Coca-Cola Femsa SAB de CV (KOF) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Coca-Cola FEMSA Q3 earnings event conference call. My name is David and I'll be your coordinator for today.

(Operator instructions).

This conference call may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect manage expectations that are based upon currently available data. Actual results are subject to future events and uncertainties, which could materially impact the company's actual performance.

The financial information for the nine months ended September 30,2003, both on a consolidated basis and by country includes nine months results of the original Coca- Cola FEMSA territories, Valley of Mexico, South East of Mexico and Buenos Aires. And only five months of our new territories acquired from Panamco. Our consolidated results for the third quarter of 2002 do not include new territories.

Coca-Cola FEMSA's financial information will not be comparable with previous quarters until the third quarter of 2004 and on a yearly basis until the end of 2005. I would like to now turn the presentation over to your host for today's call Mr. Hector Trevino, Chief Financial Officer, Coca-Cola FEMSA. Please proceed sir.

Good morning and welcome to Coca-Cola FEMSA's conference call to discuss our third quarter 2003 results. We continue making significant progress with the integration of our operations by streamlining manufacturing and distribution facilities. We are starting to achieve higher productivity levels for employee (inaudible) operations. This effort is helping us reach higher quantum's of scale, data utilization and will improve six cost absorption over time.

Currently we are operating with 34 plants all over Latin America compared to the 52 that we had in early May of this year. Strengthening our manufacturing network will provide us with flexibility to invest in the market place to develop the capability to compete more effectively in our territories.

These market initiatives include introducing returnable presentations to strengthen the brand equity of the Coca-Cola company brands, rationalizing in some markets and increasing in orders the portfolio brands, improving and increasing our cooler presence and reconfiguring our distribution network in order to become more efficient, by adapting our pre sales system practices to our new territories. We believe that the integration process is progressing better than planned.

In Mexico, excluding volumes generated for marginal activity with further (inaudible) last year. Total volumes grew 3.2 % during the third quarter of 2003, including a 4% CSB volume increase. This performance was mainly driven by 1 approximately a 1.5 volume growth of brand Coca-Cola. This strong performance of our carbonated soft drink label brands mainly driven by the recent introductions of Fresca Rosado and (inaudible) and the off scaling to a 2.5 liter, non-returnable BT packaging presentation of our core flavor brands.

Carbonated soft drink flavor volumes increased around 13% in our Mexican territories during the quarter. Volume growth was also driven by the strong performance of Stillwater CN in the Valley of Mexico, growing volumes by more than 60% during the quarter, which partially offset the volume decline of the jug water business in our new Mexican territories. We continue to implement (inaudible) management initiatives to increase the profitability of the jug water business.

Excluding volumes generated from promotional activity with (inaudible) last year, carbonated soft drink flavors generated more than 70% of incremental volumes during the quarter. Brand Coca- Cola represented more than 25% and the balance was reduced mainly by Stillwater brands here. The Valley of Mexico will present us slightly more than 70% of the incremental volumes generated by our Mexican Territories during the quarter.

The Carbonated soft drink industry in Mexico is certainly facing a more competitive landscape and the Mexican economy is facing a weak economic environment. However we believe that our 2.5 liter return over BT packaging presentation for brand Coca- Cola is proving to be a compelling value proposition for our clients and consumers.

This presentation has helped us strengthen our market presence in our regional Mexican territories and its (inaudible) market presence trends in all of our new Mexican territories. We are ready to introduce 2-1/2 liter returnable BT packaging presentation for brand Coca-Cola in the main series of our regional and new Mexican territories.

Recently our main competitor in Mexico initiated a price cutting strategy and family site presentation for Cola and individual site presentation for Cola's and flavors. We believe that our family side return over packaging presentation for brand Coca-Cola and non-returnable package for core flavors will continue providing a better value proposition to our clients and customers at current prices.

In the case of individual size, package and presentation, revenue management and packaging (inaudible) station by channel has proven to be the viable or sustainable strategy for Coca-Cola FEMSA. Throughout the years, Coca-Cola FEMSA developed a marketing model with the strong brand supported by state-of-the-art information system and high cooler progress, executed by a proven management team that developed a close relationship with their clients.

The second week of October, we adjusted the pricing architectural for our (inaudible) presentations for flavors from 4 pesos to 3 pesos and the eight-ounce, non-returnable glass presentation of brand Coca-Cola also from 4 pesos to 3 pesos. These two packaging presentations combined represent less that 3% of total volumes in Mexico. We already implemented a similar strategy in the fourth quarter of last year with successful results. When our main competitor in Mexico implemented a price discounting strategy for its twelve ounce non -returnable TT packing presentation.

During September, we also introduced Coca-Cola Vanilla on a 450 milliliter PT packaging presentation and an 8-ounce aluminum (inaudible) package to test new alternatives in the Cola (inaudible) recycling (ph). We believe that Coca-Cola FEMSA has the portfolio brands and packaging presentations that provides enough liquidity to compete wisely in the current environment. We will continue analyzing new packaging alternatives approach (ph) to complement our portfolio fronts.

In Mexico, in the execution front, several strategies have been implemented in our new territories during the quarter to stream line our process structure, including sub contracting our production delivery from our plant to our distribution facilities to FEMSA logistica (ph). Sub contracting cooler maintenance to Bando (ph) associate of FEMSA and taking over fleet truck maintenance in-house. These initiatives will help us manage more efficiently our process structure over time.

Now let me talk about our Latin central division. In terms of America, our focus on returnable packages in the family size and in the view of presentations is to strengthen the market prices of our core carbonated soft drink brands and we believe it will increase the profitability of our territories. As a consequence of these strategies, TSDS in Central America posted more than 10% volume growth during the quarter. Approximately 75% of this volume growth was generated by the brand Coca-Cola and the remainder by our TSDS flavor brands, Fanta, Fresca and (inaudible).

The introduction of family size returnable (inaudible) presentations in Guatemala and Paraguay are helping us to capture incremental volumes from all of our risk segments such as juices and (inaudible). In Guatemala specifically, brand Coca-Cola reached a leading position in the Cola segment for the first time. Our regional Stillwater brands in Central America increased volumes approximately 15%, driven by better execution and proper placement at the point of sale. The more the consumers go to our coolers to buy soft drinks, the more likely they will buy more of our water glass (ph).

In Colombia, it is fair to say that even though the micro economic environment is showing signs of a recovery for export related industries, disposable income remains depressed. We are focusing our efforts on designing the appropriate pricing architecture, reinforcing the presence of our existing returnable packages in family size and media (ph) presentations.

We intend to foster future consumption of soft drinks with our reintroduction campaign for our 2-liter returnable BP (ph) package and presentation of the CSC's (ph). Providing our customers with the a more affordable value proposition. It is important to highlight that during the quarter in Colombia, approximately 50% of the volume decline was driven by our revenue and asset management strategy aimed to increase the productivity of water glass (ph).

In Venezuela, we continue showing positive results, despite a weak economic environment, and a very depressed consumer purchasing capacity. Our main focus in Venezuela is to bring back our operations to a more sustainable path of profitability. We are evaluating different alternatives to make our operations more efficient to a full provision of the call by the chain (ph).

