Coca-Cola Femsa SAB de CV (KOF) 2002 Q3 法說會逐字稿

I would like to remind all parties that today's call is being recorded for replay purposes. This conference call may discuss certain forward-looking statements recording Coca-Cola FEMSA's forward-looking statements and good faith estimates made by the company. These forward-looking statements that are based on currently available data. Actual results are subject to future events and uncertainties which could materially impact the company's actual performance. I would now like to turn the program over to Hector Trevino. Please begin.

Good morning, and welcome to Coca-Cola FEMSA conference call. We will discuss our third quarter 2002 results. I will make a brief commentary on the third quarter results before we go to our questions? This has been a very successful quarter for Coca-Cola FEMSA. Our company continues delivering double digit of rate and income growth, increasing profitability. Data operating income to 1.6% during the quarter and consolidated down margins to reach 31%. In Mexico, profits grew 4%, excluding other products. We continue sampling Coca-Cola trademark under the keen light, a diet flavor product, in order to better examine the potential. This is a clear example of how Coca-Cola FEMSA can on a distribution network using the markets gathered through our system to explore new business opportunities that will not overlap with our existing portfolio of products. Now, excluding other products, Coca-Cola and Coca-Cola light generated more than 20% of the incremental earnings during the quarter. No one existing carbonated soft drink flavors considering more than 50%, and brand seal, the Coca-Cola still water brand, consumed more than 20% of the remaining bottled generated by non-carbonated products launched during 2002, including power aid, nuclear adventures, and the recently launched [inaudible]. During the third quarter, we expanded our portfolio of products and entered into new beverage flavors with the support of the Coca-Cola company. We launched mystique, a lemon flavored ice tea in a new packaging, targeting of those in the mid to high income levels. We also launched beep, a citrus flavor carbonated soft drink targeting teenagers. This new approach will bring forth our presence in the flavor carbonated and non-carbonated soft drink segment. The performance of these products is going according to plan. Regarding our strategy, beginning in the third quarter of this year, we agree with the fourth quarter company to strengthen the market of the still water brand. For this reason, we launched on October 12 a five liter one way packing presentation at 10 pesos. We believe there is a significant business opportunity for the take home market segment for still water, especially with our distribution network to position this product. Our distribution network reaches approximately 175,000 points of sale in the Mexico until September of this year. This new packaging presentation has a more profitable pricing point per liter than the competition, still water, sold in 19 liters. And is more affordable than any other comparable packaging presentation currently being sold in the market. We believe that this product provides an excellent alternative for customers that have their only choice a 19-liter return presentation. This packaging presentation was traditionally available only in supermarket segments. In the region, we expect to present this presentation throughout Mexico during the fourth quarter of this year. We believe that the agreement reached with the Coca-Cola company to en - is an important value presentation proposition for our company. We will take advantage of the marketing support already available to promote this brand, to extend the number of packaging presentations in the market. Before the end of this year, we expect to be available more packaging presentations to target all other consumptions, consumption locations in the distribution channel. Our company has proven again to possess the appropriate execution tools and market expertise to bid successfully against new entrants in the industry. We can monitor daily the performance of our marketing strategies and the braver and progress of our competition in the marketplace. Based on the information, intelligence gathered through our system, we know that a company like Coca-Cola, a low priced brand producers of Coca-Cola flavored soft drinks - excuse me, Coca-Cola flavored soft drinks, has reached a market presence of less than half a percentage points in all of the points of sales covered by our company in our Mexican territories, both in the value of Mexico and the southeast. This despite operations in our third quarter in the last four months. We are using marketing information to leverage on the brand equity of our products, to implement promotional strategies. These strategies intend to manage more efficiently our marketing resources, helping our clients to increase [inaudible], motivating our consumers to prefer our products. These initiatives include bottling, cross-promotional activities, and packaging innovations. We have repriced some of our 2-liter non-returnble flavor presentations in order to strengthen their price points. We reinforce their market share prices and maximum profitability. Today, 2-liter returnable presentations - excuse me, non-returnable presentations of Sprite and Fanta are being sold at 12 pesos in the value of Mexico. At the same time we are adjusting pricing points of our C.O.D. flavors canned presentations from 4 pesos to 3 pesos. CRD flavor canned presentation only represents 1.5% of our total volume. And though this is strategy only affects a very small portion of our portfolio of packaging presentation, it provides a very competitive valuable position for our consumers in the flavor presentations. We are currently in the process of developing new packaging presentations to reverse price points of brand Coca-Cola. We believe that Coca-Cola has very strong brand equity in Mexico and is widely preferred among our Mexican consumers. Our strategies are formulated with a clear strategic focus and their success is assured to consistent execution. Our company is better prepared than any other soft drink bottler in Mexico to successfully deal with increasingly competitive environments. Now, moving into Argentina, despite the difficult economic environment in the country, we have been able to our execution strategy, taking advantage of changing consumption and buying habits of the population. The purchasing power declined of the Argentine consumer, is more available to buy returnable presentations, which are mainly available in small retailer stores. This consumption development combined with our execution expertise is helping us build new competitive advantages and values to entry against the competition. We are told our presentations reach 90% of total volumes in the third quarter. From 6% of total volumes during the same quarter last year. This shift in packaging has been mainly driven by the recently launched 1.25-liter returnable glass presentation for Coca-Cola and Sprite. We introduced this packaging presentation at 89 Argentine peso cents in May of 2002. If we went into approximately 24 cents U.S., a similar price of which a B brand, 2.5-liter presentation sells for. The recent success of this strategy confirms the strong equity brand of Coca-Cola, that being are willing to buy one liter less of Coca-Cola instead of a B brand. This presentation carries a very compelling value proposition for the customers when compared to our 2.25-liter presentation for Coca-Cola and Sprite, that is being sold at around 2.2 Argentine pesos. In October of this year, we increased the price of 1.25-liter presentation returnable glass to one Argentine peso. A very compelling price point. It is very encouraging that we're starting to use Argentina have worked exceeding our expectations. Largely in our value presentation brands. More than 8 eight months ago, helped us to position in low economic areas, using market information gathered by our sisters. This strategy strengthened our portfolio brands, helping us gain substantial market share from low price brands. Non-returnable presentations are providing loyalty to our products created buyers to enter into the competition, which in turn helps us gain further market share and strengthen the brand awareness of our products. At the same time, returnable glass presentations can reduce our dollar denominator raw material because we require the glass bottles - and they are more profitable than brand [inaudible]. Today, our market share in the low price brand territory seeks 30%. Eventually, we expect some creation of consumption from our one-way value protection brands to our returnable brand presentations, pleading to a more profitable volume. Value protection brands represent 14.8 of our total volume during the third quarter of this year, down from 20% during the second quarter of 2001. Excuse me. During the second quarter of 2002. We will continue strengthening our portfolio of products with new returnable packaging presentations, implementing price management initiatives in the near future. The strong efforts implemented year to date have streamlined our operations further, decreasing significantly our selling expenses. We expect our returnable presentations to help us regain our path to volume growth. Volumes are running flat to positive in the month of October. During this quarter, we have decided to report a one-time noncash impairment, writing off a significant amount to the goodwill related to Argentina and to cease recording the net asset value for our Argentine subsidiary as a hedge of our dollar liabilities during the current devaluation of the Argentine pesos year end results. Going forward, consolidated net income and as a consequence earnings per share will reflect a clearer and more meaningful result of the underlying performance of our operations. Due to the success of our current strategy in Argentina, we expect Argentine connection with our Argentine subsidiary to reach approximately 75 million Argentine pesos during 2002. In Mexico, we continue to expect growth in the Mexican territories to increase at the rate of 3 to 5% for this year an we are increasing operations income growth range guidance to 14 to 16% for 2002. With this, I would like to open the call for any questions that you may have.

