Coca-Cola Femsa SAB de CV (KOF) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Coca-Cola FEMSA third quarter earnings conference call. My name is Alicia, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]

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’s expectations that are based upon currently available data. Actual results are subject to future events and uncertainties, which could materially impact the company’s actual performance. I would now like to introduce your host for today’s call, Mr. Hector Trevino, Chief Financial Officer of Coca-Cola FEMSA. Please go ahead sir.

Good morning everyone. Thank you for joining us today. We certainly achieved another solid quarter of top line growth. our third quarter results again display the strategic benefits of our balanced geographic diversified portfolio facets, located in countries with different and complimentary seasonality.

Our consolidated quarterly revenue grew by almost 5%, and our consolidated operating income increased by more than 5%. The majority of our territories produced top line growth for the quarter with our Mexican and Brazilian operations representing the bulk of our growth in operating income for the third quarter.

Our Brazilian operations continue to out perform, with a remarkable 50% growth in operating income, lapping a very strong growth in the third quarter of 2004. consequently these operations have become an increasingly important part of our growth story. We will talk more about these markets’ positive performance in a moment.

Despite huge increases in the price of PET resulting from higher oil prices and the impact of the Katrina hurricane, our gross margin improved by 20 basis points. This gain was driven by higher RS prices per unit case in almost all of our territories, and the appreciation of the Mexican peso, the Brazilian real and the Columbian peso against the U.S. dollar. We expect PET prices will continue to increase in the short term, affecting our fourth quarter results.

Our third quarter volume growth was driven mainly by the positive performance of our carbonated soft drink portfolio, which accounted for more than 75% of our incremental volumes. Brand Coca-Cola led our volume growth. our wider packaging portfolio combined with our strong marketing container on the run drove this growth.

Our third quarter net income was impacted mainly by higher integral cost financing that was partially compensated by a reduction in the effective income tax rate, driven by changes in the Mexican law.

Now let me talk about Mexico specifically. As part of our continued product innovation, during the quarter we introduced several beverages in the non-carbonated segment, increasing our participation in this strong growth category. Additionally, we are participating in the operation of SELSCO, a joint venture among all of the Coca-Cola bottlers in Mexico and the Coca-Cola Company. Through this new company we offer a more complete portfolio of non-carbonated beverages to the supermarket channel in the same platform.

The new line of products includes Kin Dasani, which leverages our existing Ciel brand; Minute Maid, a juice based product in different flavors, and Ciel Aquarius, our recently launched non-calorie flavored brand, most of them sold through SELSCO.

