Fomento Economico Mexicano SAB de CV (FMX) 2009 Q2 法說會逐字稿

Good morning, everyone and welcome to FEMSA's Second 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 up the conference 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 Second Quarter 2009 Earnings Conference Call. As always, Alfredo Fernandez and Juan Fonseca join me today.

Let me begin by saying that as was the case for the first quarter, overall we remain encouraged by our results for the second quarter and from the entire first half of the year; particularly in light of the difficult backdrop.

Even when taking into account a sluggish business environment, GDP contraction's approach in the double digits in Mexico, and the one-off effect of the so-called swine-flu outbreak in late April and early May; our results show a remarkable resiliency.

Once again, we faced foreign-exchange headwind across most operations. And we continued 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 integrated platform, allowed us to deliver a set of results that represents another step in the right direction as we move through this challenging 2009.

In terms of business highlights for the quarter; Coca-Cola FEMSA delivered strong results driven by solid volume growth in brand Coca-Cola and in the Jugos del Valle portfolio across all markets.

Meanwhile, in terms of Comercio-- opened 269 net new stores throughout Mexico to reach 6,811 stores, on pace to surpass its 7,000-store milestone well before the end of the year, while once again delivering strong earnings growth.

At FEMSA Cerveza, we again highlight the resilient volume trends in Mexico, in spite of very solid pricing and a contracting economy, particularly in our key Northern Mexican strongholds where manufacturing-related job losses have been highest.

We are also encouraged by the fact that the aggressive expense-containing initiatives rolled out across our organization in recent months are delivering according to plan and continue to bear fruit, as selling expenses only grew by about half of total revenue growth.

In terms of FEMSA's consolidated numbers; operating income increased 16% during the second quarter. And below the operating line, we saw improvements in terms of gains and losses on foreign exchange and financial instruments, mainly as the peso and other local currencies strengthened sequentially during the period. As a result, net majority income was stable relative to the prior year.

On the balance sheet front, our position remains solid. As of June 30, our net debt to EBITDA coverage remained at 0.9 times with 82% of our debt denominated in local currencies, mostly Mexican pesos.

During the first week of July, FEMSA retired a maturing tranche of peso bonds for just under $100 million and Coca-Cola FEMSA retired bonds in the U.S. and Mexican markets for an aggregate amount of approximately $300 million.

Now let me elaborate a bit on the results of each operation, starting with FEMSA Cerveza. As has been the case in the preceding couple of quarters, soft consumer trends across markets were partially compensated by strong pricing. In terms of volumes, even though we started the quarter on a high note given the favorable effect of Holy Week; this was more than offset a few weeks later with the emergence of the flu in the final days of April.

The official mandate to shutdown the [operating] channel for several days affected the industry across markets and very relevantly in the tourist destinations. This came on top of the already significant economy and unemployment-driven headwinds, particularly in the manufacturing heavy north in the country which has adverse mix repercussions for our base business.

Mexico GDP estimates for the quarter are close to minus 10%. But the economic contraction along the U.S. border was slightly worse than that. And so, our domestic volumes contracted by 5.9% during the quarter, but were offset by an increase of 9.7% in average unit price, reflecting increases taken in the marketplace in the second half of 2008 and during the first half of this year, still in the context of a mostly rational competitive environment.

It is important to note that our pricing decisions are designed to balance our need to offset the sustained cost pressure, with the consumer's need to have a broad set of product and package alternatives at prices that do not alter their consumption habits. Currently, we are satisfied with what we have achieved so far during the present downturn.

Given the unique convergence of negative external factors during the period and judging by the recovery trend that has begun to appear in our Mexico volumes in July, we are confident that the second quarter will turn out to be the most challenging of the year. And while we are aware that our volume performance underperformed that of the industry in recent months, we believe the reasons for this are not structural, but are rather largely driven by the aggressive upsizing strategy being rolled out by our competitor as well as the short-term higher impact in the Northern Territories, as opposed to Central Mexico. Therefore, at this point we do not foresee major adjustments to our own strategy being required.

In our exports, volumes increased 2.4% in spite of sustained pressure on the overall import (inaudible) as well as some pricing on our part as our average pricing dollars rolled close to 4%, driven by price increases in Tecate and the continuing positive mix shift in volumes from Tecate to those segments.

In Brazil, volumes contracted 8% in the face of an 8% increase in average price per hectoliter in local currency, and a very tough comparison with over 12% volume growth in the second quarter of 2008.

Let me spend some time in Brazil. As you may recall in our previous conference call, we mentioned that 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.

We also mentioned the fact that we believe that the equity of some of our brands in certain territories has improved to the point where we narrow some of our price gaps versus the competition. As it turned out during the year, price increases by other brewers in some important markets and channels have been less aggressive than expected. And as a result, while our revenues in Brazil for the second quarter were in line with the prior year, we are obviously not happy with the volume performance. Therefore, further adjustments are currently being made to return our growth trends to a more balanced mix of volume and pricing; and already July volumes are showing a clear improvement on this matter.

And so, as was the case during the first quarter, in all three markets- Mexico, USA, and Brazil, pricing continued to be a bright spot for us in the second quarter and we remain well-positioned on that front as we continue to tread in this complex environment. For the quarter all in all, total revenue increased close to 7%.

On the cost side, raw materials pressure persisted as we anticipated in previous conference calls. Costs per hectoliter increased a little under 19%, continuing the trend from the first quarter and reflecting the significant brand pressure experienced across our growing 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, as was the case in the first quarter, we were able to partially mitigate the impact of the depreciation through dollar forwards we contracted at attractive levels for a portion of our dollar requirements.

