Coca-Cola Femsa SAB de CV (KOF) 2004 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to Coca-Cola Femsa's Q1 fiscal year 2004 earnings event.

[OPERATOR INSTRUCTIONS]

I would like to now turn the presentation over to host of today's call Mr. Hector Trevino Chief Financial Officer, the Coca-Cola Femsa. Please go ahead sir.

Good morning everyone and welcome to Coca-Cola Femsa's Conference Call to disclose our first quarter 2004 results.

Our company continues making process in the integration of our new territory implementing important strategies in the packaging and brand extension front and improving our debt profile. Now, let me talk about Mexico.

Let me start by saying that during April of this year we had begun to see a more stable pricing environment in the value of Mexico.

Our main strategies are focussed on rejuvenating single serve consumption by developing known dual packages to increase profitability.

Adjusting our relative pricing structure to position our packages at the appropriate price for each consumption occasion and territory. In launching new carbonated soft drink flavored lined extensions to implement segmentation strategies by channel and social economic area. We continue to experience aggressive pricing strategies from our main competitors throughout the first quarter of 2004 in both carbonated soft drinks and the water segment.

However, despite new circumstances our carbonated soft drinks sales volume measuring unique cases increased 3.7% during the first quarter of 2004 as compared to the same period in 2003 mainly driven by almost a 4.3% sales volume growth in the corner category, which contributed almost 90% of the incremental sales volume during the quarter.

Carbonated soft drinks flavors increased 1.8% representing a growth balance. Our total volumes were slightly positive during the quarter because growth in CSD's more than offset volume decline of bottle water presentation.

The volume decline in jug water is a consequence of making our jug water business for channel more profitable.

Additionally in the case of five-leader presentation for brand Ciel, which have adjusted the price from 12 pesos to 10 pesos due to higher competition in that segment. During the first four months of 2004 we had launched an 8-ounce mini can presentation for brand coca-cola price at 3 pesos continually role out of the single chair presentation from brand Coca-Cola including the 450 milliliter and 710 milliliter in the territories outside of the body of Mexico.

Off-scale at 600 milliliter FET to a 710 milliliter for CSDs in flavors and also launched Eskelockhom (ph) a flavored drink for children in the value of Mexico priced 2 peso 50 cents. We feel confident that our new packaging strategies will help us to capture more profitable volumes in single served packages.

Currently the company has an individual package presentation for brand Coca-Cola in several price points from 3 to 7 pesos. We are in the process of the where looking similar price con segmentation for more deserving presentations.

During the quarter we also implemented a new multi flavored strategy for the brand launching a tool leader now return our PP presentation and a 600 milliliter on asset meant with channel basis. This new broad line expansion is helping us to implement segmented packaging and revenue management strategies.

We are using this trend to the brand to capture self-space in the super market channel and strengthen our presence in other channels.

During the month of April our main competitors started to increase prices in multi serving presentations for colors and flavors in the value of Mexico evidence of what appears amongst favored pricing environment for 2004.

On the efficiency front we closed three addition and distribution centers during the quarter reaching 110 centres by April 2004 down from 132 in May of 2003. We reduce our head count in Mexico by 2.3% and introduced a little over 7000 new cooler during the quarter.

We continue building stronger franchise in Mexico on every front. We continue feeling confident of our ability to create value in a more complex business environment.

Our strategies to wisely compete with new law price players are working. The pricing environment appears more stable, we continue streamlining our process structure and we have gone with the full support of the Brand Coca Cola Company.

Now let me talk about our Latin Central division. In Central America we continue posting strong results. Total sales volume increased 7.7% as compared to the same period in 2003 supported by an 8.3 sales volume growth in carbonated soft drinks. The coca cola category posted more than 70% of the incremental volumes with Guatemala and Karava contributing significantly to these results.

The recent launches of our tool leader in the package and presentation in Guatemala and Karava continue strengthening the presence of the brand cola.

Additionally our 600m presentations is becoming a popular presentation of our consumers. This quarter every one of our Central America countries continues to deposit sales volume increase in the regions.

The competitive dynamic in Guatemala remains challenging, however we implemented a 14% price increase during the quarter that was eventually followed by our main competitors. Our new package and presentations are letting us increase our market presence further in Guatemala.

In Costa Rica we launched three new returnable glass presentations for Brand Coca Cola during the quarter, an 8-ounce leader and the one leader with returnable glass presentations. These packages will provide us with more packaging alternatives to strengthen Brand Coca Cola in this more retinal channel.

In Columbia total volume declined 5.9% more than 60% of the sales volume declined from the bottle water line as a consequence of our revenue minus management strategy to implement by the company to improve the profitability of our water business. This quarter bottled water volumes represented 14.2% of total volumes down from 17% as compared to the same period a year ago.

