needing the next day.

And in terms of simplification of the organization, we have also made some decisions. Once we have been mastering the learning curve of the practices and capabilities we have been developing, we feel comfortable at consolidating some regional areas or some local areas under the head of just one people instead of two. And so, that is also creating some savings both in terms of headcount at executive levels and, also, staff people, because now having less centers in which decisions are being made.

So all in all, I would say, again, what I said at the beginning, that this is a more comprehensive and ambitious cost-cutting and rationalization program; and it's coming, as I said, a bulk of it as part of the ongoing efforts of the Company to save where we need to save money and we have opportunities to reinvest in what we think is a good idea to invest behind the brands, basically.

Okay, thank you. That's a very helpful description. And just to finish up, is there a way to quantify what one might expect to see out of that?

There's definitely internal -- not only the broad numbers, but specific. What I just said, instead of mentioning the numbers of the actual savings we're aiming at, because it's a delicate matter, I think, I can tell you that 97 initiatives are supporting this effort of cost rationalization all across the organization and the effort is being done, I would say, not only in the most professional way, but also pretty much tied up with, as you said, incentives which are basically established for people.

We think that, again, we need to keep compensating people a lot on the value that they create pretty much in line with the overall performance of the Company. But under these scenarios, we have been shifting a little bit the proportion of incentives which are driven by internal actions of the people as opposed to the overall performance of the Company. Because, again, due to the uncertainty of the environment, which can basically produce not very good numbers for the Company, but we would like to reward internal effort and internal delivery of these types of efforts, but still pretty much tied with continuing to improve the brand health of our brands.

So, it's not like we're switching gears here in terms of now cost-cutting is what's important and we're forgetting about brand health. But, yes, we're diminishing the proportion of incentives which are pretty much based on the overall performance of the business or the business units in which people are responsible for; and we are putting part of their incentive program towards the achievement of objectives of the rationalization program we have put in place.

Very helpful, thank you very much.

Thank you, Celso.

As a reminder, in the interest of time, we ask that you please limit yourself to one question at a time in order to allow for the maximum number of callers to ask their questions.

We now move on to Alan Alanis with JP Morgan.

Hi, Javier. Hi, everybody. A clarification and a question. Just a clarification regarding CapEx. You mentioned that it is going to go down 30% in US dollars. Does that mean that it's going to go up in pesos, Javier?

No, no, but we still are thinking that devaluation is going to be somewhere within the mid 20s for the full year, once you take the average. And -- so in peso terms, it should come down, and in real peso terms it should come roughly 10%, I think. We're aiming basically for a $900 million equivalent maybe, but as I said, this is a directional number that we will be looking at on a quarterly basis.

Okay. And the question I have is regarding beer and soft drinks. I mean, could you tell us a bit about what's the progress and what we should expect, I mean not only in the short term or in the long term in terms of the increased coordination and collaboration between the beer and soft drink business you're describing here, please.

Sure, sure. I that maybe this is a little bit more of the same in terms of the basic concept, Alan, but I should say this. If people -- or the question regards possible integration of actual operating on a combined mode either through the pre-selling or distribution or warehousing activities, we are not in that space at all in new markets.

As we have stated, we are pleased with what we are achieving and learning in the Brazilian market, which that is basically the mode in which we are operating today. And we have, again, opportunities to do that, as we have agreed with the Coca-Cola Company, in some other markets in which we have not really found the best way to precisely put in place a dual model.

But at the same time, the two businesses continue to collaborate very, very heavily. We have been working for the last couple of years, I would say, more closely than ever in precisely bringing different groups of people to share best practices. I would say, a lot on the value chain management, but also a lot in sharing market intelligence and sharing, also, segmentation models and protocols to execute those segmentation models in different customers.

And I think that there's been learning for both businesses and, as we speak, both businesses are engaged in, I would say, not even small pilot tests, but now I would say rollouts of concepts in which the segmentation models of both companies have been refined and brought with new variables into it that would allow us, precisely in times like this, to select in a more efficient way how we allocate resources.

Not only I'm speaking about capital, but also time and how we place our bet in terms of product development within the different channels. So, integration is not what we are trying to achieve in the short term, but collaboration, coordination is basically the words that we are using more in the Company these days, Alan.

