Fomento Economico Mexicano SAB de CV (FMX) 2009 Q1 法說會逐字稿

Good morning everyone, and welcome to FEMSA's First Quarter 2009 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. Welcome to FEMSA's First Quarter 2009 Earnings Conference Call. As always, Juan Fonseca and Alfredo Fernandez are joining me here today.

Let me begin by saying that overall, we're encouraged by our results for the first quarter, particularly in light of the challenging backdrop. The business environment across our markets is not getting any better yet. Just yesterday we saw Banco de Mexico updates expected range of GDP growth for this year lowering to between negative 3.8% and negative 4.8% for the year.

And we know that demand for Mexican goods and services from the US continues depressed, as evidenced by the fact that US GDP contracted over 6% in the first quarter, likely signaling a severe contraction in Mexican GDP for the period that could easily reach the high single digits.

We continued to face foreign exchange headwinds across most operations and we again had to deal with high prices for many important raw materials, as we worked through our hedges, particularly in our beer business.

However, robust pricing and tight spending across our businesses allowed us to deliver a set of results that represents a step in the right direction, as we move through this challenging 2009.

In terms of business highlights for the quarter, Coca-Cola FEMSA's integration of Remil and Jugos del Valle continued to drive growth and exceed expectations. Meanwhile FEMSA Comercio opened 168 net new stores across Mexico to reach 6,542 stores; well on its way to surpass the 7,000-store milestone before the end of the year, while once again delivering strong earnings growth.

At FEMSA Cerveza, we highlight the resilient volume trends in Mexico in spite of very solid pricing, a contracting economy, particularly in our key Northern Mexico strongholds, and tough comparisons exacerbated by an adverse calendar effect. We are also encouraged by the fact that the aggressive expense containment initiatives deployed across our organization in recent months are very improved, as selling expenses were almost flat, while total revenues grew just over 10%.

In terms of FEMSA's consolidated numbers, we saw similar dynamics to those of the fourth quarter of 2008, only the FX [piece] was less dramatic this time around, due to the smaller depreciation of our main currencies as well as to the lower dollar exposure in our liability position, relative to the fourth quarter.

Our operating income grew 20% for the first quarter. Just below the operating line, our Latin majority income fell 39%, mainly reflecting the effect of the appreciation of the dollar on our dollar liabilities and to a lesser extent, to the mark-to-market valuation of certain financial instruments. As you know, FX markets continue to be volatile and this may not change for some time.

On the balance sheet front, our position remains very solid. As of March 31, 2009, our net debt to EBITDA coverage remained at 1.1 times, with 80% of our debt denominated in local currencies, mostly Mexican pesos.

Given that Coca-Cola FEMSA has converted a meaningful portion of their cash position into dollars ahead of the repayment of dollar debt coming due later this year, our consolidated exposure to the dollar in our debt position is now [only 7%] of our gross debt or roughly $200 million. We are also glad to report that we have already refinanced all of our 2009 maturities.

Now let me elaborate a little bit on the results of FEMSA Cerveza. As was the case in the preceding quarter, softening consumer trends across markets were partially compensated by strong pricing. In terms of volumes, we again faced tough comparisons versus the comparable period, particularly in Mexico and the US; accentuated this time around by have one fewer calendar day in February and an unfavorable effect from the timing of Holy Week.

Having such severe headwinds, in Mexico we saw volumes contract by 3% during the quarter; [lapping] a comparison of 7% growth in the same quarter of 2008 and setting the stage for beer revenue growth of 3%, given our strong pricing in this key market.

In Brazil, volumes increased 1.9%, despite average unit prices rising significantly in local currency. [In our] exports, volumes increased 2.2% in spite of very tough comparisons over 12% growth in both the previous year and quarter.

In terms of pricing, we achieved gains in local currency across our markets. Beginning with Mexico, pricing was up 6.2% in the quarter and between late March and April we are rolling out a new round of pricing that should position us well to offset expected inflation for this year; still in the context of a rational competitive environment.

We should note that the remaining effect of incremental direct distribution acquired in the past 12 months was minor during the first quarter, with the majority of the increase in Mexico being driven by actual pricing actions taken in the marketplace.

In Brazil, pricing in local currency was up over 18% as we continued to increase prices selectively, while capitalizing on the positive mix shift driven by the Heineken and Xingu brands in the super premium segment.