Despite facing a perfect competitive environment from incumbent beverage players and other beverages categories the rate of decline in carbonated soft drinks sales volume has come down.

We continue to emphasize our strategy to develop a larger returnable base in most detailing presentations. A linear manufacturing base should provide us with a more flexible fixed cost structure and allow us to benefit from more operational levels once our volume resume positive growth.

During the quarter we launched Coca Cola Banela to reintegrate the market presence of Brand Coca Cola.

We continue working closely with the Coca Cola Company to the well of right price packaging and portfolio for Columbia.

In Venezuela we reported a significant volume growth of 44.5% as compared to the first quarter in 2003 when political unrest in Venezuela due to a national strike in January of 2003 made it difficult to run its operations on a regular basis. Because of the strike in 2003 we are effectively comparing 2 months for the first quarter of 2003 versus 3 months of the same period this year.

It is also important to highlight that our operators are focussing on packaging the brand segmentation strategies by channel.

Flavored carbonated soft drinks and colas represented more than 80% of the incremental sales volume during the quarter, with the coca cola category representing almost 50% of the total incremental volume.

At the same time carbonated soft drinks core brands in non-returnable number PET presentation and returnable glass presentation accounted for the majority of the growth in this volume during the first quarter in 2004. Specifically the 1.5 liter non-returnable PET presentation and 12-ounce returnable glass presentations accounted for more than 50% of the incremental sales volumes.

We have been able to balance our growth with both non-returnable and returnable presentations strengthening our packaging portfolio along the way. Returnable volumes remain around 36% of total.

During the quarter we launched a 2.25 liter non-returnable PET packaging presentation for brand Grapfruit our value protection brand in Venezuela in grapes and red cola flavors. Venezuela is slowly becoming a more important part of our consolidated business.

Now let me talk about our division. Our Brazilian operation continues improving its sales volume and packaging mix.

During the quarter sales volume decreased 6.7% showing a significant improvement from the previous quarters in which volume post higher declined due to the restructuring of channels and distributors. Nonetheless the cola segment remains statically flat when compared with the first quarter of last year.

In according to our strategy to reduce dependency in the 2 liter package we sold 55% of brand Coca Cola bottles in 2 litre presentation during the quarter down from 60% one year ago. This quarter the cola category represents over 71% of total volume sales compared to almost 67 a year ago aligned with our focus in brand Coca Cola.

Despite the sales volume decline during the first quarter of 2004, the company had maintained its shares of industry revenues accomplishing of its subjective of the line of operations to continue profitable growth during 2004. The majority of the volume decline comes from carbonated soft drink flavor brands including value protection brand Zimba and Tilie in 2 litre presentations.

We continue working with Coca Cola Company to develop the best portfolio of carbonated soft drinks flavor brands for our Brazilian operations.

Again, during the first quarter of 2004, we sold more volumes in the Coca Cola than the all portfolio by the perfection brands combined.

We continue strengthening our relationship with traditional small retailers, even in the first quarter we sold a little over 52% of our total volumes through this channel up from 42% during the same period last year. In direct or third party sales increase from 28% to almost 18%. We are starting to shift to the traditional distribution channel of direct sales and review our reliance on third party wholesalers starting to pay off.

The Coca Cola bottling is achieving a better coordination of price and packetized texture by distribution channels. Helping to reduce prize gaps between franchises and those to reduce franchisee. Our Argentine operation reached the highest first quarter profitability level, since we acquired in 1994. Our Argentine operation contribute during the quarter, the highest absolute operating income outside of Mexico lively carried on Central America.

Operations Argentine recorded a strong boding growth of 17.5% during the quarter as compared to the same period in 2003. Cola represented slightly over 57% of the incremental volume and the balance was divided almost evenly between our value protection brand and core carbonated soft drinks label brands.

Slightly over 50% of the incremental sales volumes were generated by our core brand in returnable PET and glass presentation during the first quarter of 2004. During this quarter 27.5% of our total sales volume, we sold in returnable PET presentations versus 22.9 during the same period last year.

We are taking advantages of key learning experiences in Argentina to proactively implement multi segmentations, compliment our portfolio brands and packages in our advantage. These initiatives will provide us with more alternatives to the well off revenue management strategies by beverage market.

On to financial front, we review our total net debt by approximately $91m and took advantage of available bank financing to improve our debt maturity profile while decreasing our currency exposure.

Today more than 60% of our total debt is nominated in local currency, mainly Mexican pesos versus 33% in May of 2003, when we close our position of finance. These are clear indication of the finances strength of Coca Cola front.