Okay. Thank you, Javier.

Thank you.

And we'll move next to Jose Yordan with Deutsche Bank.

Good morning, Javier and everyone. My question is just about the hedge comments that you made in the beginning, where you said that most of the time, the derivatives qualify for hedge accounting. And without getting into a very technical discussion here, was the reason they did not qualify in the fourth quarter the great volatility in the underlying instrument or --?

I guess my question is did they qualify in the first three quarters of the year and in the fourth quarter there was a different criterion that led to a different application of their accounting principles and if so, how would your P&L, your operating P&L in beer, how different would it have looked had the treatment been the same as in the earlier part of the year? So, I'm just trying to see what -- if you had been able to apply it to the cost of goods sold line, would there have been a significant change in the operating numbers that we see in the release?

Hi, Pepe. No. The criteria for how these accounts -- I mean, haven't changed any is not really related to the volatility in the fourth quarter. As I said, the most, I would say, simple explanation I can offer is the one that I just described, in which, again, close to MXN900 million out of the MXN1.3 billion on that line is pretty much due to foreign exchange.

But the main reason it's in that line is because the accounting criteria tells you that, for example, in the Coca-Cola FEMSA, which was the case, which is the only business which had basically an important liability position exposed to dollars, if Coca-Cola FEMSA, which is the case, contracted peso denominated liabilities and then swapped that into dollars, the exchange loss of that cannot be accounted as foreign exchange loss because of an accounting criteria.

So, that's where it should be allocated. So, the bulk of that line, again, I will encourage everyone to look at it as basically foreign exchange loss. The other --

But changing from one non-operating to another and it would not have applied to the operating line at all?

Yes, it's -- I mean, it's within the interim result of financing, but it's in a different line. But the way to look at it is basically foreign exchange loss on a dollar denominated liability position of Coca-Cola FEMSA, which is basically close to 100% of what the effect of foreign exchange loss on FEMSA's financial consolidated statement is all about.

The other component, the most important concept in it is precisely the unwinding of a hedge we had on wheat while the negotiations with the barley growers in Mexico were taking place. As we have said in the past, the formula now for establishing the pricing on barley in Mexico is pretty much linked to wheat. So, when we started negotiations, but that wasn't the summer, we hedged the position into it.

So, the timing of the wheat hedge didn't match perfectly with the timing of the final negotiations on the price of barley in Mexico. So, again, because of an accounting criteria, we needed to reflect that on the quarter once the hedge unwinding was made, so. But again, that's the smallest component of the MXN1.3 billion derivative instrument loss line.

So, this part of it would not have been accounted for on the cost of goods sold line or --?

No, no, no. It would have gone to inventory and taken into 2009, basically, numbers.

Okay, thanks a lot.

Thank you.

We'll move now to our next question from Lore Serra with Morgan Stanley.

Yes, thanks very much, and good morning. I wanted to just go back to the theme, just quickly, on CapEx. I think on the last conference call, you were talking then about cutting CapEx in '08. If I remember correctly, you talked about $950 million and you came in at $14.2 billion for last year, which I think, if I flip at the average rate, is closer to $1.3 billion, which I think was the original budget. So, I'm guess -- I'm just wondering why there wasn't more cut in the CapEx last year versus the intention?

And related to that, if I look in the fourth quarter beer numbers, I'm seeing a 20% rise in both the depreciation and the amortization in the fourth quarter, a much higher level than what we saw sort of on the year-to-date basis. So, if you could talk about those trends, which I think are related, that would be helpful.

Lore, let me -- hi, this is Juan. Let me first talk about the CapEx. There was -- I mean, through 2008, there were significant capacity increases at the different businesses. In the beer business, we added capacity here in Monterrey and in [Northeast Harbor] and Coke FEMSA added capacity a number of places.

We have discussed, obviously, the new plant which is in the very early stages of development. And now as we enter 2009, we are in a position -- once you adjust for the volume trends probably not being as aggressive or as optimistic as they were six months ago or a year ago, obviously, we figure that we don't need as much capacity as soon going forward.

