Coca-Cola Femsa SAB de CV (KOF) 2005 Q1 法說會逐字稿

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

I would now like to read the Safe Harbor statement. 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.

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

Good morning everyone, and thank you for joining us today. Our first quarter results underscore the importance of geographic diversification that we achieved by acquiring under-performing operations outside of Mexico and Argentina.

After finalizing the integration of the acquired territories, our consolidated results continue on the growth path, both in terms of absolute revenues and cash flow generation. This is a sustainable development in our view.

It is important to highlight that, due to its seasonal characteristics the first quarter of the year is always the lowest on a consolidated basis, in terms of our revenue and cash flow generation. A strong summer in Brazil and Argentina, revenue growth in Colombia and greater operating efficiency in Central America more than compensated for seasonal factors in Mexico, and a challenging raw material cost environment across the world.

Our Venezuelan operations recorded relatively flat results year-over-year. In the first quarter of 2005, we experienced improvement in profitability across half of our operations, including Central America, Colombia and Brazil. Our consolidated quarterly revenues grew 1.5%, and our consolidated operating income increased 2.7%.

However, we recorded a reduction in net income, driven by 2 non-operating factors. One, a lower monetary position gain, resulting from Mexican lower inflation rate in the first quarter of 2005, as applied to our lower net liability position. And second, a one-time tax payment in Mexico, resulting from the Mexican Ministry of Finance Secretariat change regarding taxes options for coolers.

Now let me talk about Mexico. In Mexico our volumes remained almost flat year-over-year, despite a tough comparison with March of 2004, which was one of the last year’s best months. 2 lost work days for the Easter holiday season, and 2 weeks of below normal consumption in the Valley of Mexico, because public vacation fell in March of this year compared with April of last year.

And finally, our increased prices for multi-serve carbonated soft drink presentations in almost all of our territories. Our carbonated soft drink volumes declined slightly for the quarter, mainly driven by a 1.3% decrease in volumes of flavored Carbonated Soft Drinks, and flat volumes for brand Coca-Cola.

The initial roll out of Coca-Cola Citra compensated for the phase out of Coca-Cola Vanilla, which was launched last year. Our Water volumes remained relatively flat for the quarter, and our volumes of Non-Carbonated products showed important positive traction from a low base, growing more than 20% year-over-year. In the second quarter of 2005, we should benefit from the world base that we launched during the first quarter of the Easter holiday.

On the pricing front, our average price per unit case declined in real times by 3.1% year-over-year, and 1.4% sequentially, accounting for the majority of the decline in quarterly revenues. This price reduction resulted from a slight decrease in nominal prices -- a slight increase in nominal prices, that did not fully compensate for year-over-year inflation, and a small shift to multi-serve presentations, which carry a lower average price per unit case, year-over-year, and a lower level of single serve packages, which carry a higher average price per unit case, year-over-year.

The price increases that we implemented in the first quarter of 2005 are positively impacting our prices for the second quarter. So far we have increased our weighted average prices by 3% throughout Mexico. The competition is generally following our price increases for multi-serve presentations across the country. Consequently, we expect a better pricing environment for the second quarter of 2005.

Our cost structure is clearly under control. Both our cost of sales and SG&A per unit case declined year-over-year at the gross sales level, with the exception of resin costs, which increased 40% year-over-year, and higher prices for other packaging materials. The rest of the components of our cost of goods sold declined. It is important to note that by selling a higher level of multi-serve presentations, which carry a lower average price per unit case, we reduced the cost incurred expense per unit case.

At the expense line, our tight control of marketing expenses, and our lower maintenance costs, more than compensated for higher wages in the quarter. We expect resin prices to remain volatile for the rest of the year.

In summary, lower revenues grew our Mexican operations first quarter margin contraction. Going forward, higher revenues will increase our operating levels, and as we maintain a stable cost structure, our Mexican operation will reflect real levels of profitability.

Now let me turn your attention to our Latin Central division. In the first part of the quarter, our Central American operations overcame a challenging weather environment, driven by cold weather and heavy rains across the region, and an aggressive price discounting by competitors in Nicaragua and Costa Rice, resulting from Big Cola centers into the region.

In the second part of 2004 Big Cola has operated a carbonated soft drink production plant in Costa Rica. We are following a package and pricing condition strategy, rather than outright price reductions. Our Cola volumes increased almost 1%, partially compensating for a 6.8% decline in flavored CSD’s. In-production of 2.5 liter returnable presentations of brand Coca-Cola in Costa Rica, is providing an attractive packing proposition to our consumers, and becoming an effective way to contain the Big brand development in the Cola segment. Volumes in Costa Rica remained flat for the first quarter 2005.

We are ever awaiting the ramp out of packages strategies in the flavored CSD category to strengthen our portfolio profitability. For example, in Costa Rica we launched Fresca Uno, the sugar free version of Fresca, our grapefruit flavor brand, which already represents 10% in this brand’s volume in the country.

We also introduced Frescolita, a cold Venezuelan brand as a value protection brand in Costa Rica, that replaces Tai, and complements our portfolio of flavored Carbonated Soft Drinks.

In Central America the majority of the quarter’s price decline was driven by a packaging shift mix to one-way multi-serve presentations. This is a national development during the initial stage of low price value producers entering into the market. It is evident that our cost structure in Central America is improving. Our cost of sales per unit case declined 4.1%, driven by other production efficiencies that offset higher resin costs.