Late last year, we began selective price increases ahead of the industry, anticipating that some competitors would raise their price umbrellas to adjust to the new tax structure. Furthermore, we believe the equity of some of our brands in certain territories has improved to the point where we can narrow some of our price gaps versus the competition.

And in the US, average price in dollars increased by almost 5%, following price increases in Tecate and the sustained mix improvement driven by the fast growth of Dos Equis. All in all, pricing continued to be a bright spot for us and we are well-positioned on that front as we continue to trade in this tough environment. In the end, for the quarter total revenue increased 10.4% in beer.

On the cost side, raw materials pressure continued unabated as we anticipated in the previous conference calls. Cost of sales increased 19.1%, well ahead of the 10.4% revenue growth. Cost per hectoliter increased 20%, reflecting significant grain pressure experienced across our brewing operations, combined with higher aluminum prices and the depreciation of the Mexican peso and the Brazilian real against the dollar, as applied to our dollar-denominated costs.

However, we were able to partially mitigate the impact of the depreciation through dollar forwards we contracted at attractive levels for a significant portion of our dollar requirements. Gross profit increased 2.6% for the quarter, but gross margin contracted by 370 basis points.

At the operating expense level, we saw an encouraging change in trend, driven by the selling expense line. During the first quarter, we had only minor expense effects from incremental direct distribution in Mexico, as compared with the past quarters. More importantly, a combination of aggressive expense rationalization and the back-loading of some marketing initiatives in Mexico and Brazil to the second half of the year, allowed selling expenses to grow by only 1.9%, significantly below revenue growth.

As a result, income from operations at FEMSA Cerveza increased 13.8% and operating margin expanded by 20 basis points in the first quarter. However, while we are very encouraged by the profitability the dynamics achieved in the quarter, we must remember that the first quarter is a light quarter relative to the rest of the year and we must be cautious and redouble our efforts going forward in order to minimize the damage to our margins given the challenging outlook for our cost structure and the overall economic activity in our markets.

Turning to our soft drink business, Coca-Cola FEMSA delivered another quarter of double-digit revenue and EBIT growth. Approximately 40% of revenue growth was organic, driven by price increases deployed in recent months and by the continued success of Jugos del Valle and the rest of the non-carbonated beverage portfolio. Remil contributed with 25% of the growth, while positive FX translation drove the rest.

Operating income increased 17.3% but operating margin contracted by 160 basis points, reflecting cost pressures driven by higher sweetener costs, the depreciation of local currencies in key markets, as well as higher operating expenses from Remil and Jugos del Valle.

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 finally at FEMSA Comercio, during the quarter we observed signs of consumer activities decelerating. Same-store sales were down by 1.8%, reflecting slightly higher traffic and lower average tickets. Even though we already lapped the introduction of prepaid electronic airtime, consumers that used to purchase physical airtime cards continued to shift to electronic purchases, such that we still see the distortion that has been present in our numbers for several quarters now, although the impact is lower as the months go by.

As a result and for comparability purposes, we booked the full amount of the electronic recharges. As opposed to just the margin, average ticket would have grown in the mid single digits.

In terms of store-based expansion, our long-standing efforts to flatten the [core] of store openings more evenly throughout the year, allowed us to add 168 net new stores during the first quarter; almost 100 new stores than the 73 we opened in the first quarter of 2008.

It is important to note that this does not mean that we're raising our target for the year above the 800 mark that we have mentioned before, but rather that the base of openings will be smoother as the year goes on, and therefore less concentrated in the fourth quarter.

Revenues increased 10.4% during the quarter, aided by the Services category, reflecting its defensive nature. Gross margin improved 250 basis points, driven by the change in the way we book prepaid cellular airtime as we have described in the past, as well as by more effective collaboration and execution with our key supplier partners in the key categories.

Operating expenses increased 19.3%, in line with previous trends and driven by the large number of store openings in the past 12 months that more than offset efficiencies achieved at the store level. Operating margin expanded by 60 basis points to reach 4.1% of revenues.

And before opening the call for your questions, let me make some final comments on our results and try to set the tone for the months ahead.

Clearly, we believe we have delivered a strong quarter that was driven by many different elements of our platform and our strategy. Our ability to offset cost pressures with solid revenue management, the flexibility of our packaging mix, the defensive nature of our products, our increasingly strong brand portfolios and the robust competitive position of our operations; all those things come into play every day and we're encouraged by the scorecard we are sharing with you for the first quarter.