Thank you. Ladies and gentlemen, if you would like to ask a question, please key star, then 1 on the touch tone telephone. Once again, to ask a question, please key star followed by 1. Our first question is from Francisco Chavez of Salomon Smith Barney.

First of all, congratulations on a very good quarter. Next if you could, Hector, tell us a little bit about how the pricing is evolving. You mentioned something in your remarks, but pricing from what you reported here has dropped in both Mexico and Argentina. Can you tell us if this is part of what your strategy of addressing competition or has inflation impacted the numbers or what is going on in both markets?

Let me go a little bit more in depth on the pricing structure. Let me first start with Argentina, which is probably shorter to explain. In Argentina, when we're trying to local currency, we have been increasing prices substantially in those presentations. The range is probably between 47, 50% on the low end, presentations like 2.25 PT one way, all the way to presentations that we have increased like 80% in the case of cans in Argentina. In that specific case, cans, you know, this is close to the exchange rate. Very importantly. And in the presentation, and therefore, we have been increasing prices in local currencies, very important.

What is happening in Argentina, is as we have introduced also the 1.25 returnable presentations and that presentation follows very close to 15%, in excess of 15%. That has lowered our other price per ounce or per unit case. It's very important to point out, we're trying to explain that, given the returnable glass bottles, that we use that several times during the life of that bottle, the cost structure is substantially different and therefore our profitability is also improving even though we are seeing a lower price per ounce even with we compare that with some other brands like crush. So the profitability for the company is improving although, as you correctly pointed out, our price per unit case looks as if we are reducing prices in Argentina, yes.