Additionally, the tight control of our marketing resources, combined with the year-over-year turnaround in profitability of our Guatemalan operation, reduced our operating expenses per unit case by 3%.

The turnaround of our Guatemalan operation is more than compensating for our Costa Rican’s operations slightly lower profitability. Driven by volume growth and price stabilization, our Guatemalan operation’s EBITDA margin is reaching high single digits. On the profitability front, the rest of our regional operations remain stable in real terms.

In Colombia, our top line growth is improving. Tactical price increases that we implemented in the middle of last year, from a declining price base at the beginning of 2004, and the growth of flavored Carbonated Soft Drinks, helped us to increase revenues by almost 9% year-over-year.

On the profitability front, higher revenues and the appreciation of the Colombian peso more than compensated for incremental resin costs, and increase in exporting to PP packages. Although the first quarter is a period of seasonally low revenues, our operating expenses per unit case declined 4.6%, driven by higher fixed expense absorption, lower maintenance costs and more effective marketing expenses.

In Colombia, our efforts are totally focused on our carbonated soft drink portfolio, and our strategy is working. We expect to continue improving our performance in Colombia and FEMSA Company’s overall results. Venezuela increased revenues 7.5%, mainly driven by price increases implemented in the second and fourth quarters of 2004, and a slight increase in Carbonated Soft Drinks, despite heavy rain that flooded certain parts of the country, and made it difficult to adequately serve our clients for 2 weeks in February. Total volumes declined 1.2%, driven by lower Non-Carbonated volumes, which were partially offset by a 0.9% increase in Carbonated Soft Drink volumes.

Additionally, volumes of brand Coca-Cola declined 1.1% for the quarter, in the face of a difficult year-over-year comparison, due to the 2005 phase out of Coca-Cola Vanilla. Flavored Carbonated Soft Drink volumes offset the decline in Colas, increasing 3.9%, mainly driven by incremental volumes of our value protection brand. We expect that a normal operating environment in the second quarter will help us to increase the volumes of all of our portfolio of beverages.

On the profitability front, our higher revenue offset incremental U.S. dollar denominated raw materials cost, and greater exposure to resin costs, as the majority of our incremental volumes coming from non-returnable PP presentations. We are rolling out a complicated strategy for different territories in Venezuela, to increase the coverage of our internal presentations. This strategy should help us to improve our volumes of returnable packs.

For the quarter, our operating expenses per unit case increased 18% year-over-year, driven by higher transportation costs and higher wages. Both of them increased more than inflation, as well as the impact of the Venezuelan Bolivar devaluation on our dollar denominated expenses.

Our marketing expenses are well under control, representing less than 4% of total sales. We believe there are opportunities to reduce SG&A expenses, so we are working to implement tighter controls of these expenses. We expect continuous top line growth in Venezuela. Moreover, if we successfully implement tighter expense control, we will achieve stronger levels of cash flow.

Now I will talk about our Mercosul division. In Argentina, despite the comparatively high top line base that we reached last year, our revenues increased 13.7% in the first quarter of 2005, with both prices and volumes contributing similarly to these results.

In the quarter, CSD volumes increased almost 5%, driven by extraordinary 14.5% volume growth of our premium brands, and backed by our well executed revenue management strategy. Returnable packages and value protection brands significantly slowed the pace of price competitors, and maintained our core brands’ volumes, in spite of widening price gaps.

For the quarter, our return on packaging base increased 3.6%, contributing around 27% of our total volumes. As a result of these actions, we continued growing our market share, and attained our highest share of sales since we began operating this franchise.

Our Non-Carbonated products increased more than 5 times, from a very low base. The Coca-Cola Company’s new juice brands continued significantly to be competitive. In the first quarter, higher revenues more than compensated for incremental raw material costs, and higher operating expenses, including higher labor costs and incremental expenses from the introduction of new returnable bottles and cases.

Going forward, we expect a challenging economic environment with accelerated consumption and higher than expected inflation. Tactical price increases implemented in the first quarter of this year, should help us to offset some of those challenges, and maintain our Argentine operations for at least higher profitability rates.

In Brazil we have had an extraordinary quarter. The country contributed more than 60% of our consolidated incremental volumes in the first quarter of 2005. While this quarter is normally strong for South America, this performance was truly exceptional. We continue to benefit from a gradual recovery in consumption, combined with more discipline and better co-ordination among the Coca-Cola bottlers, and effective marketplace execution.

Carbonated Soft Drink volumes increased almost 10%, with brand Coca-Cola contributing 70% of this growth, and flavored carbonated soft drink brands contributing the balance. Additionally, our bottled Water volumes increased more than 40%. Our research shows that our proprietary Crystal bottled Water brand now commands the strongest brand equity and awareness amongst the Bottled Water brands in Sao Paolo. Of course, absolute leadership in both share of volumes and sales in our territories of the [Spring Water] market.

We are reaching our highest market share of revenues and sales in years, both in Carbonated Soft Drinks and Bottled Water. On the packaging front, our returnable base continues improving, reaching almost 7% of total volumes, excluding beer. We expect this trend to continue improving rapidly during the year.

Our average price per unit case also continues to improve, aided by revenue growth management and incremental sales volumes of small retailers, which carries higher prices per unit case in the traditional channel.

