Coca-Cola Femsa SAB de CV (KOF) 2004 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Coca-Cola FEMSA fourth quarter earnings conference call. My name is Enrique and I will be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]/

I’d like to read the following statements.

This conference call may discuss certain forward-looking statements concerning Coca-Cola FEMSA’s future performance, and should be considered as good faith statements 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 fourth quarter and 12 months ended December 21, 2004 on a consolidated basis and by the country includes 3 months and 12 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 12 months results of 2003 include 12 months of our original territories and 8 months of our new territories acquired from Panamco. Coca-Cola FEMSA’s financial information will not be comparable with previous years on a yearly basis until the end of 2005.

I would now like to turn this presentation over to your host for today’s call, Mr. Hector Trevino, Chief Financial Officer. Please proceed sir.

Good morning everyone, and thank you for joining us today. We can proudly say that we have finalized the integration process of Coca-Cola FEMSA. In just over a year, we have successfully completed the integration of 8 new franchise territories located across North, Central and South America.

In 2004 we turned around the performance of our Venezuelan and Brazilian operations. We achieved records levels of profitability in Argentina. We increased the per capita consumption of our beverages in Central America, and we stabilized and showed sequential profitability improvements in Mexico and Colombia.

These are exciting times for our Company. We are already realizing the rewards of the consolidation process, and seeing improved profitability across our Company. As we speak, we are focusing more diligently on looking for alternatives to stabilize and grow our top line results, while expanding our profitability.

As important as our financial results, now we are successfully changing the way we want to market in our territories. As a result of our efforts, we are on the right track to maximize our long term growth and profitability.

During the fourth quarter of 2004, we experienced profitability improvements in almost all of our territories, despite a challenging raw material cost environment across the world.

Our consolidated quarterly revenues grew 1.8%, excluding non-recurring revenues recorded in Mexico in the fourth quarter of 2003. And our consolidated operating income increased almost 11.4%, excluding non-recurring items recorded in the further quarter 2003. A detailed reconciliation of these items is presented in our fourth quarter press release.

We also recorded a significant increase in our net income as a result of a positive one time impact of MXN172m from a reduction in deferred tax liabilities driven by a decline in the Mexican income tax rate going forward.

Our full year results for 2004 reflect our geographic diversification and our new business models. Almost 45% of our total revenue and more than 30% of our EBITDA came from territories outside of Mexico. Additionally, more than 80% of our incremental CSD volumes came from territories outside of Mexico.

Our sustainable business model in Mexico re-enforces our Company’s strong cash flow generation, and our geographical diversification in Central and South America bolsters our growth territories, both in terms of incremental revenues and EBITDA.

Now let me talk about Mexico. In the fourth quarter of 2004 our total Mexican volumes increased 1.8% compared with the fourth quarter of last year, mainly driven by 2% growth in our CSD volumes. During the quarter, volumes of our single-serve bottled water grew 8%, offsetting a 1.1% decline in jug water volumes.

This is the lowest rate of decline in jug water volumes that we have experienced since we began the consolidation of our Mexican operations in May 2003. This trend underscores the effectiveness of our differentiated territorial prices to improve the competitiveness and the profitability of our bottled water business. With respect to our jug water business, we are beginning to improve slightly going forward.

Flavor carbonated soft drinks represent more than 80% of our incremental volumes within the quarter, mainly driven Mundet Multi Flavors and Fanta Naranja. The balance of this growth was generated by brand Coca-Cola.

In the fourth quarter our consolidated average price per unit case decreased 6%, compared with the same period last year. So it increased sequentially over the third quarter 2004. The year-over-year price decline was driven mainly by higher rates of volume growth in our territories outside of the Valley of Mexico, which carry a lower average price per unit case, and a lack of price increases in line with inflation.

However, sequentially, our average price per unit case increased by 1.3%, driven by a better packaging mix in multi-serve packages, tactical price increases for single-serve, carbonated soft drinks implemented during the quarter, and incremental volume growth from single-serve presentations.

Consumption of multi-serve carbonated soft drinks remained stable year-over-year, representing slightly more than 60% of our total CSD volume.

On a yearly basis, we have achieved around $70m of gross synergies in our Mexican territories. We have captured the majority of these synergies at the gross market level, enabling us to offset significant increases in raw material costs. During the fourth quarter our sweetener costs remain flat, and resin prices increased more than 15% versus the third quarter of 2004, and more than 30% year-over-year. We expect resin prices to increase around 10% during 2005.

We are planning to use high fructose corn syrup to satisfy some of our sweetener needs in 2005, and to partially offset incremental resin costs.

Our operating expenses are improving per unit case and in absolute terms on a sequential and year-over-year basis. Distribution efficiencies, fewer production of returnable bottles and cases, compared with the fourth quarter of last year, and stronger controls in marketing resources and locations contributed to these results.