Gross profit increased 2.4% for the quarter, but gross margin contracted by 220 basis points. At the operating expense level, we saw the continuation of the change in the trend first seen last quarter, as selling expenses increased 3.5%, again well below revenue growth.

In the U.S., we continued to increase marketing spending, particularly behind Dos Equis, with very encouraging awareness on volume results. However, even in the face of this higher dollar-denominated expense, the combination of our aggressive rationalization efforts and the deferral of some marketing initiatives in Mexico and Brazil to later periods, allow us to recover a significant portion of the gross margin contraction.

Income from operations at FEMSA Cerveza was almost flat for the second quarter, decreasing only 0.7%, while operating margin contracted by 110 basis points.

Wrapping up my comments about our beer business, I'd like to express that given the severe pressure under which we operated during the second quarter, particularly in Mexico, we believe the numbers are encouraging and we are convinced that our approach to keep balance in the short and the long term is the right one.

This year will go into the books as one of the tough ones, but we are well-positioned to ride the recovery as soon as the first signs of growth materialize in the US economy, with the added tailwinds of lower commodity prices.

Turning to our soft drink business; Coca-Cola FEMSA delivered yet another quarter of double-digit revenue and EBIT growth, on the back of strong organic volume growth, particular for brand Coca-Cola and for the Jugos del Valle portfolio across territories.

We continued to see pressure on the margins, largely driven by the higher cost of concentrate in Mexico and sweetener in every territory, as well as the effect of the depreciation of local currencies versus 2008 levels.

Operating income increased 16%, but operating margin contracted by 190 basis points. If you were unable to participate in Coca-Cola FEMSA's conference call last Friday, you can access a replay of the webcast for additional details on the results.

Finally, at FEMSA Comercio, during the quarter same-store sales were slightly up by 0.5%, once more reflecting higher traffic and lower average ticket. As was the case in the first quarter, even though we already lapped the introduction of prepaid electronic airtime, consumers that are 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 low single digits.

In terms of store base expansion, our long-standing efforts to flatten the curve of all store opening more evenly throughout the year, allowed us to add 269 net new stores during the first quarter. While we have opened 960 stores in the last 12 months, for the full year 2009 we still aim to open a few more stores than the previous year, as has been the case recently. Therefore, we expect the pace of openings will be smoother as the year goes on and less concentrated in the fourth quarter as in the past.

Revenues increased 13.3% during the quarter, aided by the favorable calendar effect of Holy Week in OXXO. In terms of the swine flu episode, it is possible that OXXO benefitted from a shift in consumption from the (inaudible) beverage channels in major metropolitan areas, however, the (inaudible) stores suffered severe slowdowns and even today they have not returned to normal sales levels.

Gross margin improved 170 basis points, driven equally 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 [permits], specifically in promotional activities.

Operating expenses increased 14%, showing an improvement over previous trends driven by efficiencies achieved at [the store] level mainly. Operating margin expanded by 150 basis points to reach 8% of revenue.

In summing up, before opening the call for your questions, we remain encouraged by the results of the second quarter and of the entire first half. Yet we again must be cautious in our outlook. We have yet to see any signs that the worst is over in terms of the economic downturn in Mexico, particular in terms of unemployment trends in the north.

Until economic activity picks up in the U.S., we can expect the tough conditions to prevail. And so, while we're optimistic, we still have some rough waters ahead in the short term. And with that, I would like to open the call for your questions. Operator, please--?

Thank you, Javier. (Operator Instructions). We will take our first question from Lauren Torres with HSBC.

Good morning. Javier, you mentioned that you think the second quarter will be your-- or was your most challenging quarter. But you're also concluding your comments today, talking about the recovery not really setting in yet here. So I was just curious why-- as we think about the second half, we should expect to see sequential improvements; is it more macro driven, is the consumer environment looking better at all, or is it as a result of some of the competitive activity that's going on? Are you seeing changes on that front?

Sure, Lauren; hi. My reflection on this is the following. We think that the first quarter was heavily affected in the Northern part of Mexico, a lot by the industrial-- I mean the industrial decline in the production of manufacturing activities in Mexico as a part driven largely by the inventories reduction that took place in a number of sectors in the U.S. economy as well as in Mexico. For the second quarter we would like to think that that's going to be more like a continuing trend. We have started to see-- I would say that the end of June and early July-- and as we are ending July, we are seeing much better performance, both in terms of the beer business and the OXXO business as well, in the Northern geographies as opposed to Central.

The performance in the first semester, when you look at Mexico, it's a clear distinction of how things went within the Northern part of Mexico as opposed to Central. And we think that if the initial signs that the worst part of the deceleration of the U.S. economy took place in the first half of the year, that the second part of the year will be beneficial for the territories in which we have our strongholds.

So a little bit both; just looking ahead of the leading anticipated indicators of the U.S. economy, as well as of the Mexican economy, as well as the last five weeks' performance in the Northern territories; makes us a little bit optimistic going forward, on one part.

On the second, if you look at against the still very dynamic changing estimates for the economic performance of Mexico for the full year-- if you believe that the worst case scenario for GDP contraction for Mexico will be around 7% or around that number, the performance for the second semester will need to be better or less worse than the one that we had in the first semester.

And even though the relationship between volume performance and GDP in such volatile environments is not as close as in long-term trends, we still think that the most important determinants for volume in the short term will still be consumer income and unemployment rates. And we are optimistic about seeing the unemployment rates that we are looking in Mexico-- in the Northern part of Mexico-- not deteriorating more than in the first half of the year. So that's kind of the reasons why we're a little bit more optimistic about the second part of the year, as opposed to a very ugly second quarter we just finished.