On the profitability front, higher revenues, year-over-year [indiscernible] optimization, cost efficiency throughout the value chain, and lower margins and costs offset significant increases in resin and sugar costs. We expect our Brazilian operation will be an important contributor to our Company revenue and cash flow during 2005.

On the financial front, our gross debt levels remain practically flat compared with those of year end 2004. We have a strong balance sheet, and a well balanced capital structure. More than 70% of our total debt is denominated in local currency, mostly Mexican pesos, and more than 75% of our total debt carries a fixed rate of interest.

Our acquisition of Panamco merely provides us with a continued diverse platform, which will generally increase our growth alternatives. Our geographic diversification alone is an important competitive advantage for Coca-Cola FEMSA. With that, I will open the line for any questions that you may have.

Operator, are there any questions?

Please hold while we co-ordinate the questions. [OPERATOR INSTRUCTIONS]. Your first question comes from Andrea Teixeira of JP Morgan. Please proceed.

Hi, good morning. I just want to -- if you could explore more about the PET resin costs. What are your expectations throughout the year?

And also if you can talk about the market share gains in Brazil. Thank you.

Good morning Andrea. As we basically stated during the conference, the increases that we have seen so far in resin costs, are around the 35% to 40% level in the different countries. In Mexico, being around 40%. Our expectation, and let me state for a moment, that 35% to 40% already includes a 5% increase during this first quarter. We are expecting probably another 5% increase towards the middle of the year, and that would basically cover the 10% that our people in procurement were expecting for this year.

Obviously, this is very volatile times for oil prices, and with that volatility it is difficult to predict the impact of that on our resin costs. But our expectation is that during 2005 we will have a 10% increase. Or maybe put in other words, another 5% increase from the levels we have right now.

And with that you would be increasing your usage of fructose, high fructose or, to mitigate those, or we should expect the same level of usage that we had on the quarter, on the first quarter?

Yes, in general, I mean the answer is yes Andrea. We obviously need to look for alternatives to mitigate those increases. So far we have been using around 30% of our mix of sweeteners with high fructose. Potentially we can increase that, and we have discussed this in previous conferences. This is a sensitive issue in Mexico, and we just need to balance all those forces.

The need for improvement in margins and the sensitivities to some of our consumers and suppliers, especially in some regions where sugar cane is very important. But if you want a simple question, yes, we will use more fructose if we have higher resin cost increases.

And on the second question regarding the market share gains, do you think it’s sustainable, given that AmBev have also followed the price increase? Or you think there should be some reaction going forward to the market share gains in Brazil?

Andrea, you know, I think that the market share gains could be sustainable, because we foresee the rational pricing environment among the established players in the industry, and because we are implementing different strategies in terms of packaging roll out that are just starting this quarter. So I do believe that that is sustainable.

Great, thank you very much.

You are welcome.

Your next question comes from Yang Sang of HLM. Please proceed.

Hi, this is Yung from Hardin Loevner Management. A couple of questions. One is, you mentioned the average pricing. So far it’s plus 3%. I wonder what’s the outlook for the rest of the year? And that’s the first question.

And the second one is on the -- the second one is on the free cash flow front. I wonder whether the one-time tax related to the refrigerator, is that paid in the first quarter? And what do you expect the free cash flow pattern for the rest of the 3 quarters? My understanding in the first quarter you probably didn’t pay down that much of debt, other than the foreign exchange.

And the third question is, like fourth quarter Mexico EBITDA grew like 8%, despite even stronger negative pricing headwind. And in the first quarter, EBITDA over there in Mexico was down, like, 11%. I wonder what’s the difference? Is that mainly because of the resin cost? Thanks.

Yes, let me -- the first question relates to the pricing front. We increased prices -- if we -- in the second half of last year, we increased prices on some presentations that are already held in the first quarter. But more importantly, we increased prices of our multi-serve presentations, and that was basically done toward the end of the quarter. So we expect to benefit from that going forward.

Now, the important element here is that all the competitors are following our price increases, which is a little bit related to your third question, and let me mix the 2 of them. The impact of resin price increases for Mexico alone is somewhere close to $12m in the quarter. But that definitely impacted our profitability of this quarter compared to fourth quarter.

So we have the slight benefit of this price increase during the later part of the quarter. It didn’t trickle down to all the improvements that we’ve got to see going forward from these price increases. But on the costs front, this $12m impacted very importantly on Mexican profitability. Now the good news about this is that, basically 100% of our competitors are 100% based on non-returnable products. Very little returnable presentations from some of our competitors. Basically to cover some of the restaurants and bars.

And mostly the pressures that they have from this cost increase on resin is stronger, and for the first time in several months we saw the opportunity to start increasing prices a little bit more aggressively. If you ask me, can we increase prices again in the future in this year, I think that it would depend a lot on how the resin prices came in lower.

I mean, I was answering the previous question, if we have some additional resin price increases we will look for higher utilization of other raw materials that will bring some efficiencies. We will look for other efficiencies in our production and distribution systems. And obviously we will look for some price room. But that variable is the most difficult to move when you are in this competitive environment.

Now, with respect to the free cash flow question, the answer is yes. We basically generated say close to $90m in free cash flow. That were basically used to pay around $70m in one-time taxes, although a very large part of that has to do with the cash flow payment that we had to do in March for last year’s income declaration. So, in other words, because of 2003, the year that we bought Panamco, we have a bunch of extraordinary expenses related to lawyers and advisors.