So, we can defer some of this investment to 2010 and beyond. So, we really are in a position to step on the brakes on a number of the projects because the volumes, they're not going to -- we're not going to demand that additional capacity or they are non-critical projects, which allow us to bring the forecast for '09 down to $900 million, which, as Javier was mentioning, is a lower dollar number than what we had even in 2007.

Right.

Yes, okay. And the reason for the increase in the fourth quarter in the D&A?

Yes, I would say that a number of [aluminum] was there, but basically the most important ones is capacity projects that were put in place which are now starting to be depreciated, the impact, also, of the foreign exchange in terms of how it affects depreciation, and, also, in terms of amortization.

I would say the effect, also, of a couple of price increases during the year, also, now makes the amortization of some of the [tight house] agreements are significantly higher, in nominal terms, which is the way these numbers are presented. But most of the impact is coming from the depreciation and most of it is coming from Coca-Cola FEMSA, Lore.

Actually, I'm looking specifically at the beer numbers and it looks like it was 20% in both the depreciation and the amortization on Cerveza.

Okay. On depreciation, again, it's, as I said, new capacity coming on line and the depreciation. And on the amortization, the bulk of it is, as I said, a little bit of mix in terms of the volumes on the quarter, volumes which are done more on an exclusive basis than a non-exclusive basis, and the effect of the two price increases, which, once you put it in nominal terms, gets you to those numbers.

Okay, thank you.

Thank you.

We'll now move on to Alex Robarts from Santander.

Thanks. Hi, everybody. My question is on Brazil. We're getting to 16%, 17% of the beer sales now coming from that country in 2008. And I wanted to get a sense -- first, just a clarification. Were you -- did you follow somebody's beer price movements in November and December? You might have mentioned that, but I wanted to clarify that.

And as you look in terms of the quarter and in terms of 2009, I mean, the profitability levels, I mean, do you -- are we going to be in a situation where we could see increasing or better possibility in 2009 compared to 2008? Is it really a focus still of volume? It looks like you did get market share during the year in beer in Brazil. Because this is obviously an operation that I think, as you've described it before, one where you wanted to get a footprint.

You've built a track record now and I guess you didn't really talk too much about selling expenses in Brazil in the fourth quarter. So, is it -- if you could give us a sense of is it, the positive possible in 2009? Is closing the profitability gap a priority or is it kind of still building out that volume footprint?

Sure, Alex. First, on the pricing front, as I said, yes, we've moved prices and, as I said, even closing gaps basically on multiple channels almost against any other brand, both for our Sol and Kaiser brands. So, yes, we did increase price. We, again, are ahead of the industry in the fourth quarter and that sets, I would say, a good tone into 2009.

On the more overall question of our performance in Brazil, we still think that in '09, to be very simple on my answer, that we can break even positive on EBITDA, not on EBIT, but just on EBITDA, such as we did in 2008, not that being the main mantra that the organization is pursuing. But I would say that the most important developments in Brazil have to do with what you just said in terms of establishing a good, sound volume base, which can still keep on growing on a consistent basis going forward, with a more reasonable level of spending behind the brands.

I would say that's the biggest achievement I think we can talk about in the three years we have been managing this business and that creates, again, a possibility for the profitability of this business to keep expanding once we keep on growing volumes.

But 2009 is going to be a challenging year to really produce an incremental profitability for the business due to the fact of, again, commodity prices, also, not being able to have the full benefit of the commodity prices decline because of agreements to buy both aluminum cans and barley being made when the prices were not that -- I mean, when the prices were high, and, at the same time, because of the devaluation. And in the case of Brazil, as opposed to the case of Mexico, we are not going to have a relief in terms of foreign exchange as we do in Mexico for the beer business.

So all in all, I would say that for the development of the business, we feel very good about the brand health, that it's allowing us to close some price gaps, to start to close some price gaps, not to eliminate them, but to reduce them, and, at the same time, now having the ability to not invest on an incremental way marketing dollars behind the brands, because the brands have got to a level in which they can sustain reasonable growth on their own. But we're going to suffer those effects on the cost side, which [wouldn't] allow still the business to be on a profitable way on the EBIT line, but definitely on the black numbers on the EBITDA line.

