Coca-Cola Femsa SAB de CV (KOF) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen. Welcome to Coca-Cola FEMSA’s third quarter earnings conference call. My name is Stephen and I’ll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

This conference call may discuss certain forward-looking statements concerning Coca-Cola FEMSA’s future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management 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 third quarter and 9 months ended September 30, 2004 on a consolidated basis and by country includes 3 months and 9 months results of the original Coca-Cola FEMSA territories, the Valley of Mexico, the South East of Mexico and Buenos Aires and of our new territories acquired from Panamco.

Our consolidated results for the 9 months results of 2003 include 9 months of our original territories and 5 months of our new territories acquired from Panamco. The third quarter of 2004 financial results are comparable with the third quarter of 2003. Coca-Cola FEMSA’s financial information will not be comparable with the previous year 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 proceed sir.

Good morning everyone and thank you for joining us today. The integration of our new market territories is providing positive results on every level of our organization. In Mexico our profitability is starting to stabilize, showing sequential improvement this year. Year-over-year profitability improvements in the majority of our Central and South American territories is compensating for reduced profitability in our Mexican territories.

Year-to-date our operations outside of Mexico represented almost 30% of our total cash flow generation, an important component of our growth story. Top line and bottom line improvements are trickling down our P&L, increasing our consolidated operating income by almost 9% over last year. We also recorded a significant increase in net income, benefiting from a favorable foreign exchange gain and lower interest expenses, reflecting lower debt levels. Consolidated net income increased more than 130% compared with the third quarter of last year.

Let me talk a bit about Mexico. In Mexico our total volumes increased slightly compared with the third quarter of last year. 1.6% growth in CSDs volumes offset a 5.5% decline in bottled water. The vast majority of the decline in water came from lower profitability to (ph) water on the 5 liter jug bottles. Year-over-year our total volume is down 2.1%, due to a significant reduction in our jug water volumes, but our CSD volumes are up 1%.

Year-to-date, our jug water volumes have declined approximately 13%. However, in the third quarter we reduced the rate of decline to 6.4%, underscoring the effectiveness of our differential territorial pricing to improve both our competitiveness and the profitability of our bottled water business.

Carbonated soft drink flavors represented two thirds of our incremental volume during the quarter, mainly driven by [indiscernible] multi-flavors and line extensions Lift [indiscernible], Fanta Chamoy and Senzao Guarana Naranja (ph). The balance of this growth, one third, was generated by brand Coca-Cola and its line extensions.

In the third quarter our total average price per unit case decreased 5.7% compared with the same period of last year, but remains stable versus the second quarter of this year. The year-over-year price decline was driven by higher rates of volume growth in our territories outside of the Valley of Mexico and similar pricing for our up-scale 2 liter to 2.5 liter multi-serve presentation. However, sequentially from the second through the third quarter 2004, multi-serving consumption has remained constant, and we have started to see a recovery of single serve consumption, helping to stabilize our average price per unit case. In the third quarter, multi-serve presentations represented almost 52.3% of our total volumes in Mexico, slightly lower than the same period of last year.

On a yearly basis, we have achieved approximately $70m of gross synergies in our Mexican territories. These synergies have enabled us to offset significant increases in raw material costs. During the third quarter sugar and resin prices increased 3.4% and 7% -- excuse me, 3.4% and 7% respectively. In Mexico our operating expenses are already showing improvement in absolute terms and on a per unit case basis.

We still believe that there are ample opportunities to streamline our sales and the distribution network of 111 business units countrywide.

Competitively we have seen more stable pricing from our main competitors. Our larger portfolio of single serve presentations, our more diverse portfolio of multi-serve products and packages, and our strong focus on effective strategies at the point of sale are helping us to maintain our share of sales.

In Mexico we are encouraged by the re-activation of single serve consumption and the more stable competitive price outlook for the remainder of the year. Now, let me turn my attention to our [indiscernible] central division.

In Central America we post incremental CSD volumes of 2.6%. Volumes of brand Coca-Cola increased approximately 1.7%, driven by our introduction of 2.5 liters returnable presentations in Costa Rica, and the strong growth of our 2 liter non-returnable presentation in Nicaragua. CSD flavors grew 4.9% and generated half of our incremental volumes. Our core flavor brands, in almost all of our regions, regional operations contributed to this growth.

Our Guatemalan operation continues to increase its profitability, while it wasn’t as strong of a contributor to our incremental volume growth during the quarter. Its gradual turnaround contributed significantly to our year-over-year profitability. Our favorable packaging mix and first quarter price increases contributed to these results.

For the quarter, Costa Rica and Nicaragua drove volume growth in the region. And Guatemala and Nicaragua led the way in terms of profitability.

Our Colombia operations continued to improve its profitability, despite the strong short-term discounting activity from our main local competitor throughout the year. This activity was the main reason for the quarterly decline in our carbonated soft drink flavor volumes. However, we partially offset this decline through 5.3% volume growth in brand Coca-Cola and its brand extensions.

In Colombia, our improved profitability was driven by a 14% weighted average price increase implemented in May, on a very depressed and declining pricing base, lower sweetener costs, savings captured from the manufacturing rationalization process that we implemented last year, a favorable foreign exchange impact on our dollar denominated costs, and finally lower administrative expenses driven by headcount optimization and our centralization of certain practices.