And I guess relative to what your competitor is doing-- is there anything different that you expect in the second half? I guess you mentioned the first half was somewhat rational. Do you expect more of the same? Have you seen that so far for the second half?

No, we're assuming pretty much stable competitive environment. We think that again, as I said, we have been making our decisions in terms of trying to just be sure that we still are managing pricing, looking at our cost base, but also looking at the consumer. And we don't think there's really any structural thing happening in the industry and that we'll need actions on our side in terms of change in the course of action we've been following.

So in the second half of the year, we will basically execute our plan; which by the way, we are basically-- half of the year pretty much on it. We are-- I would say a little bit below volumes, when we are now reaching the start of the second half of the year. But I think we have been also able to optimize a little bit more our cost base. So all in all, we are not that dissatisfied with the overall performance of the business in Mexico. So we are still optimistic about our competitive environment being the way it has been in the first half of the year. We are not that concerned, as I said in my opening remarks, about the difference in the performance because we are not looking neither at a loss of a distribution base or a loss on a transaction base, consumers going away from our brands, not on the equity brands health indicators that we keep on monitoring on a monthly basis.

So we are just trying to understand the phenomenon that are taking place in the short term and managing those for the long-term good health of the business.

Great; thank you.

Thank you.

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

Good morning, everyone. My question was related your beer operations in Brazil. What kind of adjustments are you planning to make? Do you feel comfortable with your current price differential or do you expect to implement some more discounts going forward to get back volumes?

And also related to your marketing expenses; can you tell us what is your current rate of marketing expenses as a percentage of revenues in Brazil? And what are you budgeting for next year?

Yes, I have some comments on some of the questions you just made, Antonio. As I said, we are as we speak, applying a number of initiatives in order to reduce the difference between the price of the leading brands as well as the competing brands in some geographies in Brazil. As I said, we moved ahead of the industry in some markets, assuming that competitors will increase pricing at a certain level. That has not taken place. And as an overall, the equation of managing pricing and volumes-- we are not comfortable with the performance of the second quarter. And as I said, we are just starting to do so. So we are-- from gaps, which were closed more than we think is helpful for the business for the long term, during the first and second quarter, we are now moving into the third quarter to a gap which is not as big as the one we created.

So as we are now looking-- so the gap will be reduced; so as we are moving into the end of July, we are now [seeing] a very different performance in volume, as opposed to the declines we saw in the second quarter. Now we're looking basically at more even numbers in July, as opposed to last year's. And the revenue of course, still is good because we are still maintaining pricing in real terms.

So the overall equation of pricing and volume-- we would like to have a different composition during the third and fourth quarter, to round up a good 2009, as has been the case for the last three years.

In terms of the marketing spend, I won't like to go into details of how much we're spending as opposed to the revenues; but what I can tell you is that-- as I told you in the past, we have put the resources of what we think the brands need to reinforce their competitive position, both for the short term and the long term. We are monitoring on a monthly basis, also the level of spending of the competing brands in Brazil. And what I can tell you is we are not over-spending over our target numbers for marketing resources in Brazil, but we are not under-spending also. So we feel comfortable about the level of resources we are still committing for the Brazilian market in terms of marketing investments.

Okay, thanks. So it's a fair assumption to say that your marketing expenses will remain stable going forward?

Yes. For 2010, we are not assuming that what's in the plan in 2009 will be radically different and we are still, I would say, spending more than you can assume a business which has a pretty much stable competitive position could be spending. So we're still over-spending on what would be the normal level of spending of a more stable kind of portfolio brands.

Okay, thank you.

Thank you.

And moving to our next question, we will go to Alan Alanis with JPMorgan.

Hi, good morning. My question has to do also with brand strategy. (Inaudible) quickly, I mean we're seeing Dos Equis grow strong in the United States, yet it is small and remains small in Mexico. We're also seeing Tecate grow, but with a large amount of cannibalization from your other brands. And then in Central Mexico, you're seeing Indio-- it seems to be moving slightly better than Sol, but in Brazil, the Sol brand has a completely different value proposition from the Mexican Sol. So my question here Javier is-- what is your marketing picture of success in terms of beer brands? And second, how do we reconcile this with the recent market share losses that we've experienced?

Sure, Alan. I would say that the core of our beliefs in terms of brand portfolio strategy is segmentation. And that we do think that we need to target different brands to different groups of consumers, and also we have to recognize the base-- that the different brands have in the different territories. So it's not like a guy in Monterrey deciding what people should drink in Sao Paulo or in North Dakota, whatsoever.

So the truth of the matter is that if you look at the performance of our different territories, starting with the U.S. as you were mentioning-- I mean Dos Equis is by far the number-one or number-two fastest growing import brand in the import category in the U.S. But if you look at the Tecate performance, it's also very, very strong. And these two brands are so different in character, so different in liquid profiles, so different in packaging strategy and so different even in price points; that I think that you will need to say that it has been a pretty much successful strategy-- targeting different groups of consumers with different brands.

So we're pleased with the brand strategy performance in the U.S. which is pretty much as we have been sharing, pretty much focused on just Tecate and Dos Equis, even though we sell three or four more brands in the U.S.; very, very niche-focused strategy kind of way of doing things. And if you move to Mexico, as you were saying, well-- Tecate and more specifically Tecate Light is performing great, as well as Indio in some territories of Mexico.

