Coca-Cola Femsa SAB de CV (KOF) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coca-Cola FEMSA fourth-quarter earnings conference. My name is Alicia, and I will be your operator. (OPERATOR INSTRUCTIONS).

This conference call may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered a good safe estimate made by the Company. These forward-looking statements reflect management's 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.

Financial information for the nine months ended September 30, 2003 both on a consolidated basis and by country includes nine-month results of the original Coca-Cola FEMSA's territories, Valley of Mexico, Southeast 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 now like to turn the presentation over to your host for today's call, Mr. Hector Trevino, Chief Financial Officer of Coca-Cola FEMSA. Please go ahead.

Good morning everyone and welcome to Coca-Cola FEMSA's conference call to discuss our fourth-quarter and full-year results for 2003. 10 months ago we initiated the integration of our new territories from the Panamco acquisition, the largest and probably one of the most geographically complex acquisitions ever made by a company. To date we can say that the integration process is progressing better-than-expected, more important than our short-term financial results, or other initiatives we have put in place during this period achieving positive results for multiple (inaudible).

First, it is worth highlighting our strong asset rationalization program. We have consolidated our operations by 20 plans from the 52-week we had in May 2003 and reduced 37 distribution centers. There is more than 50 percent improvement in manufacturing and productivity on a companywide basis, measured in (inaudible) cases per plan. This initiative is already providing us with more flexibility to concentrate our resources on the marketplace in 2004.

During the fourth quarter of 2003 and the beginning of 2004, we consolidated three additional plants -- one in Mexico, one in Colombia and one in Brazil. We are taking advantage of our diversified points of sale across Latin America to launch new packaging presentations for (inaudible), while increasing our per sales progress to reach more clients. The more we can control our sales and distribution capabilities the more we will be able to launch and develop the right (inaudible) and longer-term presentations for our diverse portfolio of Coca-Cola trademark beverages.

For example, in the territory that relies heavily in package presentations such as (inaudible), over the last 10 months, we have launched more than six different packaging presentations for Coca-Cola brands. After the acquisition closed, we had and are spending one year on rich loan facility (inaudible) $838 million. We took advantage of the low interest rate environment and capital market opportunities to refinance and present this rich loan facility before year-end with the proceeds from a Mexico (inaudible) offering worth approximately $550 million. $200 million (inaudible) cash and the balance with return loans.

We currently have a net debt position of $2.3 billion. As a result, we were able to eliminate refinancing risks related to our position at Panamco and balance our capital restructure between peso and U.S. dollar-denominated debt. The opportunity to complete this transaction in just eight months underscores our Company's great quality. Moody's Investor Service and Standard & Poor's maintain our pre-acquisition investment-grade rating of BAA2 and BBB respectively, assuring their view of our Company's current strength and stable outlook.

Currently more than 50 percent of our total debt is denominated in local currency. Two-thirds of our total debt carries a fixed cost, and 65 percent of our total debt is in the form of bonds in the capital market. Now I can say that we have achieved a stable and well-balanced debt process.

Now let me move to our different market territories. In Mexico, 2003 was a year of considerable strategic progress for our Company in the face of a difficult economic and competitive landscape in Mexico.

Our main operation. During the year the following factors put significant pressure on our margins. The higher cost of raw materials. The year-over-year devaluation of the Mexican peso versus the U.S. dollar. The weak economic environment. Lower disposable income. The cheap carbonated soft drink consumption from (inaudible) presentations to larger less profitable family-size presentations. The entrance of new low-priced brand competitors, and very importantly existing competitors' aggressive pricing strategy, specifically at the end of the year.

The fourth quarter of 2003 was not an extension to this trend. However, despite these circumstances, our carbonated soft drink volume increased 2 percent during the fourth quarter, driven by balanced growth from our cola and (inaudible) brand, with each generating approximately 50 percent of our incremental volume. Our new flavor (inaudible) line extensions -- Lift, green apple and Fresca, pink grapefruit -- combined with the new introduction of Coca-Cola Vanilla contributed significantly during the quarter. Our total volumes were slightly positive during the quarter because growth in carbonated soft drinks more than offset volume declines in larger size presentations of bottled water.

In Mexico, selling expenses appear higher than usual because 1) higher marketing expenses, and 2) when we continue to streamline our plants and distribution centers, we also decided to accelerate the rollout of certain packagings, such as the 2.5 liter one-way and returnable presentations fro, Mexico City to some of the remote areas of our territories -- negatively affecting trade expenses.

At the same time, our aggressive rollout of new colas combined our standardization of the mountainous levels for colas in our territories, increase (inaudible) mounting expense and continue to be (inaudible). This increase in selling expense occurred despite the positive impact resulting from extending useful life from three to five years in the colas in the value of Mexico and the Southeast of Mexico.

In Mexico, the fourth quarter of 2003 was weak in terms of volume growth and profitability. As we previously discussed, this was largely driven by the lower level of disposable income and the growth of carbonated soft drink consumption in larger presentations. During the quarter, one of our main competitors decreased its water (inaudible) price between 15 and 20 percent.

We implemented several (inaudible) management and new packaging properties across our Mexican territories. For example, in Mexico City and other regions, we increased prices from 6 to 8 percent for Brand Coca-Cola and core flavor brands in 2.5 liter longer return on presentations. Our 2.5 liter return on presentations for Brand Coca-Cola will continue to be our value proposition for our consumers.

In Mexico City, we decreased the price of our 600 milliliter presentation for Brian Coca-Cola and flavors front 6 to 550 and launched a 710 milliliter presentation that is being priced between 6 and 7 pesos depending on socioeconomic areas. In some other Mexican regions, we are now testing two new presentations that we flank our 600 milliliter package for Brand Coca-Cola -- a 450 milliliter presentation being sold at 5 pesos and a 710 milliliter presentation being sold at 7 pesos.

As you can see, we are developing more packaging segmentation by territory. In the family-size presentations, we are further differentiating between affordability and convenience, and in the newer presentations, we are developing new packages to reinforce several price points for Brand Coca-Cola and reactivating our single serving transaction growth. Knowing how and when to capitalize on growth by the segmentation is one of Coca-Cola FEMSA's execution of strength, and we expect to continue to play to this strength.