We continue to evaluate several factors and product strategies with the Coca-Cola Company to enhance our competitiveness and to foster growth of our flavored carbonated soft drinks.

Our ongoing revenue management strategies aimed at increasing the profitability of our water business caused our water sales volume to decline 11%. This quarter bottled water volumes represented 13.8% of our total sales volume, down from 15.1% a year ago. Changes we have implemented to our business model in Colombia are starting to materialize. All of the strategies that we have implemented over the past 17 months are helping us to improve our profitability on a sustainable basis.

In Venezuela our operations recorded strong incremental volumes during the quarter, driven by every beverage category in our portfolio. Volumes of brand Coca-Cola and its line extensions increased more than 8%, and flavor carbonated soft drinks increased more than 25%. Our introduction of new presentations, such as the Splash (ph) bottle for our multi-flavor Hit brand, and our continuing rollout of 2.25 liter and 3.1 liter non-returnable packages for our Grapette brand, contribute significantly to this growth.

Flavor CSD brands contribute more than 55% of incremental volume. Brand Coca-Cola and its line extensions accounted for more than 30%. And, [Sun Fill] a non-carbonated juice based orange flavor brand represented the majority of the balance.

Year-over-year our prices were driven up by average price increases implemented in the first quarter of 2004, but they declined sequentially from the second to the third quarter due to the incremental volume growth of our Grapette value protection brand which carries a lower average price per unit case. Grapette represents over 5% of our total incremental volumes for the first 9 months of 2004, compared with less than 3% for the same period of last year.

In our continuing efforts to increase the efficiency and profitability of our Venezuelan operations, during the quarter we converted 2 manufacturing plants into distribution facilities, bringing down our total number of plants in Venezuela from 6 to 4. We expect these initiatives to help us reduce our production costs going forward.

Now, I will talk about our [indiscernible] division. Our Brazilian operations post a [indiscernible] incremental volume growth, increasing 8%. This gradual recovery in consumption, combined with better execution practices, contributed to these results. Volumes of brand Coca-Cola and its brand line extensions increased 14.9%, flavor CSD volumes increased 5.9%, and bottled water volumes surged more than 40%.

Brand Coca-Cola and its line extensions contribute more than 85% of our incremental CSD volume growth. Strong volume growth from our Fanta and Sprite brands contributed to the performance of our flavor CSD volumes.

Leveraging our understanding of the point of sales dynamics, we implemented several multi-packaging strategies, bundling colas, flavor carbonated soft drinks and bottled water in 2 liter and 1.5 liter non-returnable PET presentations. Implementing several promotional strategies in conjunction with an upscale 2.25 liter non-returnable PET package of brand Coca-Cola and Fanta and offering several attractive value propositions to our customers.

Now that we have stronger control over the sales channel in Brazil, we are looking to diversify our packaging base from PET, while raising prices are increasing (ph). We are implementing several multi-packaging strategies using cans to drive future single serve consumption and launching 12 oz. non-returnable glass presentations for on-premise consumption.

Evidence of Brazil’s economic recovery is the fact that approximately 30% of our incremental volume growth came from single serve packages. During the quarter we also initiated the rollout of our 1 liter returnable glass presentation of brand Coca-Cola on a segmented basis, aiming to build our Brazilian operation base of returnable packages.

Our average price per unit case continues to improve, aided by tactical price increases, incremental sales volume from the small retailers and a favorable packaging and product mix, comprised of a higher percentage of our core and premium brands. Year-to-date our Brazilian operations are generating as much operating cash flow as our Argentine and Venezuelan operations, underscoring its growth potential.

In Argentina our operations continued to increase its profitability. In this regard our performance continued to benefit from our rapid recovery of consumption, higher sales, driven by balanced volume growth across our beverage categories and tactical price increases. In the quarter our core brands generated more than 47% of our incremental volume. Our Tai value protection brand accounted for slightly more than 35%, and almost all of our premium brands accounted for the majority of the balance.

Our Argentine operations continued to realize higher average prices per unit case, despite increased sales of our low price returnable presentations and multi-server presentations of our value protection brands. This positive performance is a result of our successful revenue management strategy by channel.

On the financial front we reduced our total debt by $70m. We have a strong balance sheet and a well balanced capital structure with almost 70% of our total debt denominated in local currency, mostly Mexican pesos, and almost 75% of our total debt carrying a fixed rate of interest.

On September 1, 2004 our rights offering expired both in the US and Mexico. The rights offer did not have a significant impact on our ownership structure because of the offering price exceeded the market price.

I also would like to note that Mr. Irial Finan President of Bottling Investment at the Coca-Cola company was named member of our Board of Directors, replacing Mr. Steve Heyer, former Chief Operating Officer of the Coca-Cola Company.

These are exciting times for us. We have successfully completed the integration of our new operations, and we are beginning to see the rewards of the consolidation process in the gradual improvement of profitability across our operating network. As we look forward it is clear that the geographic diversification we achieved from our acquisition of Panamco will help us foster balanced top and bottom line growth through Latin America. Moreover, despite the difficult competitive environment in Mexico, the incremental synergies that we achieved so far are helping us to offset adverse raw material pressures.