The payments due in 2004 were lower than what really -- because that’s the way it is done in Mexico. You pay the provisional payments that you do month by month, are based on the taxes that you paid the previous year. And 2003 was a year of very low taxes because of those extraordinary expenses. So when we presented our final profit declaration, or tax declaration on March, we had to pay around $48m to $50m because of that.

In addition to that, we have this basically $20m of additional taxes because of this change in the way we deduct our coolers. We totally fixed the cooler controversy with the authorities. We paid that, and now we will deduct our coolers on a 5 years basis, as opposed to as an expense of the year. We were doing that the previous year. That doesn’t have an impact on the P&L except for the penalties that we were charged because of the delay on this payment. But it’s a payment that doesn’t fully affect P&L. It’s more a cash flow thing during the quarter.

And the rest of the cash flow was used to pay CapEx for around $20m, and we did re-purchase around $10m of our peso denominated bonds that were cancelled. So, at the bottom line, we basically reduced $10m of our debt, and we used a little bit more than that in our cash balance. In other words, the net debt position increased slightly because of these extraordinary expenses.

Thanks.

Just one more thing related to the question, because you were also asking, going forward. We still believe that for the full year our target is to reduce our debt by around $250m, as we have sustained in the past.

Thank you.

Your next question comes from Jeff Kanter of Prudential. Please proceed.

Good morning gentlemen. Hector, what were your cash flows in 1Q ’04? Where your net resources generated by your operating activities in your capital expenditure? That’s my first question.

My second question is, how much did the high fructose corn syrup shift help you in the quarter, and what’s your expectations for the year?

And then just, you know, finally, what gives you a sense that mix will improve in Mexico as we trend through the year there as well? Thank you.

Jeff, I’ll ask Alfredo to check on this question about the first quarter of last year’s cash flow, because I don’t have the numbers handy with me right now. We will answer that a little bit more.

High fructose – the estimate that we have is that we have savings in Mexico of around MEX20m in our sweetener costs, but that’s a mix of increasing sugar prices and a little bit higher savings on the tax with those. Probably savings in this quarter for the use of high fructose is somewhere around $4m Jeff. In other words, I say $4m in general terms, because of the use of high fructose, and in the part that I am using still sugar, I have a $2m increase in sugar. So the net is around $2m saving.

In dollars right?

In dollars, yes. Basically, it’s around MEX40m, and probably not the figures. It’s around MEX40m in savings from the uses of fructose, and around MEX20m in additional costs, because of the price increases on sugar.

So, are you thinking maybe MEX80m to MEX100m for the year?

Yes, somewhere around that will be our sense. If we start using a bit more high fructose, we can increase that saving.

Right now, our estimate is that -- our appreciation right now is that high fructose is around 15% cheaper than sugar. And assuming in this number that prices stay more or less with that relative.

I forgot your third question.

Can you give us a sense of what’s going to improve the mix shift as we -- Mexico. Thank you.

Yes, we are starting very little to see some improvements in the personal presentations in April. And I’m speaking about Mexico.

Yes.

We are planning some additional roll outs during the year of new presentations, basically returnable presentations in different sizes, that we think will help us a little bit to improve our margin. And one of the very large challenges that we have this year is to start also improving on the distribution front of the business. And to improving the cost structure of our distribution. I think there are opportunities there also, that we can catch up as we advance in the year.

Are you ready for your next question?

Yes please.

It comes from Robert Wertheim of Morgan Stanley. Please proceed.

Yes, good morning. First, just a quick follow up on PET, and then a question on Mexico. On PET, do you feel like you have seen the full effect of market prices in the first quarter? In other words, did that 5% in the first quarter, is that full in the quarter, or will there be a little bit of follow on in the 2Q?

And do you think you’ve seen the full effects of the market prices of PET across all franchises, especially in Brazil?

I didn’t follow the second question.

Did you see the higher PET effect in all your franchises? Brazil costs seemed a little better than we thought, so we wanted to know if the higher PET was showing up across all franchises in the first quarter?

No, the PET has been a pain in the neck this quarter. As I mentioned, for Mexico, the effect was around MEX120m on the quarter, because of these increases in PET. But it’s the same proportionately in the other territories. The effect on the full, on the total Coca-Cola FEMSA consolidated, because of price increases in PET is MEX200m. So the rest, the other MEX80m is divided between Brazil and Argentina and the rest of Latin Central.

As we mentioned, we do expect that potentially another increase by the middle of the year of around 5% in PET prices. That’s the view of our procurement guys, and they’re in very close contact to the procurement office that the Coca-Cola Company co-ordinates in Atlanta. So, traditionally they are very precise on these predictions.

But PET prices have been a constant in all of our territories because of the oil prices have been very high, you know, and that has affected importantly all of our operations. Again, I think that we have commented since long ago, that we are a Company that believes, because of several reasons, but especially because of providing an affordable product to our consumers, of our premium brand, to believe in returnability. We show a lot of initiatives in that front in the different countries, and we believe that’s one of the strong points that we have in this environment of very high costs for resin.

Okay, thank you. The second question I had was on Mexico. I think flavor volume declined for the first time in a long time. Is that attributable to lower price brands not raising prices, or can you comment on, in terms of the competitive environment, including lower priced flavor brands, and maybe innovation from the Pepsi system for competitors?