However, as I mentioned before, we must be cautious in our outlook. There are parts of the equation that we do not control and there is no question that the macro slowdown in still out there; the manufacturing activities contracting in Northern Mexico, that exchange rates are volatile and definitely that we are not out of the woods by any stretch.

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

(Operator Instructions). The first question comes from Lauren Torres with HSBC.

Good morning. In the quarter, your beer volume in Mexico was down 3%. I was just curious if you excluded the calendar effects-- that one less day and the Easter shift; would volumes have been flat or maybe even up?

And also the second part to that question, with respect to the beer business, you mentioned taking some pricing in late March and early April. I was curious if you could talk about the magnitude of those increases and also was that more or less in the plans; or are some of the pressures, that you're seeing, a bit tougher and that's why you felt you needed to put through those increases?

Hello, Lauren; good morning.

Good morning.

On the first one, I would say that-- I mean just like doing the math of saying-- well, one day out of a little bit more than 90; that should get you maybe a little more about 1% which would explain a third of the 3% reduction we had. I would say that the Holy Week effect is, I would say, at least similar to that, if not bigger than that. It all depends of course on how good the weather for the Holy Week was last year, and how it would turn out to be-- it turned out to be in April this year. So all in all, I would say that volumes would be more close to flat than-- just looking at the 3%.

And the second part of your question; the price increase was-- since the beginning of the year it was contemplated in the plan; we maybe took some decisions to advance a little bit, parts of it because of again the circumstances both in the economy and in the FX front. But our pricing was pretty much driven by the expected inflation for the year and that's kind of the magnitude of the price increase we're looking at, which should be in the range of between 4% and 5%.

And as far as the cost environment is concerned, I think you said before that expecting some relief-- it won't happen until what-- the very end of this year or even next year?

Yes, you're right; not this year, but basically beginning maybe next year, part of it.

Okay, alright; thank you.

Thank you.

The next question will come from Robert Ford with Merrill Lynch.

Hey, good morning everybody and congratulations on the quarter, Javier. I was very impressed by the reduction in the expenses, and you mentioned that there's a shift in marketing and I was just--. It begs the question-- how much of this decline is attributable to that shift in marketing spend and why are you doing it?

And then with respect to Brazil, the pricing there too is also very impressive. And I was curious as to how much sole shot impacts that performance year on year?

Sure. Hi, Bob. The first part I would say that the marketing has a couple of components; one, it's a rationalization which is I would say [it's reached] to a level which we think is reasonable one, considering the circumstances, and there's a second component which is the way the plan for year is structured, it's a little bit different from the one we executed in 2008. So in 2008 we had a little bit more front loading of the plan and in this year because we would like to be more cautious because of the again, environment, we have a plan which is a little bit more back loading; so there's those two components.

We are not doing, and I said that in the past; we are not doing anything that we feel is not appropriate for the long-term sustained improvement of the brand, of everything in our portfolio in the three regions. We are making decisions considering the environment and the competitive dynamics also. We don't think we are doing this on our own. We are looking to-- I mean all of the players out there are taking decisions because again, the environment. So we are very, very-- I would say, pleased that again we have still a good momentum on our brands and we have still good numbers in our volume growth considering the circumstances. So that's a little bit for the marketing reduction, Bob.

On the second one, yes I think this is quarter in which again, because of decisions we made at the end of last year, driven by the two reasons we just mentioned-- or three-- I should add expected inflation going forward and volume pressure; but again, this-- and I would like to be very clear on this. This doesn't really make a profound change in terms of our attitude towards pricing in Brazil, in the sense that we have been doing a lot of fine-tuning on position, our price points for the different brands and SKUs in the different regions in Brazil; in the past, I would say maybe 12 months.

The quarter now reflects pricing in anticipation of some of the movements of some of other players, taking advantage of again, what we feel is going to be some of the price adjustments that the leader in the market is executing and it's going to continue executing in the marketplace, due to the effects of the new tax structure. And at the same time, in some I would say buckets, we have seen the opportunities to reduce slightly the gap between our brands and either competing brands or leading brands.

So all in all, I would say that it turned out to be a spectacular quarter for pricing in Brazil and we feel confident again that volumes are performing well and also brand equity indicators are telling us that we have good and solid grounds for doing what we're doing down there.