In the past in Venezuela, the lack of well-defined price and architecture, insufficient investment in returnable bottles, low channel segmentations and little marketing brand support, limit significantly the execution capabilities over the operations. We are focusing our strategy in fostering (inaudible) consumptions in returnable packaging presentations.

We are also adding more balls (ph) to the market in key packages, such as the one-liter returnable flat (ph) presentation for brand Coca-Cola, and the (inaudible) milliliter returnable glass presentation for our core branches. These strategies combined with basic channel marketing, higher pre-sale coverage and training in basic (inaudible) should help us to strengthen the brand equity of the Coca-Cola Company brands and improve the profitability to our business.

Now let me talk about our (inaudible) division. In Brazil, we have reversed negative profitability trends, achieving positive operating income every month into the third quarter of 2003, while increasing our carbonated soft drink share of revenue in this industry. On the packaging front, we launched the following initiatives. Upscaling from 2 liter to 2.25 liter BT (ph), to (inaudible) family size packaging presentations of our core flavor brands.

We also launched a 200 ml returnable glass packaging presentation for brand Coca-Cola, in the (inaudible) channel with a price of 50 cents (inaudible), marking the steel cap on the bottles. (Inaudible) to approximately $18 U.S. dollars (ph), targeting the low income side. We just initiated the roll out of our 1.5 liter and 1 liter non-returnable, BT packaging presentations for brand Coca-Cola, targeting new consumption locations.

We intend to continue developing new points of sale to initiate packing segmentation strategies by channel, and to diversify our packaging concentration from 2-liter non-returnable BT packages and aluminum cans. It is important to highlight that the volume decline during the quarter comes mainly from the 2-liter non-returnable BT aluminum can package and presentations, precisely the type of volume we are trying to diversify from the ones and the one handle in the bag by intermediaries. We will leave that packaging diversification combined with basic new (inaudible) channel segmentation, should bring profitable volume growth over time.

We also launched three new products during the quarter. (Inaudible) a flavor with orange, Coca-Cola lite with lemon and a new volume rotation brand called Symponea (ph), in orange, lemon-lime and (inaudible) flavors, only for small retailers. The new (inaudible) and Coca-Cola liter with lemon have been well received by our resident consumers. Our preliminary marketing analysis demonstrates that these two line extensions are capturing new consumers and showing minimal to a small (inaudible). We think we have two winners here.

The launching of Symponea (ph) is part of our testing and evaluation process to develop the most effective value production starting for (ph) Brazil. We currently have other two (inaudible) brands namely (inaudible). We continue having conversations with the Coca-Cola company and the rest of the Coca-Cola bottlers in Brazil to design and implement a coordinated mechanism to decrease (inaudible).

In Buenos Aires, we reached the highest EBITDA margin in the history of the franchise. For the first time, we sold more volumes of premium brand than of value rotation brand. Returnable presentations reached 25% of total volume during the quarter, mainly driven by our one and a quarter liter returnable glass packaging presentation and the recent introduction of our 2-liter returnable BT presentation.

Our core brands in returnable presentations accounted for approximately 80% of (inaudible) volume during the quarter. And the balance was generated by the premium segment mainly driven by Coca-Cola lite, Fanta lite and Schweppes brands.

In Argentina we continue our multi segmentation and revenue management strategy focusing on socio-economic segments. For example we recently launched (inaudible) targeting the middle to low socio-economic levels. We expect to continue achieving volume growth with the highest margin contribution possible.

During the third quarter we issued several local debt offerings and prepaid with the proceeds approximately $549 million of our $830 million breach loan due April 2004. Currently 50% of our total debt is denominated in local currency and is slightly more than 60% of our total debt (inaudible) a fixed interest rate.

As you probably understand we are going through an important transformation. We expect to continue streamlining our manufacturing base and developing and strengthening our execution and marketing capabilities in our territories, to develop the most effective and efficient product and packaging portfolio. We expect this process to continue throughout the first year of operation in all of our new territories.

We strongly believe that through our manufacturing expertise, our experience in market segmentation with our diverse group of retailers and our large portfolio approach, we will continue increasing the overall profitability of Coca-Cola brands. We continue sharing with you the progress of our strategies and new initiatives. Thank you for your attention. Now I would like to open up the call for any questions that you may have.

Thank you very much, sir.

(Operator instructions).

And our first question comes from Robert Ford from Merrill Lynch. Please go ahead, sir

Hey, good morning guys. Hector first question was Cola's up 1.4% in Mexico, given the upscaling that's occurred year on year. Why is it only 1.4%? Shouldn't it be more than that? And maybe within the context of what's happening to the market as a whole, I know it was very difficult weather quarter for beverages, perhaps that is a factor as well.

Yes, good morning, Bob. I think that when you basically look at the different sizes that you have in the presentations, and you look at the, for example, at the 2-liter and 2.5-liter statistics. You will find that the number of transactions has continued to stay more or less at the same level, which implies that the upscaling is bringing some additional (inaudible).

(Inaudible), in the small (inaudible) presentations, not (inaudible) that's like a general trend that we believe is related with the economic environment in the territories we have. It is also important to point out though that, during the taking over of some of these new territories, that Panamco-the old Panamco car (ph) in Mexico, we have been moving away from wholesalers and distributors that in the past, were basically selling to other territories included in the valley of Mexico.

So that (audible) the first step, which uses somehow the volumes of our soft drinks or put in a different way, we have to bring a lot of growth in, because of these strategies (ph) but we think it is the appropriate movement in our-in that direction in different new territories. Now moving away from these wholesalers and distributors that were not necessarily saving in the old Panamco territories and that's mainly in the Brazil (ph) region.

Do you have an idea of what exactly Panamco sold to these wholesalers and distributors last year and in third quarter?

I need to check on that information, we checked and (inaudible) , but I don't have on the top of my head. I will come back to you with that.

OK. And you eluded to the fact that the Pepsis' made some changes in terms of their pricing architecture, and that you are comfortable with the changes that you've made in your pricing architecture, at this point. I am sensing that you don't feel as if you need to make additional changes. Can you, can you walk us through the changes you've made in pricing for package over the last quarter.

Certainly. Well, first of all, we were a bit surprised by these movements from Pepsi Cola. But basically what is happening (inaudible) is that on the 2.5-liter presentation, we now have basically the same price than (inaudible) on the 3.1-liter presentation, for (inaudible). We have what we believe is a very compelling, by-the-book position for our clients in the 2.5 returnable BT presentation.

Yes, again we are basically one peso above the Pepsi price and we don't have the convenience on that presentation of the, one way facility of not (inaudible) with the burden of the (inaudible) in our case. We believe that that pricing structure is good to maintain our position in the market, and we have not seen so far any signal that will, or any trend that will signal to a different position.

At the end of the day, if you were to compare the basic (inaudible) pricing 2.6 liters at 10 pesos, you will have similar packages of 10 pesos of (inaudible) 11 for Pepsi and 12 for Coke. We should be comfortable with that. We were supplied by the price of the decrease on this month's presentations, as you are aware Pepsi Cola has been competing with 12 arms. PT Wangway they are (inaudible) for-more than a year now.