We are working closely with the Coca-Cola Company to leverage our deep knowledge of local market dynamics to develop the right portfolio of beverage by region.

We deeply appreciate the support of all our shareholders. We are sure that our strategic initiatives will continue creating value across our market territories. Thank you for your attention.

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

[Operator Instructions]. Our first question comes from Tobias Stingelin of JP Morgan.

Yes, hello everyone. I just have a question. If you can go through –- if you can give your expectations for the cost outlook going forward; if you can provide anything about sugar, about PET, about what’s happening? What the company believes will happen within the next, let’s say, 2 or 3 quarters? Thank you very much.

Good morning Tobias. After receiving several increases in sugar prices over the last 2 years and I would like to give you a figure in a second about the sugar price increases. What we are now starting to receive is a lot of pressure on resin prices. Obviously that is wholly correlated with oil prices. No?

Over the past 12 months resin prices have increased basically around 15.4% and sugar prices, in Mexico over the same period, increased close to 9% in real terms.

We believe that in the sugar front we might still have some increases. What has happened, Tobias, is that as we and some other bottlers started to use a little bit more of standard sugar, the prices of standard sugar have increased a little bit more than the refined sugar. So the price gap that we were benefiting from, the differential of standard versus refined sugar is closing a little bit. Again, because of standard sugar being used now by other bottlers and therefore the sugar means increasing the price of standard sugar. The number I gave you is basically for the mix that we are using in our company, the close to 9% increase.

We believe that we might still have some increases going forward. The positive news in that respect on the sweetener costs is that as we speak, Congress is discussing the possibility of using high fructose conserve for next year, on a limited basis. The rumor is that it’s being discussed now the possibility of using up to 15% of our sweetener needs with high fructose, that obviously will help us in our cost structure. But for that we need to wait until the end of the year and see how the initiatives, how the tax law changes and what it is to taxes –- the excess taxes on [indiscernible]use sugar.

Resin prices we are expecting some increases going forward. I believe that as oil prices continue to stay at these levels we will continue to receive price increases on that front. There is already conversation that maybe in the next couple of months we will receive close to a 6% increase in resin prices. Not definitely, but this is the outlook that we have for the remainder of the year, a potential 5% to 6% increase in resin price.

Thank you. If I can just clarify something? So, I could say that the incremental cost on the PET side might be, let’s say, 5% to 6% on top the pressure that you’re already experiencing. And in the case of sugar it’s still unclear; there might be some pressure this year. And, the next year we have the discussion regarding high fructose syrup. And, if I just might add some things also, do you have an idea what will happen if this is approved, the way it is being discussed in Congress right now? Is it fair to assume that that the cost of sugar will not increase but it will not necessarily decline? Can you just give a sense about what would be the impact in your operations? Thank you very much again.

Yes. Tobias, the description that you did is correct. The price increases on resin, on PETs on top of the 15% that I mentioned. And with respect to sweeteners, the industry is not buying high fructose. I’m not sure about the prices of high fructose right now, but my expectation is that as we open up a bit more competition we’ll see probably some -– I agree with you, I would not see a reduction in sugar prices. But I think that the combination if we’re able to use high fructose will benefit the company in that 15% if that’s what it costs along with Congress.

Thank you very much again for your time.

Our next question comes from Carlos Laboy of Bear Stearns.

Good morning, Hector. Hector, I was -– when we look at your package mix by country, there seems to be either an erosion in returnable volumes or a move that is not consistent with your stated objective of growing returnables. Specifically in Brazil we’re seeing no growth. In Venezuela and Colombia there seems to be an erosion, and more concerningly the one ways (ph) that are growing seem to be, from your comments, in cheaper brands. Can you expand on these trends? Are you worried about them? And can you guide us through how you think of package mix trends by country as we go forward? Thanks.

Good morning, Carlos. Yes, let me -- one of the clear objectives that we have stated through all of our business plan processes that we are doing with all of our operators for next year, is clearly the importance that returnability has in our business. As you are seeing, the increases in these resin prices are affecting the profitability of one-way products, because obviously with the price pressure that we have in the market we haven’t been able to necessarily pass along all these price increases.

The good news on that front is that obviously in most of these markets, but especially in Mexico, we are basically the only one that has a returnable capability. But my feeling is that because of the pressure that some of the other competitors are facing, that’s why we have started to see a resurgence of, or a movement rather than a resurgence of 3 liter presentations or in excess of 3 liter. As you all know, [indiscernible] moved from 3.1 to 3.3 liters at the same price. So that clearly indicates for us that the raw material increases are starting to hurt badly some of our competitors.

So, one of the very important strategies going forward in all of our operations is the importance of returnable presentations. Having said that, obviously there are different market dynamics happening in different places in the different countries. In Brazil very specifically after spending the last 16 months trying to build a new business model with the relationship with the other Coca-Cola bottlers and the Coca-Cola Company, and by the way this is a model that I think that has been successful. And, in a way, us being the leader of that change, where we set minimum prices in the different regions so as to avoid transhipments and things like that. Now, we’re starting to focus on the other factors that are important in the business, like starting to build returnability. So Brazil is a process that we are just starting to move.