Yes, what we have seen there Rob, is that the only player that we haven’t seen moving the prices, and we talk about Pepsi Cola and Big Cola increasing the prices because of the PET, is this brand [Habitos], which is not a price brand.

They have a lower price brand than our products, but it is not, for us it is not in the same category as some of the other players that we call B brands, because they do have a distribution system that is organized and similar to what we have, and it’s fully integrated with, you know, full social security taxes and all of that. They advertise in TV. You see billboards in the street. You see buses painted or adorned with Habitos advertising. So they have not increased prices. And I believe that that has caused a bit of a ruction in our Flavor segment market share.

The other element is that we have seen a, on the value category again, different competitors. A bunch of regional brands that have started to replicate some of the things that Big Cola have been doing in the past, in terms of the way toward the market, and the aggressiveness on the price front.

In that front, we have seen several newbie brands, especially 1 brand that is strong in the Valley of Mexico. It was strong a long time ago, and it is kind of coming back, with the name of Lulu. And that has 2 effects.

One, it has hurt, also on Pepsi on the Flavor front, but has also eroded Big Cola’s portion of the market substantially. Because again in that, also the size of the value protection brand categories is increasing, this increase is being carried out by these new [covers], and they are eroding importantly the share of Big Cola, and they are also eroding our market share.

So we have those 2 effects. One is Habitos that has all of these prices, and that’s something that we have to look, and to take care of in the second quarter. Potentially with Mundet. We are, you guys are aware, that we have a multi-flavor strategy with Mundet. We have been in very close contact with the Coca-Cola Company. Obviously, Mundet is a brand that is owned by FEMSA so is a difficult [segmentation] purpose. But I think that we are in very terms with the Coca-Cola Company, and we hope to use that brand.

It certainly has a much better brand recognition than all of those brands, and it’s something that we can use. And again, if Lulu and -- excuse me, Habitos, and Lulu and some other players that are coming into the market, regional players that are eroding the share of Big Cola and a little bit of our share.

Thank you.

Your next question comes from Dan [Kowalski] of Schroders. Please proceed.

Good morning. A few questions on Mexico principally. You talked about price increases weighted average of 3% in 2Q05. Is that on a sequential basis, or is that on a year-on-year basis?

Dan, that’s on a sequential basis, from the prices that we had before the increase. The average of our mix would bring a 3% increase, sequentially.

Okay, that’s great. Secondly, could you give us the split of administrative and selling expenses in Mexico? You didn’t give that to us this quarter.

Dan, I’ll ask Alfredo to go over that with you.

Okay great. Thirdly, have you seen any impact from the second, well the Monterrey plant of Big Cola yet? Have you noticed any greater availability of product in Mexico?

No Dan. We know that they opened the plant. We believe that they now have a greater capacity, but they are covering some of the new territories also in the north. In general, what we have seen is that, as I mentioned, because of the entrance of all these low price brands, regional brands that were in existence before. They have eroded the share, Big Cola, in the marketplace also. Big Cola has been very stable in our territories for several months now.

Right, okay. Do you think you could quantify the impact of Holy Week, the 2 less working days, and also the mass exodus to the beaches? Can you quantify how much you think that has impacted you in terms of volumes?

Dan, the 2 days is probably [easier] basically every day it’s around 2% or 3% of volume for the month. But the other is a little bit more difficult. It’s usually, it is well known that a nice time to visit Mexico City is Holy Week, because it’s basically empty, so you don’t have traffic, and you can visit a lot of places.

And that’s a little bit of the effect that we have which is very difficult to quantify. I’m sure that the guys in Mexico know that number, but I don’t have it in front of my mike.

I mean, basically for the full year. I know you don’t give explicit guidance of full year volume growth, but what sort of -- I mean, is it going to be high single digit volume growth in 2Q05, as a result of the timing, you know, the calendar effect? Or, I mean, has it affected your full year thoughts, in terms of volumes for Mexico, the weak showing in the first quarter?

I think that, I mean, in general the answer will be yes, we will be expecting a very good performance for the month of April. But for the full quarter, obviously, we need to see how May and June’s performance. And surely May’s is a very good month. Last year, it was not as good. So my feeling is that we should be seeing important volume growth. I’m not sure that’s to the high single digit level, but I would see some, probably somewhere in the middle single digit level, I’ll feel more comfortable there.

Okay, great. And last question, in terms of -- could you remind us what your CapEx assumptions are for 2005 on a consolidated basis?

Yes, for the full year, do you mean Dan?

Yes the full year.

The full year, we are -- the expectation that we have is somewhere around $200m, because of the very low rate that they have performed in the first quarter. I mean, I mentioned the figure of around $20m to $25m. The number might be a little bit lower than that. For the first time in many years, we will buy a new production line, and that’s for Colombia. Because we have been very very successful in improving the efficiency of our production plants. Whenever you look at some of the numbers in terms of efficiency, and number of cases that have been -- of the output of cases of our production plants have increased importantly, because of all the best practices that we have, if it was imported into the new territories, and that we have in Mexico and Argentina.

So because of that, we are not in a need to invest in production lines. But now with the very successful launch of Crush in Colombia, we are seeing the need to invest in a new line in Colombia. So we are starting to see some additional CapEx during the year. My estimate of that is still around the $200m, although it might be slightly below that because of the very low CapEx in the first quarter.