Okay. And the new territory that Coke FEMSA had acquired in Belo Horizonte, have you seen some low-hanging fruit there as far as that beer business and your share, brand health indicators? I mean, are there some opportunities this year or has it kind of really -- did you really kind of take it over last year and it's really kind of just doing more of the same into '09 in that new territory?

No, no. Definitely, there are opportunities. The improvement in '09, during the second half of the year, once we took Remil, was significant, I would say, more in terms of volume than in brand health just because of, I would say, a little bit more focus into the category and a little bit better execution.

Brand sales should come along as we keep on increasing distribution and making people try our products. But in 2009, we are still expecting stellar performance of that region. So, we still have a number of opportunities to come, Alex.

Okay, thank you.

Thank you.

We'll now move to [Sohel Amir] with [Lucite] Research.

Hi. Just a quick question. I'm curious to know what potential steps you can take to protect your sales volume in Mexico and US for Cerveza?

To grow volumes, you mean, Sohel?

Well, yes, but just to protect them, because I mean, in the US, I imagine that beer volumes are going to take a significant hit, perhaps not so much in the Latin American territories. But I'm just curious of what are the specific steps that you have planned or that you believe you can take to reduce the impact of the slowdown that you --?

Sure. Sure, sure. I would start by saying that packaging, mix management is the starting point in terms of executing the price increases that we would like to implement during the year, as we have done in the August-September timing, to execute price increases in a fashion that pretty much takes care of what we consider the more bright, sensitive volumes on our mix, which is very different not only by packaging brands, but also by region. So, understanding elasticity on our products is a key component of how we decide how to implement, in a segmented way, price increases.

A second one, variable is to make a shift on the promotion and marketing activity driven on the channel activity to the returnable part of the portfolio, which is the one that pretty much starts growing or behaving differently in times such as this. So, that's the second component. A third one would be that the structure of the promotional activity, I would say, in healthier economic times is very different from the one that we are looking at into 2009.

I would say in times in which there is more disposable income, there is more confidence of consumer, more spending, discretionary spending. The nature of the promotions can be a little bit of more driven by emotions or people -- I mean, an example. We made a promotion in the third quarter of people winning a trip to Las Vegas, for example.

That's not the kind of promotion we're going to put in place in 2009. We're going to put in place promotions that if you buy a case of beer whatsoever, you can get for free some, I would say, more basic products at the time of purchase instead of being part of a conquest or something like that.

So, I would say that a lot of it has to do with, again, the value proposition for the different portfolio of brands and packagings that we have in the different channels. So, that's basically the main thrust that we have going into 2009 and it is not only applicable to beer. This is also applicable to coffee and it is also applicable to OXXO.

I mean, you -- we are not, I would say, as optimistic as talking about margin expansion in OXXO into 2009, because we're sure that we're going to have to implement some either promotional activity or price management in some categories that really give consumers more bang for their bucks. So, that's kind of what we're trying to do here.

Okay, thank you very much. That was very helpful.

Thank you.

Our next question will come from [Katy Blackbock] with Nevsky Capital.

Hello. I just wanted to check, when I look at the currency mix of your debt and the $9.7 billion, does that include all of the debt that's been contracted in Mexican pesos, but then swapped into dollars?

We have both cases, Katy. We have cases in which we contract the debt in dollars and swap it to pesos and the other way around. I would say that the best way -- and that has a lot to do with, again, efficiency and the cost of financing in certain times. There are windows of opportunity in which it is better doing it one way or the other. So, that has a lot to do with how the different financial markets operate, both the Mexican and the US market in terms of financing.

But I would say that the main -- the basic way to look at this is that if you look at the mix, again, of local currency against foreign, we have close to 80% of our debt denominated basically in local currency, mainly pesos, with the exception of some debt in Colombia, Argentina and those places in which we are able to get very, very soft interest rates as opposed to local inflation.

So, the cost of financing is pretty much negative, to be honest. And that even has been moving more to the less exposed position into the dollar denominated kind of debt in the first couple of months. And as we said, that has been achieved not so much by converting dollar denominated debt into pesos, but by buying dollars in the market to be able to have on the cash balances, enough dollars to pay maturities, which are dollar denominated, basically in Coca-Cola FEMSA. So all in all, that close to 80% exposure to dollar denominated debt has been coming down in the past couple of months.