In Venezuela and Colombia, obviously the introduction of new presentations and larger sizes, including this 3.1 liter presentation that we introduced in Venezuela is shifting a little bit the volume, or the mix trend towards one-ways. But there is no doubt in our mind that the way we -– the advantage that we have in these markets, because of the scale that we have and the returnable base that we have, is to leverage our returnability.

One of the strategies that we have is that we will never, never use Coca-Cola at a price parity versus our competitors. We would use some other brands. So you will see some strategies like this that I was mentioning in Venezuela where we launched Grapette or Hit with lower prices per unit case to compete with some of the D brands. But in Coca-Cola, the way that we have to -– and in brand Coca-Cola the way we have to bring to the consumer an affordable product, always at a price differential is with returnable presentations.

Carlos, this is Alfredo Fernandez, how are you?

Hi.

Mexico has remained quite stable in fact. Certainly the 2.5 returnable has been quite successful and we are evaluating pricing activity, with that packaging in areas of outside of the Valley of Mexico. But just to be clear, if you get into Central America, in Costa Rica we just introduced a 2.5 returnable which is going quite well, and eventually is going to give us –- I mean intelligence about is it necessary (ph) to be used somewhere else, and that package should stabilize the shift in packaging mix that you see.

In the case of Venezuela it is clear that the 2.25 and 3.1 presentation of Grapette is helping us to gain market share in a segment that we want to, as you know, participate and contain. So, it’s driven by a successful strategy implemented by the company specifically there.

And, in Brazil we’re just initiating the rollout of the 1 liter returnable glass. So some of the initiatives that are taking place in this quarter and next year should help us to strengthen the packaging shift that you are seeing.

Should we look for more erosion of returnables as a whole 12 months from now from where we are today? Or do you think it will level out where it is now?

Clearly Carlos our strategy is for us staying as it is right now or slightly increasing that. If we see some erosion it’s because of the pressure in the market and maybe some of the value protection brands growing a little bit more than our Coca-Cola brands.

But, as I said, one of the main strategies that we have going forward is just to continue strengthening our returnable base, and obviously we are investing behind that.

If you analyze our value protection strategies in the past Carlos, you’ll see that when they grow an important consumer base, eventually they give us room to develop the appropriate returnable packaging entrance with core brands. So, it’s not necessarily a negative development, but this is part of the way the consumer is behaving in different markets.

Thank you very much.

Our next question comes from Dan [indiscernible] of Schroeder.

Good morning, I’ve got a couple of questions. The first one is on synergies, and the second one is on financials.

On the synergies you say you’ve made $70m of annual synergies so far. Can you give us a split of that in terms of production and say on selling synergies?

Good morning, Dan.

Good morning.

Let me give you some estimates that I have here. Out of the $70m I would say that around 60% reflects on the cost of goods sold, because it has to do with closing down production facilities. Improvements that we have in terms of procurement and things like that. So, it will be somewhere around $40m because of that.

And, the rest has to do with some of the commercial practices and closing down some of the warehouses that, as you know, we have advanced important (ph) in that front.

Great. You obviously dropped your guidance to $270m in the last conference call. Seeing that you’ve already got the $70m in this quarter, do you think that that guidance now looks conservative?

I think that -– let me try to qualify that a little bit. If you look at our P&L you will see that a lot of these synergies that we are saying right now, and we try to stress that in our conference today, are being -– a big chunk of that is being offset by the pressure that we have in some of the raw materials. And obviously, as you have lower prices for supplies (ph) versus last year’s, also that has an important effect.

I think that we might still have some additional synergies, but I don’t think that is going to be a large amount. I think that around the $70m maybe getting close to $80m is somewhere where we are going to end up by the end of this year.

Great. Then we see -– on your SG&A line that’s dropped in real terms both year-on-year and sequentially. What should we expect going into the fourth quarter and into 2005 from the SG&A line?

Are you looking at that on a consolidated?

No, sorry, on a Mexican basis.

Mexican basis. I think that what we have right now is what we’re seeing is a very stable SG&A. I don’t see a lot of movement. We had a lot of noise at the beginning of the year because of as we were closing down some of the facilities we had some important increases in freight costs and things like that. But now we have a more stable base and stay with the numbers that we have on a sequential basis, staying more or less as they are right now still.

Great. And last question is net debt for year end, where do you think that’s going to be?

I don’t necessarily see any more repayment of debt going -- we are 2.5 months away. We would certainly accumulate some cash. I don’t have a specific number that I can give you right now, Dan, let me think about that. But at the end of the day we are basically generating somewhere around $350m free cash flow during this year, after paying taxes and CapEx and all of that.

Right. You mean you’ve reduced net debt by about, what $70m over the third quarter. Should we expect an increase of cash of around $70m in the fourth quarter, or something less?

No, I think it will be a little bit more than that because the fourth quarter is always a more positive –- a higher volume and free cash flow generator. But that’s correct.

Okay. Great, thanks very much.