Now let me go to Mexico. We have - during the last conference call, you recall, we mentioned that the only point where we were worried about our market share in numbers were in the large format stores that sell at very low prices. Because of that, we have decided, and in that case, it's specifically the case of flavors. Of the four flavors, not for brand Coca-Cola. Because of that, we decided to adjust the prices of some of or flavored products. We basically have reduced the price of Fanta and Sprite in the 2-liter one way presentation to have price parity versus brand Pepsi-Cola and let me give you some numbers. We were selling out of our 2 liters one-way presentations for 14 pesos. And we are selling our 2-liter returnable presentations at 12 pesos. The highest price of our competitors for a 2-liter one way presentation is 12 pesos, or in similar package, we have a 2 peso premium, which is a substantial premium, but in the case of flavors, where we don't have a very important volume base on returnable products, the price gap, we were comparing Pepsi Cola products at 12 products if a one-way package versus 14 pesos in our products, so we decided to move those prices to have a price parity with Pepsi-Cola. With that we feel with those brands that do not have the same brand equity that we have with Coca-Cola, it's important that we adjust our price. It's very important also to point out that these presentations represent in the case of flavors less than I would say 6 to 8%, including the volumes that we're selling in cans. Cans represent in flavors is around 1.5% to 2%, and 2-liter one-way products for our flavors are around the 6% range. So on those specific presentations, we are adjusting the prices of brands during this conference call. With the basic idea of going into our price parity against brand Pepsi Cola. We believe that that price movement and volume effect on that, that the - that the profitability 4 our company - for our company, the combination of the selling price and the original volume that we are expecting from that will be a good economic proposition for the company and that's basically what is happening, Francisco, with pour detail on the pricing front for our products.

That's great.

Brand Coca-Cola, we are selling 14 pesos, Pepsi-Cola sells 12 pesos one way, an we're selling brand Coca-Cola in returnable packages in 2 liters of 12 pesos. So the consumer wants a slightly better price, they will buy the returnable presentations and those consumers that really like our brand and they like the convenience of our package, they need to pay these 2 extra pesos for the same amount of liquid.

Very helpful, Hector. Thank you.

Thank you. Our next question is from Carlos Leboy (ph) of Bear Stearns.

Carlos Leboy (ph): Good morning, Hector. Hector, I was hoping you could expand on how you see the returnable bottle strategy evolving in Argentina, specifically in three areas. In the area of production, how do you see a returnable mix going eventually? And do you see yourselves having to invest in new fixed assets for returnable bottles? For returnable bottle capacity? And how do you balance that idol capacity that's growing in one-ways. Also, in the second area, if you could expand on channel mix. How is the returnable bottle affecting your channel mix. And lastly, internally, has it been difficult to reintroduce the returnable bottle culture in Argentina and is there a lot of execution upside as you move forward

Good morning, Carlos. Let me go into some of the capacity situations in our production plant. Where you have the need to look for opportunities to rationalize your operations, you need to start finding ways to really to do investment in a very efficient manner. The investment so far in our case, in our division in Buenos Aires to introduce the 1.25 glass presentation has been on the order of 5 to $6 million. The majority of that investment has to do with bottles and cases. Which is an investment that is hard to decide because of the specific presentation in Argentina, but I think it is one that is - one in the sense that not every other company might have those kind of opportunities to dedicate that kind of resources to the market, to reintroduce again this returnable presentation. It has been in our sense a very successful introduction, and as I mentioned, most of investment is in bottles and cases. A small portion of that amount is for returning some of the production line. We have one example if Argentina that I think is remarkable. We have production lines that are doing returnable glass bottles, returnable TP bottles, an one-way TP. bottles, which is the only case where we have a single line producing the three different packages. We have seen in the past lines that were doing either returnable PT or one-way PT We have some of those in Mexico, but this is the first time that we are doing it on the same line, also glass bottles, and I say that this in a way that it is a necessity also pushes for a lot of activity in our operations. Depending on how this year was, we do believe that it might be necessary to continue investing in some other presentations, in the internal presentations. We can expect that returnable presentations reach around 400-45% of our mix in Buenos Aires, and that's something that we believe that we feel very - that's a very reachable target, and as I said, this is a very important element because clearly for our B brand producer, going into returnable presentations I believe is not an option. The crisis that we are having in Argentina as we have mentioned in the past, I think that is presented to us also an opportunity to change some of the basic structure of our business, namely returnable presentations and also to improve the presence of the small retailer, these presentations so far are being only sold in the small amounts and what we call the traditional channel. As you recall, supermarkets, they are a challenge that they don't like handling returnable products and that has also helped improve our channel mix. If we were to compare versus 1999, the traditional channel that in 1999 represent around 30% of our volume, it is now selling close to 40% of the volume, so this 10% differential is being taken totally from the hypers and supermarkets, which is for us a better proposition. So in summary, I think that again, this presents an opportunity to change towards a better mix in terms of what we have returnable bottles as a barrier for other producers competing in this market and also to our better channel mix than what we were having in Argentina in the past. I don't know if I answered all the questions that you have, Carlos?