We are also in Mexico-- very, very straightforward when we say that the bulk of the marketing resources in Mexico go to the two brands that account for close to 70% of our volume base in Mexico which are basically the Tecate franchise and Sol. So those two brands are performing well; Tecate better than Sol. And Indo is still performing well, but if you recall, Indio is a dark beer which by definition has a lower ceiling in terms of volume expectations going forward. So it's a brand that should be targeted to a very, very specific group of consumers with very-- I would say-- rational expectations of how big that brand can be going forward.

And in Brazil, as you were saying, it's a totally different proposition. Still, the bulk of the volume is based on Kaiser. Kaiser is still performing very well. But we were very aggressive in pricing the Kaiser brand in the last two rounds of pricing. And we really closed the gap against the leading brands and we opened the gap against the competing brands from the smaller competitors in Brazil. And even though the volumes are not performing the way we were expecting, we assume that the reason behind that is precisely that because the price points of the competitor didn't move as high as we were assuming when we rolled out our price increases.

So all in all, I would say that we have what we like to believe is the right strategy for the different markets, even though from an overall Company perspective, you can look at different brands and maybe some people would like to see more like a global brand for the three territories-- which we don't think is the right approach to manage the brand strategy.

I think I would even add on top of that-- this is Juan-- that in the case of Tecate and Dos Equis, which as Javier mentioned are the big brands in the U.S., the move has been towards more homogenous positioning across the border. In other words, the Tecate plus Tecate Light positioning, if you look at what we're doing with boxing which actually works on both sides of the border; if you look at what we're doing in terms of the positioning with Harley Davidson which also resonates with people that live on the other side. And in the case of Dos Equis, which in Mexico we are putting some resources behind Dos Equis as a very premium brand with recent efforts with the David La Chapelle campaign.

In other words, even though we're not using the-most-interesting-man-in-the-world campaign in Mexico, we are positioning Dos Equis at a similar point. So for the two brands that drive our business in the U.S., the positioning in Mexico is actually quite similar and definitely we have been making progress on that front.

Okay. That is useful. Now, if I may ask a different question; what update can you give us regarding the integration or increased collaboration among the three businesses-- the beer, soft drinks and OXXO?

I would say that we are still-- we have talked about this in the past about major projects or collaboration between the businesses. The one in OXXO which is pretty much focused on sharing consumer data to derive from that data knowledge that will help us to better manage a number of variables in the store, so it's a SKU-- SKU presence and price points and elasticity and promotional campaign; that is going on very, very well. I think that we are pretty much advanced in the sharing of that learning within OXXO and the beer business, but Coca-Cola FEMSA is also now working closely with OXXO to take advantage of that.

And in the part of the collaboration between Coca-Cola and beer; we have also made a number of I would say, progress and work done on that regard, mainly to share different perspectives of the two businesses on how to address different customer needs from the perspective of what the value proposition from the beer category or from the CSD category through the channel, and also from the way that different customers are better served and better supported in terms of what kind of portfolio is the right one and what kind of operating procedures are better to serve them; both from order entry and delivery of product and collecting the cash.

So there is a big effort also going on and it has been for the last, I would say, couple of years. And some of those learnings Alan, are pretty much translated into how the two businesses are changing the way they go to market in a very radical way. We don't talk a lot about this. But we have been now doing a lot of work in going into-- I would say, third round of the route to market way of doing things in the beer business, as well as in Coca-Cola FEMSA. And we are now very, very intensively using for example, [tel-sale], which we don't talk too much about that, but I would say that north of 30% of our sales are now being put into a tel-sale kind of fashion. But that only tells part of the story.

I would say that the way to address this-- I would say opportunity, is to look at it from a very holistic point of view, looking at what's the value of the customer for beer, [or] for soft drinks; and then taking it from there to create a picture of success for each customer and then segmenting the way we're taking care of them.

So it's not like-- again, we've been sending this message for a long time, it's not like people still are-- keep on asking-- well, when are you going to distribute the beer in a truck of Coca-Cola in Mexico? I mean that is not what we are focused on. We are focused much more on sharing the learnings of both business and trying to create a common platform, how FEMSA operates its two beverage businesses; getting the best from each to really have the best of the two worlds.

Excellent; thank you very much.

Yes.

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

Hey, good morning, everybody. Javier, I just wanted to confirm if and when you went from LIFO to average-cost accounting and if you could, review the impact on the various businesses that that change created, please?

It's been over a year. Hi, this is Juan. We moved to average-cost accounting more than a year ago.

Yes, I have you doing it in 2008, but it looks like you didn't restate prior periods. So in the second quarter of 2008, you were already average cost?

Yes.

Okay, because some others were doing it differently. And then-- Javier, when you look at the performance of the volume in Brazil by regions, it looks like the (inaudible) territories were up; particularly in Sao Paulo. What do you attribute the difference in volume performance in the rest of the bottling territories to be; because is it simply just price or are you just not getting the kind of support that you'd like to have for those other bottlers?

No. I didn't want to mention this, but the Northwestern territory or the [Minous] region is very important for us. I mean it was flooding all the quarter. I didn't want to mention that because it would have sounded like an excuse on the reality of an 8% volume decline. So I would say that there's a slight weather effect, basically in Northwestern, which has been a territory is has been growing double digits for the last three years; very, very consistently and which we think that against the competitors in that region, we are still performing extremely good. And I would say that Sao Paulo, yes, you're right. We are growing in Sao Paulo as we speak, even though we have declined in the past couple of years- I would say.