With respect to the rights offering, we are currently in the process of preparing pro forma financial statements and we have set to write offering to conclude in the third quarter of 2004. Please note that this is not an offer of any security for sale, which might only be made through our prospectors contending information regarding the company.

We are firm believers that sharing the best practices of our successful strategies across our company will help us to improve the profitability of our operations outside of Mexico and will help our Mexican operations to be from more sophisticated implementing segmentation instructive with our portfolio growths and practices.

We would continue evaluating opportunities to grow fertilizers strategy among our different countries in order to strengthen our experience of our executives. Thank you for your attention. Now I would like to open the call for any questions that you might have.

Thank you sir.

[OPERATOR INSTRUCTIONS]

And our first question comes from Jeff Kanter from Prudential Equity Group. Please go ahead.

Good afternoon gentlemen. What gives you confidence in Mexico, the pricing is, is of anything from, firming or stabilizing or getting better and have you seen any heavy price changes from your, from the value brands at all, that's my first question I have, a quick follow up

Good morning Jeff, well, as we discussed it in the last quarter conference call we were pointing out with the very large people that we have got in the price of the mortgage serve presentations, our main competitor Pepsi Cola. You remember at that moment, we were pricing our 21/2 liter at 16 pesos and our 21/2 returnable PET at 12 pesos and Pepsi Cola was brightened the 21/2, one way of presentation at 11 pesos, which is again a huge difference the 16 we were charging and even below our returnable presentation for the same charge.

We have increased in April the price of this 21/2 liter one way from 11 to 12. So we are back to the same basically structural where we were pricing our returnable presentation at the same price over Femsa Pepsi groups along with presentation on equivalent size. We also increased the price of the 1 liter presentation from 7 to 8 pesos and the increases with price of the play was on the 21/2 liter one way from who were in the market 12 to 30.

So, though we have not seen any specific changes on the other competitors there in the markets we (inaudible) that with this price movements of our, by our main competitors that the environment in the pricing from its improving for our company.

OK. What's going on your gross profit margin here on. They continue to be under a little bit of pressure and which is surprising to me given, given the cost sales, the there is a way to discuss that would be great and finally are, why was the write-offs when push back into the third quarter. Thank you.

The main issue that we have got, with the growth margin obviously is that the, on page is two fold, one is that is consumer continue to move to the larger presentation more to (inaudible) presentations. Now, we are sending more of the 2.5 leader presentation.

So on (inaudible), on today, and by mess of the single presentations, especially from the NR, but while you have seen a lot of objectives, as I care to describe in this introduction of launching new individual factors and presentations in the course of the leader, at the 710. These presentations are not present in every single market. It's an attempt by the company to try to go to different channels with different presentations and looking for an opportunity to either slide a value presentation like the second term, the refracting price so that we get some additional consumers there or in some cases, saying that 450m is a very good price for - very good margins in the area, where we feel that we can see that presentation.

At the same time, we continue obviously pushing this 600, which has software because of the relative slide price that this presentation has versus the larger presentations.

The other front of the pressure in margins has to do with the fewer prices and regional price. And that's clearly, we are showing through the Mexico case.

We can't continue to experience some increases in sugar prices, PP prices have stayed very stable. We have not done specific situation with that. Obviously, the 1117 exchange rates during the quarter was not a significant element, when we compare versus the fourth quarter because actually, during the fourth quarter, the standard was a little bit higher for Q4.

But I think that this are the two main issues, consumers moving to lower presentations that carries a lower price and slightly lower possibility for us and some raw material increases, especially (inaudible)

And how much cost price did you book in the quarter?

Meaning to say in terms of savings?

Yes.

OK. Last quarter, we said that we will earn around $40 m in synergies, we were discussing that at the end of February and say that, thoroughly, an additional $5 m on that roaming rate, it's because of this launching of this pre distribution centers and so much on savings on for Q1 and Q2. Right now, it's not that we are running a $145 m on an annual basis on savings.

OK.

And with respect to the rights offerings, we basically have something lays on presenting this performance numbers because we closed the year end numbers basically in February, then our right offs get working an hour people obviously working with the closing this first quarter.

We have already started on this Performa numbers for 2003 and we are well advancing that. But even if they finalize, let's say next month with that process, then we have to work through the SEC process of reviewing the prospects and our lowest as we guess the factors, it would take between six to eight weeks.

And that basically would take us through the third quarter. I don't feel that we can't have a lot of delays here but that is basically is the prime scale that we have been preparing that by the time save us for these writes offering.

Thank you.

Thank you.

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

Hey, good morning everybody. Hector, could you elaborate a little bit on Columbia -- erosion quarter on quarter, that usually kind of always precedes seasonality that was a surprise to me.

Robert, you would please give your comments please because we didn't hear it properly.