Dan, just another comment related to your question in the selling expenses. There has been some reclassification of admin expenses to the selling line in order to standardize costs at the business units in order to be able to manage them better. That’s probably one of the reasons why you see on an absolute basis, an increase versus the previous year.

Great. Brilliant, thanks very much.

Our next question comes from Jung Shing(ph) of HLM.

Hi, good morning everyone. I have 3 questions. The first one is on the raw material price increase. The impact of that on the D brands is obvious. Do you have the pleasure (ph) to make basically like [indiscernible] you said moving from 3.1 liter to 3.3 liters? I don’t quite understand why that’s an indication of increased pressure on them. I would imagine they may have increased the price or something along that line. That’s the first question.

And the second question is on the free cash flow (indiscernible). Out of that net debt reduction of roughly $200m, that’s my calculation, I don’t know whether the following breakdown sounds right to you. Roughly like $80m from free cash flow, $20m from the currency movement and $100m from the tax rebate from the Government.

And the last one is on the –- wonder whether you have some update on the Coke’s help on the marketing side? Thanks.

Good morning. On the resin prices, our belief is that we are the -– in the Mexican operations, and that’s true for the rest of the territories, that us being the biggest player in each of these countries, we’re always buying prices -- We’re buying raw materials at the best price. We have an area that specializes in value in procurement and is always looking for the best prices on that.

So the price increase that we have had, we believe are similar in percentage to wherever our competitors are (ph). But we start from a lower dollar per quarter price if you will. But the prices, I’m sure that for Pepsi Cola and [B] Cola are increasing at the same level, at the same percentage that’s for us.

So this is certainly hurting some of our competitors, especially in Mexico where they don’t have any returnable presentations. In some of the other countries you find some returnable presentations by either Pepsi Cola or some of the local producers like [indiscernible] in Columbia that has a very strong presence of returnables for example.

What I was trying to say to you, and you are correct, though. The pressure of big Cola moving from 3.1 to 3.3 is not necessarily a reflection of these price increases but rather the reflection of the way that the markets are sort of moving in the country. And our expectation is that pretty soon they will probably need to increase prices or else live with a lower profitability.

With respect to net debt, or to the debt reduction that we have, the 2 extraordinary events that we have -- we have had in our –- during this year is this tax rebate that we received that was approximately $100m. The capital contribution, when you look at the net debt position, remember that we sold a portion of our ownership in Brazil, and there was a $50m contribution. And the rest of that is basically repayment, or as you correctly pointed out, some foreign exchange movement.

Anticipating, or rather than anticipating in a way, trying to avoid any risk related to exposure to 100% of US dollar debt that we had in the beginning of last year, we moved very swiftly towards changing some of this indebtedness into Mexican pesos. And that has certainly created a benefit in effect for us, when you translate that figure into dollars.

During the last quarter, however, the Mexican peso appreciated. So the effect that we have on this quarter is that, although we repaid around $70m of debt, the number would have been approximately $20m higher because of the appreciation of the Mexican peso. In other words, because of the Mexican peso appreciating our –- the debt that we have in Mexican pesos when we translate that into dollars, is larger by $20m. So, in spite of that, we reduced the indebtedness by $70m during this quarter. Or just say the main ingredients of our debt –- the breakdown of our debt repayment.

And the last question is with respect to marketing participation with the Coca-Cola Company. I think that in general I haven’t seen a positive either way. A movement either way, either positive or negative in the relationship with the Coca-Cola Company in terms of marketing expenses. I think that the company is going through this process of analyzing all the –- with the new Chairman, all the relationships with the bottlers. But I don’t see necessarily any movement in the way they are spending with us, together with us in the market place.

In general we continue to distribute half and half the marketing expenses in each of the countries, and we are not seeing any specific change in that from –- at least in the short-term.

Thanks.

Our next question comes from Robert Ford of Merrill Lynch.

Hi, this is actually Melissa Byun. I have a few questions this morning. First, could you provide some figures for year-on-year physical case volumes in CSDs in Mexico, both overall and then in multi-serves particularly?

Secondly, could you discuss some of the recent trends in jug water refillers in your territory?

And lastly, going back to the synergy story, do you see any opportunities for further headcount reductions in Mexico going forward? Thanks.

Let me start with the jug water and the synergies. I didn’t quite understand your first question, if you can repeat it a little bit later.

With jug water, as you remember, Coca-Cola FEMSA didn’t have any presence in jug water business was when we acquired the Panamco territories that we were exposed to this. What we have found and obviously the industry supporting (ph) very rapidly is that the pricing pressure from local producers that have these shops and the corner stores where they refill and somehow clean some of the containers and then they fill them, with a good process which is different from ours and from any other major producer. It’s putting a lot of pressure on the prices of water.

We are moving away from the low income areas, because it’s the market -– at the moment we sell a jug of water, a 20 liter or 19 liter jug of water, close to 20 pesos, 19 pesos; and there are some of these stores that refill these things for 10 pesos, which is half our price. So it’s in a way impossible to compete long distance. Long distance meaning that if you are producing in a different city and sending the product to different towns or cities, because of the shipment costs and to compete versus the locals that are selling at this price.