I would say clearly a lot of trans-shipment kind of activities that were taking place still from that region to the contiguous territories; and the rest of the territories we have very, very clear signals that again, the pricing that we made was a little bit too aggressive in the face of the pricing activities of the rest of our competitors. Because what we're seeing is not a loss of distribution, but a loss in the number of transactions that we are taking from the consumers.

So we are-- I would say 80% of our explanation of the volume performance comes from the pricing architecture that we put in place late last year and the first quarter of this year. And that's what we're working on, as we speak, Bob.

Great. Thank you very much.

Thank you.

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

Yes, good morning. I wanted to ask a question about the beer pricing in the quarter. Your revenue per hectoliter increased real strongly- 7% sequentially, 10% year on year. I think you talked in the last conference call about taking pricing tactically. I thought a bit more like in inflation; but clearly you did more than that. So could you help us understand when we look at that 7% increase sequentially; is there any effect of mix there? I wouldn't guess that would be the case. And if not, can you sustain that pricing? Is it possible that the pricing levels are too much, given the economy and maybe that's a factor in terms of your underperformance versus the industry in the quarter?

Yes, Lore. We said that we will take as much pricing as we thought the consumer could take, and of course our pricing performance looks good, both on a quarter-by-quarter basis and sequentially. And it even looks much better if you look at our competitors, because again, we have been not as aggressive in terms of using the upsizing to drive volumes, but in keeping our eyes more on the revenue. And I would say that we do not have a big mix effect. If there would be a mix effect, it would be on the other way around, because as I have said, the Northern territories which command higher pricing, have been performing below the average of the country.

So I would say that we think that the price that we took in Mexico, looking again at the leading economic indicators, is the right one. We are not envisioning for the remainder of the year, a very different stance on what we've done during the first and second quarters. So we are assuming for the next two quarters, more stable pricing. And I would say those would be my comments.

Well, I understand that but-- looking at the quarter; you lost 230 basis points of volume share. If I look at the first half, you've lost 170. And I understand some of this is upsizing. But you really-- if you look back in the industry the last five, six, seven, eight, nine years, it's very unprecedented to see that kind of volume decline. So even allowing for some upsizing, what is the source of your confidence that you can sustain that kind of pricing in light of these volume trends?

Well, my assumption again, is that the situation of the consumer going forward would be better than it has been in the past. So we are assuming that if you look at the long term trends on pricing, even though we have been very aggressive in '08 and '09 in pricing; we are not far away from what pricing used to be in '06. So we are not-- on the longer trend, we don't think that we are-- I would say-- been excessive in the pricing variable in the case of the consumers.

In the short term, we will need again to just have a clear picture of what's been going on in the first quarter of the year in the Northern part of Mexico, which has been extremely soft and as you know, the changes in Mexico I would say started late 2008 in Northern Mexico, with reducing shifts and reducing overtime for people. And as long as again, there's a slight recovery in the U.S. economy and we still see the signs of that recovery now having an impact in the Northern part of Mexico, we still are comfortable with the level of pricing that we have put in place.

When we look at the relative performance against our competitors, and you just mentioned again the price per hectoliter sequential and quarter by quarter [on our site], if you look at our competitors, there's a clear explanation behind the bulk of the volume performance, because again of the upsizing strategies that shows a diminishing-- not a diminishing-- a smaller increase in price on their behalf as opposed to ours.

So all in all, what we are saying is that so far, even though there's a radical change in the volume trends we have had in the past three years in Mexico which was more like 3% or 4%, as opposed to now 4% minus; we are now having that 4% with re-pricing in place and with the GDP collapsing more than 10% in the Northern part of Mexico. So we're of the opinion that things were not going to improve on a microeconomic level, yes, definitely we will be thinking twice again, what we should be doing in terms of pricing.

And the final comment here would be that if you remember our performance in 2008, it was pretty much skewed, the volume growth for the first semester. So now for second semester, we will have much more easier comps. So I think that the decline on the volume trend in the first semester is also influenced by the tough comps we had in 2008.

Thanks, that's very helpful. And if on OXXO, I could just ask a couple of quick questions; can you give us a sense of your best sort of estimation of how many stores you will open for calendar '09? And can you comment a bit-- I mean you had fantastic margin expansion in the quarter and I know some of that continues to be driven by the phone card substitution, which is hard for us to see, but obviously it continues to be some factor. As you look beyond the balance of the year, do you still see margin expansion opportunities in OXXO or are you getting to levels that-- you said in the past that they would stabilize but they keep increasing nicely. Where do you see a limit for the margins-- if that's the right way to ask the question?

Yes. In terms of opening stores, my best guess would be we're going to be north of 850. I don't think we're going to be able to sustain the 960 stores we have opened in the last 12 months because as I said, part of the way we changed the opening core of the business, really promoted to be a much more smoother one. We were facing-- I would say the large number of stores we were opening in the fourth quarter in previous years, presented serious challenges from the logistic point of view. So we saw a benefit in trying to smooth things down. So we even changed the incentive mechanisms for people which are responsible for that.

And what I can say is that we will be between-- north of 850 stores I would say easily. And the good news is that we still are opening only high quality stores. So the batting average which measures the quality of the store opening, still remains above 90% which is very, very high for the standard that OXXO manages in that regard.

And in terms of margin expansion, as you just said, first quarter I think proved to be a good one because of a number of reasons I think. Even though we faced same store sales diminishing in some categories-- important categories I should say. I would say that the efforts of working together with suppliers, with a much more targeted and focused promotional activities, I think it's the major responsible for growing the gross margin for the first semester. So I would say that we have been perfecting the model for investing money behind promotional activity that gives us more bang for the buck.