Try to understand how they are maintaining that pricing, we went to find that even the cost of the bottle because of the size is a little more expensive than the normal bottle, you have to remember that when you move to smaller packages, (inaudible) is difficult to maintain, so you have to have a heavier bottle and sometimes you have to have some additional turns in the containers to maintain (inaudible) but they are that price.

So I was feeling so far is that by moving (inaudible) count presentation, from 43 pesos and reducing the price for our 8 ounce, from 43 pesos it used to be a 3 pesos, have increased the prices at the beginning of the year, that we will basically do the job of having presentation at 3 peso price point which is basically what we need to have.

So we are using that price point. What we have seen in the market is that, while these openings have been very recently, we believe that (inaudible) of the market is that the retailers have some inventories from the old price, so the new pricing has not been fully implemented, they have marked the low prices so we expect that this price would be (inaudible) in the future but so far we have not been that successful by-- in terms of the price being respected in the market because of the inventory that the retailers have.

So our idea is that with those two more pensions on the flavor, (inaudible) come 43 pesos and the 8 ounce one way glass Coca Cola, the very nice and small bottle, the old bottle does (inaudible) also from 43 pesos, but that's what we mean, and obviously we would be continued monitoring this pricing movement. It is also important to mention that in the case of the large presentations, Pepsicola only moved it with prices for brand Pepsicola not for flavor. So flavors on indeed a false brand for Pepsi Cola brand at the 12 peso level

Great, thank you very much.

Thank you and our next question comes from Lore Serra from Morgan Stanley. Please go ahead.

Good morning, Hector. My question is on the expenses in the Mexico and I know that the comparability of the lot of the status is difficult because of having two months of Panamco in the second quarter against three months in the third quarter but when I look at your SG&A expenses as a percentage of sales on absolute terms, there seems to have been more of an increase in to the third quarter than it would have expected and I know that you are on the process of realizing quarter over quarter all the synergies and is not clear exactly how they are coming into the numbers so, two questions, one if you could specifically given the sense of why the SG&A rose so much sequentially relative to whether it was in the second quarter and if you could just give us an update in terms of the progress of the synergies you are telling us if it is ahead of schedule but its hard to see it frankly in Mexico or any other franchise, thanks.

Yes, Lore, good morning and in general within these that if you remember most of the scenarios that we were anticipating comes basically from systems distribution, manufacturing and obviously with respect to the back office as we closed some of the head quarters in Mexico. We believe that we have accounted for some this | during manufacture and distribution from that we are moving ahead of scales.

With series of lower SG&A reflected the all the work that has been carried out, with respect to integration. Travel expenses have increased, we have also some additional expenses with respect to consulting fees mainly related to the integration of our systems architecture, you know we have a very long and we are estimating (ph) progress 2 lac for other 1, 2, years, to move all the SECs platform that Panamco have or the different platform that Panamco have on SEC to the single KOF platform that we have for our outgoing | and that has created some pressure on the SG&A.

Still it is very difficult to try to get a sense of where the line is moving because besides what we are saying that we compare easy (ph) of the numbers and as we are bent on this process we would be able to give a better chance SG&A language moving down. But I would say that those are the main liners that have increased importantly versus second quarter versus last year.

OK, and there's nothing in that, that is on any level one time need of recurring expenses in SG&A

No.

They were recurring, correct.

Its although what we said is basically recurring expense.

OK, and then I guess just two follow up. Is this sort of 27% EBITDA margin that you are realizing in this quarter, is that a pretty good base for thinking about what the near to medium profitability is in Mexico and I guess is second and related question is that-I still am not at all understanding where the synergies are coming in.

I mean you cut the Panamco corporate expenses which is I don't know $39 million or something, are they been reflected in the numbers or are they not, it is not clear to me, how true this Q3 margin is in Mexico.

Yes what I see that obviously I would target - with respect to your first question that is to continue moving not on that EBITDA margin obviously in the short term I don't expect very large movements on that because these improvements | to be doing little by little. The savings that we got from closing the Panamco offices in Mexico and Miami are fully reflected in this numbers. We have as I mentioned another different expenses related to the on going process of integration of systems.

We have also some regional expansive related to the movement of the Mexican peso currency is all that, in what it has to do with the depreciation of office that we have been on computers. Let me prepare some additional information on that and then I'll give you some additional information, but that - those are the main depreciation and comparison after that we have been travel and fees related to the integration of the SAP platform.

And just one last follow up, in the last conference call, you gave a sense of the $120 million synergies. How much of that you have already captured? Could you give us an update on that figure?

I was feeling right now is that we basically and really that we were speaking of the $120 million to May. Out of that, we believe that around $40 million to $45 million have already been captured, mainly as a reflection of the -production plants that were closed and the distribution centers that were closed, changing some of the labor contracts in our sales and pre-sales personnel and in new territories to a more that would have a KUF type of contract what we have target, that supposed to fully viable compensation of the sales personnel and so all those synergies have been captured and we believe that we are placed here on $40 million to $ 45 million level right now.

The $120 million numbers still stands.

Yes.

OK, thanks.

Thank you and our next question comes from Yang Xang (ph) from Etailers (ph). Please go ahead.

Hello, good morning, Hector. This is Yang from (inaudible) Management. A couple of questions. The first one is on the - could you please update on the reform the competitions, re-branch side, may be like Mexico city as well as the |. As you roll out the 2.5 litre format over the end, the second question is wonder whether in Columbia and Venezuela do competitors like fallow up your pricing increase over there and the last one is like-good to see the reduction in net debt in the range of $100 million. Wonder how the operating cash flow going for the past quarter, may be a touch on the working capital side. Thanks.

Good morning, let me try to end in the same order. With respect to re-branch in Mexico, we need to remember at the very beginning we were with a idea of distribution to 2.5 returnable TT presentation only to Mexico city. But seen this | we have in containing the growth of some of the de-branching in Mexico we have decided to move out presentation to the rest of the main cities in the territories. We follow this and we are basically there now, we don't deny.

What has happened, we thought is that you have seen trends where, specific of speaking of Cola brand, where they are basis of around 2% to 3% level in market share, in the areas like Mexico city, in the south east of Mexico given the recent introduction of our 2.5, they are little bit above us, closer to 3% to 4% and some of the old Panamco territories specifically the problem area of the Gulf area where the Ria has gone from 6% to 7% level that they reach to around 4%. We firmly believe that's basically related to the introduction of account stating by the proposition, for our consumers we have a very strong brand name like Coca-Cola.

In the other territories we do have a very important flag work going on in Guatemala. I believe it's mainly related to the issues that under is include, is starting to sell we have got in Guatemala and the prior monopoly operator on beer also had a, a soft drink brand that they lowered the prices of those brands basically, to de-brand levels, to make life very difficult for Mariposa which is the Pepsi bottler, but is also the bottler that is distributed in numbers here. So we are in the middle of that price situation in Guatemala and prices have come down dramatically.

The rest of Central America is pretty much in good shape and not like Europe price competition. Venezuela and Columbia as you correctly pointed out, we have increased by just some of our approach especially in the case of Columbia, in water brands we have been basically giving away water for a long time. In Columbia our competitors have not followed.