(Inaudible) it's really not a factor in terms of how big the impact on the top line because of the mix, so it's maybe helping a little bit but it doesn't really amount to an important component of the price increase, Bob.

Great, thank you very much.

Thank you.

And now we'll hear from Celso Sanchez with Citi-

Yes, hi. Good morning. I guess you spoke to this a little bit, but maybe I can get a little bit more color; the selling expense that you kind of backend loaded-- I'm not sure if I missed it. But to what extent would you say that that could be expenses, that if the economy really turns a lot more difficult than we're seeing; obviously (inaudible) could come out with revised downward forecasts; do you think that that selling expense could actually just be deferred to another year or how much of it do you think is really imperative for the brand-- it's just a question of timing within 2009?

I will answer it maybe-- but through a couple of ideas. One is we'll still need to see how things evolve, but as I mentioned, our basic assumption calls for a huge reduction in GDP in the neighborhood of maybe 4%, around that number. But again, if you look at the first quarter performance of our products, we still feel comfortable that even with good pricing that our product has some resiliency in terms of facing this tough environment. So the first thing we will need to look at is the overall performance of the economy and how well our volumes are holding up with the new round of pricing we're putting in place into the market. So that will be a key signal for us.

The second part is-- again, we have a very aggressive program in place for cost containment. I wouldn't say that the-- even though a good part is due to, I would say, discretionary spending behind the brands, it's not the biggest component and it's not even one of the most biggest components of the plan. Most of the plan is, I would say, structured regarding efficiency programs, rationalization, simplification of the structure and dealing with terms and conditions with certain segments of customers which we feel we can now extract a little bit more value than we were able to do in the past due to a number of reasons; because of having much more say on the way those outlets do their work or because we feel that we have stronger brands in some markets in which we can again, I would say, either lower a little bit margins or exercise some also rationalizations from some other components of the support we give to some of those retailers.

So all in all, I would say that we are prepared for a very tough 2009. We have a number of initiatives to manage the cost base. Some of that is related to marketing. Some of the marketing is back-loaded, but we still need to see the evolution of the economy and most importantly, the evolution of our volumes, to make decisions on executing our plan the way it's structured or if we will need to make some changes to it as time goes by.

Thank you. And just to clarify; so not talking about the discretionary marketing spend necessarily, but just all these structural changes you're referring to; you clearly have a plan for them. Would you say that you've kind of pick the low-hanging fruit already in the first quarter or you're beginning that plan and from a modeling standpoint we should assume that there would be further leverage as you go through that plan over the course of the year?

Hi Celso; this is Juan. I think definitely there's a plan in place for the full year with a very aggressive number as a target and what we've done in the first quarter will be continued. So I wouldn't think of it in terms of low-hanging fruit. Obviously there are some one offs such as reducing the number of regional offices that the brewery uses across Mexico from five to four. Right-- so obviously there's a number of people that had to be let go and every quarter until we lap that effect, we're going to see the benefit of that.

So I think some of them are one offs that continue to flow throughout the year. Some of them are activities that will be initiated in the next nine months.

Thank you.

Our next question will come from Antonio Gonzalez with Credit Suisse.

Hi, good morning. Congratulations on the results. Also on the SG&A in the beer business; you mentioned in the last quarter some adjustments on your pre-selling strategy. I wanted to see if you could give us an update on how that is doing. And also, if you already have an idea of what the amount of savings you could reach on a yearly basis after this whole program.

Sure, Antonio. Good morning. Where we are making progress-- basically in line with the plan-- this is again not something that started for the quarter. I mean we have been working. What we have been done for the year is that we have put much more spit into the plan and much more aggressiveness in some components of how we go to market. And I spoke about tele-sales and different techniques that we are now rolling out. But what I can mention is that we are basically on the plan and I will take the opportunity to say that again, as I said, there are a number of initiatives, close to 100 different initiatives only in the beer business, to deal with this environment. And I would say that route to market we have maybe 15 different initiatives that deal with just this component of the cost structure.

And instead of sharing numbers, specific numbers on what should be the amount I would say in savings coming from these basic initiatives on route to market, I would just reinforce the message that we have a very aggressive cost-containment program in place. It's working. We're pretty much-- based on-- I mean really it's pretty much in line with the plan and we'll continue, as Juan just said, we'll continue to execute the plan as the year progresses. So we think this is going to be a key factor for us to manage this complex environment.