Right. And very, very last question from me. Your operating expenses in Mexico don’t appear to show any seasonality, or haven’t shown over the last 5 quarters, sort of pretty flat at around MEX2b. You talked about the possibility of, you know, reducing the distribution cost structure. Should we assume, going forward, that, you know this, the MEX2b per quarter is reasonable, in terms of operating expenses?

Yes Dan, I think that’s, I mean, for the rest of the year we will probably see the same kind of level of expenses. Just to give you a little more flavor about that. One of the ploys that we have is that, as we are faced with competition that uses very informal ways of going to market, even though we have -- even though we are the benchmark in terms of cost of distribution per physical case on the formal way of distributing. When we compare with this informality that is in the market, we are a bit disadvantaged.

So we need to review all of our processes and systems, and how we go to market, and how we compensate our employees, retailers and truck drivers and all of that, because we are facing a [small]. Because, at the end of the day, it’s a very [small] part of the market. It is still around 3% of the total value brand for the market.

But that competition is there, and we need to review our processes. So I’m expecting that that process, or that review process will take probably 6 or 7 months. So I would not expect any savings in this year, but I do expect that our people will find ways to improve a little bit on the distribution expense part of the equation, and that we’ll have this for next year.

Great, thank you very much.

And just finally Dan, admin expense in Mexico represent 20% of total operating expenses.

Great, thanks very much Alfredo.

Your next question comes from Jose Yordan of UBS. Please proceed.

Hi, good morning. I just want to re-phrase a question that was asked earlier about the PET resin effect on the different franchises. Because basically, the only place where there was an increase sequentially in the gross margin, was in Brazil. And I guess Rob’s question was, you know, did you have inventories, too many inventories that were priced at the old levels? And that was the reason, or what was the reason?

And I was also interested in Brazil, what your impression was of why you under-performed the Coca-Cola system as a whole. Coca-Cola reported about 13% increase in volumes, and you guys did only 7%, and your comps were pretty easy. So if you could comment on those 2 things that would be great.

Let me address your first question. In Brazil, we picked up increases in PET prices. I don’t know if this is an inventory effect or not. But if we compare first quarter versus the first quarter of last year, the PET prices increased somewhere around 25%. That’s in our cost. I don’t know exactly a number per kilo or per pound basis how we will be charged in March. So we might have some inventory effect there. And as I mentioned, in the case of Mexico, this increase was around 40%. So we do have an effect there on Brazil.

With respect to the comparisons versus the rest of the system, I haven’t seen some of the other franchises’ numbers. My understanding is that CSD’s in the numbers that the Coca-Cola Company released, the increase was around 10%, and the rest, to get to this 13%, 14%, was because of some juices that they were accounting for. I’m not sure about the color on the numbers, but basically it is that on CSD’s we were growing -- our comparison is more with respect to that 10%, which is the internal information we received from Brazil.

And also we have to take into account that we are improving also pricing. And that is another formula that has to be taken into account.

Yes, pretty much everybody has been raising prices in Brazil. But anyway, I guess we’ll see what the other franchises are about. The only other company that reports is [Sandina] but I was just curious on your view of that. Thanks.

Thank you.

Your next question comes from Joaquin Lopez of Deutsche Bank. Please proceed.

Hi, good morning Hector. I was wondering if you could give us some more color of what you have been doing in terms of new product and package introductions in Colombia?

Yes, good morning Joaquin. Yes, Colombia, and you called me a few quarters ago, that was a mystery. I think that we are finding very good opportunities in that territory. It’s growing very fast. It’s growing its profitability. But part of the challenge is that we are facing a competitor that has been in the market with a local brand for more than 100 years, similar to Mundet in Mexico.

The difference with Mundet in Mexico, they do advertise and they do carry a lot of promotions, which we hope to start doing in Mexico [to win] Mundet. But, so in general, when you look at the industry in Colombia, flavors have a bigger share than colas. In other words, flavors represent a little bit more than 50% of the total industry, which is very different than the other countries.

And within that flavor category, our competitor has a 70% share, or somewhere around that. But this is round numbers. So for the first time this year, we started in January --. The other side of the coin is that we are basically unknown in Coca-Cola. On that 47%, 48% of the market that is colas, we have a 90% gross share of [indiscernible].

So, when you look at that situation, obviously, for us it was important to start doing some strategies in flavors, and starting increasing our penetration of the size of our buy in the flavor category, and we believe that we have an important formula now, with the launch of Crush. Crush, as you know, is a Coca-Cola brand in a lot of the countries where we operate. In some of the countries, like Mexico, where the acquisition of shares by the Coca-Cola were not allowed, then Crush continues to be a calorie serve brand.

But in the case of Colombia it is a Coca-Cola brand. So, we used that, we launched 5 flavors, 3 presentations to start dieting teams. And I think that we have had probably the most successful introduction of a new product in the recent history of Colombia. So far, things are going very well. Obviously we have been there only for 4 months with this presentation, but we are very happy with the initial results. Our expectation obviously is to capture a bigger share of that flavor segment.

Thank you very much Hector.

Your next question comes from Alex Robarts of Santander. Please proceed.

Hi, good morning. I have 2 questions. I guess, I was going to have a PET question, but I think we’ve, kind of, handled that a lot. But going then into the selling expenses, and one of the things that is interesting to us is when you look at what Coca-Cola is doing this year, in this marketing expense and the whole kind of build out that they’re doing globally in their system, how should we look at KOF in the next couple of quarters, as far as what might be the implications from your marketing spend point of view? I mean, I know you’ve got the BIP’s, and you like to keep the marketing rate at 4% of sales. But do you think that there might be some interest in Atlanta for you to pick up some more in that marketing spend area in the next couple of quarters?