In Venezuela most of the competitors have increased prices as we have increased, because obviously with a very difficult macro economic environment and the non-availability of dollars to buy some raw materials or very expensive raw materials because of the exchange rate, they were also forced to move prices. In the few week we continue with the same kind of environment with respect to results to buy | brands that are very abundant and that are there and we believe that we are moving in the right direction as we start taking over a livid more control of the channels.

In Argentina as we mentioned we have started as the economy starts to fairly be better to recover the importance of Coke and premium brands. As we mentioned during this presentation for the first time we are telling more premium brands namely, Coca Cola light, Fanta light, Sprite light and Scweppes' (inaudible). More of those stocks been tie and cross which are our (inaudible). So we believe that in Argentina we are doing also a good job although I have to say that because of this, the success of valuable brand, we have no way of comparing those (inaudible) in what we call now C&D brands, because they are selling at lower price then the previous (inaudible).

So it's a (inaudible) in flux moving and we respect to working capital. I believe that the main moments that you see there is related to the fact that we mention Coke and in fact to mainly with inventories and the suppliers. In Mexico you have, we have started to show concentrate from our production plant but in Europe, I suppose to our production plant that there is no longer selling a 100% multi conference rate, but plant was based in Mexico before, so we have a agreement with the Coca Cola company where we have additional credit turns but we also have a larger level of inventory. So we basically would have a igniting (inaudible).

When you look at the numbers, on large year, inventories and suppliers and some of the working capital it is also important to remember that Panamco is noting those numbers, notice those stands with 2002 figure are basically for all the Coca Cola FEMSA. I think that basically that I cover most of the questions now.

Any comments on the operating cash flow side?

Operating cash flow, I think that, we are basically moving according to our estimates, the only guidance we kept, given that chance is that respect to repay our debt to be in the next debt positions of equal to zero in six years and we have for making for that direction. We are basically in line with that.

Thanks.

Thank you and our next question comes from Hose Tahwan from BDBA. Please go ahead.

Yes, good morning gentleman. Couple of questions. One regarding the $120 million, the timing, I suppose that still all right, I mean, in terms of just picked to achieve those $120 million things, some point of (inaudible) and the second question is regarding the dead level, what we shall expect by the end of those entry. Can we expect more payments in the fourth quarter. That's it, thank you.

Yes, good morning. The first question is, yes, we do expect $120 million in synergies, in the 24 months that we were anticipating and as we express we believe that we are moving a nearer faster then the anticipated, because of this speed of the movement of the what you going, specially with distribution centres and plants in Mexico and some of the other areas in South America. With respect to the debt levels, we are expecting to use our cash balances to pay us as much debt as is advisable during the fourth quarter and when I said that as is advisable, meaning just to remain with enough cash to carry over our operations and for working capital needs and things like that.

Obviously taking into consideration of the level of impairments that we need before the quarter and the first quarter of next year. Will there be advise to move up there and continue this repayment process. At the end of the day we have around $280 million of remaining of the (inaudible) that was regionally contracting (inaudible). We have, from here to late April of next year, to pay those amounts, but we believe that is important just to, makes economy sense, to use our cash balances to reduce that breach of multiple (inaudible) before quarter.

Thank you very much.

Thank you and our next question comes from Carlos Laboy from Bear, Sterns & Company.

Yes, good morning. Hector. I was hoping, if you could expand on the 2.5 liters returnable in Mexico. Is you sense first of all that it was taking shape from Pepsi before the price architecture moves and second of all can you expand on what you doing with 2.5 liters returnable on flavors in Mexico as well.

Yes, good morning Carlos. It's difficult to judge shift there, 2.5 was causing Pepsicola and all -- when you look at the numbers at the end of the day, you compare the number when Coca Cola Real was not here, we will probably got a little more from a (inaudible) substantially larger base in what we are moving to close to 90% and call us to 88 what Pepsi Cola was moving from whatever is being spent to 9. Proportionately the effect that Cola real have on the Pepsi Cola season was most larger not because of two sides of difference that we have on market shares.

The information we have seen is that we have been into introduction of 2.5 liters, you have seen that, reversion or changing the trend in the Cola Real movement and we think that Pepsi Cola must stay in at the levels. This have basically 8 to 9 present level on these, on the Cola segment when we are referring of Mexico season. But I believe that at the end of the day, they are in a way strong position and with that likely change and pressure on both sides.

Also, that's may be what created this idea of moving the prices and. In the flavor front, at some point of time larger, we move our way from the return our present issues on flavors and we moved totally to one way presentation on two litre first.

At the moment that the we are doing now is to move from 2 litre to 2.5 litres and because basically that's the side that is now available all over the market now. But when you have that the kind of volumes that you have on doctors and patients the case for returnability on the staffer because of the investment that you have to do in bottles and cases and remember that in this presentation we have a very large number of ex-user excuse me in different flavors and different brands.

So even though you have seen a lot of rolls on the flavor segment it has to do with introduction of these up siting on the 2 to 2.50 and also besides that we have been introducing constantly no fresh-- no flavors and no drugs which I think is part for the name of the (inaudible) not on the flavor categories it is important that you continue with the innovation process of introducing new flavors or new brands not for new flavors. In some cases it is flavors stands as indicator as leap month unaware of it or for example (inaudible) has been a very important volume drivers for this quarter

Thank you

Thank you Carlos

Thank you and our next question comes from Marco Vera from Deutsche (inaudible), please go ahead.

Hello Good morning Hector. Regarding water as far as volumes are concerned the 5 liters new presentation seems to not be going at the clouds at least sequentially and also you're suffering on the jobs and it seems to me makes it punctually and also your suffering on the job but it seems to me that you are also punishing prices nominally, could you discuss a bit of more of what you are doing there to your pricing architecture on water and why it's maybe not working and what's your outlook?

Yes, good morning Michael, waters as you are fully aware is not (inaudible) Coca-Cola spent some more we are not present in the jug water businesses, by jug meaning the 19 and 20 liter presentation. What we found when we arrived to the (inaudible) is that some of these presentations were not profitable at all, that the more you sell this jugs the more money you were losing in presentation(ph).

So, we decided to rationalize that including important increases in prices on gallon is 19 or 20 liter and I say 19 and 20 because we these two presentations and some of the markets we need to work on the (inaudible) of that. But we increase prices substantially on those and obviously volumes have come down on jug on the back even and goal for regions. We shall now introduce as jug water in the all Coca-Cola fans are rejoicing as we need to understand better the dynamics of that market.

In the 5 liter (inaudible) way presentation that we introduced in Mexico City and parts of the South East, which was our way of saying this is the package to work through the (inaudible) to the office with convenience of not so heavy presentation and a good level of pricing.

We started with a 10 peso price point and were setting somewhat from any of those presentations that we were forced to increase the blowing capacity of our plan to double our production capacity in other words the bottom line has enough to speak to do a larger number of calls, but we have the blowing of the PC in the enough for our blowing capacity place so we will force you to move that.