So, when you say the 80% of your debt is in Mexican pesos, is that as of now or as of the 31st of December, because on the press release, when you show the table with your debt mix, it shows 70% of your debt in pesos? I just want to be clear whether that 70%, because the additional 10% is actually swapped into dollars or whether it's actually, when you're talking about 80%, you're just talking about the movement that you've done in the first two months of this year.

When I was talking about the 77% in local currency, both in Mexican pesos and Colombian and Argentinean and Venezuelan and Brazilian, [three Is], so that's the 77% which is consigned in the press release. And that 77% in local currency has been even incremented in this couple of months because not a reduction in the dollar denominated debt, but because of accumulating cash in dollars. So, the net exposure has been declining. Instead of now having 22%, we may be now below 20% for February the 25th or 26th.

So, if you're talking about MXN11.6 billion of debt coming to you this year and then refinancing MXN9.3 billion of that, can you give me an idea of the change in terms and currency mix that we should expect as you refinance?

Okay. I would say that once we finance and we pay maturities, because none of it -- once we pay down the debt that we're going to pay with the cash flows and the cash balances and we renew, I think that we will be approaching the, I would say, third quarter of the year to an exposition to dollar denominated debt, which should be below 15%.

And just for reference, Katy, Coke FEMSA did a placement of bonds in the Mexican market about a month ago. The rate that we got on that was the T or the reference rate plus 80 bps, whereas a year ago or a couple years ago, we were issuing at T minus 3 or 4 bps. So, there's been an increase of -- in the spread, there's been an increase of maybe 80, 85 basis points, and, of course, the reference rates have shifted. But that's pretty much where we are today.

Okay, perfect. Thank you very much.

We'll now move to David Malone with Barclays Capital.

Yes, hello. Just a couple of questions. First of all, on Brazil, I just wanted to understand the situation really after the 3.5% decline that you had in the fourth quarter. You were saying that the results after that sort of at the beginning of this year were better. Do you have a sense that you're gaining market share in Brazil or is this market really recovering? Because my understanding was that the beginning of the year was also quite soft for the Brazilian market overall.

And the second question was regarding the restructuring program that you have in place that you say is one of the biggest you've had for the last six or seven years. Does it only relate to FEMSA Cerveza or there are very similar initiatives across the business? I understand there are other factors driving the margins this year for OXXO and for coffee, but would you say that there is an equally ambitious program of cost reduction throughout FEMSA and not just on FEMSA Cerveza?

Yes, definitely. I was referring to FEMSA Cerveza because of being the biggest one, but there are definitely efficiency programs all over the place, the most important one being in FEMSA Cerveza, because if you look at the way the other businesses are basically operating, these are not businesses which have suffered such a dramatic change both in terms of the portfolio brand strategy and the incremental dollars needed to improve brand health, and, also, due to the fact that practices, operating practices in FEMSA Cerveza that have been brought into the marketplace have been just the most recent one as opposed to OXXO and Coca-Cola FEMSA.

In those two businesses, the efficiency programs are more, I would say, directed to recognize that the environment is going to present some challenges in terms of the ability to grow volumes, but more in terms of the structural things that we are doing as part of the transformation effort, which is big.

In terms of OXXO, to tell you the truth, we are not canceling any project which is directed to the creation of infrastructure and even higher execution capabilities, such as variety, replenishment and management space in a much better way, segmenting the markets -- I mean the stores. So, we have programs all over the company, but the most important ones, again, due to the nature of the business, being in beer.

And in terms of Brazil, I would say that when I was referring to a better start of the year, we're not making that judgment, also taking into account that the numbers on a calendar basis for January, you will need to look at them in a careful manner, because as opposed to last year, Carnival now ended being basically at the end of February, which, in last year, it was earlier.

So, volume in January and February are having different performances against last year. But again, we feel confident that what happened in the fourth quarter of 2008 had a lot to do, again, with both poor weather and our pricing decisions going into the marketplace and reducing some price gaps. But in the first quarter of 2009, we feel comfortable that we will be able to still keep growing ahead of the industry.

Okay, thank you.

Thank you.

With no further questions, I will now turn the conference back over to Mr. Astaburuaga.

Well, just to thank you very much for being with us and have a good week, everyone. Bye, now.

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