In the marketplace, we are currently implementing a strong campaign behind brand Coca-Cola, under the theme [Tome La Guelo]. We are very excited by the new campaign freshness and positive perception among our consumers.

On the pricing front, we initiated a price increase of approximately 3% in the value of Mexico and 2% in the [Bahia] regions as a consequence of increasing prices in some of our multi-serve presentations. This increase translates into a 1.5% weighted price increase for our Mexican operations as a whole.

We will explore every opportunity to be the sovereign industry price recommendations in our Mexican territories. As well, the economy should foster our ability to increase prices.

Now let me turn your attention to our Central American division. In the fourth quarter of 2004 our Central American operations was incremental CSD volumes of 1.7%. Volumes of brand Coca-Cola increased approximately 1.7%, driven mainly by our introduction of a 2.5 liter returnable presentation in Costa Rica, and incremental volumes from our 2 liter non-returnable presentation in Nicaragua.

Flavored carbonated soft drink volumes grew 1.9%, accounting for almost one-third of our incremental volumes during the quarter. Fanta in Nicaragua contributed significantly to these results.

By rolling out a wider array of multi-serve returnable presentations, we make the Coca-Cola trademark more attractive to price sensitive consumers. We attract and maintain a larger and more loyal base of customers, and we increase the per capita consumption of our beverages across the region. In 2004, per capita consumption of our CSDs increased by more than 2% throughout Central America.

In 2004 we implemented tactical price increases in all of the countries comprising our Central American operations, which offset our lower average price per unit case, resulting from incremental volume growth of our multi-serve packages.

The successful launch of the 2.5 liter returnable CSD presentation for brand Coca-Cola in Costa Rica is proving successful. It is helping us to provide a better value proposition for our customers and consumers, while increasing per capita consumption.

Going forward these developments put downward pressure on the average price per unit case of the multi-serve packaging beverage. But depending on our segmentation strategies, we still maintain our profitability.

During the year, we experienced raw material cost increases across the region, which put pressure in gross margins. However, our operating income expanded, driven by the savings we achieved through better manufacturing and distribution practices, and higher fixed component in our sales team and a turn around in profitability in our water market operations.

In Central America we have initiated an aggressive Core rationalization effort. Our share service program, to which we expect to reduce our some of these costs and strength of procurement practices, which further streamline our costs structure and prepare the operation for a tougher competitive environment.

Our Colombian operation continues improving its profitability, whilst seeing strong volume growth for brand Coca-Cola, which increased 3.4% for the fourth quarter, and offset the decline of our flavored CSDs and bottled still water.

Our average price per unit case increased significantly compared with the fourth quarter 2003, but remained stable in 2004 as a result of tactical price increases, from a declining price base at the beginning of the year, driven by incremental volumes of multi-serve packages and the appreciation of the Colombia peso against the U.S. dollar towards the end of the year.

Strong short term discounting activity from our main local competitor throughout the year was the primary reason for the decline in our flavored carbonated soft drink volumes. We are seeing less discounting activity during the first quarter of 2005, and the competitive pricing environment seems to be stabilizing.

After a thorough review of our flavored soft drink portfolio with the Coca-Cola Company, we launched Charge multi flavors nationwide at the beginning of 2005 in 3 different packaging presentations. This launch is designed to enhance our competitive position, foster demand for our flavored soft drink brand and leverage our extended distribution and improve our distribution capabilities countrywide.

In Colombia, better procurement practices, savings achieved from the rationalization of our manufacturing network, and the appreciation of the Colombian peso against the U.S. dollar applied to our dollar-denominated costs, increased our gross margins by 300 basis points over the fourth quarter of 2003.

This gross margin expansion more than offset increased freight costs derived from our manufacturing rationalization efforts and higher marketing expenses. Currently we are re-evaluating our still bottled water strategy. Bottled water volumes declined 15% in 2004, mainly as a result of active rationalization, starting to produce the production of still water sold in less profitable packaging.

Our transformed business model in Colombia is beginning to bear fruit. Through our ongoing rationalization process, we have managed to turn around our operating efficiency and productivity. Since May of 2003, we have consolidated 11 manufacturing plants out of 17, and converted them into distribution centers, to focus our effort more on market execution.

We have further bolstered our management team to strengthen our commercial and marketing capabilities. Moving forward, one of our opportunities is to continue increasing our levels of productivity and asset depreciation.

In Venezuela, we increased our revenues by more than 10% for the fourth quarter of 2004, compared with the same period of 2003, driven mainly by tactical price increases, including a 6% weighted average price increase in the fourth quarter of 2004.