We continue to get a lot of these five liter presentations so we increase the price to 12 pesos and that is the price that we have which has not lowered the prices of that. What has happened there is that the machine launch 10 liter presentation that are very compelling price point compared to our growth. And I don't remember exactly the price for this is not that far away from the 12 pesos, but is selling the double of bottle know, so I will say that's the main reason why you have not seen the speed of growth on some of your territories, however in Mexico City, volumes however continue to grow over importance as we say is growing around 60% and a lot of that has to do with interviewer presentations and also with 5 liter presentation.

(inaudible) Fernandez

Yes, the five liter presentation has been mainly ruled out in Mexico City, I mean there is another referring in the seat of traveling the (inaudible) region and the realities of the volume growth that we have in Mexico City is keeping up the production lines now, and certainly our water strategy in generally in Mexico is being evaluated with now the (inaudible) presentation, but now the new presentation of 10 liters yet to mention (inaudible) also launching in some parts of Mexico but I don't think that they have the point of self coverage in order to extend it to the whole territory. So we are right now evaluating thoroughly to do a similar effort than the one which is (inaudible) in other cities.

I mean, then the price decline that I see for (inaudible) in Mexico overall is more related to the quarter three months consolidation than there is something going on in water. They went down a 4 peso from 2Q to 3Q and then would you exclude others or non soft drinks, its flat.

No, I see that in general, is your way to 2Q to 3Q, the file that in the previous quarter we have two months of Panamco and obviously the fact that we have water growing that are at 50% base compared to South east the same place as also you know, moving right the off sizing on the 2.5 litre, the off sizing on the flavors taken its toll on the average price.

OK, just one more question. What's the outlook on the rights offering timing and also your view as to whether as do you think it should be involving now that it's been delayed so much to be an opportunity for you to expand you float beyond the historical levels of 19%.

Yes Michael, the rights offering let me tell you what the story is there now. We, in order for us to do this rights offering, you have to work through the call process of preparing document on filing those with the SEC at any public office, even though you are basically targeting the same base of share holders that you have.

For that the rules in the US basically call for a full year obviously financial statements. In this case it would be on a proforma basis for 2002 (inaudible) even 2003. We are working right now, working with all the resource, first let me choose goal one study whole.

To prepare 2002 performance for Panamco, we are changing in Panamco numbers into Mexican GAAP and doing all these effort that we didn't prepare in the initial (inaudible) were very time consuming for I work if people that is now focusing in all the integration of processes and systems, and also very time consuming and costly on the (inaudible) because probably the payment is to be (inaudible) as a pro forma 2002.

So the timing would basically bring the timing of the offering that you were at year-end and we basically keep two or three months in the third to second quarter of next years we can work with we are 2003 as opposed to the pro forma for 2002.

Without the bargain of resolution of effort in our (inaudible) in preparing, you know moving the all Panamco numbers to Mexican -- as I explain. So we are now working in preparing the January to April numbers from the old Panamco to Mexican (inaudible) that we took over in May, so we have everything in order from May to December and we have a written order from Coca Cola FEMSA from January to December, we need to work with auditors and now we will turn up people in preparing the pro forma for January to April, in order to working or preparing the numbers at the different fashions started up in on January 1 as opposed to May 6. When we have those numbers ready, the next step is to work with our lawyers and prepare an offering memo, file that with the SEC and go on do this rights offering you know.

We show you that , we believe that the first step because of the way it was in Mexico and the way register with the Mexican SCT we got through this offer, moved back to the 90% first, and once that is clear, we can look at the other possibilities for right now is something that is price are down the road.

What I am saying to summarize Michael, its we are looking to have this numbers, we are looking to this offering with the 2003 numbers, once we have that way but we need to evaluate that moment you know how the market is and it is appropriate to do all these effort.

We obviously would like to see the effort with the SEC and the (inaudible) and everything in an environment where we are living more certain and then everyone would subscribe you know, as opposed to carrying a effective offering you know, but the idea is, work on these numbers be ready with the 2003 and at that moment we judged the timing of these numbers.

No, great. And but Hector do you think the size of the company merits are bigger flow on the road.

Yes.

Thank you.

Thank you and our next question comes from Jose Yordan from UBS. Please go ahead.

Good morning. One of my questions was answered, but the other one exploring a little more the whole issue with selling expenses that I think Lori brought up initially, I can understand what you are talking about in terms of travel expense and all that, but is it possible also that you are having a bit of what I am calling the Kontau (ph) syndrome, because it was evident in them first, where basically their volumes are doing very well in Mexico but it is just costing him a lot of money in promotions and all kinds of other expenses in order to keep that volume. Do you see yourself spending more in those areas right now and could that be a reason for the increased selling expenses.

And then secondly just a follow-up on the rights issue. I do understand that if the price, lets say stays between 20 and 21 during the first quarter of next year, that you just won't launch it and that will just a kind of hang in there until such a time that like you said you would have some reasonable expectation that it would be subscribed.

Yes, well let me address the first question on that. I think that on the SG&A front, when you look at the promotional and marketing expenditures we are facing basically very much in line and I would say that even the lower expectations for the so -- I don't think that it has to with the regional efforts inside some of these cases, because we have been, you know, to a certain, marketing and promotional activity are moving pretty much in line with what was in (inaudible) paid and then what this cause would be with other cola companies since the beginning of the year.

With respect to the -- and then just following that I believe that its more related to these issues that I mentioned when Lorry asked the question is, the effect of depreciation of the next Compasso, on some of the depreciation of facts that are mainly computers and office equipment and things like that. Their travel expenses and fees especially with this two-year project that we have with integration of SAP.

With respect to the rights offerings, the feeling that we, Jose, have was that we at this moment we feel that -- first of all we believe that is important that we don't count on those resources in order for us to repay the breach and we basically feel that with the $280 million remaining and the cash balances that we have, we are pretty much, you know very intense of repaying the breached loan.

So that's the first element of importance of whenever we do these rights offering, clearly once it had been used to reduce it to that levels of the (inaudible) that is fully prepared (inaudible) have in our balance sheet.

The big question is, one step before that. We took up this 2003 numbers and I explained why were to costly to distract our people and retrieve to (inaudible) to prepare 2002 numbers from Panamco on Mexican GAAP and other, (inaudible) what has been taken to waste to 2003 numbers.

When we have that middle of, end of first quarter, we probably needed, it you will be decided what have needed in order six week period with ACC in terms of clearing all these documents and we questioned that we got is what surprise to be surprising around the 21 of any dollar pressure of where we are.

We think that the at that time, clearly I think that you will be very negative for the companies to go ahead and do this rights offering and these (inaudible) and because with lawyers and (inaudible) and then drop with rights offering that is the (inaudible). At the same time we understand that the market has this perception that as long as we have these rights offering there, the share price will never go up above the $22 level now.

Correctly or incorrectly (inaudible) and for practical purposes he is stating that a feeling for our share, know. So one of the things that we have we discussed with our lawyers is the possibility of what we are ready with the numbers is what we feel the same thing and we believe with some of the covering (inaudible) their view of participating or not according to those levels in other words doing kind of (inaudible) before moving with the with rights offering and we are reviewing that with our lawyers and (inaudible) that's up with (inaudible).