We are implementing all these initiatives to our leaner and more flexible organization in Mexico. Since May 2003, we have eliminated the former financial headquarters in Mexico City and Miami, closed five carbonated soft drink plants, consolidated 29 of the Company's (inaudible) distribution centers, introduced more than 73,000 new colas into the market, and reconfigured its presale and distribution network, reducing third-party sales and distribution. During 2004, we will look for an appropriate balance of volume by our contribution, prices and market share to protect and improve our profitability in a sustainable way.

Now let me talk about (inaudible) division. In Central America, we continue to concentrate our efforts on strengthening the marketing presence of our core carbonated soft drink brand. During the quarter, (inaudible) carbonated soft drink volumes comprised the majority of our growth. Brand Coca-Cola contributed more than 80 percent of our incremental volumes, growing by more than 8 percent in the fourth quarter. The balance came from flavored soft drink brands, including Sprite and Fresca.

In Central America, we launched new line extensions for some core flavor brands and new packaging presentations for current flavors of carbonated soft trains. On the bottled water front, in Panama we just introduced a new (inaudible) water brand called Lefin (ph), the same brand used by the government bottlers in the U.S.. This launch is part of a still water re-evaluation strategy being implemented across Latin America in coordination with the core company.

In general, Central America presented opportunities to develop a more effective return on our packaging base, new grow alternatives and improved execution strategy. Guatemala will face a strong competitive environment and a higher than normal process structure, which we do not expect to change in the short-term. However, we believe that our packaging initiatives combined with our revenue management strategies are repositioning the strength of our brands in Guatemala, especially Brand Coca-Cola. During the fourth quarter 2003, Guatemala on contributed 50 percent of Central America's incremental volume.

In Colombia, during the fourth quarter of 2003, an increase in competitive landscape is comprised of lower priced or inexpensive beverage alternatives such as (inaudible) or tap water continue to affect the Colombian soft drink industry. This has put pressure on topline results. However, our new execution practices and our transformation of the production assets are somewhat compensating for lower volumes.

During 2003, we implemented a stronger asset consolidation program. We intended to increase efficiency for our manufacturing network. From May 2003 to February 2004, we converted 11 of the 17 manufacturing plants into distribution facilities and consolidated previous division centers. A leaner organization is expected to provide a more flexible cost structure that will allow us to concentrate our resources and effectively handle our software competitive landscape.

On the commercial front, we are focusing on producing bottled water in more profitable presentations, and we are changing the way in which we manage our returnable carbonated soft drink bottles, introducing greater marketplace discipline that will allow us to execute returnable packaging strategies effectively without excessive introductions or bottles and cases.

We continue evaluating the right growth, package and pricing architecture for our portfolio of brands in Colombia, and even though we expect the difficult compatibility environment to remain throughout 2004, our leaner and more efficient implementation has strengthened our execution capabilities to face this challenge.

During the fourth quarter of 2003, we changed the accounting policy regarding the treatment of bottles and cases in the Colombian market in order to conform to Coca-Cola FEMSA's accounting policies. In the past, Panamco capitalized the bottles and cases introduced in the market, while Coca-Cola FEMSA's traditional accounting policies treat them as marketing expenses. Due to these accounting changes, non-cash charges were reduced significantly in the fourth quarter. The Company's Auditing Committee approved these accounting changes.

In Venezuela, we achieved an important turnaround in terms of profitability in the quarter. Volumes increased almost 35 percent year-over-year, aided by growth in practically every diverse category. Volumes of Brand Coca-Cola alone increased more than 55 percent during the fourth quarter of 2003. This figure is being impacted by a very strong December compared to a year ago, when the effects of the nationalist strike started.

In Venezuela, better asset utilization and higher volumes strengthened our path to profitability. Since May of 2003, we consolidated three out of nine plants and closed two distribution facilities. On the commercial front, our well-defined pricing architecture and the reintroduction of our one 1 liter returnable glass presentation for Brand Coca-Cola and initial (inaudible) segmentation are strengthening our marketing execution.

Nonetheless, it is important to note that the 20 percent of (inaudible) of Venezuela in February 2004 could generate higher inflation levels that could negatively impact our cost structure in 2004. However, the (inaudible) organization started we have implemented through the acquisition combined with better market execution should provide us with more operating flexibility to weather a potentially unfavorable business outlook.

Now let me talk about our (inaudible) division. In Brazil, we continue increasing our profitability in this regard. It is important to highlight that our Brazilian operations contribute as much breaking income as any other territory outside of Mexico in absolute terms, and we believe this is only the beginning.

In Brazil, we negotiated a packaging differentiating strategy intending to diversify our operations from 2 liter BT longer return on packages and (inaudible), which together accounted for approximately 82 percent of our total volume in the package. At the same time, we increased our direct selling capabilities by relying less on third-party wholesalers and distributors, serving more than 30,000 additional point-of-sale in the seat of Sao Paulo by the end of 2003. By selling more product over less use, we intend to strengthen our packaging and brand portfolio and enhance our pricing architecture in order to increase the profitability of the business.

In the fourth quarter of 2003, the majority of the volume decline came from 2 liter nonreturnable presentations, including low margin brands like Zimba (ph) and Tiie (ph), as we work to achieve a better price value combination combination by shifting to more profitable presentations. During the quarter, we sold more volume in the Coca-Cola Lite in February than the whole portfolio of value protection brands combined. Currently we are working closely with the Coca-Cola Company to revalue our entire portfolio of flavored carbonated soft drinks in order to make them more competitive.

On the manufacturing front, we consolidated one of three manufacturing facilities that we have in the Sao Paulo region. Better asset utilization combine with volume integration from last profitable packages and brands to higher margins volumes is helping us to achieve this turnaround. Just like Venezuela, we are reaching our highest level of profitability since we took over control of the operations.

In Brazil, we are implementing a profit utilization initiative to take advantage of experienced people and success stories from Buenos Aires and Mexico with excellent results. In the region, we have developed and improved our relationships and coordination with the Coca-Cola Company and the rest of the Coca-Cola bottlers in Brazil. Trend shipments in Brazil are decreasing.

In Buenos Aires, we were again able to exceed our past performance, reaching the highest EBITDA margin in the history of this franchise. We continue selling more volumes of premium brands than of private protection brands. Our initiative is to reinvent the business in Argentina to cope with the devaluation in prices, our returnable packaging strategy, and an economic recovery from the devaluation of the Argentine peso in 2002 resulting in an excellent year.