So we are moving away from the low socioeconomic areas. Trying to focus in offices, schools and homes in the higher socioeconomic areas. And, at the end of the day, from our perspective jug water business is becoming, because of these industry dynamics, into pretty much a local business. You have to be present nearby your market; otherwise, the freight costs will kill you.

So what you see in our numbers is that if you compare versus last year our volumes in jug water have decreased importantly because of us starting to get away from some of these markets.

And the good news is that the jugs that we’re staying with continue to be profitable because we continue to sell at this price level, between this 17 to 20 pesos per jug on these specific markets. It’s a difficult market. One that we believe that if we find a way to successfully compete with a one-way package, it will be better than to continue to compete with these returnable containers that are stolen by some of these local companies and used in the refillable process. And you end up doing investment in these containers and spending a lot of resources on that.

So it’s an industry -– in some ways it’s an industry that is very dynamic. A lot of new competitors in the local markets. And from our perspective we should focus on the high socioeconomic levels with good prices, and try to exit totally this market.

Now, with respect to headcount reduction, I do believe that there is still some opportunity in where it relates to the 110 distribution centers that we have in Mexico. I would not necessarily see that in the very, very short time, but more as we advance the integration of some of these areas, and as we successfully implement strategies to be able to distribute with different systems some of the products.

And that’s reflected basically in the idea that I said, that as we think we can draw a little bit more on the $70m synergies that we have seen.

And the first question, could you repeat that? Sorry; I didn’t quite --

Sure. I was asking about physical case volume trends in Mexico on the CSD side both overall and then particularly in the multi-serve segments.

Hi, Melissa, how are you? This is Alfredo Fernandez.

Hi, Alfredo.

We don’t disclose the specific physical numbers. But what I can tell you is that there has been a decline in multi-serve presentation, but it has been compensated with a growth in single serves. In fact, if you analyze incremental volumes of Mexico during the quarter, more than 50% of that growth is coming from single serves. The strategies around our can presentation, the mini-can we launched, all the packages are under 600 are contributing significantly to that.

In the case of the multi-packages, the introduction of the 1.5 liter is taking over volumes of the 1 liter and the 2.5 obviously of the 2 liters. But the good thing for us there is that single serve consumption is now showing more than 3 months of picking up, and that’s related to physical cases and transactions.

And, Alfredo, could I also ask, what is the sell-through rates like?

What is what? I’m sorry.

Your sell-through rates. I understand that you’re initially –- you’re able to push it through, but are there re-orders?

I don’t know (ph). Yeah, there are re-orders on the 8 oz. cans and the 1.5 liters.

Yeah, they are growing ahead of expectations as we had before. It is not only an introduction development, but also a picking up in consumption in re-orders from there, from the point of sale.

Okay. Thank you.

Our next question comes from Lore Serra of Morgan Stanley.

I wanted to ask a question on Mexico and then ask something outside of Mexico. I don’t know if I can ask the question this way, but is there anyway you can give us a sense of your current PET resin costs? What kind of oil price are they reflective of? I’m trying to understand as we think about 2005 what kind of increase we could think about in PET, because it seems like everybody’s living sort of month to month in terms of resin costs?

Hi, Lore. It’s a difficult question, because I don’t know exactly how the supplier is basing. My personal feeling is that at the very beginning of the oil price increases we were not necessarily receiving increases in resin price. But I don’t know over what oil prices the supplier is basing their prices. My personal feeling is that they are a little bit delayed, because they have not –- as I said –- if you look at the curve of price increases in resin versus the oil price increases, we are behind that.

Okay.

So if this is a 40 level or it’s a 45 level oil price, I don’t know.

Okay. And, I guess, as we think about 2005, and I know you don’t give guidance, but it seems like you’ve mentioned that you’ve taken the majority of the synergies. So, in terms of offsetting the gross -– the pressure you have in your PET increase, I guess it has to come from pricing, is what I’m understanding. And, I guess, in that respect and I guess I’m going back to a question that was asked earlier. Counterintuitively Big is upsizing amid these kind of costs. Obviously, given your returnable mix, you have more pricing flexibility and less exposure to PET than your two other competitors in colas and obviously the B brands as well. What’s your level of confidence that you’ll have some ability, in terms of pricing flexibility, if the PET costs do continue to go up into ’05? Do you have to wait for the low end of the market, or do you think that you can move, or the branded producers can move?

Yes, I think that we will be able to start moving prices. At the end of the day some of the information that we have received when you start analyzing like this in Nielsen numbers and things like that, you conclude that Pepsi or PBD want some share points because of the price reductions, and then that was totally lost again. So, at the end of the day, reductions in –- the reductions in prices that PBD has been doing is not necessarily reflected in market share from our analysis of the numbers, Lore. And I assume that they are looking at the same numbers.

So our feeling is that both Pepsi Cola and Coca-Cola will be increasing some of their prices in the longer-term because of the resin prices. I assume that Heritos (ph) and Big Cola will do the same. The difficult part here to judge is that we have a different weapon that they don’t have, which in theory we can stay with the same prices in returnable presentations, and just wait for them to start moving some of the one-way prices. And that’s a dynamic that is a little bit difficult to judge for next year, because obviously they will be very concerned of our pricing of the returnable presentations.