Its just to go to all these expenses and therefore the (inaudible) and then for some reason with surprise being at a price which is not attractive for the shareholders to describe. That creates some of the certainty not in our minds at least know.

Is there is a time limit for completing this, or this is an open ended?

Hector Trevino. This is open ended, its open ended, the way it works is that we have Mexico, we have register those rights and (inaudible) do the rights offering or we get a negative for (inaudible) has to be every shareholder then we are then clear from that process.

So the (inaudible) that its something that (inaudible) in my area (inaudible) top of mind to sell that (inaudible) ideally for us we do this rights offering as soon as we are ready with the 2003 numbers and we would use that level for we have mentioned before. But at the end of the day, the market forces are there also and it is the share prices note their people will not subscribe on it is their (inaudible) 22:16 and still that everyone would subscribe now because there is Mexico (inaudible).

And you have any rethought the strategy of giving no guidance at this point, I mean that something that plays into this a little bit because with everybody kind of applying blind ear and obviously you know with the kind of short ball versus application that this quarter had you know lets say have an actually fantastic fourth quarter, you know, the combination of that and no guidance can only just turn this into a vicious cycle. In terms of expectations and the stock not going over 22 and so forth.

Hector Trevino. It seem that, let me tell you what we have felt here as I have mentioned before as you (inaudible) that some point in time when we have a better control on some of the new territories and secondly rather confused we need to provide the market with some important initiatives inaudible or indexes are by the why is that we need to look so that you are watching how we progress on what we are working and basically the way we kept in thinking about it that we believe that providing guidance will result in that is noted in our mind right now.

No, no, but I would mean particularly for 2004 for a normalized type of full year situation, not for this year.

Hector Trevino. Yes. We have not changed our mind as we don't have to.

OK.

Thank you and our next question comes from Alex Roberts from Santander. Please go ahead.

Hi yes, thanks I guess the first question just to get back into the synergies here and a couple of clarifications, I mean, looking out into fourth quarter you are putting the travel expenses in the consulting seat, if I understand that in the selling line item as supposed to the administrative and you mentioned before that those are going to be recurring into the fourth quarter, is that correct.

Alex I didn't quite catch the question, as you referring to which line within the GMA, what was you referring to?

I'm sorry, the specific selling line, you know, that you split it in admin. And then you split it in selling expenses, and again to me as well, the selling expense number was the concern based in the quarter in relative to 2Q and I just wanted to understand is in fact the travel expenses in the consolidated fact actually being brought inside the selling line, is that right.

Yes, I think Alex that we obviously could bear in on a sequential basis different quarter or versus ratios largest in not comparable because of the -- in the second quarter we have only two months of Panamco. The main items that have brought my attention of this is -- this idea of what I mentioned is you know, some of the strategic fees that have been paid on season for the integration.

The depreciation of some of the office equipment of structure with more with amidst of these line. On the selling line we have reconfigured some of the way would Panamco use to pay to the sales personnel. So we have lower that number in the Panamco case but its still not comparable because of how the quarter has been presented.

We have invested heavily on some of the (inaudible) Panamco territory because they were very much in the very bad shape, so that for because that will be so much reputation expenses on the strategic scheduled line. But that they should be what we have know, I think that we need to work for a more normalized quarter to make it a little bit more comparable with them.

OK. And in fact the other -- you said recurring as far as its travel expenses and consulting fees, is that is right?

Not well, what I am seeing is that may be if I am - well choosing the right word, what I am saying is that I have take staked up for the next two years starting, two years, starting (inaudible) we have a very important element of consulting fees and travel fees in relation to these tenderization of process and fees course. Strategically on the eastern side, we do have some consultants that are related to all these process of shutting down facilities, another (inaudible) that are also, you know, part of the expenses that we have here, in the case of Mexico, we are using our own personnel to work on that because that is clearly an area of expertise for us.

So I expecting that these travel expenses and fees are basically therefore the next two years where I do not expect those to be there after that. On the southern side clearly as we move from 2 countries to 9 countries we would have more that what we use to have in the Coca Cola FEMSA. But it is less that what we have because of all these moving around for this integration of processes you know. I don't know if you heard it or not.

No sure, and just OK. Then going in to this $45 million number that you have given us I mean you made this distinction before with $70 million synergies is the Mexican; Panama you know, specific issues and then you got this $50 million, which is coming from the best practices and that relates kind of the distribution areas as well.

And where have this $45 million I mean, been mostly, I mean is it safe to say that it that has been mostly from the integration of the Panamco Mexican territories, i.e., synergies and not best practices or in fact a little bit of both. If you could give us a sense of where the 45 has already happened, Hector that would be great.

Yes, what we have -- I am saying that the areas where we have a more advanced, we will integrate -- it's a integration of synergies, it has to do with commercial area where basically we have half of the synergies meaning closing down, basically 24 distribution centers, that Panamco used to have. So out of 94, 96 that they have, which are closed, 24 which is 25% of the total. We have closed down 4 plants in Mexico. That also brings some savings.

The fact that we out source some of this freight from production plans to the division centers as we have it in all the Coca Cola centers, with center looking thicker. That alone has reduce more then 400 people from our payroll. The closing of the Mexico City office that was pretty much redundant with the office that we had in Mexico for the Mexican operations we need a duplication of marketing and duplication of the promotional activities, duplication in the back office.

We have increased a little bit over and it be vary, but clearly the resulting processes is less than the additional operations and I will take up that basically the synergies.

So the $15 million in debt practices is, that's pretty much going to fall into '04 and really be mostly in the non-Mexican territory, is that a cfair assumption?

What I am trying to say is that , but we use to call the $15 million debt practices, what I am referring as the commercial area and that's half of the single (ph) result we have right now and when we were fail to $50 million was on the Mexico City also, in the Mexico as a continent, Mexico City. So we will capture some savings for debt practices also as we have close some of the these plant in Columbia and distribution centers in Venezuela.

In the field for trade, the name of the game is not to start closing plants or institution, that is just to take over the control of the channels and the price package channel architecture. So when you look at the numbers, in Brazil we have the same number of people there in this business, reduction is very small. We have done a very large effort in the rest of the country, it includes Mexico, most importantly, because of the duplication of --, remember that in Mexico, the only common territory, the only common country that we have with Panamco.

OK, listen, that's great, and the second question was really just on the average selling price per case in Mexico. The 26 peso 14 number that we see you know coming in lower obviously than 2Q, as you get the third month, the fourth months of financial, but I guess, as you look in the Q4, I just want you to give us a sense of where that average selling price per case might going or otherwise you plot the up scale, you are going on the upsizing in the Panamco territory and that is going to have some pressure, you have done your little bit of reduction in some of the smaller sizes, would it to be safe to assume that, perhaps barring the price increase, that might kind of drift down as well, specifically in the fourth quarter and what would you looking hope for in terms of the this discussion of the VAT coming down from 15 to 10, would that be something that you will be hopeful for and as you look into the first quarter, could that give you a kind of 5% implicit revenue entry.