Increased sales volumes were mainly driven by our core and premium brand with Brand Coca-Cola and Fanta Orange Lite increasing by 8 and 40 percent respectively during the quarter. The result is important to highlight that we continue to generate more sales volumes from premium brands than value protection brands forced through by Coca-Cola Lite 12.3 volume increase and the successful introduction of Fanta Orange Lite during the year.

Premium brands represented 12.1 percent of total volumes in the fourth quarter of 2003. Return on presentations reached almost 25 percent of total volumes during the quarter, mainly driven by our 1.25 returnable glass presentation and the recent introduction of our 2 liter return on (inaudible) presentation.

Argentina remains one of Coca-Cola FEMSA's newest segmentation and revenue management benchmark. We are going to separate our sales here in our countries to increase their profitability. As a result of our implementation of all these initiatives, we are poised to move from a fear of consolidation to growth with increasing profitability. The integration of our core competitors and strategies throughout our territories is paving the way to sustain our growth.

We have just begun to start the full potential of Coca-Cola FEMSA. We greatly appreciate the trust and support that our shareholders have placed in us since our Company's inception. We will continue sharing with you the progress of our strategies and newest initiatives.

Thank you for your attention. Now I would like to open up the call for any questions that you might have.

(OPERATOR INSTRUCTIONS). Jeff Kanter, Prudential Equity Group.

Good morning, gentlemen. Good morning, Hector. You mentioned that there was some competitive pricing moves in the fourth quarter in Mexico if I understood you correctly. I was hopeful that you could drill down a little bit and talk about what exactly happened?

Yes. Good morning. What has happened in Mexico basically is it started a little bit before the fourth quarter is the fact that we have never in the last 10 years that I have been in the company sustained such large price gaps based around Pepsi-Cola. When you visit the market in Mexico City or the rest of Mexico, you will find that to give you some examples, that we are selling 600 milliliters at 6 pesos, and they were already selling at 5 pesos. So that is 1 peso price differential has pushed us to adjust our pricing of 600 milliliters to 550 and the introduction of these other presentations -- the 450 milliliters and the 710 -- to try to capture a little more opportunities on the revenue side.

Probably the most dramatic example of the price differentials that we have is that we presently sell 2.5 liters of Brand Coca-Cola in a one-way package of 16 pesos, while Pepsi-Cola is pricing at 11 for the same presentation. In the past, Pepsi-Cola usually will price their one-way presentation at the same price as our returnable presentation. But in this case, again for the first time in the history, we have a 2.5 returnable presentation that is being sold at 12 pesos, and Pepsi-Cola at 2.5 on-way at 11 pesos. So again, we are not only having a larger price but also the inconvenience of (inaudible).

So that would explain then why you are -- that would probably explain why your CSD by your Cola volumes are only up about 1 percent. It is a pricing differential rather than more attractive prices cannibalizing your higher profit margin presentations. Is that fair?

I think that in general what you see is that in some territories you have seen (inaudible) increasing slightly their market share, and that is affecting basically the quality of both Pepsi and Coke. And also some other participants like Juoritos (ph) on the flavor segment that are doing some inroads again on the supermarkets and bodegas in Mexico on the flavor segment.

When you have such a high differential in market terms between the two leading bottlers, I understand Pepsi-Cola has been pressured a lot to start adjusting their prices. Now with that in mind, we have been forced to adjust slightly our prices -- in some cases, as I explained, on the 600 ml -- because clearly that was a case where not only the competition from some of our competitors, but also competition from our own 2.5 returnable Coca-Cola presentation, was also cannibalizing our efforts on that, so we needed to adjust that price. While at the same time, we are introducing these other presentations to do as much as possible this (inaudible) marketing strategies that we think we are very good at and trying to present this approach to different consumers that are willing to pay a little higher price.

In general, I will say that the market is very competitive right now, and we need to be very watchful of, very careful with how prices continue to evolve and how these new packages that we are introducing start performing, and then we need to adjust accordingly, not according to how things are performing.

You gave a goal -- I know that you're not in the guidance business -- but there have been suggestions that pricing may be relatively flat for '04. Is that somewhat still the goal, or given these changes, that may be optimistic here? Also, if you could give some sense on volumes on CSD volumes for '04, and then finally, just an update on the rights offering? Thank you.

Yes. I just want you to understand this is a very difficult competitive environment. Its volume guidance is very complicated for us and (inaudible) we have not provided any guidance. On the pricing front, we have always tried to stay very close to inflation levels. Obviously these are very difficult times in terms of the pricing environment in Mexico. I think that more than -- at the end of the day, the price is going to be the result of this movement in different presentations and how these presentations gain or loss importance within our mix. But in general, what you will see is quality (inaudible) use the prices in some presentations if we need to be more aggressive, and we will try to compensate by introducing more presentations and try to go to higher priced producing systems, markets and consumption locations. So that is basically what I can tell about 2004 in terms of volume and pricing.

With respect to the rights offering, we are after finalizing the UN numbers -- and believe me, it has been a very difficult and painful process of getting all be new territories in line with all the accounting policies, and as we have stressed in our press release and our conference, we were even adjusting some of these policies in markets like Colombia in the fourth quarter. We discovered these changes, it has been difficult to set in this very short period of time all these accounting policies to have very standardized processes across the board. We feel we are pretty much there, but it has been a complicated process.

So now that we have closed the year, we are presently working on finalizing the pro forma numbers for 2003 from January to April, which the remainder of the acquisition took place in May. So we think it will take basically a month and half to finalize that, and with that, when we finish that process, we will be ready to go to the SEC with an offering number, including this performance for the full year of 2003. And once we clear that, our advisors, our other advisors have expressed to us it usually takes between eight to 10 weeks to review those numbers, those documents by the agency, and then we will be ready for the rights offering. So our idea is that with that in mind, we will probably be around May with this process.

Thank you very much.

That is pretty much our timetable for these numbers.

Jose Yordan, UBS.

Good morning. I have one question. With all the plant closings you have done already and all this stuff, can you put into context in terms of your original estimate of 120 million of annualized synergies that you expected to extract from this deal and I guess what you earlier indicated was a conservative number or somewhat conservative number, is there any reason to believe that the number, once it is all said and done, is going to be any different from the levels you had indicated before?