Today, we are tailoring our commercial strategies and operating practices to capitalize on Venezuela’s market opportunities. In spite of the price increase, implemented in the quarter, our carbonated soft drink volumes increased 3.5% driven by the flavored category.

Volumes of brand Coca-Cola were impacted by price increases in the majority of its presentations. Volume growth of flavored carbonated soft drinks was driven by incremental volumes from our 2.25 liter and 2.1 liter non-returnable presentations of the Grapette Value Protection brand and a consistent well implemented marketing plan behind our multi-flavor Hit brand. Including the introduction of new presentations from promotional activity at the point of sale, and incremental brand products.

Incremental carbonated soft drinks volumes offset lower still jug water and non-carbonated volumes. Revenue management activity to increase the profitability of our jug water and the attractiveness of our carbonated soft drinks versus non-carbonated products contributed to these developments.

We are developing a balanced portfolio of beverage category in Venezuela, with the future consumption of CSDs, while increasing the profitability of our other portfolio packages and brands.

For example, in Venezuela, the majority of our incremental volumes for 2004 came from non-returnable key presentations of Value Protection and Core brands. However, the absolute number of volumes from returnable glass presentations remained almost flat year-over-year. Initial price segmentation, coupled with tactical introduction of 12 ounce and 1 liter returnable glass presentations, is helping us to increase the pricing architecture of our one-way packages.

On the profitability front, our revenue management strategies, combined with higher manufacturing efficiencies, are helping us partially offset higher resin cost pressures, a packaging shift to non-returnable presentations, higher inflation environment, the depreciation of the Venezuelan Bolivar as applied to our U.S. dollar denominated expenses, and higher freight costs.

On a consolidated basis, Venezuela is becoming a more important operation, especially after its 2004 turn around in profitability. Today Venezuela generates a similar amount of volume and profitability as Colombia, with half of the population. This underscores both the potential for capital growth of Colombia, and the profitability improvement of Venezuela.

Now I will talk about our Mercosur division. Our Brazilian operation closed the year strongly. Around 50% of the incremental volumes generated in 2004 were posted in the fourth quarter. The operation increased carbonated soft drink volumes 8.1% producing a credible incremental volume growth.

We continue benefiting from a strong recovery in consumption, combined with a focused execution strategy behind brand Coca-Cola, and the flavored carbonated soft drink brands. Brand Coca-Cola increased 7.2%, flavored carbonated soft drinks 10.5%, and bottled water 11.4%.

Brand Coca-Cola and its line extensions contributed slightly over 50% of the quarter’s incremental volume. Fanta, Sprite and Tai accounted for a little over 30%, and the remaining balance came from our proprietary bottled water brand, Crystal.

The new business model that we are implementing in Brazil is designed to provide the right brand, in the right presentation, at the right price, for every consumption occasion. In the fourth quarter of 2004, a wide array of multi-serve packages generated over 85% of our incremental volumes, helping us reduce our dependency on the 2 liter packs.

Single-serve growth was driven by our 600ml one-way PET presentation, and 200ml returnable glass package. Since May of 2003, we have launched more than 8 different presentations for brand Coca-Cola alone. We are re-inventing the way we go to the market, improving our client coverage, our packaging segmentation by channel, and our manufacturing efficiency. And we are successfully implementing our revenue management growth initiatives.

Over the last 19 months, with the rest of the Coca-Cola system, we have developed a sustainable pricing discipline for the branded soft drink market, intensive market activities, pricing, coordination and strategic implementation plans.

Today we are tailoring package differentiation strategies between our clients. We are tending to their competitive needs, and simultaneously segmenting our packages by channel, leveraging the strong brand equity of brand Coca-Cola.

We have significantly increased our sales volume to our [greater] and small retailer channels, reaching from over 36% in 2002 to over 51% in 2004. Our increased client reach from 82,000 in May 2003, to 107,000 today, contributing significantly to this development.

Our average price per unit case continues to improve, helped by revenue growth initiatives, incremental sales volume from small retailers and the appreciation of the Real against the U.S. dollar and the Mexican peso.

On the profitability front, higher top line growth in the fourth quarter of 2004, combined with cost efficiencies realized throughout the value chain, offset significant increases in resin and sugar costs.

In 2004, our Brazilian operations already exceeded our Argentine operations absolute cash flow generation, confirming its successful business turn around and growth potential.

Our Argentine operation continued posting top line growth despite a comparably high revenue base year-over-year, closing 2004 as its best year ever. In the fourth quarter of 2004, carbonated soft drink volumes increased more than 5%, and non-carbonated soft drink almost doubled from a very low base.

Our volume growth was supported by higher sales of premium brands and personal consumption packages, both of which posted more than 15% and 10% volume increases respectively, as a result of our multi-segmentation strategy, and improved execution [indiscernible].