And also, if you look at our performance, relative to ANTAD, we are still performing better than most retailers that carry the lines of products that OXXO carries. So we are still enjoying the benefit of delivering to our suppliers, volume growth and of course that is now-- and that creates the benefits for OXXO in terms of the compliance for the targets of volume growth that then creates expansion of margins for OXXO as well.

And I would say that OXXO has proved also that it has the discipline and the capability to adapt to tough times in terms of the operating expense at the store level. I just mentioned in my opening remarks that the performance on the operating expenses growth is largely driven by efficiencies that we have been able to achieve at the store level. We have benefited a little bit by the diminishing of the energy fees, but I would say that the bulk of the efficiency has been driven by much more closely followed through things of how the stores are operated and much more closer supervision in order to reduce any peso that is spent at the store level.

So I would say that all in all, not so bad traffic and ticket statistics as well as cost containment efforts at the store level, complimented by very, very close work promotional activity with the suppliers; are behind the expansion of margin of OXXO. I won't be-- I have been saying this for the past, I would say, two years; that the margin expansion of OXXO has been higher than the ones we're expecting. But to tell you the truth, the strength of the brand and the strength of the consumer proposition that we have been building has been outperforming our estimates for the past two years.

Going forward, we are still going be facing tough times. But we are still confident that we are going to be able to keep delivering more moderate margin expansion, Lore.

Great. Thank you very much.

Thank you.

Our next question will come from Alex Robarts with Santander.

Hi, everybody. Thanks. I want to go to beer as well and kind of start off with the SG&A line. Again, you've seen and shown some nice control in those expenses. You talked about it last quarter as kind of a combination of some secular initiatives, closing one of the sale centers, kind of trimming some of the media spend on the regional brands. And you also talked about some back-loading in that first quarter. Did that happen as well in the second quarter? Was there some back-loading or was it really just kind of more pure benefits or kind of pull back from what you saw in the first quarter?

And when we think about the second half, as the volumes recover, will we have kind of a disproportionate amount of selling expense from this back-loading initiative or not? If you could give us some color, that would be great.

Sure, Alex. As I shared in the past, the way that the plan for 2008 was structured, was more skewed to the first quarter, both in terms of volume targets and the level of spending as opposed to the second half of 2008. For 2009, it was the opposite. And as I said, part of the diminishing in the volumes for the first semester is influenced by that fact, because we are now facing tough comps on volume growth for the first semester of 2008.

And looking at the perspective of the year, which has taken place which as I said, we were expecting a very soft first semester and a not-so-bad second half; even though still not growing, but contracting significantly less. The program since the beginning of the year was established that way. So there's a little bit of back-loading into the second semester as opposed to the first. But in the end, the overall year will still-- will be aiming at diminishing in a significant way, the rate of growth for the operating expenses as experienced in the past.

So the short answer will be, Alex, yes there's a little bit of back-loading. That's the way the plan was designed. But still, that will round up a year in which operating expenses would grow below the revenue growth, for sure.

Okay, that's helpful. And just the last question is on the recovery of the beer volumes-- as we think about the second half and kind of we can appreciate that there are going to be some easier comps in Mexican beer for the second half; you've talked about already in July some indications that the regional economic issues in the North seem to be rebounding or are improving a little faster than in the Central part of the country. I'm wonder, as we think about volume recovery in the second half, to what extent could it be-- might it be stymied by accelerating upsizing by your competitor and I know it's a tough thing to gauge and measure and forecast; but maybe what could be helpful for us is thinking about as you look at just the packaging in the industry, you've done your upsizing to the 1.2 liter and the 350 ml last year at various points in the past. They seem to be in the process of this, of upsizing. Do you think that they're kind of at or near your levels vis-à-vis upsized volume in that domestic portfolio or not and is that a risk that we should kind of just be aware of?

On the first part, there's no doubt that I would say-- the strategy of our domestic competitor in terms of-- given this product's very broad base of distribution and a very aggressive discount on the milliliter that this product offers; and I'm speaking more specifically about the liter and a quart. There's no doubt that varies, again incentivizing the volume growth of the industry. If you look at the volume growth for the industry as opposed to unemployment, income and GDP; there is not a--correlation as direct-- at least in the long term, as I said.

So there is no doubt there is an effect there. I would say that if you look at the Mexican market, on the second part of your question, there is a difference in the sense of the way we have been executing the upsizing strategy, which is more and more targeted and targeted in terms of the distribution. We are not using the upsizing products in a very broad base of channels. We're just-- we're using just this product for those areas of the country and specifically in each city in which we think the sensitivity of the consumer to this kind of product-- it's a good equation on a value basis for our consumers and for us.

So if you look at the distribution of the liter and a quart, on our leading brands in our strongholds, it's significantly smaller than the one our competitor is having. And if you look at the discounts that each one is giving to consumers on the leading brands in the strongholds, it also tells a very different story. So we-- as you said, it's pretty difficult to quote precise numbers, but we have techniques in which we can measure the impact of that and that's from where we derive the notion that we feel comfortable still sticking to our strategy in terms of not changing the amount of distribution we are giving to these products, or changing the discounts that we're giving to consumers on these kinds of packages.

So we are not seeing anything here which tends to be structural. But we think that this is a short-term effect; that we can deal with it.

The number doesn't look good in terms of the short term performance on the volume base perspective, but if you dig down a little bit into the economic performance of the business, we are still comfortable with what we are delivering in the end.