Yes. Good morning, Jose. The estimate that we have has proven to be very difficult to try to isolate the different effects on when we start looking at the numbers of Panamco last year when they were working under U.S. GAAP (inaudible). The number that we have right now is that we are pretty much on the same level of savings as we we expressed the previous quarter around the $40 million mark. Obviously from procurement, we may yet achieve the savings that we were anticipating that were around $10 million.

In the manufacturing and distribution front, we closed the facilities. We also improved very rapidly on those expenses. The system is, as you remember, we had a system line when we were discussing this $120 million, something that is taking a little bit longer than anticipated. We were estimating or already finalizing by in two years that is probably going to take us two and half or three years to complete, and this has proven to be a little more complex than anticipated. And basically we feel that once we do our internal analysis with the numbers that we have internally, basically we will do that around $40 million more or less where we are right now in terms of those $120 million savings.

We don't have any specific indication right now as to change our estimates on that number, and I will say that we're basically going basically in line with the timing of those $120 million savings.

Great and if I could just ask a quick follow-up. This whole issue with your reversal of provisions during the fourth quarter for the excised tax legal action victory I guess, I am just interested why we did not hear about that in the third quarter because clearly this was something that pushed down your average pricing in the third quarter, and I would have at least mentioned that that time has one factor that would lead to somewhat of an increase in the revenue per case.

Yes. In general, the idea that we have was that we had this process in the jurisdiction system in Mexico. We won't discuss this for 2002. We have leveraged back the money that was paid in 2002. As a conservative way of doing that, we were paying all these expenses, all these taxes all the way through September when we received a better indication from our tax lawyers that we have very good chances for 2003 given the fact that we wanted 2002 in (inaudible), and that is basically on the same basis and that is why (inaudible) and decided to adjust to this accounting adjustment on the fourth quarter. So we are reversing basically all the effects that we have provisioned differently from January through September. It also helps us indicate that we are (inaudible), and that is why part of the reason is it is very important it is registered now.

So basically going forward, the excised tax on diet soft ranks is officially repealed in Mexico, or is it just for Coca-Cola brands because you were the one to sue in court?

No. What has happened is that the tax law has changed now for 2004, and in 2004 -- I need to revise that just to be sure of one thing. But now we are paying these taxes, and it is probably something we will not have the opportunity to appeal because they changed the regulation. But let me get with our tax lawyers, and I will give you a little more information. But the law has been changed starting January 1st, and this affected basically for 2003 and 2002 where we have the opportunity to regain control of some of these resources.

Great. Thanks a lot.

Alex Roberts, Santander.

Good morning. Two questions. I guess just a follow-up first on Mexico pricing. I was surprised to see how you guys got almost 28 pesos here for a case in Mexico -- higher than third quarter. I would have thought that that was going to come down, and I guess you had two things going on -- the higher water pricing but then the upscaling in the Panamco territories, which is a downward pressure. Is it really safe to say that it was just better-than-expected impacts from that water pricing that got you higher selling price versus 3Q or was it something else?

The other part of that is looking into first quarter, you made a couple of adjustments. Do you think that we could call third quarter '03 the low point in the average selling price?

Alex, let me answer the first question, and then you can repeat the second question if you would so that I truly understand what you asked. With respect to the pricing front, the main effect that we have is this decision with the excised tax. As we reverse the provisions that were made from January through September, that is increasing our revenue line on Mexico. However, these will work to isolate the effect of the excised tax. The prices all have been a little bit higher than what we had in the third quarter, which I think reflects some of the pricing movement that we have done as we increase the 2.5 liters from 15 to 16 pesos, the effect of reducing the 600 happened really more during this year, not so much in the fourth quarter, so we might see some effect of that reduction in the first quarter of 2004. But in general, our pricing architecture for the fourth quarter, isolating the effect of the change in the tax accounting, was slightly positive versus third quarter 2003.

Now can you repeat the second question that I missed originally?

No, that is fine. Actually you gave me a sense for the first quarter. That was helpful.

Just going into the second question then here, it is really on Brazil. Hearing you, I get the sense that you are more bullish actually on the outlook than what I remember back in October on the call. And frankly, you see the profitability level reaching very high levels here in Brazil. That was a very interesting surprise for me.

But specifically what makes you a little bit more bullish if I can qualify it like that? As you look out into 2004, the drivers -- pricing, glass packaging, asset rationalization -- these three items, are these three equally the main drivers? Would you agree with that? Is that a fair assumption? Maybe you can give us some color and your thoughts really on Brazil?

Yes. That is a very interesting story. Obviously the volume there is very very large compared to the other territories. It is not as large as Mexico, but it's larger than what we have in Colombia, Venezuela or Argentina. It is about what we have in Argentina. But still the profitability, it is low compared to some of the other territories. No?

Not only do we have a lot to do with the pricing architecture that we have, but very importantly, Alex, to the fact that a lot of the volume that was being sold in Brazil, for example, with this Simba brand, the more cases we were selling, the more we were losing money. I really don't understand why Simba was in the portfolio with that price architecture and that cost structure in the past.

So one of the first movements that we did as we understand better because structure of that and fully allocating some of the fixed distribution and fixed expenses that are related to this is to initially start changing the pricing architecture on the cost structure of that, and to change the cost structure, you need to talk to the Coca-Cola company obviously. So we basically launched another new brand that is called Sintenea (ph), which we think had better economics. It is not doing that work. But at the end of the day, even though we were reducing our CSD volumes by close to 20 percent in the quarter. We're able to really increase the profitability. That is clearly the signal that some of the movements we are doing are in the right direction. The fact that we are relying less on third distributors, that we are doing a lot of (inaudible) territories and (inaudible) have been reduced from other territories into our territories has also helped. So I think that without being too bullish yet because the profitability that we have is very low, we do see some very positive signs of improvement in how the market in Brazil (technical difficulty)-- is advancing. No?

So I will say that in general terms it is how we have been able to move the prices. The fact that we have better control on the distribution front by going directly to the market and having more access to our clients. Adjusting our cost structure by closing some of the plants and moving away from these presentations that were not making any profit for the company and just creating additional volume. I think that is basically the formula for what we have been doing so far.

So we do see some opportunities in the market in Brazil. Obviously it's a very large market, complex in the tax structure as has been expressed for a long time since Panamco was in charge of that, and that tax structure also creates a lot of different incentives for these achievements. But I think that again we do see some opportunities in Brazil.