We also continued implementing our strategy to control price brands development with increased sales of our core returnable presentations, which have reached 26% of our earnings, and penetration of value protection brand Tai.

We have almost doubled our non-carbonated soft drink volume by re-launching our ready to drink juice brand Cepita, and repositioning our packaged water approach.

Fuelled by definite strategies we increase both our share of market and share of sales, and became the fastest growing bottler in Argentina.

During the fourth quarter of 2004, higher revenues partially compensated for incremental raw material costs, and higher operating expenses, including higher labor costs and incremental expenses from the introduction of non-returnable bottles and cases. The operation continues showing higher average price per unit case. In 2004 tactical price increases across the world helped us to improve our pricing architecture, while increasing the per capita consumption of our products, to the highest point in [Easter].

Financial performance. In the financial front, Coca-Cola FEMSA has strong leveraging story. For the year we reduced our Company’s net debt by $390m. We further capitalized on the relatively low integrated environment and opportunities in the Mexican financial markets, to eliminate our refinancing risk, reduce our foreign currency exposure, and improve our debt maturity profile.

We will finance this $140m of debt maturing from 2005 to 2008 with new 6 to 7 year loans with tighter pricing conditions. Today we have a strong balance sheet and a well balanced capital structure. More than 75% of our total debt is denominated in local currency, mostly Mexican pesos, and more than 80% of our total debt carries a fixed rate of interest.

Furthermore, we completed our corporate initiatives ahead of schedule. These initiatives include our implementation of a [indiscernible] process for each country’s financial and non-financial information, improving internal control systems to monitor our renovation best practices. Evaluation mechanisms to offset the performance of our internal control systems, and the creation of internal corporate and reasonable disclosure committees.

We continue building on our long-standing relationship with the Coca-Cola Company. We are working closely with Coca-Cola to leverage our knowledge of local market dynamics, and to develop the right portfolio of beverages for our customers and consumers.

As we look forward it is clear, our geographic representation will enable us to foster better balanced top and bottom line growth. Now that we have successfully finished the integration process and restructured our debt, we can focus even more of our attention on growing our Company’s top and bottom line.

Thank you for your continued support, with the successful integration of our operations, we are well positioned to create sustainable value for now and into the future.

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

Thank you sir. [OPERATOR INSTRUCTIONS]. We’ll take a moment to compile a list of questions. Your first question comes from the line of Jeff Kanter from Prudential.

Good morning Hector. A quick question for you. Was there any benefits from the high fructose corn syrup ruling in the fourth quarter in Mexico? And can you quantify the benefits that you are going to see in 2005?

Secondly, also relating to Mexico. PBG talked about unit case volumes up 7% in the quarter which suggests that you lost share. I was hopeful -- did you, and can you talk a little bit about the competitive pricing that you are seeing in Mexico as well? Thank you.

Good morning Jeff. Let me first address the issue of high fructose corn syrup. We were able to reduce some of this product, of this raw material in the fourth quarter. The estimate that we have, for it we have savings for around $1 to $1.5m during the quarter in that raw material.

Going forward for this year, 2005, what I can tell you right now is that the difference in price between high fructose corn syrup and cane sugar is around 12 to 14%. This issue has become a very political and sensitive issue. So it’s very difficult to predict or to try to say a number for 2005 in terms of the use of high fructose corn syrup.

Obviously with that cost differential, we will be trying to use it as much as possible, and obviously taking into consideration the effect that that might have on the political front, or in some of the States where we work that are very heavy on cane sugar products. And it’s obviously a very sensitive issue also that we are willing to take into consideration.

But, as I mentioned, there is a very large, wide gap between high fructose corn syrup and sugar.

What do you think you are going to use Hector? 50% of your volume with high fructose corn syrup in ‘05 - any clarity there?

No, it’s very difficult to give you a number Jeff because right now, we are basically not using that, because it has turned out to be a very political sensitive issue, and we are very closely watching that now. So, either way if we have total freedom to use high fructose corn syrup we would probably produce somewhere around 30 to 35%. But that’s assuming that we have total freedom on that front, and we don’t. But, I think that’s basically what I can say on that issue, because we are under uncertainties going forward with that.

Okay, it’s just the share gains in the pricing.

You are fully aware, and so that everyone is clear on this, we do have this injunction where if we use this raw material we won't be paying this excess tax. So on that front we are covered. Again it’s more a way of how do we deal with these issues on the political front and in some customers it’s very important also for our consumers.

Okay, and just the share gains of PBG relative to you and also the pricing environment.

The reading that we have is that we have lost a few, and when I say a few, probably 1.5 to 2 percentage points year-over-year on the total industry.

I don’t believe that this has to do with PBG. So probably the numbers that you were referring of PBG growing around 7%, probably that growth is coming from other areas where we are not competing.