So they might be similar today in terms of a percentage of upsize 1.2 liter, in terms of their portfolio, than you are? Or are you suggesting that they've actually perhaps today, have a higher percentage in that kind of 1.2 liter format; they have a higher percentage of their volume that perhaps has been upsized already, compared to yours? Is that what you're saying?

Yes, it's the second-- more than the first.

Okay. Thank you.

Thank you.

And our next question will come from Sohel Amir with Lucite Research.

Good morning, everyone. Just quickly, if you could share with us your market shares in Mexico and Brazil; that would be helpful. And just a confirmation; you said that-- if I got it correctly-- that the opening of new stores would be likely north of 850 store for OXXO. If that was figure for on a per-quarter basis or for the rest of the second half?

Yes. First, on the second question, the 850 net new stores is the number for the full year, Sohel. It's for the full year, not for the quarter. So that's what we're expecting. That could be a higher number than the one we achieved in 2008.

And in terms of share, as Lore was saying, for the first semester of the year, we are having a loss of about 1.5 points of market share and the bulk of it is explained by both upsizing on a liter and a quart, on the 12-now-ounce Corona returnable in Mexico and on the geographic effect of Central Mexico growing or contracting significantly less than the Northern part of Mexico.

And in Brazil, I would say we are not still aware of volume numbers from the leader of the market. We will have that maybe in the next two or three weeks, but we think that we will be approaching something like eight tenths of a point of market share loss, maybe, in the Brazilian market quarter to quarter.

And just as a starting point, Sohel, our market share in Mexico roughly is a little bit under 44%. Once you take the adjustment that Javier just mentioned, that would take us to somewhere between 42 and 43 for the first half of the year. And in Brazil, we are at a high single-digit market share. We're one of three players that basically split about 30% of the volume among the three of us.

Great. Thank you very much.

(Operator Instructions). Our next question will come from Carlos Laboy with Credit Suisse.

Yes. Good afternoon, everyone. Javier, in Mexico at what level and when does the market share loss end, in your estimation, given this upsizing impact? And then on Brazil, I wanted to ask Antonio's question a little differently. How does market spend, ad spend, media spend in Brazil compare for Kaiser with the levels of one or two years ago? Have you made a mistake with these Kaiser budgets this year; maybe cutting them too hard at the start of the year and would it surprise you if you lost share this summer?

Sure. On the first question, Carlos; the decision of our competitor to increase from 11 ounce to [12 ounce], the returnable leading brand in Mexico; I think it's already made cycle in June, basically. So we don't anticipate that going forward we will still have an impact on the 11 ounce to 12 ounce decision. On the liter and a quart, we still think that for the second half of the year, we will have an impact. But as I said, we will be facing easier comps in the second part of the year as opposed to the first one. So when we're looking at market share, again, we are trying to come up with a clear picture of what's going on, separating if we are losing distribution or if we are losing transactions from consumer or if we are losing brand equity of our brands. None of the three have happened. So most of the difference between volume growth of the two companies, at least for the first semester, the explanation we have internally are pretty much driven by the upsizing strategy and the difference on the geographic growth of the North as opposed to Central Mexico.

So going forward, we will need to wait until the final numbers get there. But we will have of course, this year comps and they will have tougher comps, but they will still have some benefit of the liter and a quart, still not making cycle, but not anymore the 11 ounce to 12 ounce effect.

And on the second question, as I said, we are still driving the bulk of our decisions in terms of the marketing investments we're making in Brazil, driven by the fact of how much money we think the brands require and how much money the rest of the players are investing. So we have cut some of the-- I would say media advertisement being spent in Brazil. And the disproportionate share of voice that we had against the rest of the competitors has been reduced, but still we are over-spending if you look at our market share as opposed to our share of voice in terms of media spending in Brazil as we speak.

And on the rest of the elements, we were in the initial stages when we bought the business in early 2006; we were spending a lot in internal-- the establishment of the internal system for monitoring the brand health was done in a very, very extensive and expensive way. And we think that now, we can reduce the level of spending for some of those activities and that's an example of some of the places in which we have been reducing the amount of money that we have been putting behind the brand.

And if you remember also, when we launched Sol late in 2006 and '07 and part of '08, we were spending accordingly to a brand that needed to get to certain levels of [native] awareness for Brazilian consumers. Once we reached those levels, which we think are healthy enough, now we can reduce our spending in more brand-building efforts as opposed to just brand awareness efforts.

So we don't feel, as we have said in the past, we don't feel pressured or obligated to manage the marketing spending to balance the P&L for a certain year. We're still in Brazil, building the business for the long run, and we are comfortable with the way we are spending our money in that market. So that would be my comment, Carlos, on your question.

Do you expect to lose market share for Kaiser this summer?

I'm not sure, really. It will depend on what the reactions of our competitors are behind the adjustments on pricing and the promotional activities we're putting in the marketplace. But, what I can tell you is that we're going to balance much better, the equation of pricing and volume, as was the case for the second quarter. We were not that disappointed for the first quarter, which we feel showed, I would say, a healthy volume growth similar to the leading player in the industry. But the second quarter, to tell you the truth, was a disappointment. So we're reacting very fast to change that.

Thanks, Javier.

Thank you, Carlos.

Our next question will come from Celso Sanchez with Citi.