Sure. I was just asking if you could elaborate a little bit more about challenges of profitability in Columbia, there was substantially lower than I had anticipated in a pre-paid reductions, just quarter on quarter which isn't - I was that wouldn't be sufficiently accounted for by the changes these -

Yes, good morning. Columbia have to be in kind of least 80%, we feel that we have advanced significantly in some of the efficiencies in terms of manufacturing especially when we close down these profitability is down that last year. Volumes have not been responding.

We have tried improving in introducing larger presenters of our Board through our internal presentations. And we also learnt that which sells people in Columbia, we are not properly trained to - we don't know what minus they in a profit manner.

So we have been doing some changes in Columbia, as you see in the quarter volumes came down, still we have been seeing that very stable and declining basically either here is where we have a stable volumes or declining volumes basically for the last three years and we are basically decided to change the minus there and also basically March of this year, we have on the roof, Chief Operating Officer for Columbia hoping to see some improvement there.

But the main reasons for all this erosion on margins have to do with the volumes not drawing or actually declining. So we hope that with two manufacturing place, we will start to have a better concealments, some of these bio workers and several better (inaudible) of where we manage the Donald presentation which I will transfer.

Hector, will it be fair to say that you are still - because you are going to see over that only to put in to March. I would be - is it fair to say that you really haven't identified a detailed solution with the difficulties that you are experiencing right now and if you have some shape our expectations in terms of what kind of time it may take to turn that business around and perhaps some of the things that you can do to improve the profitability there besides just to down plans?

Yes, I think that given the recent changes just as I mentioned, we just changed in last March, it is too early to predict in a little bit, when we expect some changes there, we are working very close with a company to look for the rise price factors in channel portfolio and what I can tell you is we wanted to have Columbus, is in our radar screen, that is a big area of opportunities and we need to work very closely with the new management there to try to turn around that business, that it has been evolved this quarter and may be we are going to contribute more at that time.

Fair enough, in the press release, there was a reference to standardization of the cooler, practices. What actually did that mean and what kind of an effect did it have on the quarter?

I think that we have found as we were reviewing and doing this Performa and reviewing the numbers for the first quarter of last year. It's that, I don't know if that to discuss to do with the fact that we announced this acquisition in December and then the acquisition - the closing of that happened in May, we are basically doing that year of time from December to May. There was very little maintenance and on plant and our gross, of a number gross at that time.

So, sometimes, trying to make this number comparable, so that we better understand some opportunities in the margin, it is difficult because of this given practices. I think that the exercise of finalizing the 2003 on a Performa basis for the write offering and next quarter where will start again comparing the full quarter versus the second quarter, when we have some of interest basis from May to June and certainly during the third quarter, we will start more control and housing works in prepared, from an accounting perspective, on last year and also from the way that was doing the actual maintenance of all this equipments, during that period of time, but that basically was what were referring to that.

So, it sounds as if - what was the actual pygal impact that from the standardization of accounting -

Let me review those numbers and I don't have it at the several migrates right now and that certain, some of the areas where we are reviewing that for the Performa for 2003.

Right, it sounds as if it is material enough to mention it in your press release, right and it had an adverse impact, is that fair?

Yes, yes.

And then, when it comes to your Coca Cola single serve growth rates right now, physical cases, can you give us an idea of where that is just quarter on quarter so we can get a sense of how the introduction of the mini can and the new pricing strategies are working?

Give me one second just to look here at the tables and we will give you the numbers.

Thank you.

Let me give you some preliminaries, with the introduction of these two stations, before 50 and 710, we saw a reduction of - on the 600 ml and at the same time, did both the regional volumes that we were selling or the recent volume that we captured with this kind of new presentation was based around 1 m additional phases. So, we lost approximate numbers which was - begin our on the top of my head, we've learnt around 3 m - in 600 ml and we sold 4 m additional cases in 427 --. So, that's some of the strategies that we are currently doing to increase our single penetration.

And Hector, just you know, I know launching the presentation is expensive, if the incremental gain with these types of initiatives are merely cases, is that a profitable thing to do?

We can do it (inaudible) please.

After that, I am just curious as if given, given the expense of launching new presentation, and the changes you have to make distribution, it is-is this sort of thing profitable -is it profitable for launch new presentations for a net gain of many new cases? Thanks.

Yes, we are doing this with one-way presentations. So, the presentations that are based level, where do Coca Cola company knows that the malls for producing the ET walls are available, so we are basically have to - the Asian expenses that we have this buying these malls, struggling with our malls supplier in this case Mexico to prepare this new presentation for us and then, directives basically marketing expenses related to the promotion and through this presentations.