It’s a very dynamic market, but my expectation, personal expectation, is that because of these increases in costs that the industry will need to start looking at price increases for next year.

Okay. Just to be clear, the market share data you’re talking about I assume is Nielsen? And, I guess, on the data that we see, in terms of the numbers that PBD report, we would not make the assumption that their market share declined. What you’re saying is based on the most data you’re seeing PBD’s market share coming down?

Yes.

Okay. And just outside of Mexico for a second, in terms of Brazil you had a fantastic result, and I guess it’s a very encouraging start in terms of better profitability in that market. I was wondering, in terms of the comments you made earlier, I wasn’t sure if you were suggesting that not all the resin price increases were in the Brazilian market, but I guess with that kind of a profitability run rate, what are your thoughts in terms of what’s possible in Brazil sort of in the medium-term?

The challenge that we have in Brazil, Lore, is that we do have a similar price that we have in Argentina, when you look at the prices per unit case. And we have substantially lower profitability. So I think that in general we need to start moving Brazil closer to the Argentine profitability. It’s a difficult task, because some of the markets are difficult. But we do think that Brazil has a lot of potential for us.

Brazil and Argentina have very low prices. These are the 2 areas that have the lowest price per unit case for us. But still Argentina is in the 20s in terms of EBITDA to sales and Brazil is 8% or 9%. So we do see that we have room in Brazil. There are a lot of challenges there because of this new business model that we are trying to implement, but we feel that we have potential there.

Okay. And I guess the opposite question of Venezuela, I guess I was a bit surprised that given that you had volumes and pricing, that your margins were down, both sequentially and year-on-year, in Venezuela. You mentioned some of the issues in the press release, and you talked about the move to grow PET. But is there something structurally why Venezuela is stuck in this kind of high single digit, low double digit range in terms of EBITDA margins?

Well, Venezuela, some of the issues that we have is that with the hurricane season as it was hitting also Florida during this last summer we had one of our plants closed for 20 days, because it was totally flooded. Still, we are moving to reduce the number of plants. The inflation rate in Venezuela is very high, it is in the 20 something, 22%/23% level. So we have been receiving some pressure on some of the costs for our raw materials.

During part of the year we had a short supply of sugar, a shortage of sugar that put also pressure on the prices of sugar. So it’s a bunch of little things that are not necessarily all perfectly aligned and therefore has –- you know, prevents us from having better profitability in Venezuela.

The good news there is that as we have increased prices importantly to compensate for some of these costs that the volumes are also increasing. As we stress in the press release, volumes are also growing in some of these Grapette and Hit brands that are not necessarily the best packages and products for us to sell, but that is part of the dynamics of the industry.

Our concern, a little bit in Venezuela is that we still have a very unstable macroeconomic environment, because of all the things you read in the press. The political situation and the macroeconomic situation. In theory it should be going through a nice period of stability because of the oil prices and the revenue that we have from oil price.

On a side note on Venezuela, if you remember, we had around $50m in commercial debt that wasn’t paid at the beginning of the acquisition of Panamco as it was, as we repaid all of the debt of the different countries –- commercial debt, because we were asking for these control dollars for –- to use the Bolivares that we have in Venezuela to repay that debt. It was finally approved and of last week, or at the beginning of this week we finally repaid those $53m in commercial debt using a big portion of our cash balances that we have stuck in Venezuela. So I think that’s good news for us in the sense that we found –- we basically have close to $50m. Or the equivalent of $50m in Bolivares stuck in Venezuela without a way of getting out. So now with this authorization we are, basically with our cash balances there for what we need for working capital. But, I think that is very positive news for us, in terms of we are able to use this resource as well.

But again, coming back to operations, Lore, again it’s a little bit dodgy (ph) this instability on the macroeconomic front that is creating a few problems here and there that stop us from getting to higher profitability numbers. But, obviously, we will work towards that end.

Thank you.

Our next question comes from Joaquin Lopez of Deutsche Bank.

Hi good morning Hector, Alfredo. I have a couple of questions. The first one is if you’ve identified any significant changes in the competitive landscape since the [Essopec] takeover of Brett?

Yes Joaquin and congratulations on your wedding. Essopec is clearly a -– from our perspective, a better, meaning a tougher competitive for us than what Brett was. And, they rely a lot on working with the point of sale, especially restaurants and bars and taco stands and [indiscernible]. So, they work very differently than the rest of the Pepsi Cola bottlers. But I think obviously since we have been working now in these territories in the Brazil region and competing with them we have learned also to compete on [indiscernible]. But yes, the competitive nature of these territories that Essopec acquire is getting a little tougher for us.

Thank you Hector. And, my second question is on your current market growth. I don’t know if you might recall, but a little over a year ago you shared with us the view that the float size was not really commensurate with KOF’s importance as an investment vehicle. Clearly after the equity offering, well the rights offering that just expired I wouldn’t expect this to be addressed right now, but would you still maintain the same view fundamentally?

Yes Joaquin I think that in general I can say that we have 14.7% and we did have some people that subscribed some of the shares, a very small amount. At the end of the day we received around $350,000, as the most subscriptions. Those are both the mean and in terms of percentages.