As we try to explain this, the fact that we have a no comparatives likely despite that some of the all comparatives like Parilithos (ph) Hariokos (ph) and some of the other brands that have been here for a long time, are also comprises and now despite that Pepsi Cola has lower importance due to freight, that should clearly position a lot of competitive environment.

What we are seeing is that, what we are anticipating right now, is that with the movement on prices that we due on less then 3% of our mix, which is the flavor on plants, and the year downs Coca Cola bottle, we, that basically continue comparing, we call this wisely in this market, that those as means that we are going to stay with our arms closed, waiting for no movements, it's a very dynamic market and we need to start finding, no problems, no packages, etc, to compete in this dynamic market.

We are not anticipating increasing prices from the level we thought. What we were anticipating launching, as I tell you would have to revive enough activity in no excuse and then seems to watch going forward, it has to do only fiscal reforms as you correctly pointed out if they were to move the advert lower tax from 15 to 10, that we need to value how fall in is to reaction and move accordingly. Our pressure is would be to stay as we are and obviously we need to be very careful and watchful of how our competitors mood. The over all element which is important, that we are aware also, is the fact that, they are cutting the lot of noise or rumors in the market Mexico as to the sugar and (inaudible) situation.

As you remember right now, we do have a tax on approach (ph) that is not have cane sugar in it and because of that we had been tax on mineral water and in light products like Coca cola light or Sprite light, it is something that we are comparing and we are successful, that's part of the, in a way, we will not move the freight level, but we will keep this difference on the taxes. So that might have a positive effect on the prices inside and most importantly if this parts on user change somewhat, it allow us again would be able to again move into cheaper source of sweetener as we used to have over using fructose.

Right now all of our products use cane sugar except Coca-Cola liter, that use the sweetener that is provided by the Coca-Cola company and sparkling water that does not have any sweetener of our own, but those are, the liter those, and the mineral water were being tax right now. So we might - depending on how things move with respect to these people who perform -- we might have some positive effects on the pricing problem.

I'm Decentro Fernandez. Yours speak is related to the selling expenses obviously due, described to the Q2 of this year, the Mexican operations, is that correct?

Yes, no I mean I was basically noticing that obviously you have that extra month of sample as well right.

Yes and if you look at this quarter, third quarter of 2003 versus second quarter 2003 in Mexico you, will see that there is an extra amount that you have not included in the information. And if you doing the consolidated basis there is a extra amount that is generally included in the other 8 countries. So certainly that has to roll out with the difference.

Panamco had a more expense in selling a structure and a lot of the strategies that we have been implementing, they have been on the going during the last 3 months, so they certainly were not going to be -- capture in the very short term now. I do want to make that clear.

That's great, that's awful, thank you then.

Thank you and our next question comes from Dan Quitoxy (ph) from Schroders. Please go ahead sir.

Hello, I'm doesn't that in a pull off in a plain made by of Cozy Oden earlier about guidance, and I am just trying to understand the rush now behind not giving any guidance when obviously the expectations of the company and the expectations of the market also divergent, from the top analyst expectation, the Boston analysts expectation is about 15% needed in Boston, but the results, I'm just trying to understand from your comments you seem to be suggesting that you are ahead of expectations where as by looking at analyst expectation you are behind the expectations. So I'm trying to understand why you are sticking with the policy of no guidance and what do you expect to do about that in future?

Yes, it is clear when we move into this direction we clearly - we are very thoughtful of what's this movement. We believe that we are in a way in that respect being also very close to the way the Coca-Cola company is moving and in the sense what we are trying to avoid is this short term movements because of quarter by quarter performance.

I've seen that in general in the past we were receiving a lot of pressures in terms of trying to review projections, specific projections from financial and giving very specific guidance on that level and in wonderful broad means our goal decided to move in that direction. That place we are right now.

OK, well thank you.

Thank you, our next question comes from Timothy Ranzy (ph) from Bear Sterns. Please go ahead.

Good morning, guys. I just want to ask you a question about Venezuela. What do you think you can do there about growing returnables in Venezuela and if is that can be more difficult but it will also be higher brand equity for Pepsi in that market? Thank you.

Yes, one of the things that we are moving is, in Venezuela, we are doing a network on returnable presentations, specially on black because again we will not like to be dependent on the foreign currency for TT. So that's totally URS in the local currency and we believe we have better control on that. Strangely some of the things that we have found is that when you look at those brands, Pepsi Cola versus brand Coca- Cola, Coca-Cola has very good indicators in some cases and the minority of the cases in a better position than Pepsi Cola, so we believe that the way to go in Venezuela, being in there circumstances and the permission is to move in the direction of the returnables and trying to tear away from raw materials that are dollars nominated in nature.

OK, thank you.

Thank you and our next question comes from Lore Serra from Morgan Stanley. Please go ahead.

Yes, couple of follow-up's. I just declared this is dead. The sole issue of the travel expense and the consulting expenses. The way you had describing it sounds like Mexico is becoming the repository for the expenses that are increasing corporate expenses because of the increase in complexity of the operation and I just to want to confirm is that's the case and wonder if at some point you'll break out some of those expenses and I guess there is some more question, is it getting more of a corporate expense is it also getting more of the cost savings. You know as you shut down Miami, the next will be more of it or is it being put across franchises?

No it's-you are right in that sense. We have always included the expenses of the corporate head quarter in the Mexico territory because that's where we are and that's part of the culture that we have at the legal structure that we have in terms of companies. So the corporate expenses are including Mexico. The savings on the corporate - that the number used to report that are also reflected there in Mexico and clearly all these Easterns Airports and traveling expenses is basically billed on that level right now. So clearly Mexico is where it reflected.

OK, just sort of one of a general question outside of Mexico. You have now run the operations for 5 months, you have obviously studied them for more than 5 months, you need to point a couple of times on the call that the $120 million is a Mexico number for synergies and I don't know if you want to show with us what you think the additional quarter over quarter opportunity out side of Mexico, but I assume that they are important.

I guess the question I have is philosophical, I hope that you can answer it. If you think about those savings due you think that's going to be reflected in greater profitability for Coke FEMSA franchisees over time or do you think that the pricing architecture you mentioned in places like Columbia is sufficiently off that you going to have to really reinvest those savings in terms of better market initiatives.

What we are expecting to do with all of these queries (Ph) is that our profitability of the other territories will increase, certainly, that's the direction that we are trying to move. On a case by case basis, we'll need to and on certain periods of time we need to invest some of these savings on marketing activity. As you correctly pointed out I mean Columbia we have basically some kind of spicing activity going on with waters and flavors. That's we need to tackle and introducing new act of use and new investing a returnable presentations also uses a lot of this resources.

On the medium to long term we are expecting that all these savings in closing fertility, closing distribution centers, we listen to number of people, it's going to move the profitability in the right direction. I believe that the speeds at which we are moving is specifically on not the Human Resources front in terms of reducing the number of people.

The sphere which we are closing plants, despite that we have moved from 60 | pertain to --. There are 34 plants in such a short period of time and the sphere which we cut close 25 % of this distribution centres are Panamco has in this territories. For me sense of | lifting chin, that we are moving very fast and ahead of the schedule on where were anticipating on this front.