Thanks a lot. That is very helpful.

Yang Sang, HLM.

Good morning. A question on the net debt reduction. I wonder what is your view on the timing when net debt will start to decrease significantly?

Good morning. When you look at the net debt levels that we have, we basically from the moment we took all this additional debt in May through December, the numbers are basically -- we reduced the net debt position by around $180 million. Part of that movement is a reflection of the fact that we have a very important part of our debt denominated in pesos. So it is not necessarily that we actually repay the loans, but it is more a reflection that in dollar terms the Mexican peso loans are worth less because of the exchange rate moment. As we move forward, we do believe that we need to be very aggressive, and by aggressive meaning a lot of control on the CapEx programs that the company have going forward because we have a very clear mandate from our Board of Directors that as we promised when we did acquisition, we should basically reduce the net debt position back to 0 in six years, and we continue to have that goal from our Board of Directors, and therefore, we need to be very careful with the cash generation of the company and how we spend those in CapEx, etc..

Robert Ford, Merrill Lynch.

Good morning everybody. Hector, I wanted to ask you a question about the expenses, specifically in Mexico. You talked a little bit about standardization of the the cola maintenance and higher distribution expenses and marketing expenses. Can you tell me with respect to the change in terms of the cola maintenance practices, how did those change, and what is the incremental difference in all these line items? Of these, what is recurring and what is nonrecurring?

Yes. In general, all these changes in Mexico are in the fourth quarter. Some of these are clearly nonrecurring as these adjustments on the life of the quarters is one movement that as we were discussing with our auditors, Panamco has this policy of depreciating the quarter within five years, and we have in our own territories three years.

We have evaluated taking the colas that have improved significantly from 10 years ago when we started or five years ago when we started in terms of our colas, but (inaudible) the Company in '93, and clearly given the income improvement that the colas have suffered, it was reasonable to work with five years. That was certainly a positive effect on the marketing or in the selling expense line that we saw.

On the (inaudible) side, we have some adjustments that are nonrecurring, which is basically the market environment. If you look at what we have through September of this year, we are basically running at around 3.7 3.8 percent of revenues on our marketing reserves with the idea that we will have a more stable charge throughout the year. But as revenues for the full year were below what we were anticipating because of the pricing volume (inaudible) and what we have disclosed, the target will move to larger presentations in a more -- in a larger fashion than we were anticipating, the movement away from the 600 milliliters (inaudible), and they volume brands that we also have described. We were not hitting the numbers that we were anticipating for the full year. So when we were basically at the end of the year in this fourth quarter, we need to adjust for the real marketing expense of the year. So, in other words, the provision that we have all the way through September was a little bit short of what we were as the (inaudible) has been. No? So we have a larger expense on the saving line because of these adjustments in the third quarter.

We have also introduced as you noted a lot of new presentations, and none of those presentations have expenses that are related to the introduction, especially the return on presentations have (inaudible) selling expenses as you have to go basically door by door, exchanging old bottles by new bottles. As we said in this conference, we have the policy that bottles and cases that go to the market are expensed as part of the selling expenses of the year that they are introduced.

(inaudible) used to have a 10 year amortization period for those introductions. So we are coming to take in these territories. We also found out that this policy was in the core system with what we believe should to be (inaudible) and which is taking that (technical difficulty)-- for the quarter as opposed to amortizing that over such a long period of time. So the combination of all these forces is what is creating these higher selling expenses during the quarter.

Hector, just to understand, when you reverse the depreciation or you change the useful lives of the colas, are you restating -- are you taking a huge depreciation credit I guess instead of a charge? Are you restating the asset values, or are just restating it for 2003? Going forward, you are taking the book value at the end of September 2003 and you are depreciating it over a longer period of time?

And when you say that you are booking the higher marketing expenses due to lower-than-expected revenue, does that mean your lower-than-expected revenue for the full year, and then you are playing catchup because you under-recognized your marketing expenses in the previous nine months? Is that what I am hearing?

Yes. In the second part, yes. In other words, we have commitments in some of the marketing expenses that just start negotiating with the core cola companies at the very beginning in the year. So on these expenses, you cannot cancel obviously. As we were expecting a more productive volume-wise and revenue-wise fourth quarter, we were basically targeting reserving the marketing expenses for a more stable percentage of revenues in each quarter as opposed to expending as they are being incurred day by day. So at the end of the day given the fact that the fourth quarter was below our revenue expectation in Mexico, we were under-reserved on the marketing expenses all the way through September.

With respect to the colas, if I understand what you were saying, I think (inaudible) to explain what we are doing. We moved the life from three to five years, so we have to adjust the remaining life of the colas, and obviously the expense of the amortization that we have because of that is reduced in every quarter. And going forward, we will have that. Every time we introduced new colas we will amortize that over a longer life period. No?

I guess my question, Hector, is do you take the existing book value of the cola and then depreciate that over five years, and as a result of the fourth quarter, you reduced your depreciation charges considerably? Or did you upwardly revise the value of your colas because they take a larger (inaudible) credit?

No, no. The first way you said. We have a value of our colas, and we are amortizing them the remaining life whatever value we have. But this is a longer life value.

And did you then also in terms of the new packaging, you introduced a number of new packages. But did you also take an additional charge to reverse the accounting treatment that Panamco had taken in previous periods, meaning that when they were amortizing their new product introductions over 10 years, do you just come into the fourth quarter to write down that all off?

Yes, in a way. Some of this -- Panamco had in their books, let me call it, an inventory or an asset of bottles and cases that were in the market that was very difficult to prove that you have full control of that. In our case, whenever we go to the market and introduce bottles, what we call introduction to the market, not the bottles and cases that we have in our control, but the bottles that you go out and promote to the houses, we take that as an expense. So we have to adjust this value of these assets and reduce it as an expense now as opposed to as they were taken, and that was certainly (inaudible).

Hector, when I look at your results quarter on quarter, it looks like your EBITDA margins in Mexico are down 254 basis points. So I would really like to understand or have you quantify each of these items so we can have a better appreciation for how the business is developing? As you have had more time to consolidate Panamco operations -- I know initially there were some happy surprises, particularly with respect to capacity. But there were some disappointments with respect to the distribution. I am curious to learn what other little surprises you have come across as you have had more time to consolidate these operations.