So we are pleased with the progress we have been making; and as you see, some of that is being already shown in the quarter on the operating expenses line.

Okay, thanks.

Thank you.

Our next question will come from Alan Alanis with JPMorgan.

Hi, how are you (inaudible)? My question has to do to try to understand what happened below the operating line. I know-- if you could expand number one, what's in other expenses? I know that two thirds of that is coming from Coca-Cola FEMSA, but we're still hitting about one third of the increase in other expenses coming from either Cerveza or OXXO.

The second question would have to do, in a similar way, with the derivative instruments, Javier. We're still seeing there, a loss. If you could expand in terms of what's in there; I assume that that's related to Cerveza?

And finally also below the operating line, I was trying to understand the higher taxes; the effective tax that you're paying right now, it's about 37%. And I would like to understand what's behind the hike? Thank you.

Yes, hi Alan. The other expenses line, as you know, it's basically-- it includes the profit-sharing component of the way we in Mexico are obliged to pay our workers a portion of the profits; and basically I would say any other non-recurring items. And I would say that the big increases for the quarter have mostly to do with indemnifications to personnel which have been laid off; that's the basic explanation behind the increase for the quarter when you compare '09 against '08.

In the case of derivative instruments, I would say it's basically, if you look at the numbers we're showing for the quarter, and compared to those for the fourth quarter of 2008; are basically pretty much in line with what they were, driven-- I would say the vast majority of it by foreign exchange. So that's basically it.

And in terms of higher taxes for the quarter, we had to recognize some effects of some transactions, both in FEMSA Coca-Cola and in-- I mean (inaudible) which are not Coca-Cola FEMSA and in Coca-Cola FEMSA as opposed to last year. But this is a number that shouldn't stay there for the coming quarters. So going into the next two-- second and third quarter, you will see the number coming down to the more stable level which is likely below 30%. So that is just a one-off for the quarter in terms of taxes.

Perfect. Thank you, Javier.

Thank you, Alan.

The next question comes from David Belaunde with Barclays Capital.

Yes, hello. I just wanted to come back to pricing in Brazil. Brazil always sees a very high figure. And I wanted to see to what extent this is-- I mean this whole market pricing is double digit this quarter; or what portion of that was you repositioning the pricing of certain brands which would be a very company-specific factor?

And then the second thing I wanted to ask you about is the-- perhaps an update on the volume trends in April in Mexico; just to see what the impact of the shift in Calendar for Easter would have been on the positive side in April; thank you.

Hi, David. Pricing for Brazil; as I said, we are not repositioning our brand portfolio price architecture in Brazil at all. We're basically being very consistent with the course we have taken in terms of occupying what we consider were white spaces or open spaces for brands such as Sol. We have continued to reinforce the-- I would say price message that the Kaiser brand delivers to those markets in which the brand has a significant role and we have stayed the course of being very disciplined in managing the value segment with the Bavaria brand as well as going the super premium segment with Heineken, Xingu and Bavaria Premium.

So as I said, the quarter shows a big increase, driven by the fact that we moved ahead of the competitors in some regions, mostly all of them, that we are again moving price in advance of for what we feel is going to be the behavior of the competitors going forward, due to the-- I would say-- economic performance of a couple of competitors and of course the pressure that the lead player in that market is going to face going forward; also, and has been facing in the past as well.

So the main message is we have been helped by the mix of super premium growing in a better fashion. We have also benefitted a little bit because of the mix in geographic terms, being helpful. And what we are doing is basically just fine-tuning price gaps in those places in which we feel we have a better result of managing pricing on volume if we increase pricing in some of our products in certain channels. So that's basically, for the pricing in Brazil, the question.

And the second one, what I could say; maybe it's that in every way we're looking at, very good trends. When you look at the numbers in April that we were experiencing until the third week of the month, before all this virus thing came out; I think that we were looking at trends which are consistent with the first quarter, once you take into account the difference in the calendar day and the Holy Week timing; so all in all, I would say we were growing our volumes, but normalizing those because of these effects; I would say that we were pretty much looking at a performance which was consistently-- for the first quarter, which is in a sense good because it doesn't really reflect a continuous diminishing in the economic activity or in the consumption of our volume. So it's kind of a decline to a certain plateau, as far as we can say for the fourth month of the year.

There are still a lot of things to come ahead of us, but so far, that's what we're seeing, David.