Carlos Leboy (ph): Thank you. Just one last thing. Internally, as you start moving very fast towards returnables, is there a lot of room for improvement on execution with returnables to get margin improvement as you go forward with returns?

Yes, Carlos. We do believe that especially as we move - as we switch from the - our what we call or value protection brands and we switch that for returnable presentations, we are clearly improving our markets in that switch.

Carlos Leboy (ph): Thank you.

Thank you. Our next question is from Alex Roberts.

Hi, good morning. Actually, the first question is actually I wanted to drill in more to this stepped up noncash strategy. It seems like you're doing a lot here and the first part is really on the waters and in terms of volume, it's 5% now first 9 months water. Maybe you could give us an idea of where that's going to be in three years. It sounds like this could be really the fastest growth area for you. In terms of advertising, wondering what kind of support CL will get going forward, now that might differ really from what you've been getting up to this point, and is this really, you know, something that is part of a coke strategy to have a national sale brand? Is this kind of the beginning of this type of idea that we're seeing? Finally, in terms of relative margin on the waters, I'm getting the impression that really there could be a lift, a margin lift here, but not really the maybe you could comment a little bit on the timing of when we might be able to see the margin lift from the water. Thanks.

Good morning, Alex. Let me start, I do clearly believe that this is a very important change in the strategy for the Cole Cola company as you correctly pointed out. I think changing brands, that would now have a better structure for our brand - for our water brand sale on the national sale. That clearly helps in all the advertising and promotional activity. In the past, remember that the local it have TV stations, it's very difficult to advertise in Mexico city because those TV stations go national, so if you want - if you are based in Mexico city, it's very difficult to use TV if you want to promote our regional brand that is being sold in Mexico city, so I think that it's important that change and that we are also moving to brand field on this specific presentation. In terms of the volume reach of that product, it's very difficult for me to use specific items, that I think that activity is growing importantly. I think that we have a lot of room to grow. There are many participants and with this strategy of launching this 5-liter presentation, which is very specifically targeted for the home market, I think that we will start chipping away some of the market share that our competitors have with the 19 - or the 5-gallon jug presentation. So you have a better idea, we are selling these presentations at 10 pesos, when you have the 5-gallon jug presentation being sold at 20, so there's still an important price gap, but the convenience of this package compared to just carrying this bottle to your house and putting it in the appropriate device to serve the water is a totally different story. We do believe that using our routes, our trucks to go to the 175,000 retailers that we visit several times a week in Mexico city, it's a very important twist in the strategy because now the consumer will have to buy this presentation in the corner store, take that presentation very easily to their house, and as opposed to the traditional way of handling this very large containers of water. The profitability of this water brands are good. They are not as good as carbonated soft drinks, consolidated price point is substantially below that of Coca-Cola presentation. But it is a better strategy and very importantly, we view it as we are competing in the territory that is growing, it's something that is not - our carbonated soft brink but rather taking some share away from some of our competitors.

Thank you.

Our next question from Mark Rivera of Deutsche Banc.

Good morning. I just have three questions. Firstly on the water, regarding your reinforcement of the water strategy via this 5-liter presentation, should we expect anything further as far as complimenting your water strategy or the water strategy that you used to have and within that question also I would like to know how the price point compares against some of the main brands that compete in this package, like Fanta (ph).

Yes. Good morning, Michael. This presentation, it's clearly a presentation that is doing the market - it is not an important presence in the market as a presentation. We have on package sizes, so far, they were selling around 14 to 14.5 pesos. For 5 liters. Same presentation that we have. The important difference is that they are only basically present in supermarkets as opposed to the - they don't have the distribution reach that we have, is so we believe by having access to all these retailers, it's a very important twist in this strategy. I'm trying to answer your first question. We do believe that there are opportunities in other sizes, personal sizes. We are trying to develop in the process of developing a presentation that will be target for different consumer locations, like a sports water, - using water as a sport drink, so we're developing a presentation that is the appropriate size and the appropriate capital for that.

Great. Now, regarding pricing, the strategy of lowering pricing in those packages that represent the small part of the mix, it's pretty much what Nam co-management says it's doing, but could you share with us whether you believe your vision of how you'll deal with new pricing threats a the competitive environment changes, whether it differs from that of other coke bottlers and how?