Yes. I think that we have obviously been preparing a list of all the things that we have (inaudible), so it is a large number of things. But this issue with the way they were accounting for bottles is one. The fact that there was basically not spending on maintenance of colas, which is an important element that we have now also, on the new (inaudible) standardizing our policies. The same is true for production plants and (inaudible). We have to introduce a lot of new (inaudible) to replace the very old (inaudible) Panamco had in the Mexico territories. We have found some tax issues in Brazil that are being adjusted in the acquisition balance sheet and also affecting the value of the numbers, but I don't think in cash flows in Brazil, no? That is I guess the main thing that we have found.

Great. Thank you very much.

One more thing, which I think is important, I believe that once we go and prepare this performance for January to April for those who care a lot understanding some of this trend's as we compare same quarter versus same quarter rather than what we are left to do right now, what is compare fourth quarter versus third quarter because it is the only thing that we can compare so far, no? So I am looking forward that once we prepare all the documents for this rights offering, we will have a little bit more light to share with you in some of the performance of the Company on the previous year.

Where I am coming from, quarter on quarter should be an easier comparison. And when I look at, for example, the brewer volumes in Mexico, they are all up quarter on quarter. I know you are in a tougher environment, but you certainly have summer in the Southern Cone (ph). As a result, you have record profitability in Brazil. That is completely attributable to seasonal factors in large part, right?

So when I look at these numbers and I see quarter on quarter a 254 basis points decline in EBITDA margins, I am concern, and I really would like to see a better breakdown of these expenses. It will really help us obtain a higher level of comfort with the consolidation process.

Understood. Let me take a look at all of that and see what we can do.

I appreciate it.

Lore Serra, Morgan Stanley.

I would second all those comments, and maybe at the risk of complicating things, can I just ask you have recorded 210 million pesos of non-cash items in Mexico in the quarter. What I would like to understand is you changed the cola amortization from three to five years. But I guess what I am reading into the press release is you started that policy in September, so you did not restate prior quarter's amortization during the course of 2003. Is that correct, or did that restatement reflect the whole year?

You mean in the cola life?

Yes. This 210 million, does that just reflect the fact that starting in the third quarter, you went to a five-year life instead of a three-year life. So instead of recording 300 million pesos odd non-cash per quarter, now it is at 200 million sustainable run-rate. Is that what is in the quarter, or did you change the whole year and some how that is in the fourth quarter?

That is also reflected in the fourth quarter, and I am going now into my Mexico City offices because of (inaudible). Let me get back to the headquarters and take a look at what the ball is reflecting and what you are saying.

But in theory, if you took a bottle and case write-off from the former Panamco territories, that would be in that chart. Is that correct?

Yes.

So I guess I am still confused. If I think about -- and I am know you are frustrated by this sequential issue -- but it looks to me like from the second quarter, which was the first quarter we saw Panamco together, that we saw something like a 600 basis point margin decline if we assume that the 130 million excised tax reversal you got in the quarter was basically pure profit in the fourth quarter. I know the selling expenses have been the culprit, but I don't understand how much of what is in your selling expenses are nonrecurring.

I guess another way to ask the question is, we have see the EBITDA margin in Mexico go from a 30 percent level to around a 23 percent level in this quarter if we strip out the excised tax reversal. Do you have a sense of where the accurate way to think about the franchise was during 2003?

What you mean the accurate way?

Well, I mean if the fourth quarter is being somehow affected by some charges that you are talking about -- you referenced some charges in the third quarter -- I guess I am trying to understand what is a recurring EBITDA margin in Mexico is we enter 2004 -- is stripping out some of these onetime charges? Like you talked about how you were still shipping 2.5 liter to remote areas of Mexico. I guess I am asking the same question that Rob is asking.

I don't have any doubt that the EBITDA margin in Mexico is coming down because of the competitive nature of the business that we have in Mexico. There is no way around that. We are selling more 2.5 liter presentations instead of the 600 milliliter presentations and have a huge (inaudible) versus this quarter. We think that has affected our profitability, and we are not denying that.

The 30 represented in the margin was basically what we had in Mexico prior to Panamco, and we have a lot of water in our volume. Panamco had that territory in the past.

What is a good number for 2004? We are not giving guidance on that end, but just so you know, the 30 percent that we used to have when (inaudible).

Let me ask a couple of other questions, and then we can follow up on the back of it because I think it's the fourth quarter is very confusing. Let me ask just a couple of quick questions.

In terms of the 40 million of the synergies that you talked about earlier is that what you have captured in 2003, or is that on a run-rate basis as you start 2004 what you have captured?

The estimate that we have --

I am asking, if you start 2004, are you at a run-rate of 40 million, or is 40 million what you have captured in 2003 results?

It is a run-rate of 40 million starting in 2004. I know that number is what I am giving you. So during 2003, the actual number is modest because we started in May, no, from a run-rate basis, and that is what we are expecting for 2004.

One other question on Mexico. You talked about your pricing gaps on the smaller sizes and what you are doing to adjust to that. On the larger sizes, I understand you recently have taken some pricing in flavors. I wonder if you think that the current portfolio structure in terms of pricing on the multiserve is where you expect to be, or do you think there could be changes in that in those products?

In the pricing architecture?

Yes.

For the quarter.

On the pricing.

We see that where we are right now it is at an appropriate level. Obviously we have to watch very carefully what our competitors, especially Pepsi is doing. Our interpretation is that we might be wrong, so if Pepsi delivered more (inaudible) on the flavors then we (inaudible) Pepsi-Cola. And then they had priced like that in the past where they have flavors at a higher price. So we believe there might be opportunities on the flavor segment.

As long as you have the low-priced competitor that is affecting the second player in (inaudible) segment, when you look at the effect -- if you think that we have seen the effects of market share from (inaudible)*. And just as an example, let's say 1 percent is not the same to lose 1 percentage point out of 90 that you have in market share versus to lose one thing or (inaudible) that you have.

So Pepsi-Cola or Brand Pepsi-Cola is under a lot of pressure, and that is why they have been very aggressive on that. So depending on how they continue the volume pricing (inaudible), we need to adjust our target. Right now, as I said, we have never had such large price gaps as we have right now. I think that the economic situation in Mexico, we are starting some rebound in the economy I think that is going to help us to start moving again to single serve presentation, which is work for us and probably good for Pepsi also.