We are convinced that by providing the consumer with additional opportunities, additional tax sponge to opportunities, from us certain profit of gross. As we try to bring you in the introduction not that we have these small cans, these 8 ounce can which is price of 3 pesos, we have basically the other way, we have presentation that's on the three basis at 4 or 5 or 6 and 7 basis.

So, in a way we got a slight one for whatever occasion the consumer wants, obviously we don't have such a single presentation in everything channel, on leveraging the economic areas, but we use this to more effectively try to promote this single sales that there we go, which is very profitable for us.

Now this is Alfredo Fernandez, just going back to your question, is they have the incremental volume, the 450 and the 70 ml liter have added not only unique cases volume but physical cases, it's been in a way I was starting to recreate contractions.

So, for example, in the 8 ounce mini camp presentation, together with a 8 ounce one way glass, they are selling more volumes than the previous quarter and we are not only talking about launches, we are talking about the count to sell repurchasing the products. So, eventually they of course, have been incremental and if you compare the price of the single serve presentation per ounce versus the multi type presentation to realize that this eventually the price higher and for us more profitable.

Oh, great, thank you very much. One last question and that is I am sure you probably saw that the very senior FEMSA official was making an aggressive comment to press about tax evasion and on a particular largely other key brand competitors.

I just want to know that if those comments are accurate and where exactly is that tax evasion occurring in European and are you succeeding in getting the authorities and so you know what reports do they have and what's the kind of activity you expect when it comes from the tax employees of Mexico specifically to these areas of evasion they are (inaudible)?

Yes what I think that I was not present when these comments were made, it was in a very large conference unrelated to the industry and I think that the comments in the press or probably this of more a paying attention to that specific point of the conversation.

In general what we have said in the past is that we are seeing not very fair competition is in the way in the distribution of the products since we met. The formality of all of these have to do when the market leads just like to some other distribution center that are owned by some of our competitors and that's were a very large number of the basically almost accounted for sale of these above these used very informal, used at very informal minus in there business and it has to do with how they pays their utility, how they pay taxes and all of that. It has also has been reported in the press that a lot of the unions are against the expansion of these precisely because a big portion of our workers are into the distribution area.

Out of the 30,000 employees that we have in Mexico City, a nearly over 20,000, almost 22,000 in our case are employees that are related to the distribution of the products. So you can see, it's a very big portion of our employees and all that part of the business is being handled in some of our competitor cases in a very informal way.

So obviously the workers that are in that segment of the business are worried about the how there pensions are been informed and in a such a security expanded and how the and the authorities worried about how the value added tax is been carried all the way to the final consumer and that's basically again what we consider at this point.

Thank you our next question comes from Yang Sang from HLM. Please go ahead.

Hello good morning everyone, this is Yang Sang from (inaudible) Management. Two questions on net debt divisions, one is on the reduction in 90m, just wonder how much of it is from the cash from operation. It's not the one is on the long term target of reduction of net debt position to 0 in about 6 years and I wonder whether that includes possibility of asset disposals. Thanks.

Yes, we - out of the $91m that we repay basically on the net debt for this first quarter and to say that cash from operation is somewhere around $30m to $35m. We received basically with tax reforms from the taxes that were paid in excess last year are basically somewhere around $55m and that was obviously reduce for this repayment, so in actual free cash flow generation that was used to repay debt is somewhere around $30m to $35m.

With respect to this objective of repaying down the debt in six years, we were anticipating that and we feel that this year through we will do that with the free cash flow generation of the business.

We are -- when we are mentioning that at year ago and than we have expressed, continued to expressed, well that we are not accounting for possibility of some asset disposals or even for sample the proceeds from the rights offering, if we were to be successful with a right offerings two quarters or the next quarter basically -- third quarter we certainly plan to accelerate the pace of the net debt reduction. We are not contemplating right now very large asset disposal.

We have, we are going to sale some real estate in Columbia that is not been for the operation for this $3m or $4m and that's basically some of the what we have in our -, but we don't have any specific measures in going on that front.

Thank you and our next question comes from Waqim Lopez from Deutsche (ph). Please go ahead.

Hello, good morning. Just a question on Brasil. Now that the economic situation and also the Brazilian economic in the business and more rationale and the line across the different contributing that you mention, do you think that the country is ready for consolidation and will you be leading that consolidation?

Yes, it's a tough question because obviously we, it's always you always need to be other part also to be willing to do our constructional. I see that the business environment in Brazil is better, I think that the business environment within the Coca-Cola system is much better once we have, have to establish this discipline most of having a minimum price in the different franchises just to avoid any shipments and some thing like that.

We are managing better the relation whichever the key account like the large chains of super markets and some thing like that. We believe that there would be opportunities in Brazil and we certainly believe that, that is our duty to take a look at those opportunities if they become available.

Thank you our next question comes from Lore Serra from Morgan Stanley, please go ahead.