And I guess related to that is, you know, just listening to you talking about the interest in starting to advertise in Mexico, would that change, perhaps temporarily, this year, the 4% marketing rate in Mexico?

Yes, Alex, I think that in general, I mean, what you are saying is correct. The Coca-Cola Company is launching new campaigns. Mexico was the pilot or the initiation of one of those campaigns, of the so-called [indiscernible]. But in general, our budgets still carry a 4% total marketing expense, as a percentage of revenue.

For us it is important to maintain that level. The Coca-Cola Company, we believe, will spend a little bit more than us in the market in different areas of the world, not necessarily only in these countries. But when you compare, basically, last year, we ended up with a 3.8% of revenues. We are probably increasing that to 4%. But I’ve not seen a number higher than that Alex, higher than the 4%.

Okay, and just the impact, if there really is going to be any from just higher spending on Mundet? I mean, in that 4% number that you are thinking about for Mexico.

Yes, that’s within the 4%.

Okay, alright. Great. And I guess the second question was just on Central America. I definitely appreciate you spending more time, you know, talking about it, on this particular call. And I guess looking at the numbers and the EBITDA, this was really an interesting quarter. It was the first time in a while that we see flattish EBITDA growth year-on-year, and I guess I wanted to understand more of the competitive environment.

I mean, the Big Cola idea you mentioned, the plant opening, I guess, July or so, but as I understand it, the volume comes into Costa Rica in December, and so really this quarter is the first full quarter where you’ve got a Big Cola plant with full production mode. I guess, the question then that I wanted to asked was, you know, are there some lessons that we can, kind of, apply from Mexico into this Big Cola penetration in Central America that might make the whole evolution different than what we’ve seen in Mexico? And I mean, I guess, I understand also that they’re in north in Nicaragua, they are also in Panama as well. Could you give us a sense of their presence, and maybe relative market shares? And then, kind of maybe extend that into the Pepsi activity that you mentioned earlier in the call? Thanks.

Yes Alex. At the end of the day, we do think that we might have 4 very distinct markets. There is the Costa Rican market, which is where Big Cola has this plant that has the highest price per unit case that we have in our system. We have Guatemala, on the other side, where you have a Pepsi bottler [Maricopa] that has joined forces with [Hernandez], to introduce a beer product in Guatemala, but that created a [indiscernible] in the soft drink industry, because the local brewer launched a soft drink to affect Maricopa, because they were launching a beer. So we were kind of caught in the middle as spectators of this beer war that was being translated into a price war in soft drinks.

So we have the full aspect I think Guatemala and Costa Rica, with respect to prices. In the middle being Costa Rica and Panama. Clearly one of the strengths that we believe we have Alex, is that we have learned to deal with big brands, not only from the times of this situation in Mexico, but even before that when we had a very tough supermarket environment in Argentina. And that’s why I think that we have been quite successful in Mexico in adjusting our cost structure and launching the right portfolio mix, and having the right pricing in the marketplace.

And that’s why you see, as I mentioned, these brands representing somewhere around 3% of the value of revenues in the territories where we compete. The number is slightly larger when you look at cases. Obviously in unit cases it’s probably around 5%. But for us it’s important to do the distinction between the dollars that are available in the marketplace from the consumer. How much of those dollars are we capturing, and how much dollars are being captured by these brands.

And, as we saw the initiation of some of these operations in Central America, we clearly started to adjust a little bit our portfolio to segment a little bit better our challenge, and grew what we believe are very good at with all this revenue growth balance and value segmentation.

At the end of the day, my feeling right now is that more than the effect of Big Cola opening this plant in Costa Rica, is the effect of a total competitor whereby we acquire the Coca-Cola franchise in Costa Rica. They are doing a better job in the execution of the marketplace, and we are adjusting to that also.

So from having very, very high prices, and very, very high percent of the market share, obviously, you are always a target for some of these attacks. And obviously our reaction is how do we protect those markets, and the profitability we have in those markets. And I believe, personally, that we are doing I think a good job in trying to tackle those issues. It is -- let me put it -- it is very normal in the market where you have new competitors, and we do have gross market share penetration, and a very good price, to suffer a little bit at the beginning. But, obviously, we are looking at this with a long term view of protecting the markets and the profits we have in these markets.

That’s very helpful. I mean, just to clarify, did you say that 5% is their unit case market share in Central America?

Oh no, sorry. I was speaking about Mexico.

That’s what I thought, okay.

I mentioned earlier that the B brands have a 3% penetration of sales, and around 5% of volume. But that’s including all these new players that are coming into the marketplace.

So, right. Then just to understand, for Big Cola in Central America, you see them in Panama, Nicaragua and Costa Rica. Are there any other markets? And is there a kind of a sense of -- I mean, are they just doing the 3 liter? Do they have same kind of product portfolio?

We have seen Big Cola in Costa-Rica, in Nicaragua and in Guatemala. In Guatemala we believe that because of the very low prices that we have there because of the price war that I mentioned that is happening among the real players that have affected also Soft Drinks, we believe that the impact there is going to be minimal. In other words, prices are already very [low] in Guatemala because of Super Cola and [indiscernible]. We haven’t seen a fall in Panama.