Great. Thank you.

Carlos Laboy, Bear Stearns.

Good morning. Several questions. Just a follow-up on Lore's question. Can you sustain this price premium in your 2.5 returnable coke to Pepsi's one-way?

And second of all, on Venezuela, can you comment on your returnable bottle strategy there? Do they have traction right now? Are you modifying it? What are you seeing there? What percentage of your mix is it? Can you give us some color on that?

Yes. So far, we feel that 12 versus 11 hour returnable 11 to one-way at Pepsi is something that is creating a little bit of pressure on our market. So we might need to adjust in certain markets, in certain areas of, for example, Mexico City or some of the markets, and I think that the challenge we have going forward is how do we start applying some of this segmentation strategy that we have been establishing very successfully in areas like Buenos Aires.

One of the strategies that we have, as you can read in the lines of our presentation, is that we are also introducing new packages to start basically carrying the consumer. We have very ample selection of different price points. At the end of the day, we will have the consumer pick opportunities to buy from 3 pesos all the way to basically 10 pesos. We have everything (inaudible) possible. We have the peso for peso 5, 550, 6. So we believe that that is a very important strategy that all the companies that have systems like the ones that we have we will be able to establish and the systems and the way to go to market.

So it's a difficult question, but I don't know. We might need to adjust this returnable pricing. So far, (inaudible) and then we have been sustaining that differential, although we recognized that we are in a tough situation with this price gap. The brand equity sustained that differential, and as long as we feel that we are not being damaged in the correct volume price margin of contribution equation, we will sustain that price cap. We need to adjust that because house at the end of the day, if (inaudible) is coming down, then we are starting to adjust the Company.

In Venezuela, --.

(inaudible). In the case of Venezuela, one thing is that is clear is that we're trying to differentiate further the pricing differentiation of returnable presentations versus one-way packages. So one thing that has happened with the reintroduction of the 1 liter in the market, we have a more differentiated price between the next comparison on the one-ways. We have been able to (inaudible) the declining trend that this package has.

You will recall that in Venezuela one of the reasons that we have had is that we (inaudible), leads to a little more price points, similar in the same way that we have been moving our markets. Hello?

Yes.

I think in general, Carlos, clearly the introduction of return on presentations in Venezuela, especially with value presentation, we believe it is a winning proposition for our consumers and for our Company. We have been positively surprised in Venezuela by how the market is performing. We don't have any doubt that, in fact, operationally do better performance. The big question they have in Venezuela is what happens with all this economic situation, and what is the value of (inaudible) going forward? No?

When you look at the numbers for the fourth quarter, Venezuela has the second largest EBITDA in absolute terms, the first after Mexico, even larger than the (inaudible), Brazil, Colombia and Central America, and we are reducing a 1.8 exchange rate as opposed to 1.6 that was the official rate so even with some being very conservative on that.

In February, the central bank devalued the Bolivar by 20 percent, all the way to 1.9. The effect on us is basically from 1.8 to (inaudible). So it is basically 3 percent as opposed to the 20 percent because we were accounting for an exchange rate of, as I mentioned, 1.8. So Venezuela is doing a great job.

The question in Venezuela is again what is the dollar or the Mexico peso value of those profits, and secondly, how can you dividend up these resources all the way to Mexico, or how do you use these resources outside of Venezuela given the exchange control that the country has? But operationally and the strategies that our people in Venezuela are implementing, I don't have any questions. We are on the right track in Venezuela, no.

Also, I need to say, the value of the returnable presentation is that it is not the only presentation that is doing well in Venezuela. (inaudible), store rounds returnables, and the other one with packages are doing well. So the 1 liter is one of the remaining benefits we have that is performing better given the new pricing architecture.

Can you comment on returnable multis in Brazil, how you see that in 2004?

We will go to Alfredo Fernandez.

I think that with more control of the presale function, we will probably feel more comfortable about tempting the market with new packages. We are not making (inaudible) with the ones we are using right now a stylus or are waiting to use. However, certainly just getting away from the 2 liter in cans, and in fact, the recent launching of the 12 ounce one-way glass presentation for Brand Coca-Cola is one of the examples how in the (inaudible) market we could differentiate or start pushing a product that is more profitable for us in the same way getting away from can presentations.

And regarding the family sizes, I think that we have many different alternatives that we are evaluating. We have one in (inaudible) and Argentina and other PET products in other countries, but I think we're getting closer to launching something later this year.

Thank you.

Marco Vera, Deutsche Bank.

Given the low 1.2 percent cola growth and given the fact that the upsizing into 2.5 is fully rolled out, can you -- I am reading some significant declines in single serves. Can you give us some of those numbers for 600 milliliters, 12 ounces in colas, what the declines have been in the quarter?

Yes. Give me one second, let me see if I have it here. Give me one second.

This is Alfredo Fernandez. The decline in general, we are disclosing information as an aggregate in all the territories. It is growing certainly from our 8 ounce presentation one-way Coca-Cola and, to some other extent, the 12 ounce returnable. 600 now hasn't really affected during the quarter. Because remember the strategies of (inaudible) pricing by one of our main competitors is (inaudible) by the end of some point during the fourth quarter. That is what we have in mind, developing new packages on the 600 (inaudible).

One of the things that you see in the market is a significant (inaudible) on the number of transactions because there has not only been a decline in the industry of consumption of single presentations, but that also (inaudible) of transactions. The objective of developing new packages around the 600 is to reactivate (inaudible) at different price points to cover those transactions.

Okay.

The 8 ounce presentation probably declined about 10 percent for example. The 12 ounce returnable glass (inaudible) more or less in the same range. However, being objective, those packages don't represent a quite significant part of the portfolio as the 600 does.

Okay. As far as the previous response by Hector to the question by Carlos on the 2.5 sustainability of the pricing, just to clarify his answer, this was a package that was launched at an entry point of 12. The expectation was 14, but it is on the table to target some cities, areas whatever with an 11 price points to match Pepsi?

I believe that that is a possibility. We have not taken any decision so far, but that is certainly a possibility because if you remember for the last several years, again, Pepsi (inaudible) you what the price, their one-way returnable price on brand Coca-Cola was to (inaudible) Pepsi-Cola. And they are out of that practice lately, and we need to proceed with that.