Yes hello. Just a couple of questions real quick I guess on Mexico. First in terms of pricing your reference the moods of the Pepsi, the recent moods.

I wonder if we think about your pricing outlook in Mexico for the remainder of 2004, should we think about sort of fairly stable pricing on our per package basis or per presentation basis and than the variations being caused by next changers or should still think about changes in pricing on a per package basis.

No, the right way to look at the pricing environment in Mexico is the first one that you describe, that prices being stable on that per package basis and if we see any change in the ours price is because of the release of the properties moving to a different mix.

Great and two questions on the SG&A, in the administrative cost we saw those numbers come down from where you have been running the last couple of quarters and look like about $10m from where you cordially run rate. It's been the last couple of quarters. I wonder if that -- those were any changes in the administration cost or whether that is one time issue and than I guess the second sort of question on the on selling expenses, they continue to, I guess, to run a bit higher than I think they are to be running and I am wondering you know how much is are you still recording the number of, I don't know if it's fair to call one time given like been there for a couple of quarters but are they still transitional expenses in those numbers and they should be expected to come down as the percentage of sales or are they adjusted at a higher level than I guess I am thinking they should be.

I think that we have seen some small adjustments in between the two lines basically between selling expenses and administrative expenses as we start to and we go through our process of getting all the quarter in changing in terms of the accounting natures and all of that. We have been going through a very difficult process of time to have a one system for whole of Mexico and that process is going to finish as schedule in May of this year.

So we are giving concentrating on but I will take very minimum adjustments as we realized that some of these expenses in some of the all territories might have been recorded different from what, the policy of can go by the (inaudible).

Let me, what I cannot say is that I will review that a little bit more detail and than we probably can comment a bit more in the future. My expectations is that coming May was we finish with the all integration of single platform for all of Mexico and I want to point out it was the original calendar that we have since May of last year to finalize this more allocation of these systems in Mexico. That we will finish with all this small adjustments.

One little thing that we have also one in spite of we have on the Selling and Administrative expense this quarter is that the depreciation expense came a little down because of the lower exchange rate than we had in the fourth quarter and also some of this (inaudible) that we have as we use one - 11.17 versus 11.23 than we have in the previous quarter. (inaudible) a little bit on the depreciation expense.

OK I guess - deprecation I guess one of though in the first quarter compared to the fourth quarter so I am not sure what that comment looks relative. I guess maybe just moving to Columbia for a second I just wondered if you comment on what the volume weakness you are seeing is related to category of market share.

Lora can you repeat the questions please.

In Columbia the volume weakness that you are seeing is that a category - the soft drink category declining at the rate you have been seeing declines in the last three or four quarters are you loosing market shares as well in Columbia.

Both is very importantly watering but also see as these there has been some decline there and is obviously competitiveness we adjusting some weakness on the markets there first of all. And obviously that has to a lot of the figures.

We have now remain to change the minus (inaudible) there also. But we have seen some weakness on the markets there as well. Then regarding Columbia we have some water presentations that work very profitable. We were also selling water in plastic bags importantly very, very low prices. We have been thinking of that as dying to capture again opportunity this was real in Columbia and obviously we believe that with - would do a better job there.

Great thank you.

OK. Our next question comes from Jack Rosenbaum from SAB Capital. Please go ahead.

Hi I just wanted to know if you could any more color on beer sales volumes in Brazil where you sort of see this going over the next 12 months and the current relationships with (inaudible).

Yes good morning during this quarter beer volumes were down around 6%. I remember 5 or 6%. You remember that its important to point out that as of the beginning of the year we changed the way to business was been in manners in Brazil on the beer front. So we are 100% posses on resolving and more so to directly themselves or the sales effort.

So as of this the last 2 or three months we are only distributing this, the agreement we have with (inaudible) is that we are all the (inaudible) those beer volumes to the market place and to the plant and to the plants as they are fully in-charge of this sales forces and we don't have any responsibility now about that, we just collect the fee for the distribution and then we believe that way we have - flexibility to focus a lot of our efforts in our sales area of CSDs and Morrison is also happy with the fact that they are taking foreign got control of the sales process in individual and distribution process for us is a good way of reducing our fixed cost in the market and helping our profitability also.

Also we are happy with our economy agreement as we have with market it does respect. For me it was very correct any signal of what we see beer bottles in Brazil point because right now we are basically delivering what they order us.

Thanks.

Our next comes from Carlos Laboy from Bear Stearns. Please go ahead.

Good morning, I was hoping if you could expand on Brazil your returnable multi serve rollout. What you see as the prospects of this rollout or there any structural issues that could keep multi-serve returnables from reaching the same penetration as in Argentina and is there any insight that you can give us on what you've learned from the various pilot programs you were running returnable multi-serve in Brazil?