Okay. Thanks a lot.

Thank you.

Your next question comes from Melissa Byun of Merrill Lynch. Please proceed.

Yes good morning everybody. This is Melissa. I just want to ask a question with respect to price per unit case Hector. In the first quarter you attribute some of the weakness to a shift toward a multi-service and I guess given the launch of Coca-Cola Citra as well as what I perceive to be some greater promotional and point of sale efforts behind higher margin personal presentations, that you would have been able to offset that somewhat. Can you talk a little bit about how Citra is doing more recently? I got the impression there was some initial confusion with the consumer and could you talk a little bit about what you're doing to promote personal size a little bit more in April?

Yes good morning Bob. Yes in general we do see the effect of this reduction in price per unit case more effectively of our change -- the change of our mix not the [worst]. As you correctly pointed out there was this move to service presentations.

The penetration in the market of the personal size of the presentations have diminished in the last few months and that is an area of concern that we need to focus.

One of the -- starting we will following was with precisely with this introduction of Coca-Cola Citra. That has been very successful, which is basically a Cola with lime.

You are very correct pointing out that there was some confusion with the consumer. Some analysis that we have done as well with the Coca-Cola Company at the advertising campaign that was used to launch Citra. The results were not very favorable. The consumer didn’t fully understand what Coca-Cola Citra was about and we have changed the promotion, the advertising campaign so that is very clear. That is Coca-Cola with lime, or Diet Coke, or Coca-Cola Light with Lime. So we expect to see some better performance of Citra because of this change.

It is worth to mention the performance of Coca-Cola Citra versus our expectations is certainly below what we were expecting at the beginning of this launch. But we do believe that that has to do with that confusion that was created with the consumer with this advertising campaign.

In general, our people are thinking of different ways to continue to promote the personal size presentation because it’s an important element of our profitability and the profitability of the industry. At this point, I would prefer not to comment on some of these strategies because they are [very] sensitive in front of our competitors. But believe me that one of the concerns that we have is how to increase the transactions of the personal size segment of the market.

Hector I just wonder, you don’t have to comment on the specifics of how it’s going to be done. But what I think I'm sensing is perhaps a more comprehensive effort to go after the value protection, or to develop a more comprehensive value protection strategy using that. Can you offset the deflationary impact that you're going to have on price per unit case with some of these initiatives to promote these higher margins packages that are a little smaller?

Yes, I think that I believe we should try to do that as you do correctly point out. If we launch this campaign, we start competing with Mundet with some of -- I mean not necessarily with -- it’s not competing with -- it’s not going to compete with the value protection brands because they operate here. That is a very nice route and I think that is more similar to Habitos as opposed to some of the other brands that are there sitting in a lower price. We need to develop some other strategy for those other products.

So Mundet is all going to be sold at a very low price Bob. But if we are successful in launching a 2 liter Mundet in this -- and that part is our objective. I mean we have been trying this multi-flavor strategies and we think what we basically want to do is to base put a little bit more effort in the marketing and the promotional activities on Mundet because not being a Coca-Cola brand was a difficult process when we were on the table with the Coca-Cola Company discussing the alternatives. So Mundet would be flavored. Is not at the price of the Cola, not at the price of Lulu or [Butan] or [Habitos] or some of these other brands. It’s at a good price and a price that is affordable and that would present a better front to have its -- I don’t expect a very negative impact on prices because of those strategies.

But on the other hand, we have lost a lot of transactions on the personal size category and we do need to start increasing that regardless of what we do in the multi-serve presentation. In other words, what we do with Mundet, or if we launch a value protection brand to compete with the B brands, is just to start influencing and having a rolling in that segment so that the other guys don’t have necessarily a very easy life there. That has been very successful for us in Argentina and some other markets as a way of controlling part of that segment of the industry where we are not present presently. And that’s the reason for those strategies.

If because of that we start having an impact on prices, we need to try to compensate for that with personal presentations and things like that.

I'm just curious Hector. I don’t know. I guess, I think based on the longer term benefits, maybe it makes a lot of sense to go much more aggressively with the downward segmentation strategy and try to squeeze out the scale that some of these B brand operators are developing. And then with respect to Mundet specifically, how do the economics for Coca-Cola FEMSA compare Mundet versus Coca-Cola branded product?

We believe that longer term we do need to be more aggressive as you said and that’s what we have been doing in Argentina and some of the markets like Brazil where we have competed aggressively in those categories. Obviously the introduction of returnable presentations and the big bottlers was behind that. It’s a way also of doing live more difficult for these guys also and protect our market.

With respect to Mundet, we have exactly the same level of concentrate cost that we have for the Coca-Cola flavored brands. In other words, we pay for the Mundet brand exactly the same as Fanta or Sprite or Lift.

We have a lower cost on the multi-flavor presentation because that carries a slightly low price than the traditional Sidral Mundet brand.

Great. Thank you very much Hector.

Thank you.

Would you like to take any further questions?

We will take 1 more please.

You have a follow up question from Yang Sang of HLM. Please proceed.

Thanks. Actually my question has just been answered. Thanks.

You have no further questions.

Okay. Thank you very much for your attention and John and Julietta will be here to answer any additional questions you might have during the rest of the week. Thank you.

This concludes your conference. You may now disconnect. Have a great day.