The main effect that I can share with all of you in terms of share of market in our territories, is that with respect to the Cola they have not been growing in the last 6 to 7 months. And the main effect that we have, is the introduction of the growth of very large presentations on flavors of regional brands, like [Cevitos] and some other brands as well as the new ones, especially in the Valley of Mexico.

The market dynamics with the Cola and PBG are very stable and basically the erosion was related more to the other products.

Thank you.

Your next question comes from the line of Dan Kowalski from Schroders.

Good morning. A couple of questions on Mexico, and then a couple of cash flow questions. Can you say when you took the price increases in Mexico in the multi-serve, and if you have seen any, or if you expect to see, especially big color on PBG following your price increases? That’s the first question.

Yes good morning Dan. We basically increased on those presentations, on the multi-serve presentations, basically 1 peso last week. The idea that we have is that given the increases that we have experienced on resin prices, we believe that our competitors will follow these increases, and that these prices will stay up.

Okay excellent. In terms of the synergies in Mexico, you achieved $70m, so congratulations. Do you think that there are actually more synergies to comes now that you‘ve got these synergies and now that you have completed the integration process?

This 2004 was a very tough year, and I think that the good news is that our Mexican operation was able to, in a way, re-invent part of the way we do business. When you take into consideration the competitive pressure and the fact that we were not able to increase prices in line with inflation or in perspective at all, because basically the price gap that we have is the effect of inflation. In that respect, meaning basically that we stay with the same nominal prices that we had last year.

Our operations were able to -- the effect of that price and mix change and the revenue line was, in my estimates, around $150m. So we were able to reduce some of the costs, and obviously we have been discussing a lot of the effect of the rationalization, of production and distribution facilities. So I think that the good news is that the Mexican operation was able to streamline their distribution processes. Both reduce our head count and try to reallocate some of the marketing expenses so that we spend those a little bit more wisely.

The effect of these lower volumes in the year also helped us reduce a little bit our CapEx needs during the year. So my feeling Dan is that the $70m in synergies are pretty much the result of all these efforts and the results of this integration.

I think that we can find you an EBITDA number. But I would not expect that a very high number in additional synergies, in relation to the $70m.

Okay great. And then, a couple of cash flow questions. Can you give us an idea of CapEx expectations for 2005, dividend expectations for 2005 and if you’ve got any debt reduction targets for 2005?

Dan could you repeat cash flow--

In the CapEx, dividends, and then if you have a debt reduction target.

Okay. Yes. CapEx number, basically our operations are calling for a little bit higher than $200m. My estimate is that $200m would be the right number. We always go through this process annually. The 1 with a little bit more than some of the operations and then we start biting the program during the year, we end up with a lower number.

My best estimate for this year is $200m.

With respect to dividends, we are having a shareholders’ meeting on March 8, and the idea is that the proposal that we have there to be approved by the shareholders is to pay around MXN600m. I will give you an exact number in a second. That’s a proposal that will -- it’s MXN620m, okay.

And debt reduction targets. My feeling is that somewhere around $200 to $250m should be a good number for this year 2005.

Great. Well congratulations on the results. Thank you very much.

Thank you.

Your next question comes from the line of [Yang Tien] from HLM.

Hi good morning. A few questions. Basically questions on the cash flow and on your debt reduction in ‘04, just sort of clarifying the numbers. First of all, what’s the number for the fourth quarter free cash flow in your estimate?

Yang, let me -- [indiscernible] that is here with me to give you a very precise number. I don’t have it right now with me here in terms of the free cash flow. It was a little bit tricky because of the movements on the exchange rate. So the accounting number is a little bit different from the real number because of the exchange movement. But I’ll ask [indiscernible] and get them to prepare a more explanation [indiscernible].

Yes sure, I’ll follow up with that. Thank you.

Your next question comes from the line of Carlos Laboy from Bear Stearns.

Good morning Hector. Hector I was hoping you could talk a little bit about some of the profitability improvements that you see for Brazil. At 9% operating margins for the full year and about 11.5% for the fourth quarter, you are still running at about half the profitability rates of some of the other bottlers that we see in Brazil. What are the constraints to seeing a major expansion in your profit margins in Brazil to close that gap?

And then a related question of Brazil. Could you speak to, how you would qualify the health of the Kaiser brand at the end of the year in Brazil, in Sao Paulo? And the prospects for 2005? How are you looking at it in your territories for 2005?

Good morning Carlos. Yes I think that in general, I will say that Brazil since we took over the main issues that we have there were to bring Brazil to reasonable standards in production, distribution, the way we were going to market, the penetration of provisional trade, as opposed to using wholesalers as was being used in the past. So, rather than the trappings that we have in trying to get into a lot of -- into a more efficient year like we were having in the rest of the countries, Brazil was basically going back to basics during this first year.