Okay, and just to clarify; in Brazil, you mentioned pressure that are competitors will be facing; do you mean in terms of volumes? Do you see a deceleration in volumes, for example, in the month of March in Brazil or-?

I would say, again looking at the first quarter in Brazil, if you look at the industry it's going to be-- the better estimate we have it's going to be flat or slightly negative; considering the trend of the market you still have-- that's a significant change. And still the players are going to face also foreign exchange pressures and raw material pressure, so we think that pricing for the rest of the players is going to have to come a little bit, following some of the numbers we have been showing.

Not reaching maybe the levels that we have been able to reach, because again we are executing a strategy and we have taken advantage of some of the work that has been done in the past years.

Okay, thank you.

Thank you.

Our next question will come from Lore Serra with Morgan Stanley.

Good morning. I wanted to ask about volumes in Brazil-- I mean in Mexico, rather. You've talked about the volume trends in the beginning part of the year have been I think remarkably strong, given the economy and given the pricing that's been in place. So if you think through or could you help us explain what you think drives the stronger volumes? I mean has it been the way you've implemented some of the pricing? Has it been related to weather? And what gives you the confidence that despite the deteriorating economic picture that you're describing, that the industry can take another round of 3% to 4% to 5% price increases without a volume impact?

I'm not assuming that we may be impacted in volumes, Lore; but I would say that that may be the case. I'm just saying that the trends for the first three or four months are pretty good, considering the environment and considering that-- quarter on quarter in real terms, we have I would say basically flat pricing in real terms, again.

But my guess-- and this is again when you look at the models which take into account the elasticity to income and to pricing; I shouldn't say we're amazed or highly surprised, but again the numbers that we're looking at in terms of volume; they're holding well. Yes, in your question-- I should say it's part of the answer-- I think that the way we have been instrument in the price increases, basically channel and packaging are helping. So we have been presenting to-- I would say-- consumers which are highly affected either by unemployment or some sort of phenomena caused by the crisis. I think we have found ways to try to-- I mean to moderate the impact of that.

At the same time, I would say that again people in these times move very rapidly in terms of changing their decision making. So if you look at the rest of the elements on the retail dimension in Mexico, durable goods have been --basically come down very, very significantly. So at least part of the -- I would say disposable income of people-- some of it has been changed to immediate consumption on some of our products. So that should be helping also for the short term; even though unemployment or layoffs in the manufacturing sector have been coming-- basically 7% to 8% of the people which have been employed in the manufacturing sector basically have been laid off. This has not happened-- at the beginning of the year-- it has been happening during the quarter.

So I would say there are a number of reasons; some of those I think because we have been doing a good job. But some of those are just because consumer behavior is helping us in keeping our volumes up there.

Okay. And if I can just ask a question about OXXO; if you see a slowdown in same-store sales trends, can you contain the selling expenses better there? Maybe you could help us understand what's driving a 20% increase in selling expenses in the quarter.

And then also just related to that; in terms of the slowdown you're seeing now; and I understand that it's temporary; but as a result of the flu situation, what are your businesses do you expect to be impacted most currently?

On the first one, growth of selling expenses; if you look at the trends on OXXO, of the 20%, it's pretty much the number that we have-- I would say maintained for the past quarters. And basically what's driving that is basically store openings. And I would say that in the first quarter the number is extremely good because we have been making, as you are saying, cost-containment efforts in terms of reducing the cost on a per-store basis. And in '09, we are now catching the benefit of electricity not coming up as it was coming up in the past two or three years. So that's helping a lot.

But at the same time, we are implementing very, very aggressive efficiency measures in how we manage the costs on a per-store basis. But the overall number that you see in the P&L is pretty much driven by just new store openings. And again, if you do the math, it also includes a good number of both efficiency on a per-store basis, and of course the dilution of the fixed cost on the central office and regional offices on the bigger number of stores.

So, I would say that we are confident that yes, we have some room to maneuver in terms of getting or driving more efficiency from OXXO through the cost base if we see some same-store sales deceleration through the rest of the year.

The other question on the-- I would say the impact of this phenomenon; it's been a week, almost or basically a week since this thing started to get in the media and people have started to behave in different ways. So of course, in the very, very short term, basically the last three or four days, we are seeing different phenomena taking place. But I would say it will be very, very aggressive for me to say this is the way it's going to evolve. I think that what I can share maybe is that we are still confident by looking just at the measures that the government is taking and not only that but I would say the attitude that society is taking in dealing with this issue; we are both hoping and thinking that we're going to come out of this shorter than longer; but there's no doubt that there's going to be an impact in the business in the next maybe weeks or months.