I think that - I think, that not necessarily 100 percent sure of what all bottlers are doing as far as strategy. We share some information, but in terms of the execution of those pricing in the marketplace, I'm not 100% sure of that. Let me tell you what we are doing. I think that one important element of our structure is that with the market intelligence that we have, we know exactly every day initially 175,000 retailers that we visit, where Cola was being sold. With that, we can target a specific promotion in that specific area. Let me give you some examples. We have used very effectively cross-promotions, for example, we buy cooking oil, which is normally sold at 5 pesos, we clearly receive a substantially lower price. It's normally sold at 5 pesos to the public. We receive a very important discount on - from the supplier. With one product where we have Coca-Cola bottle, returnable PT water, that sells for 12 pesos, so from the consumer point of view, they are buying a Coca-Cola bottle that is valued at 12 pesos and they are getting a cooking oil that has a perception of value of 5 pesos for free, so in their mind, they are buying Coca-Cola for 7 pesos. At the end of the day for us, that strategy is very similar to the prices that we have under the canned returnable presentations that we have either a 1 or 2 pesos value promotion that we have, so with no additional cost, we are providing to our clients, to our consumers a very important value proposition for them. And we are using that obviously in the poor areas of the city. And as I said, with the marketing tools that we have and the information that we have, we can monitor daily what kind of progress our competitors are getting in specific segments of the city. And that helps a lot in that process. Another thing in the last four months, they have had a commercial progress in excess of 1.1%. Progress defined as the percentage of our clients that carry the other presentations and they sell their products for a few days in one store, then they disappear from that store, they move to a different store and we are keeping track of that every single day.

Okay. Well, finally, Hector, just you mentioned the equivalence pricing or matching the pricing of Pepsi flares in Fanta and Sprite that you also lowered to 12 pesos?

If I lower what to 12 pesos?

Lift 2-liter one way to 12 pesos as well.

Not so far. It's a move that we're probably going to do in this quarter. We still have and Fresca 14 pesos.

At what price point?

That is price of 12 pesos. Strategically in the cases where we don't have an important presence of returnable 2 liters, we were lowering to 12 pesos.

Great. Thank you.

Thank you. Our next question is from Pablo Ivanic (ph) of J.P. Morgan.

This is Alicia Carbo of J.P. Morgan. I have a quick question. Do you expect to increase soft drink prices next year? And if not, where do you expect the sources of EBIT growth to come next year?

Good morning, Alicia. That's a tough question. We have been saying in the very beginning of this year that after the price increases that we had in the first quarter during February were on the order of 8 to 9%, that we were not anticipating further increasing prices in the very short term. I do believe that pricing is - that we will - we're doing adjustments in prices on very specific presentations, consumer locations, or very specific channels, as we have been working all along for the last three or four years. It's very difficult to create what the pricing formula is going to be because we would have to do also - have to do with the mix of our products for next year. One thing is certain, that pricing is a watch very closely and every opportunity we have, we take additional sales we can from the market. We feel that is true price-volume combination is better for the company, then we will move the price. If we believe that EBITDA or growth for next year is going to come from some of this pricing that we will do and the corresponding effect on volumes. In some cases, we might be lower in prices and we are expecting to get a better equation in the price - a better result in the price-volume equation. In some cases, we will increase prices and even though we might suffer a little bit in volumes, we are doing that because we expect again the revenue formula to be better. At the end of the day, it's very important that we focus on the profitability of our company, the revenue generation potential, and not so much on the volume or the specific price point of our packaging.

Okay. Thank you.

Thank you. And once again, ladies and gentlemen, to ask a question, please key star, then 1 on your touch tone telephones. Once again, questions, please key star, then 1. Our next question is from Dan Hosayer (ph) of UBS Warburg.

Dan Hosayer (ph): I just had a quick question about your cash balance. How much of it is offshore, if any at all?

We have been monitoring that very closely, because obviously discount balances are growing important. The last reading I have was from yesterday. We have around 43% of our cash balances in dollar deposits outside of Mexico. And around 1% is in Argentine pesos, that is we think the - the money that we use to operate our business and the rest is Mexican pesos.

Dan Hosayer (ph): Great. If I can ask a follow-up also. You mentioned before that the profitability per liter of the - of your new water presentation is lower than CSD's and you mentioned that it was because of price, but I mean obviously the cost is a lot lower as well. And in a case of Pepsi HEMEX for example, they have something like a 24% upgrading margin on their jug water product. Of course, that's still lower than your EBIT margin, but is that the kind of gap we're talking about or is it much lower than your general profitability?

General - we have achieved very good profitability from our numbers, good profitability numbers for our CSD's. We have margins on the order of 20 for the waters, with CSD's we have specialty, higher numbers. It's not that water is not profitable, but it's simply that when you compare with one brand Coca-Cola efficiencies that we have reached, it is - it's a different comparison, no? You have to take into consideration the - also the efficiencies that you achieve when you have dedicated products and lines for some of these, compatibility 4 some of our CSD's and how the distribution cost of all of this is - I mean, in terms of distribution costs, it's very similar. You also have to have some royalties that you pay to the Coca-Cola company, an then the difference at The end of the day, you have to assure that you have in there.

Dan Hosayer (ph): Right. And can I ask one quick last question? Any update on acquisitions? There's been rumors flying all over, including yesterday about FEMSA making an acquisition in soft drink and I know Panamco is a bit far fetched, but if you can just update us on your general progress there and how that has changed over the past few months, that would be great. Thanks.