I think that the job that our operators have been doing in Brazil is tremendous in terms of turning around the operation. Remember that when we arrived, the Brazilian operations had negative EBITDA figures. And I would agree with you, I mean, at 11% margins it’s far from acceptable. But I think we are going at a very good pace, growing that market.

When you look at the prices that we have in Brazil, and you compare that with Argentina, the 2 of them have very similar characteristics in terms of competition from b brands or [Guyena] and the price at which we are starting to reduce our expenses and caused of that. And in spite of that Argentina has a much better margin. We think that Brazil should get close to the levels that we have in Argentina pretty soon and obviously with our teams working in trying to improve that.

It’s very hard to give an estimate of when are we going to reach those levels. There is still a lot of issues to cover and re-check in Brazil. But as we describe here in the press release and this conference, our new efforts in increasing the client base, going directly to a more larger number of clients, as opposed to using wholesalers. A dialogue that we have with all our bottlers in Brazil so that we have a discipline in the pricing front. The introduction of new presentations, and the reduction of the exposure that we have both to the 2 liter presentation and cans, that used to represent 80% of our volume.

I think that all of those things are very good for our business going forward. We need to work now a little bit more on the efficiency front, trying to introduce a little bit more return on our presentations to continue improving our portfolio of products.

But certainly our objective is to reach the much higher levels of profitability than what we have today.

And on the Kaiser question?

In Kaiser, it’s a tough question Carlos. From the perspective of a sovereign player in Brazil, we see very little help on the brand. Volumes are coming down importantly. I think that they have changed the management so we do expect a better execution in the marketplace. Remember that now we have a relationship where we basically deliver the product that they sell. In the past we were doing the selling also. But as we arrived, we re-negotiated that agreement with management at that time, and now we are only distributing the products.

So for us, it’s a good agreement, because we are based on a per case basis, and we are [favored] with some guarantees on our fees. And so, from our perspective, let’s say from the profitability we derived from distributing Kaiser we are okay. But going a little bit more direct to your question, to respect of the shape of the brand, we do see a very complicated environment for Kaiser in Brazil. It is caught between a very strong competitor, which is [indiscernible]. We‘ve got Brama Antarctica, and King Cariole and some of the other brands that have been growing importantly in Kaiser has been caught right there in the middle.

Thank you.

Your next question comes from the line of Lore Serra from Morgan Stanley.

Yes, just a couple of quick follow ups on Mexico. Hector if we take the price increases you did on the multi-serve, and then the single-serve that you did in the fourth quarter, is it fair to say that right now your pricing year-over-year is up around 3 to 3.5% from where it was a year ago, due to those rate increases?

Yes Lore I think that that is a good estimate. I’ll ask Alfredo to check on those numbers to give you exact figure. But it’s basically around those levels.

Okay and in terms of the price increases, maybe it’s too early to ask this, but have you seen any evidence that your competitors will follow what you did in multi-serve?

Not really Lore, we just started that last week. As we mentioned, [PET] prices have increased very importantly, year-over-year, on a year-over-year basis so, we do expect that especially the -- our established competitors would follow suit with price increases.

Okay, and then on the raw material front, you have been very helpful in terms of giving us a lot of information, but I just had a couple of clarifications. One is, on the sugar, or the sweetener environment. If we thought about a scenario where you would not be able to increase your high fructose for ‘05, what would you be expecting based on what you’re seeing in terms of the sugar prices. What would you be forecasting for 2005, your sweetener costs would do this year compared to last year?

Lore, if I understand your question that’s assuming that we just stay with cane sugar?

Yes. If you are not able to increase your high fructose component that you have quantified that for us, and I understand that you have a difficult time not knowing right now how much you will be able to use. So we just think about using can sugar, what’s the forecast increase in cane sugar this year versus last year?

In the fourth quarter the increases we had was slightly less than 1% on the fourth quarter. The difficulty in your question is that the industry is going through a transformation process that in theory should call for better pricing on the sugar industry.

Right.

So, our estimate is that sugar prices are going to stay relatively flat this year. But it’s very difficult to predict, now.

But you probably have contracted sugar for the first part of ‘05. Is it stable with where you were at the beginning of ‘04?

Versus the beginning of ‘04, yes the increases that I mentioned, around 1% have to do basically versus the previous quarter. Let me just take a look at versus the beginning of ‘04 - 1 second.

Lore, let me get back to you with a more precise number. My estimate is somewhere around 10% that we have increased, if we look at the beginning of last year.

Okay.

Okay.

Just on the PET, you mentioned the 10% increase. Should we think about that in the first quarter, or when do you foresee that hitting your cost base?

Yes, the estimate that we have is that by -- during the first half of the year, we would have that kind of price increase.