We went ahead with the rights offering, because obviously we had that thing hanging on our backs since May of last year, when the acquisition, and there was a lot of noise about potential overhang and if that has an effect or not on the share price. We had promised to everyone. So, as soon as we got the approval from the SEC with respect to the pro forma numbers we decided to launch that rights offering regardless of the price, as we commented on some of the conference calls when I was being asked if I would wait for necessarily the price. The price to be there before launching this rights offer.

But, we decided to go ahead obviously, as I said very few people subscribed, very little. But fundamentally I still am of the view definitely that the 14.7% that we have as a float this is not the appropriate number for us [indiscernible] Coca-Cola FEMSA. As correctly pointed out, we just informed our Board of Directors of the summary of what happened with this rights offering, and one of the areas that I need to focus on forwards, if we necessarily go ahead and propose something to our Board of Directors in the future with respect to this it will be to put to increase the liquidity of our share, it’s not something that we will do in the short-term, because we are not necessarily moving -- we don’t have any specific priorities in that respect right now.

But our view is that - my personal view is that 14.7% is a very little number for a company like Coca-Cola FEMSA of a float.

Thank you so much Hector.

Our next question comes from Jeff Kanter of Prudential Equity Group.

Good morning gentlemen. I apologize if this was already said or stated. What is the price point of [Cola Real’s] 3.3 liters presentation?

The 3.3 they are selling at 11 pesos.

Okay, so they haven’t changed it?

So, they moved from 3.1 to 3.3 at the same price level.

It just seems –- their costs are up just like everybody else’s, but they’re upsizing. You say that you have your weapons in returnable presentations, and I agree with that. But, why –- are you expecting them to raise prices? Or, I guess my question is how are you going to defend yourself against this if they grab more volume share?

At the end of the day every time they do a movement like that you assume that the number of transactions has stayed more or less the same, they will gain some volume share, no?

Yeah.

But obviously as a percentage of the dollars that are available from the consumer to buy soft drinks, they are not gaining anything.

In Mexico City when you look at the revenue share, in Mexico City we are very close to 90% in colas, which is a very high cost obviously. And, one of the potential reasons for them to move into the 3.3 is that if it’s true that they will finish building their Monterrey plant in 4 months, they are saying that around February they will open this plant in Monterrey. Obviously some of the production will be shipped through Monterrey, which covers the North states, and maybe this is a movement to start in a way producing a higher percentage of the potential output of the cola plant. But I don’t know if they are preparing for that, this is just speculation. In other words they are opening a new plant, they increase the size so that the number of liters they continue to produce stays high as opposed to going half of the production utilization when they open the other plant, assuming the 2 plants are the same size.

Okay.

But it might be related to the Monterrey plant but I’m not sure, this is just speculation.

It just seems that if you have over 90% value share in colas, you have the resources to just kind of take these people down if you want to. Otherwise, we’re just going to be drawn out with other companies pricing pressures. Do you ever think that –- is there ever a point where you just draw a line in the sand and kind of throw your 90% share around?

That’s a [indiscernible]. I think obviously we need to –- we would like to keep our -– and not to hurt our profitability by doing something with this 90% share that we have. And just to clarify, this share is in Mexico City, in some other areas in Mexico it is not as high.

Yes.

But, yes the answer is at some point in time we need to analyze that.

Okay. Fair enough. You used to disclose in your press release the millions of unit cases of your 5 liter CL. What was it in the quarter?

I’ll get back to you with that number Jeff.

I would imagine it was pretty small if you didn’t disclose it.

Yes, it wasn’t that large. The 5 liter has been also coming down this quarter than in the previous ones. And it has stabilized around the base that we showed in the previous quarter.

Okay. And, thank you for putting in your cash flow statements by the way. Do you happen to have last year’s numbers as well, that you could disclose, particularly cash from operations before extraordinary items and CapEx, either on a 9 month or a more relative 3 month basis?

Right now, I’m not in my office because I was traveling. Let me get back to my office and look through the numbers. I don’t have it with me right now. But certainly we’ll look into preparing some additional numbers next quarter.

Terrific. Thank you very much.

Our next question comes from Alonso Aramburo(ph) of Santander.

Yes, good afternoon everybody. I just wanted to clarify the synergy number. Last quarter you guys mentioned that $70m was a gross number and the net benefit was going to be $50m. I was just wondering if the $30m that you’re referring to this time is the net or the gross.

Morning. The $70m that we’re referring is as a gross number. Gross meaning -- let me just clarify what I mean by gross. Meaning that we have an impact because of lower prices and sugar prices and PET. The lower prices for CSD and the effect of reduced costs in sugar and PET are not included in these numbers. So, in other words, we have this benefit that is reduced substantially because of these other effects. That’s what I’m referring by gross number.

Okay, and your net benefit is $50m that’s the sort of the number that came out last quarter?

Yes, the net benefit is around $50m. That is the increased in the cost of the sugar and increase on the cost of the PET.

Okay. Thank you.

And there are no further questions at this time sir.

Well, thank you very much for your interest in the company, Alfredo and Hector will be available to answer any remaining questions. I will be back in my office by next week and I am here also. Thank you.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.