Even with the change in management, they are credibly sticking to their guns as far as you are concerned?

Yes.

Another thing, Marco, we already have the two-year returnable presentation of Coca-Cola 11 pesos on market (inaudible) in the South, which were the places in which Panamco used to have the lowest price in returnable 2 liter at 10 pesos. We are referring mainly about the Mexico City area.

One final theme, and you can answer this as quickly as you want. This juncture, given that you put under the microscope all types of decisions of Panamco, including their affiliation with Heineken in Central America. At this juncture, can you tell us where you will quickly address your soft drink issues, and where you think you can, as far as different countries are concerned, where you think you can just wait and how long will you wait to address those issues?

You mean the beer (inaudible) strategy?

Yes.

Let me try to go by some of the regions. We have a very clear -- we have seen a very clear movement from (inaudible) to different markets from Guatemala all the way to Argentina you know, as you are fully aware of all these things that have been happening. Although Argentina is a market where we were competing versus (inaudible) in the past.

We have experienced that as being a participant in the beverage market. We need to evaluate whenever these brands are sold, for example, in Argentina. It is a priority after all this time that the brand has neglected -- I don't know if it's worth anything. But obviously we have been competing successfully in Argentina without a beer brand. But at the same time, we believe that (inaudible) has not been necessarily giving all flexibility under management in Argentina.

In Brazil, (inaudible) competitor (inaudible), we have -- obviously we continue to distribute Keiser (ph) beer. It was in the strategy (inaudible) when we arrived. You have also been reading what has been said about the Keiser (ph) and Coca-Cola FEMSA relationship, and this was very simple. We were focused a lot, and we need to continue to focus a lot on improving the profitability of the soft drinks operations in Brazil and also wanted to have a little more focus on their sales side. When you look at the numbers and the performance of beer in our territories, the performance was not very satisfactory.

I think what is satisfactory is the fact that we are changing a lot of the ways we have been approaching the market by going around these special distributors and third-party distributors. No? So we suffered in the beer volumes as we were suffering also in the soft drink volumes and moving to a more profitable stat.

The latest movement that (inaudible) has done is to move to Guatemala where they entered the market, if I remember correctly, around November with a new beer. What has happened in Guatemala is that in anticipation of (inaudible) joining forces with the Pepsi bottler in Guatemala, which is Mariposa, the local brewer prior to this introduction has a monopoly there, and as a strong company started to push soft drinks as a way of damaging the Pepsi-Cola distribution centers or reducing the profitability of the Pepsi-Cola distribution, of the Pepsi-Cola Company. And that obviously cause us in the middle of this fight.

Here you have a case where beer has been introduced in a country, and someone else is responding with a beer brand to compete versus the (inaudible) Pepsi combination, which is the local brewer, and that is why Guatemala has a very good volume performance. Obviously the profitability is not very good, but the volume increases as expressed in our press release and in this conference, Guatemala basically represents half of the volume increases we have in South America. But obviously that was not under a lot of price pressure on the market.

So in general, I just want to say that on this affiliation with Pepsi-Cola around different markets in South America and Central America, because of the scale that we have, we continue to develop a more profitable or more attractive or a larger scale distribution than what they have together, and that basically calls for us to be very watchful and very observant of how things are going be on the time and decide if we need any other beer approach in our portfolio in the future. But so far, we are not doing any changes in the short-term, no.

Okay. Thank you.

Operator, I don't think -- I don't know if there many other questions, but maybe we should stop. Do we have more questions?

I have two questions in the queue, sir.

Okay.

Celso Sanchez, ING.

I will try to make these questions quick. The first is very simple. The rights offering price. Can you confirm for us again the expected pricing? Is it similar to what you said in the past, or has anything changed on that front?

I could not hear. Are you asking about the rights offering price?

Exactly.

It is 2216.

Just on the Dasani branding I think you said in Panama -- you mentioned something about a recent wide strategy -- is that going to affect the Seal (ph) branding in Mexico, and could Seal become a Dasani brand?

No. So far the conversation we have had with the Coca-Cola Company, Dasani is a brand that they have seen more intense in Central America specifically. I don't know if in the future if that takes a lot of trend, if they would be thinking of moving that to different areas.

And on the water, just on the 5 liter side for Seal, did not seem quite as impressive as I might have hoped? Were you slightly disappointed with the performance, or was that in line with your expectations in the fourth quarter in Mexico?

Let me say the introduction of that package was so successful, that we then started obviously (inaudible) receive some additional competition. The main movement is (inaudible) with a 5 liter that they are selling. I believe it is at 10 pesos, where we are at 12. And the one from (inaudible), there is a 10 liter presentation of not only (inaudible), but at a very attractive price.

So remember we launched 10 pesos and we increased to 12 because we were running out of production capacity. We are evaluating if we move that price together with more competitive sense. But so far obviously volumes have suffered as new competitors have emerged with that presentation.

Just a final question, we talked about the Big Cola (ph) a little bit I think in some of the questions. Can you give us your sense of an update on the progress? Are they making further inroads in other parts of the country? Have they lost share in your territories? Can you give us a sense there?

I think that in general since this is -- they are not present in all markets. The way we look at that is in the specific regions. So we have some regions where they have increased slightly their marketshare, basically in some of the outskirts of Mexico City. In some of the -- in (inaudible) territories, we have reduced substantially the ColaReal marketshare. In some cases, close to half of what they have once we were there. We know that they are trying to expand to other territories, and they are having some difficulties in trying to convince the authorities that what they bring is good for the workers.

But in general, when you look at all the territories, across all the territories, let's say, that they probably have the state pushing them toward the last quarter, maybe a slight increase. And in some of the Mexico City areas, it is both the ColaReal and some of the Juoritos (ph) as I mentioned, which is a brand that has a brand-name name but is being sold at a very low price. Juoritos is doing some inroads (inaudible).

Thank you.

The last questioner has disconnected from the call, so we have no more questions at this time.

Thank you very much for your attention to this conference, and we are taking all your comments and we need to revalue internally the disclosure as always. As we have mentioned here, we think that we are at the forefront of disclosure in this industry, and obviously we would like to keep working very closely with all of you and providing the information that is important for you for your analysis, and we will see you next quarter. Thank you.

Ladies and gentlemen, thank you for joining today's conference call. This concludes the program. You may now disconnect. Good day.