Yes, I think that in general, there has been a lot of speculation because of the cash balances that we have and we have commented in the past that as we have P.B.D. coming to next co, and now - in the market, we see there are opportunities in the future in the Mexican market. I think that it's pretty much what we have been saying in the past with respect to in general with respect to consolidation.

Okay. Thank you. Our next question is a follow-up from Alex Roberts.

Thanks. Yeah, I guess the line dropped there on my - after my first question. To flush out more on the water, is it a safe assumption though, the next three to five years, that water would be your fastest growing segment - I mean, in terms of this carb versus non-carb, and then to round it out, about the keen light, what are you guys looking for here as far as what might be the things that you are convinced that this is something that you want to keep on doing? Is it the fact that competitors don't have it, is it the margin factor, or is it just incremental volume, if you could just give us some color there.

Alex, I didn't understand your question on water. Let me first answer the question on keen light. Keen light is a situation where we have been basically sampling the market to understand what the economies on that kind of drinks are. There have been some movements on the pricing on that category from the participants there and we have continued to analyze that. I think we're at the very early stages to determine if it's something that we should have in our portfolio. Because of the nature of the sampling, we don't have a specific numbers in terms of analyzing profitability with that because it's water, you know, something that is without going into detail, negotiation of the economics with the Coca-Cola company on that economic proposition for us has not been totally described. I mean, again, just trying to see there's an appetite for an additional product in that category. In terms of the water, I didn't quite understand what you were asking.

No, it's just the growth of water versus, let's say, C.S.D. Cola, C.S.D. flavor, those are the three segments looking out three to five years, is it a safe assumption the fact that you've got growth coming from water?

Yes. In general, Alex, I think that is very good for me to give you a specific target in terms of the size of the power of water products. I think that that category is growing importantly, we need to participate in that, and as I mentioned earlier, we believe that with this new presentation, it will take away some market share from our competitors. I mean, that's what we're trying to do. It's growing as you see faster than some of our C.S.D. products and the whole world is growing in importance and we believe that we should be there.

Fair enough. Okay. And the last item was just on this increase in your guidance from Mexico EBIT growth. Is it such that - I mean, to get it into that mid range, let's say 15%, you need 12 for the fourth quarter, thereabouts, you had 19 first half, is this motivation here really about the, you know, the idea that you've had very good first half and you're going to be able to come into a higher range, or is it something that perhaps you're seeing in terms of recovery of consumption or kind of some incremental growth it sounds like from these other initiatives? You can just kind of give us a sense, what was going on behind your guidance?

In general, we see that - I mean, given the fact that we are now in October, we are closing to year end and we feel a little more comfortable raising this guidance, and this is just - we do believe that business is pretty much going according to plan. And we certainly feel a bit more comfortable in raising this guidance for this year.

Okay. Thanks.

Thank you. Our next question is from Robert Ford of Merrill Lynch.

First question was your estimated size of the water market, bows personal as well as the size of the take-home market in volume, if you have a sense of either one.

Well, the information we have, including the 5-gallon jug categories, is - there is a category that is larger than C.S.D. in Mexico when you include the 5-gallon jug water. I don't have with me the specific break down of the personal sizes, but I can provide that information later.

That would be great. Thank you very much.

Secondly, it's more compared to the 5-gallon jug versus the majority of the categories in that size.

Sure, sure. And then right now, which percentage - or what percentage of your clients are carrying personal size water as well as the 5-liter presentation that I know you're just rolling out?

The 5-liter presentation, we just introduced that, and the last one that I have is that it was pricing around 35,000 retailers out of the 175,000, so we are just starting to roll that out. Actually, the presentation was accepted so well that we were, you know, having actually some situation in production problems to supply demand the very first week. With respect to personal sizes, it's present in clearly every client that wants the product, they can have it because it's a product that we have in our line, but that product covers around 70% of our clients.

Is that trend growing, are you seeing more clients interested in carrying the product or is it stable?

I think that it is stable.

Okay. And then with respect to the incremental volume it experienced in water, how much of your water volume in the quarter was sold on promotion?

On promotion -

Or bundled type operations?

Let me check on that information. I don't have it with me.

Okay. And with respect to the personal size waters in particular, what kind of cannibalization do you, if any, from personal water size?

I think that is very small. Our feeling is that a consumer rather than deciding I'm going to take a water of a C.S.D., it's a decision of which brand of water to take, so we won't see any specific level can of cannibalization here but I can give you more specific information later

Okay. And with respect to the take-home market, have you entirely ruled out the 19-liter jug or are you simply delaying it until you make an impact with the 5-liter presentation and see if it matures?

If I understand correctly your question, you're asking about if we are going to roll out some day the 19-liter jug?

No. It's more have you ruled it out? Is it definitely not something you're going to look at?