Yes, we have some few consensus in the market that has to do with pricing and buy them when there is difficult with the cost structure especially in Mexico where sugar and PET, that is you know complicating life a little bit, but is we expect this does ot stay for ever but at the same time all these efforts and the speed of this process which has been a cover resources to what were the initial things that we have of returnablity in most of these markets.

And Just a follow-up ending question. As you look out over the next quarter and year could you just give us a sense of what you expect the trend of TT prices, particularly as you work more closely with Coke and you know in terms of global sourcing?

Right now what we shall seen Lore, and that I am not that more specific, because I don't have the information right now for the next quarter. But what we have seen is that we saw an increase in the dollar price of the TT because of the crisis in Iraq and all of that when the oil prices were high. We have seen prices coming down in dollar terms, well at the same time we have seen the movement of our -in the case of Mexico, the Mexican Peso versus the U.S dollar moving importantly.

So when you look at from Peso terms, TT cost has increase even though the dollar price of TT has come down. My projection from the conversation I have had with the guys of or with the Coca-Cola company together with the Coca-Cola company on global procurement area either we expect better pricing on the TT front starting next year, but right now you don't have a specific sense of the percentage results that were speculant on the dollar terms.

OK, thanks.

Thank you, once again ladies and gentlemen to give a question or comment please key star, 1. And our next question comes from Robert Ford from Merrill Lynch. Please go ahead.

Thank you, I just want to follow up on one thing, actually couple of things. First of all you said you thought that you had catch of $40 to $45 million in the Mexican synergies which you estimated 129. But are they reflected in the current results? I know I am not really if that is what you meant to say, that you want the men the men, for future periods or are they reflected in the third quarter results, I wasn't sure of that first of all.

I think that the majority of those $40 to $145 million not necessarily reflect in this quarter because it has to do with those in some of the facilities that has happened during the third quarter, so maybe reflected for one month or a month and a half. It is not fully reflected. Some other areas like change in some of the commercial practices that some of those have happened, to very (inaudible) in the process and some of those are reflected here. But I do state that you will start to see this in a more clear fashion as we advance in the future now.

OK, and (inaudible) your annual savings that you expect to annualize to $40 or $45 million in subsequent periods. Is that correct?

It may be exact, that's annualized (inaudible). Yes of course, this is not $40 million in this third quarter. It is annualized on a annualized basis.

OK and then with respect to the CAPEX budget, I understand that the manufacturing infrastructure was a better shape than you had anticipated the longer need for a mega bottling plant, but distribution assets were perhaps a little bit worse, can you update us a little bit with respect to the need for the CAPEX?

We took out a CAPEX program that (inaudible) doing this software acquisition, we are staying along to come down $250 to $400 million in the first year and then moving to around $200 million. We believe that in both cases, both for this year and for next year we are going to be below that range. We are not planning on this mega production facility as you correctly pointed out. We do have some investment, specifically on the distribution assets like (inaudible) we are investing heavily on that because we found a lot of deterioration on that front. So-forth, my idea basically there is that instead of running at this 350 level that we were anticipating for next year, we will be closer to 280 to 300.

And what was it again for this year, Hector?

This year we are very close to $300 million, we were saying that on 400 when we were in the intial phase of the acquisition.

And then when you are able to quantify the delimitation of the sales through the wholesalers distribution that occurred to the (inaudible) corporation., can you also help quantify this quarter and quarter increase and depreciation of results from the weaker backs that (inaudible) difficult that when compared with you numbers, and then lastly just following up on whether or not the rights offering is an overhang because the way, I understand this, is this is the right not navigation to acquire stock and that the un-exercised rights will not be sold into the market place.

However, when you answered Marco's question, Marco's question is a very different question, he is asking if you intend to increase the size of the flow simultaneously, and then he asked a more innocuous question, that I don't think, that leaves everybody with expectation that there is no overhang out there and his question was, is this is the company that narrates a big flow and you said yes, and that creates expectation, that this is not just a rights offering that will occur in the late in the first quarter or the second quarter, but that you are envisioning a much larger transaction which is in fact and overhang. Can you clarify that for me please?

Yes (inaudible) I did understand the first question about the depreciation you can repeat, let me go to the second question to lend you (inaudible) lend you comments on the first question and to clarify these rights offerings. The rights are there and it is for the presence as called as something that you cannot try because there is perhaps strategic base or a specific timing for that.

As I understood of the question of Marco even though it might be (inaudible) is Coke FEMSA with the market capital that we have and besides that we have, a company, that you have 19% growth.

I think that the answer is no, we choose to you have a larger flow, because as we have gone over the years or so and even for the (inaudible) when I receive the report every month from the Mexican boys about the equity of the share and we are compared to the companies that are you know a fraction of our size, in -- because again you will only have this around $600 million in the public hand you know, we have also found that we go to these certain best (inaudible) I love your company, but the fact of the matter is that decrease is allowed that with policies that, they have became our investors in the company, so from that perspectives my answer is yes, we would certainly be the larger flow or the company married to a larger flow because of the size and (inaudible).

I am not expecting to do any transaction in short time and I cannot decide on that on you know the Board Directors and the finance committees decides the move in that direction and what just leaving a (inaudible) Coca-Cola FEMSA and besides the Coca-Cola FEMSA has now, and we have to try that we will present 10% of the Coca-Cola volume on a worldwide basis.

Thus Coke FEMSA whether the (inaudible) married for larger flow, my answer is yes on a very (inaudible) level. Obviously we don't have any specific plans on that front, and as I tried to answer when Marco asked the question is, we have to first finish this rights offering, get that over, get over with and people subscribing or not subscribing but just to feed in with our process and then continue managing our businesses, as we believe its better for our shareholders in the future. That implies that for additional growth in the future to we need to use the additional shares or because of the quality issues, we think that the share price would be a better price, with our number letter (inaudible) noting that we need to value in the future. This is not the moment to be speaking what one we have the rights offering in place, we should not been speaking about increasing the flow towards a larger number though.

OK thank you. There is a question that I was asking earlier, that there was with respect to the pressure on expenses. with the Mexico Europe activity. People tended to focus a little bit on the travel and the consulting fees, but also you said that because of your (inaudible) denominated plant equipment, you restate those basic terms and you are experiencing high depreciation changes.

Can you make that incremental difference available, just like you suggested you would make available the proportionate sales that used to go through wholesalers and distributors in the former Panamco franchise territories.

Let me (inaudible) that there are the right now, we think probably these are even more information then the depreciation of all these office equipment, and also its important and I didn't mention that the price that most of the crops that we (inaudible) in our boxes are also effective by, you know these evaluation and the depreciation evaluation for that. Then we look into rather you might provide some additional information on the depreciation front.

Thank you very much.

Thank you. So once again ladies and gentleman. If you have a question or comment please key star, 1.

And there no further questions at this time sir. I would like to turn the call back to you for some closing comments.

Well thank you very much for your time and effort on this conference call and we are here to always to grace any questions you may have on this current quarter. We will be in touch the next quarter.

Thank you sir. Thank you ladies and gentleman for your participation. This concludes your conference call. You may now disconnect.