First half. But you haven’t seen it quite yet?

No we haven’t seen it.

Okay the last question, and I don’t know if you will comment on this, but getting back to the question of Kaiser in Brazil. If 1 of the options that became available to you was to adopt the sales function once again, for the Kaiser brand, is that something you are interested in?

I guess that we would have to take that obviously Lore, when we arrived there the Kaiser people were worried that we would focus a lot in CSDs. We are still focused a lot on CSDs with a lot of transformation going forward, but we would need to compare the proposal that we have on the table versus what we have right now in terms of very specific fees for distribution.

I think that we would have to look at a specific proposal. But we would certainly look at that Lore.

Okay thank you.

Sir your next question comes from the line of Robert Ford, Merrill Lynch.

Hi good morning everybody. Hello Hector. My first question has to be with more on sweetener and I was wondering hearing that other bottlers may have also received injunctions on the [YEPS] tax, and I was wondering if you had heard any confirmation of those rumblings?

Additionally, I understand there is also a WTO process that’s underway, reviewing the legality of the YEPS on high fructose corn syrup, and I was wondering what your insights were in those regards.

And then as we go into 2005, you had referenced earlier that you are comparing against past periods of pretty heavy package reductions in promotions, and the introductions of new products. And I was wondering what you anticipated when it came to marketing spend this year, your package introduction and that sort of thing?

And I just wanted to remember, you amortize your marketing spend over the course of the year. You’re not recognizing this as recurring. That was pretty much all I was interested in.

Good morning Bob. With respect to the fructose sugar issues with sugar industry, as I mentioned at the beginning it’s a sensitive issue. Obviously, you have a lot of different interested parties. The consumers looking for a better pricing environment, not now that sugar prices have increased. Very important in the last 2 or 3 years, especially after the nationalization of some consumer meals. You have the sugar cane growers that had been protected by these regulations in Mexico in the past and now the idea is that they are going to be deregulate and therefore they are not very comfortable with that. And you have, obviously, pressure from foreign producers that want to sell in Mexico and discussions about the [indiscernible] agreement. In 1 or 2 years we should be starting to be able to import some sugar, high fructose from other countries and things like that. Government officials are very involved.

So these are very hectic times in specifically that industry, the sugar, high fructose competition environment all of that. It is very difficult to predict what is going to happen right now. What we know is that we have this injunction that we can use that raw material and not pay this exorbitant tax that is being levied on CSDs. I’m not sure about other bottlers. I know that some of them tried to get an injunction also, but I don’t know the results of that.

And I guess we would be playing that by ear as soon as we see the environment more in the future.

With respect to the second question Bob, we basically are predicting somewhere around 4% of revenues as our marketing expense for the year. In the past especially in 2003, we were a bit surprised at the end because we were basically reserving around that 4% of revenues, so that we have a very stable marketing expense month-over-month, as opposed to have this related to the bottom of the revenue number.

And in 2003 as the year unfolded, we ended up with a last quarter that was short on the reserves of marketing. We are being especially cautious to have very close to this 4% of revenue marketing expense over the year. And the answer to the this specific question is yes, we are reserving that percent we can, as opposed to taking to a P&L whatever we are spending on a month over month basis.

And the idea is that we won’t have any a surprise on the year, and end up with a number around 4% of revenues.

And that’s flat versus last year right Hector?

Excuse me.

That’s the same as last year. Last year was also 4% just to confirm.

Yes.

Okay, then just 1 last question if I could. In perceiving that there may have been a slight shift in terms of creating better economics, more Coke bottlers, in particular, to pursue what are probably more - what’s the right word to say - more functional value protection strategies. And I perceive that as contributing perhaps to the solution and explanation as to why we’ve seen a lot more dynamics of categories. Is that the case, could you give us an indication of what the changes have been?

Rob, I am not sure that I quite understood the question. But are you referring to the co-ordination with the Coca-Cola Company for Value Protection brand?

Yes I am.

Yes I think that, in general, I will say that, given the new market dynamics it has always been hard, but it is now a little bit better understood on Atlanta and other options in Latin America, the need for these brands.

Obviously, if you remember, we were in Argentina a few years ago, launching Tai. It was a very painful process. It took more than 2 years of negotiation. We ended up with a Tai in a so-called tutti frutti flavor that was a total failure. Once we launched an orange flavor, that’s when we started to get some results from that.

I think that the dialogue with the Atlanta the Coca-Cola Company is here now, but is not free of discussions and pain and all of that. It’s -- I think that we are better with Atlanta, and we will develop this approach in each market [indiscernible]. Obviously, the Coca-Cola Company and us would like better to sell the so-called Core brands, because they are more profitable for all, they have a better pricing formula. They have a better scale. Our production runs in the manufacturing facilities are more efficient, and all of that is related to our Core brands.