No, I understand you're asking if we are rolling that out. No, I think that we think that it's a presentation that we have so many competitors, more competitors that are not necessarily competing on the same basis that of a traditional, well-established firm, and we rather than looking at an alternative to differentiate our products from what is there. I mean, I would not rule that out until we have the results of what all this is, but our is to start working with presentations that would create a differentiation, and also would be carried in our products as opposed to having, you know, like a totally separate distribution fleet for that.

Okay. And with it comes to the dividends, you had a pretty big increase in the dividend this year, up over 80%. What's your outlook going towards this year or next year for the dividend?

One important thing to understand is that the - when Coca-Cola created some independent company in 1993, the agreement between the Coca-Cola company and FEMSA was that the level of dividends should be around 20-25%. We have been working in that range basically during the last, you know, nine years, and it happens that last year, that income grew importantly and that's why when you look at the absolute number, the - the dollar amount, the peso amount of dividends was larger than the year before, but it was still between that range of 20-25% of net income. Next year, it's our proposition that we state at the shareholders meeting and we have substantial cash balances, but as we have said, we do believe that there will be opportunities for consolidation and we are keeping that as our war chest. If we don't see opportunities in the consolidation process, we need to take a look at our dividend policy among our FEMSA of how to use our cash values.

Our next question is from Mike Schwab (ph) of Arthur capital.

Mike Schwab (ph): My question was similar to the difficult dent question. Just expand on that. The question would be at what point on your stock price would you consider buying back stock? You currently are at valuations sort of near-term historical lows, certainly would be quite accretive and as your cash grows, investors are going to be little let patient with the cash sitting on the balance sheet. If you can give us a sense of stock price and timing for considering a buyback.

It's a tough question. Clearly, what we have commented in the past and we believe is still the position of the company, this is what we have been presented and the board and directors have supported, even though the prices are because of the historical low - and prices that we have in general, we believe that given the size of our float, we should not be focusing on repurchasing shares at this moment. I would just comment on the previous question, we do believe that because of the consolidation potential opportunities that might be developing in Mexico or Latin America, in some cases because of competition, in some cases because of the economics - microeconomic environment, we believe that those resources are very good trying to grow our business by acquiring some more franchises.

Mike Schwab (ph): Could you give us a sense of how much time the company had give itself to find acquisition targets?

I think that - I think that is kind of out of my reach to decide on that. I mean, something that we review in our board of directors and in the finance committee, but I can't give you in four months what those positions, no.

Mike Schwab (ph): Thank you.

Thank you. Our next question is from [inaudible].

Good morning, Hector. Also about the water strategy. Just a couple of questions - one simple clarifying detail. Can you confirm again when the agreement was finalized with Coca-Cola, was it in the beginning of the third quarter did I hear or the beginning of the fourth quarter?

It was at the beginning of the third quarter when we were finalizing that agreement with corporate company and it took us all the way to October 12 to arrange our production capacity to launch this new presentation.

Okay. So you had agreed back sort of in July-August and then by October was rolled out?

Yes.

The other question really is if I understood correctly, there seems to be a pretty substantial price gap in the same 5-liter presentation with your competitors. I think I heard something like 14 to 14.5 pesos for that same presentation. If I heard correctly, doesn't that mean presumably that after the initial launch phase, you could ramp up the price reasonably quickly and therefore help margins as well in a more aggressive fashion?

Yes. This is clearly - the 10 pesos is a very direct price point. The 10 pesos is a specific, you know, coin for dollar, and they have an attractiveness, but they need an opportunity to increase prices as we continue to roll out this product and see how competition reacts.

Is it fair to say that six months from now, assuming you have obviously it's a very, very early stages, but assuming you have continued strong success, where, if anything, the problems are bottle necking and getting the product out to retailers rather than demand, that your price comes closer to the 14 and 10 or will competitors just have to come down and approach you?

Water is a very sensitive product, it's very sensitive to price, no? We need to watch how our competitors react, but our strategy would be to start increasing prices in the future once we finalize our rollout of this product. We need to judge the timing of that, how our competitors are reacting.

And I know this might be difficult, but do you have any sense of what the personal size market share might be that you have? I recognize it's a small percentage of the overall water product, but do you have any sense, is it 10%, 15%, something like that?

When you look specifically at the personal sizes, we are around - slightly below the 20% range -

Okay. That's defined as sizes up to 1.5 liters?

Up to 1.5 liters.

And just a follow-up on the profitability growth question for next year. If pricing - I understand that you want to maximize the price-volume equation, but it sounds like an essentially difficult - somewhat difficult economic environment, the pricing might not be the he's easiest thing to increase, volume would be the driver I imagine, but to sounds like a bigger driver might be lower price per case, I.E., water and non-brand Coca-Cola. The implication to me is a relatively modest EBIT growth rate next year. Am I interpreting things properly or are there other drivers I should be considering? I -

We are in the midst of our business planning process, and I prefer to wait until the next conference to start giving some guidance and - on profitability for next year.