Carlos good morning. Obviously, at this style of programs are evolving we prefer to not to comment the loss because of a comparative nature of the industry and the information we are getting from this side but let me tell you that we don't see why returnable volumes should not reach a similar level to what we had in Argentina which was during first quarter.

We do believe that we have a very large opportunity we have a lot of stake in our capabilities to manage that appropriately and I mean we will continue to push hold that now. Right now I would not like to comment on this strategic problems and so got the results with we have a lot of confidence in the returnable market in Brazil.

When do you think you could be in a position to consult more openly about returnable multi-serve strategies in Brazil? Is that something that we are likely to see this year?

Yes Carlos I think that if we should -maybe by the end of the next quarter or next conference I will send comments obviously as third quarter sales and we can comment and it basically two quarters is what we can comment on, if things work very well maybe in next quarter we can talk about that.

Thank you.

Our next question comes from Alex Roberts from (inaudible). Please go ahead sir.

Just a couple of question on Mexico. First of all just on a TSD volume growth I wanted to understand that little bit better clearly almost 4% year on year, very strong comparative of coke system in general I think it will probably much stronger than the other bottlers there in the quarter. Is this something that as we can be looking for this kind of very strong growth for the rest of the year but may be specifically if you could comment on the drivers here, upsizing clearly has - you know whether a factor I think that could be dissipating and then, I guess I would have to think about the new course that you done in the quarter and the new packaging, may be you could give us kind of some color as far as how do you see that growth for the rest of the year, Hector?

It's a tough question in the sense that obviously, we have a lot of difference in the strategies going on and we would have a different presentations as that is being on the (inaudible), we finalized the roll out of the 2.5, it is going on in some of the -in the south of the country where we are not pressing with that.

We recently launched this strategy in some of the low-income areas of Mexico City, basically before - we were seeing a lot of pressure in terms of the flavor market. We are also using that - the mandate in production on the 600 ml for the very popular take stand or food stands in Madrid, where we were not facing a lot, so, the combination of all of that and obviously the way we had been maintaining our price cum package architecture by channel, it has helped us achieve this volume growth.

So to give you an idea, we estimate that of this total, we don't present the on 244 for your 5% on the total quality system in Mexico. But this quarter, we estimate that we contribute basically 90% of the additional cases in Mexico, so its - quantity of the CFD from now because as we described we suffered - water and to water cases because of the strategies that we have been practicing toward a more profitable water business.

So when you look at business exclusively to see as this the majority of the growth that you saw on the country has been provided by Coca Cola, so we would always be (inaudible). So our competitors, we act with this in the different areas, I think that it's hard to predict obviously, we will like to keep up paces as the one we have in this quarter.

Obviously we would like to see that to be reflected on the way to the bottom-line that - strategies is precisely directed towards that one, to the (inaudible) before profitability for us and whatever we can do in that - would be very good for us.

Yes, I mean I guess kind of the other side of that is the pricing which obviously on a case in Mexico I mean stable versus the fourth quarter. You talked about this - I mean we have seen some of the price increases here from PBJ, talked about the stability and the value of Mexico, I mean have we seen the B brand specifically, what are they doing as far as you know, following these price increases in the value of Mexico, if you could give us some color on what they are doing and specifically then, just going to the Penamco territory, if you kind of qualify the pricing environment there, I mean is it fair to say as well outside of the value of Mexico that you are seeing as you just mentioned, a more stable environment as well.

We are - let me exact - once have not seen any movement on the pricing on that front, you know, what's - and de-collar, continue to price basically to say, at the same prices.

Our strategy was one that is precisely added it to that, we are being very aggressive on the pricing on mudeth (ph), to give you also a collar on that, the market end especially in the next strategic market, when you wanted to ask of the CDO and the low income areas developing for data and --. Hartitosis (ph) is really doing more damage to us than the rest of the others, so and to repossess the brand name because you have the expression in the country for a long time, they do have the solution frequent to ours, but in those specific channels that the net version of Hartitosis has been very good, so we needed to launch is mudeth presentations strategically to target those opportunities not - so debating from, we have been moving from those prices from 11 to 12 in the (inaudible), from 12 to 13 on flavors and the leader from 7 to 8. And that's basically in Mexico CD, what - he has been doing, not the rest of the council. So my best feeling are guidance what I mentioned is that we are not seeing in our front any movement on the individual factor presentation. The broader with any improvement or reduction in the matter of fact that unification, with that is helping this approaches more.

I got I was trying to get at the Non valley of Mexico or is there another what you could characterize I mean is it just - would you stay as stable as you have seen in value Mexico in the financial territory?