Yes, I'm sorry, but just in terms of the impact you're seeing right now; is it stronger in the retail business or in the beer or soft drink business-- the negative impact?

I would say it's a little bit more stronger in the beer; but that may have to do a lot with that-- we carry higher inventory levels at the store level with beer than we do in soft drinks. So we don't have a clear picture if it's going to be kind of the standard behavior going forward or if it's just a very short-term observation. So that's why I wouldn't like to give you a sense of what's going on, because it's really too early to tell.

Okay, thank you.

Thank you.

The next question will come from Alex Robarts with Santander.

Hi, thanks. I'm sorry. I wanted to go back to the selling expense issue in beer. You've mentioned before part of the effort to reduce and I guess part of your commitment to have beer-selling expenses this year come in lower than the 11.9% increase we saw in calendar year '08 is kind of discretionary reductions in some of the regional beer marketing campaigns. And I wanted to understand if that had happened and were there any other kind of secular absolute reductions in Brazil or the US; just trying to get a sense of the piece of this SG&A, of the selling expense deceleration not coming from the back-loading.

And I guess just the second question is really on the packaging side. Though in Mexico we're hearing a lot about Coke bottlers as well as your beer competitor really implementing various forms of upsizing; and I wanted to get a sense of FEMSA beer. Do you feel comfortable with the upsizing that you did last year, particularly at the one-liter to 1.2-liter shift; and would you contemplate doing some upsizing in the beer this year?

Yes sure, Alex. Hi. Again, the selling expenses-- you're right if you look at the trend. We were basically double-digit growing in the past couple of years, the beer business. We explained there were-- I would say-- a number of reasons behind that. Some of those have diminished a lot; such as acquiring third-party distributors or incremental spending in selected retailers in which we were getting higher degrees of control and things like that. And at the same time we were-- I would say-- in the three markets; I talked about this in stages in which we were investing behind the brands in a significant way. So even though we're still increasing the amounts of resources that we're putting, for example, in the US market in absolute terms; the increase as a percentage is lower because of what we've been able to accumulate a certain amount of spending behind their brands. And of course we're now benefitting from the gross margin which is being derived from volume growth.

So I would say that selling expenses; (inaudible) quarter; it's being held by some of those factors that I just mentioned. But at the same time it's been impacted, and we said this from the October conference call, that looking at the environment, we were going to act very rapidly and very decisively. So it's a combination of things that are helping the number to look much better and that's close to 10 full points of swing; but at the same time, it's also reflecting a lot of the efforts we're doing in terms of cost-containment efforts within the Company-- to start with.

The second part of the question is-- I would say that all in all, and I would just like to refer to the upsizing positions both on our size and our competitors; but I would say that all in all, the level of activity, of innovation, brand extensions, line-packaging extensions, segmentation in the Mexican beer market is also part of the answer to Lore's question; why we're performing better.

And I should need to attribute also part of it to I would say in the quarter, to the upsizing positions our competitor made at the second part of last year which is helping their-- I would say volume performance this quarter. And if the question is-- do you think that's good for the industry overall? I would say yes; because again, we're providing prices points to consumers which in these times are very, very helpful to sustain capacity utilization and people interacting with our brands. So all in all, I would say we are comfortable with the level of activity.

Some of the decisions that we have taken and the way we have been instrument in them differ from those of our competitor and I wouldn't go deep into that because I think that's a sensitive matter and because people think differently. So that's the only comment that I should make.

In an overall sentence I would say-- the activity of the Mexican industry innovating and offering different alternatives to consumers in different dimensions; so liquid, price points, packaging, occasion of consumption; that is a very good thing for the industry. I'm very, very sure of that.

Understood. And I guess I just-- maybe to confirm; so you'd rather not, because of sensitivity issues; tell us if you have completed a one to 1.2 liter upsizing program or whether that could be still kind of a work in progress?

No. I can tell you that most of what we think in terms of I would say-- making decisions and putting products out in the marketplace, I think we're-- I mean basically I would say at the end of cycle; that's a different thing than saying that the way we're going to manage those SKUs-- there's nothing else to do. So there's a lot of fine-tuning in the way we're executing the strategy. And of course, competition is very dynamic, so we will need to take into account that in order to keep making the right decision going forward.