But we do need this brand in certain locations, in certain markets, or in certain channels, or certain socio-economic levels of the areas that we cover. So my feeling in general is that we are now with better coordination with Atlanta and their corresponding offices in Latin America.

Right, thank you very much Hector.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from the lines of Alex Robarts from Santander.

Hi. Just a first question really, a global question on consolidated volume growth. I mean, Hector if I understood the first comments about 80% of the incremental growth in volumes coming in ‘04 from the non-Mexico, I guess the reciprocal 20% coming from Mexico of the incremental growth. And as 70% of your cash flow is, I guess, part of this is, you know, the market share loss in Mexico, and then the kind of acceleration of the line growth in non-Mexico.

But looking out in a year or 2, do you see that percentage, you know 20 Mexico, 80 non-Mexico evolving, or is that going to be a number that we will see in the next couple of years? Maybe you could just give us some color on that?

Yes good morning Alex. Well let me first mention, I think that in general, obviously all the different aspects of the business play for this number. I think that it is very important to point out that the growth in these other territories out of Mexico also is a reflection of the lower per capita consumption that we have in those countries. And I think it’s a very positive that we are growing -- a very positive signal that we are able to grow importantly in those markets as we develop some of our strategies.

Mexico, as we discussed, the market share loss was more related to this effect of the [San Vitos] and [Bruloos], and some of the other, the [Pasqual] products that we have in the Valley of Mexico. They are having some, I’d say relative success with the introduction of very large formats, like the 3 liter presentations.

When you look at the share of revenues which is 1 of the key buyer words that we are watching very closely, because at the end of the day that’s the signal of the percentage of the monetary spend of [something] that we are capturing. In that respect, we continue to have very good performance. I mean, the number when you look at revenues as opposed to just volumes, it’s closer to being flat versus last year. It’s still a slight loss in that indicator.

Okay, but in terms of volume growth, just volume growth going forward, it sounds like you are saying more incremental growth in the next couple of years coming from non-Mexico versus Mexico.

I think that that will be very natural Alex because of the per capita that we have in some of these countries. I think that very naturally, and obviously we would like to see Mexico growing as fast as we can in Mexico. And I think we will achieve some growth of this. We are seeing a more stable competitor environment in Mexico.

But then again, it’s also very important that we focus our attention in these share of revenues indicator that I was mentioning, because at the end of the day it’s also a signal of the trend that you have going forward.

Okay. Secondly, I want to drill a little bit more into this PET resin cost. I guess I got the impression that fourth quarter, you talked about 8 to 10% increase versus, your resin costs versus Q3, you are saying 15% with the fourth quarter. I guess, does that mean that you had something late December? I think you had mentioned that before but, could that be the difference? And when you look in terms of the first half of the year, you have the 10% increase, plus the fourth quarter increase. If the prices went up in that time in Mexico, I think you mentioned earlier 2 or 3%, in my calculations the cost of sales, just from these resin costs are going to go up about 6% in the kind of the beginning of the fourth quarter to currently, including this price increase in February. I mean, is it kind of from a gross margin point of view in Mexico, is the price increase fully offsetting this resin price increase?

I mean, in general you analysis is correct Alex. The idea obviously that we have is that we need to start again taking the leadership in moving the prices in this industry. Our feeling is that we should be able to compensate for these cost increases and obviously it will depend on how the mix of our presentations move. Whether we are selling a little bit more returnable or not and again we are lead to the particularly sensitive question is if we use high fructose we might more than compensate the increases in PET. So, we need to play a little bit by ear as the year is going on. There are too many variables playing at the same time here.

And there was a December price increase?

[indiscernible] that you were saying, yes we increased 15% in resin during the fourth quarter, and we are stating a 10% increase in dollar terms during this first half of the year. And that will certainly have an impact on our cost structure. Again, as I tried to [signal] without saying aloud, the reason we are [exposing] an increase in prices is because we believe that our competitors are 100% on one-way products will have a lot of pressure on the cost structure, and therefore we feel comfortable moving prices.

Fair enough. And final clarification on the 70m synergies. I know in the past quarterly calls, you’ve talked about gross number and net. I mean, is it safe to assume that you are still -- that that 70 growth is equivalent because of packaging costs and some marketing spend is kind of a 50m net number, is that a safe way to look at it?

It’s basically safe to say about that, we are basically around the same level. It’s around $70m and then once you reduce some of the -- the net synergies being around the $50m mark.

Okay, thank you.

At this time there are no more additional questions. I’d like to turn the call back to your host for today’s call, Hector Trevino, for final remarks.

Thank you all for your interest in our company, and Alfredo and Juliette will be available to answer any remaining questions that you may have. Thank you.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Good day.