Okay. Thank you.

Thank you. And our next question is from Lewis Balareason (ph) of Action Segal (ph).

Lewis Balareason (ph): Hi, good morning everyone. Good morning. If I understand correctly, some or part of the price erosion that we saw this quarter is due to the high proportion in your mix of flavors versus Colas. You already said that you wouldn't be able to provide a target mix for waters, but what about flavors, would you be able to comment a little bit on the - on what you expect in flavors to be a part of your mix for next, say, two or five years, I mean long term? And if you could comment on profitability of flavors versus Colas, whether it's higher or lower and if the gap is approximately the same size that you have already versus water and that you already got? Thanks.

It's a difficult question because we have been introducing new presentations and obviously the mix of what flavors will represent of the total mix would be dependent also on the success of this new presentation. For example, we just launched a new presentation that is very similar to the mellow Jell-O products in the U.S. If that presentation is successful, clearly flavors will continue to grow in importance. In the other presentations, brand Coca-Cola and Coca-Cola light, the only movement you have is changing the packaging mix. You don't have - on that, we are not seeking vanilla coke or something like that. Therefore, we believe that flavors will continue to grow in importance. To what level it's really hard to judge. Colas have very - have been around the 70-75% range of our total mix for the last 10 years. And I think that that probably will come down from that level very slowly. It certainly will come down. In terms of the profitability of the two different categories, they are quite similar. Again, it would depend on how we adjust our pricing formulas in the future. As I explained, we have been able to sustain very important price gaps versus our competitors with brand Coca-Cola and Coca-Cola light. And therefore it's - at the present pricing formulas that we have, we are pretty much different among the two different categories terms of profitability. I don't know if there was another question?

Lewis Balareason (ph): Yes. I have another question. This is more of a curiosity question. With this new promotion you have in the southeast of tying up some of your products with - you were saying oil, oil bottles, do you actual live distribute the oil bottle to be - or is there any other mechanism? Because I would be a little bit concerned on the utilization of your trucks. I mean, there would be underutilized if you were to transport the oil, for instance. This is more of a curiosity question.

So far, this - in this promotions, we have been using our distribution force for that. I mean, we have to bottle the product and do this and obviously there is an advantage of that because of the way we are executing the market. There is instances where there are cross-promotions, which are very important participants on the other side, and then you can see different strategies, like when we have been working with beans in the past on promotions or whatever. But on those specific promotions, we have been working with cooking oil or with beans, we have been using our distribution,, but it is not significant.

Lewis Balareason (ph): Is there any significant profitability in your routes?

No, there's no significant -

Our next question is from Marcella Martinez (ph) of Deforte (ph).

Marcella Martinez (ph): I would like to know how much do you expect from your products representative of your product mix this year and next year and I would like to understand in just a little bit next year where your average quote is coming from?

New products. Let me answer just a few things. If we have -

This is John Hernandez. How are you?

Marcella Martinez (ph): Fine.

If we have products like beans, we have ventures with necessary tea and some of the new flavors from power aid, you reach close to 4%. It's 4% of incremental growth, but probably around 1 - less than 1% of increase of the total mix.

Marcella Martinez (ph): Okay. And can you just talk a little bit about in Argentina, if you have expect to acquire something or to improve your presence in that market with Coca-Cola or to you're supplying to outside of Argentina or going to South America?

Yes, Marcella. I think in general, we have expressed in the past that we are looking at opportunities, you know, we are always looking at opportunities and certainly Argentina is an area where you might have opportunities because of the microeconomic. It's different reasons that in Mexico, Mexico because of the presence of new competitors. We do believe that there might be some opportunities in Argentina in the future and we need to be ready if those opportunities are right.

Marcella, your first question, we are here in the conference. In the third quarter of 2002, the mix during the third quarter, coming from new products is close to half of a percentage point, but they represent close to between 7 and 3% of incremental voters for the quarter. I just want to make sure that everybody hears this, okay?

Marcella Martinez (ph): Thank you (ph).

Our next question is from Jose Galvin (ph) of DVA (ph).

Jose Galvin (ph): My question was already answered. Thank you

Thank you. Our next question is from Jose Garcia of MFS (ph).

Very quickly. Just cap ex for Q-4 if you have an idea of what you think it will be and what you think of cap ex for 2003?

The cap ex for the year we're expecting somewhere around 80 to $90 million, and I think that next year, it might be very similar to that amount, similar to the middle of our planning process and budgeting process, we have a better idea next - when we have the next conference call, but again, I think that is a very similar number, 80 to $90 million

Thank you.

Thank you. If there are no further questions, I will turn the conference back to Mr. Trevino. Please go ahead.

Well, thank you so much for your time and listening to this conference and if you have any additional questions that you might refer to the company, please give us a call.

Thank you.