Yes, hi. Good morning. I want to talk about export volumes. It's been something that over the years I had tended to look at a little less carefully, simply because it was a small part of the business. And although other parts are growing well too, I think the resilience of that business, particularly in light of what's going on in the U.S. import category is pretty impressive. Can you update us on how you see that success, again relative to the backdrop for the overall economy in the U.S.; is it still a penetration issue? Is it a coverage issue? In other words, have you improved and are still rolling out more of the coverage or is it really just taking a strong hold in some of the key markets like Texas and so forth and just growing share more robustly in those markets?

Yes, sure, Celso. I will split it in two. I would say that Tecate brand is performing extremely good in most markets. But in some of the markets in which, I would say that immigrants are more fiercely fought or pressured; in those markets Tecate is suffering. But that tells the story for Tecate. And I wouldn't say that Tecate is driven by distribution, the Tecate performance is still more driven about just frequency of consumption and the capability of attracting consumers into the brand.

I would say that if you look at the kind of advertisement we have in place today, and this is not our opinion; this is both the Heineken USA guys and the wholesalers-- all of them in the U.S. are telling us that-- the Tecate campaign today both for Hispanic niche segments, is the best we've had in years. So I think that for Tecate, I would say that the marketing campaign and the promotional programs we have in place are running very, very well. But, the performance is being affected by those markets in which immigrants are again, fiercely pursued.

In Dos Equis brand, I would say the explanation behind the double-digit growth still very health of the brand-- has a lot to do with distribution. I would say 60% of the volume growth is coming from distribution, expanding distribution; which speaks well for the brand which has now the strength to go into accounts in which it was not present in the past. But still a good 40% of the acceleration is coming from velocity. So when you look at again, bossing around of the most interesting man campaign in general media, the amount of money we're putting there; but now with Dos Equis we're having 2009 being the first year in which we have now national media for the brand and the distribution expansion, the velocity, the brand health indicators; all things are going well for Dos Equis.

So I think you're right when you say that our performance in the U.S. market has been-- when compared with the overall performance of the economy and the category, are impressive. And we are still confident that the-- anticipated leading indicators that we're looking at still tell us that this is going to continue for the foreseeable future.

Okay. And just a follow up on that; in the context of your distribution partner in Heineken; how do you ensure that-- it's not the only brand obviously or the only brand family that's suffering in this recession. But how do you ensure that your brands continue to get that kind of focus in the months ahead? Obviously the recession in the U.S. is still an issue, even if it's not getting worse; it's certainly still an issue. Is there anything in place to make sure that-- as both your partner and other competitors try to focus more on the resilience of their brands that you continue to get attention and distribution access?

Sure. First of all, I would say that-- I mean one of the important reasons why we enter into a commercial relationship with our partner in the U.S., Heineken, was because of the way they handle the business. This is a very, very robust organization and a very well-run organization. So even though they're facing tough times with their brands because of specific reasons, which it's becoming much better as we speak I'm sure-- there's a very, very clear distinction on resources which need to be allocated to the Mexican brands and these guys are very professional, as I said.

And they are, I would say, stretching the time and resources in order to-- I would say yes, put more time behind their own portfolio brands, but still continuing to do the best they can for our brands. And of course our brands have a good performance, have I would say the agreement has very, very specific terms that allow for the brands to be well taken care of. So there's not a slight concern about the performance on their portfolio is going to create a difficult situation for our brand sales. So we are very, very happy with the relationship and we're very, very happy with the commitment these guys have put behind our brands.

Okay. Thank you.

Thank you.

Our next question will come from Jose Yordan with Deutsche Bank Securities.

Good morning, Javier and everyone. My question was just about Brazil. There's been a lot of press lately about all these anti-trust cases against Ambev and as far as I can tell, some of the-- at least according to the press, some of them basically came from you. I mean the market is beginning to look a lot like Mexico with sort of accusations flying back and forth. But I guess if you can-- my question is just if you can help us understand what the issues are here, because it seems like many of them are just for standard industry practice things that you, yourself do in Mexico such as loyalty programs and requiring the coolers to only store your products, etc.

I mean obviously, we don't know the details and I'd just like to understand where exactly they may have crossed the line and what the substantive issues are here, as opposed to just-- business as usual, let's say.

Yes. Sure, Jose. As you just said, there's a very thin line behind what's printed in the regulations in each country and what the-- performance of the players in the different regions. So I would say, for distinction what I will do is-- the Brazilian market has a clear leading competitor which-- I mean is a number of times larger and takes a disproportionate of the profits of the industry. So I would say the way the competitive authorities in Brazil are managing this is I would say, very, very different from the case in Mexico in which you have two more even competitors fighting the good fight. And even though exclusives in Mexico, as you know are not only legal but very frequently used and have a number of reasons behind that, because of the structure of the retail network and because of the history and whatsoever; so I would say-- my first comment would be to separate the two markets because they are very, very different.

And I would say that again, what's going on in Brazil is just I would say the permanent work that the authorities have to make on this front when you have such a dominant player in the marketplace. The specifics of the rulings-- the appealing instance, the merits of, the guy which is accusing the other-- I would say that will give you enough material for a book. But I would like to really go a little-- I mean a lot into the details of this specific case, but I would assume that it's healthy for any market in which the structure of the competition is the way is in Brazil, I would say all in all, that it's a healthy stance in terms of the authority just-- I mean following closely, because if you are not closely following and monitoring what's taking place on the marketplace, it is very, very hard to make a ruling on anything that's going on there.

So we are pleased in terms of at least the competitive authorities are closely following this, even though the length of the time that it's taking for the authorities to make a decision is not the optimal, we understand that this is not a simple process.

Okay. Thanks a lot.

Thank you.

And with that, there are no further questions. I would now like to turn the conference back to Mr. Astaburuaga.

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

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