I think that, that is as stable as in the as is in the valley of Mexico, this was remember that was delivered (inaudible) on Mexico seemed basically. So the other territories were not as aggressive. Remember that we compete also with some other Pepsi cola bottle in the mideocon area and the - the back areas where the (inaudible) better pricing.

OK. Then OK last question is really just on the pace of the synergy with Panamco for about the year I guess you mentioned earlier you are kind of $5m of savings in the first quarter and I guess, it is probably safer side that the low hanging fruit has been captured and when you look out here for the rest of the year could you give us a little bit of colors while the areas that you think still are going to produce some savings kind of, is this more something that will see coming through it second half the year you think we are still some bit I going to kind come in a short time like this second quarter.

I think that in general note on this synergy front, I think that we have seen very good improvement in some of the obviously in performance and on back office and get - optimization. Also one has to with closing with some of these divisions same to same.

We have been very active and I think that we have to move very fast in that front. So I will tell you that if the industry works to evaluate more stable on the pricing trend on the competitive trend we probably would have seen better this result to be send synergies through our P&L.

The difficult part is to measure is that that even though we have captures and synergies in procurement, some of the raw material has increased in spite with the sweetness.

So even though we are buying now Panamco territory at the same prices than COS (ph) territory both territories are now lined at an expensive price profound of return. And that's why I mentioned very difficult to compare specific things like perfuse. Whereas we have this analysis down by a third party way back where we were saying that there was something - just I am procuring just the way we were purchasing different raw materials. I am certain that all of that is now fully integrated into because we have reviewed that and we are certainly buying everything prices everywhere. In Mexico for example at the same prices, which was synergies are bringing more come back (inaudible) charges that under rest of the all Coco-Cola FEMSA territory.

In some of the other conflicts we were improving some of the negotiations because of this scales but with regarding your operations in some of the other countries. So it is difficult to see those synergies been run through the P&L but when you come to seeing the number of plans we have closed in Mexico and Central America and Latin Central the number of (inaudible) we have closed the headcount is option which have achieved closing obviously down the Miami office and the Mexico CD headquarters of Panamco.

And all of that is here. The comfort part of this is that from the of the steadiness industry is offer the pricing environment is stocked than what we used to have at profit years ago, I am saying that it will start into local EBIT more stable. And that's where it makes very difficult for us to say here you can see very strategic X m of savings in the P&L in this specific tour of relies I don't know, if I must blaming.

No I was just explained more general of the bounces of the year had term you guys feeling confident about the 120 obviously it seems to me by the mid '05 this custom room it seems to me for the balance of the year to get additional synergies from that practices?

Yes, is actually is a daily serving us as we mentioned we are one of fast (inaudible) integration of distance, Mexico we will finalize that in may that will also bring some savings, so these number that has paid around $45m on the newly basis on the wrong rate basis it's the best estimate that we have right now working thought a lot numbers on time to (inaudible) this numbers in the middle pieces and together understand what were we spend from that perspective is part of the information we are using certainly not. But we do feel that we have still some room to go as this synergies start too much air light now.

Fine. Thank you then.

Thank you and our final question this morning comes from Tobys (Ph) Benjamin from JP Morgan. Please go ahead sir.

Yes, good morning thank you very much I just have a figure followup question regarding the increase in long cash items I think an increase was in fact is closer to 60% sequentially has been volatility tune this line and I would like to know if its really related to the standardization of the cooler of the fleet is really that you cease then or if it would be forcible to provide a break down FAFGANG, GNA level what is cash and what is non cash?

One moment. As you always telling that the non-cash items?

In Mexico.

Well, is because you are comparing that to the second to the full quarter of last year.

Yes, but I also heard like a guidance I think that its - I know, this would be very difficult to protect this numbers but I think conversation that you had - that we had I was using a number, which was closer to the first quarter number it was a very higher but closer to the forth quarter a number but it really be increase in the first quarter was surprising in my view and I think that it (inaudible) in fact has in fact probably selling expenses and I just what to an idea really if they can dominated effect from the stand what happened to the selling expensive line?

The run rate that used are going to start to see going forward should be more similar to a reach we show the first quarter this year and the third quarter of the previous year and you have to do with the adjustment on the life of the coolers during the forth quarter and I think probably we can go more detail of line in the other conversation but is you compared service against quarter that doesn't mean difference.

OK is it possible hot line or made (inaudible) to provide some big down per SG&A since will India's selling line what was non-cash?

I don't see why now we can (inaudible).

OK Thank you very much I call you later again, thanks.

Thank you sir there are no further questions at this time I would like to now turn the call back to you for some closing remarks. Please go ahead.

Well. Thank you very much for the interest in our company. As we have a special (inaudible) myself would be available to answer any questions you may have in the future.