And have you actually reduced then some of the marketing spend on the regional beer brands in Mexico?

We have been shifting resources from regional brands to national brands and we think we have been very successful in things like that. And of course, as I said, we're rationalizing market expenses in the year, considering the environment. So we've been doing a lot of that; yes, Alex.

Okay, thanks a lot.

Thank you.

(Operator Instructions). We will now move to Jose Yordan with Deutsche Bank Securities.

Good morning. My first question was answered but I just have a quick one on OXXO. You mentioned that the fact that the distortion at the top line from the switch-- well that the distortion from the accounting change that you made is no longer an issue, but that there's still a switch going on in the consumers that is leading to a distortion in the whole phone airtime issue. And I was just trying to get an idea of when is this going to be over; when is the shift from cards to airtime going to be over so that this is no longer part of the conversation on OXXO?

Yes, Jose. Hi. I would say it's going to take basically 12 months after the mix of prepaid and cards stabilizes, which hasn't happened yet. Even though we're lapping quarters since late last year in which we already had airtime, there's still migration from consumers from electronic airtime to prepaid card. So it's going to take awhile.

The comment I made is-- it's still a factor, but it's diminishing on a quarter-by-quarter basis. There may be a time in which the effect is not important; we will tell that that is already the case. But it still has an effect.

The effect in the first quarter, if you had to put a number or percentage point on it; what would it have been had there been no switch; what would the revenue growth have been?

Hi, Jose. I don't think we can-- had there been no switch; we haven't really cut the date of that away. The comments we've made are-- a year ago we were talking about if we booked everything as if it were prepaid cards-- the same-store sales number would have been well into the double digits-- in the teens, maybe-- high teens. Today we're seeing mid singles.

Of course that has a component that is-- the economy and everything; it's not just this phenomenon; but it's probably representing 2 or 3 percentage points as opposed to 15.

Okay, sounds good.

Thank you.

And our next question comes from Lore Serra with Morgan Stanley.

Yes, just a couple of very quick follow ups; on the beer side, when we look at your cost of goods sold in the quarter, is this now sort of the worst point in terms of the raw material cycle in the first quarter?

I hope it is, Lore. No, no-- I think it is.

Okay. And how soon do you think you might see an improvement?

I wouldn't say for most of this year; and the benefit at the end of the year is going to be very, very small; so I would say we would need to wait for 2010 to arrive.

If you remember Lore, a lot of this comes because of the hedges, right? So it's not that prices are moving around, it's that already know what the price is going to be for a lot of raw materials and we already know--

The flip side is we already know what we're paying for the dollars for a good portion of that. So I guess the one variable that is still moving out there is the FX for the peso and the real.

Okay, and just one follow up on this issue of the selling expenses; one of the things you cited as the reason for tighter expenses in the quarter was sort of more streamlined or tighter commercial agreements. But when I look at the income statement for the brewery, amortization went up almost 14% and I think a lot of that is client agreement, so can you just reconcile that?

Sure. When I said commercial agreements; it's not only driven by that. I mean a lot of the things we're doing have a lot to do with margin only. So not all of the things we're doing reflect in the amortization. The amortization is pretty much just resultant of the segment of customers on which we have special agreements in terms of financing, future earnings and things like that. So it's-- I shouldn't say commercial agreements-- it's basically that. It's a lot of things. It's support to some customers to face some payments, to manage margin in different ways; that is translating to stronger pricing on our behalf. So I should encourage you to look at the same thing; looking at that line and commercial agreements.

Okay. Thank you.

Thank you.

This does conclude the question-and-answer session. At this time, I'll turn it back over to Mr. Astaburuaga for any additional or closing remarks.

Thank you very much for your participation today and have a good week.

Just before we go; one quick comment on my part. As many of you know, but some of you don't, Julieta Naranjo is moving on to greener pastures; literally, she's been invited by John Santa Maria to join him at strategic planning at Coke FEMSA, so she's going back to her roots, I suppose. And I just wanted to thank her for a job well done. Thank you, Julieta.

Thank you, guys. Bye.

Ladies and gentlemen, if you wish to listen to the replay webcast for this call, you may do so in FEMSA's Investor Relations website. This concludes our conference for today. Thank you for participating and have a nice day. All parties may now disconnect.