We also launched [inaudible-highly accented language] a complete portfolio of light carbonated soft drinks, which offers a no-calorie alternative for almost every core flavor brand already available in the market. With this launch we will capture additional growth in an underdeveloped beverage category in Mexico that offers significantly upside growth potential. In the aggregate we introduced 20 new products in the Mexican market during the quarter. Brand Coca-Cola’s momentum continued this quarter, contributing importantly to our incremental volumes. Remarkably, more than 90% of this growth came from our single serve presentation which positively impacted our price per unit case. In light of competitive market dynamics, to capture growth in the flavor segment we reinforced our product portfolio through the strong reintroduction of Mundet multi-flavor and Fanta multi-flavor, both regional brand players that comprise a small part of our existing portfolio. This initiative managed to generate incremental volumes in the flavor category. All of the strategies that we have worked on are providing us with sustainable and profitable growth in a highly competitive market. As a result, our carbonated soft drinks service volume grew 1.5% for the quarter, with brand Coca-Cola and its line extensions accounting for 75% of this growth. This quarter was the second quarter sequentially, since the third quarter of 2002 that average prices, excluding Ciel water [inaudible-highly accented language] increased ahead of inflation, growing 2% in real terms year-over-year. This increase was mainly driven by incremental volume growth of brand Coca-Cola in single serve presentations, tactical price increases implemented in the last 12 months, and volume growth in the non-carbonated soft drink segment, which ultimately carries a high RS price per unit case. While we have developed these marketing strategies, we also have focused on the rollout of new, more sophisticated multi-segmentation models. The design is based on different market clusters, categorized by competitive intensity and socioeconomic levels, rather than only the types of distribution channels. Better profitability and incremental volumes are some of the results that we except from this new segmentation model. We firmly believe that it is difficult to replicate this business model without the benefit of our current information systems. On the cost side, despite year-over-year increases in PET resin prices of approximately 20%, those were more than offset by a 10% appreciation of the Mexican peso year-over-year, and lower sweetener costs resulting from our uses of high fructose corn syrup, together with better pricing, supporting our gross margin improvement of 140 basis points. Going forward, the effects of hurricane Katrina will cause an additional temporary increase in PET resin prices, which is affecting the beginning of the fourth quarter, but eventually we expect these prices to come down toward the end of the year. As a consequence, resin PET costs could end up around 10% higher in the fourth quarter when compared with both the previous quarter and the fourth quarter of the previous year. Given recent PET pricing pressure, and the effect that this has on our competitors, which rely mainly on one way PET presentations, we are implementing some price adjustments in select presentations to ameliorate the impact. Our operating income in Mexico increased by 7% for the quarter, primarily as a result of our top line growth, which produced a margin expansion of 50 basis points. Looking ahead growth from our single and multi-serve presentations, a more stable pricing environment combined with our commission initiatives should foster both our top and bottom line growth. Now let’s turn our attention to our Latin Central division. We have been complimenting our existing portfolio in our Central American territories with new volume rotation, presentation and products such as FrescoLita in Costa Rica and a 2.5 liter presentation for brand Coca-Cola in Nicaragua and Costa Rica. These portfolios should not only strengthen our position in a more competitive market environment, but also provide our customers with more affordable alternatives. Due to the more competitive environment, our third quarter sales volume declined 2.1%. This decline was driven by decreasing our CSD volumes that more than offset our incremental water and other non-carbonated beverage [inaudible-highly accented language] which show strong growth of 34% from our very small base. Our cost cutting initiatives and savings programs in Central America combined with our improved execution enabled us to partially offset the decreased revenues, resulting in a slight 20 basis point reduction in our EBITDA margin. In Columbia we continue to post strong volume growth of 12% in the aggregate, including 15% growth from our soft drink portfolio. The strategies that we have implemented over the past two and a half years to capture new consumers, combined with the country’s economic improvement drove this impressive growth. On the pricing front, we increased prices for the first time in 15 months at the end of July, to around 2% [inaudible-highly accented language]. Nonetheless we were unable to compensate fully for Columbia’s 5% rate of inflation over the past 12 months, resulting in a 3.4% average price decline for the quarter. On top of our innovative market strategies and our stronger non-carbonated soft drink portfolio, we introduced a no calorie flavored water and mineral water under the Dasani brand. The introduction of these new products to our existing bottled water enabled us to achieve more than 25% growth in single serve water presentations for the quarter. however, our water volumes decreased 3.2% in the aggregate, driven by declining sales of our less profitable multi-serve packages. For the quarter our cost of sales per unit case was increased by 5% from a shift in our packaging mix to higher cost non-returnable PET presentations. More than 90% of our incremental volume came from non-returnable PET packages, which with the incremental resin prices, resulted in a reduction of our gross margin. However our revenue growth partially compensated for these factors, resulting in a 1.5% decline in our gross profit in absolute terms. Despite our 10% reduction in operating expenses per unit case, higher cost per unit case and lower average prices led to a 7.4% decline in our operations operating income for the quarter. In Columbia we are continuing our strong marketing campaign along brand Crush. Simultaneously we are working on several initiatives to improve our execution in the market, and to reach every point of sale more efficiently. In Venezuela, our third quarter revenues grew 6%, driven by an 8% increase in our average price per unit case that more than offset a 2% decline in our sales volume. The increase in our average price per unit case was driven by our better product mix, resulting from the significant decline of our [inaudible-highly accented language] and our 9% price increase implemented in September. To achieve greater profitability we focused our manufacturing efforts on brand Coca-Cola and realized moderate volume growth of 1.4%. However, our declining flavor volumes more than offset this growth. carbonated soft drinks face a soft year-over-year comparison from 18.8% growth for the third quarter of 2004 including a 30% growth in flavors. During the quarter we launched Chinotto Rosada, a line extension of our Chinotto grapefruit brand. These refreshing brand preferences among consumers resulted in impressive growth of 65% for the quarter. In Venezuela we recently changed our head of operations to control costs and productivity improvements more strictly across the value chain. Our operations team is developing a sustainable growth model in Venezuela, which will allow us to capture the benefits of our top line growth. From a profitability standpoint, our Venezuelan operations higher revenue offset incremental PET prices, increased labor costs, and greater exposure to higher resin costs even that non-returnable PET presentations was a percentage of our total sales volume by almost 500 basis points. On the AD&A front we started to capture some benefits from our ongoing standardization process on the commercial and initiative labels. These benefits more than offset salary and transportation cost increases ahead of inflation. Our third quarter operating income remained almost flat in absolute terms. Now I will talk about our Mercosul division. In Argentina, volume growth in our core and premium brand segments and prices increased incrementally at the beginning of the year, dropped 2.3% growth in total revenues for the quarter. Our total volume increased by 0.9% as a result of incremental growth in our [inaudible-highly accented language] representations of brand Coca-Cola. The [inaudible-highly accented language] size of our Ciel bottled water brand and strong [inaudible-highly accented language] growth in our [inaudible-highly accented language] segment, including brands Sprite 0 [ph] and Schweppes [ph], which compensated for the 14% decline in our [inaudible-highly accented language] brands.

Non-carbonated beverages, including our Cepita brand juices and our recently launched flavored water products, continue to consolidate their preference among consumers. In the third quarter, their volume grew [inaudible-highly accented language] 77.6% in volume compared with the same period in 2004, reaching 2.6% of our total sales volume.

Our Argentine operation’s higher revenue could not fully compensate for incremental raw material costs and operating expenses, particularly, higher labor and trade costs. Consequently, our operating income margin decreased by 200 basis points.

In Brazil, our new business model continued to foster our sustainable quarterly growth. For example, in the third quarter we generated EBITDA of over $20 million, more than five times the amount produced in the third quarter of 2003.

Our carbonated soft drink volumes grew 7%. Our incremental [inaudible-highly accented language] were driven mainly by brand Coca-Cola, which accounted for more than 75% of our growth. The roll out of our internal strategy, supported the majority of this growth, [inaudible-highly accented language], with internal [inaudible-highly accented language] accounting for more than 60% of our incremental carbonated soft drink volumes for the quarter.

On the flavored side, our [inaudible-highly accented language] operations posted more [modest] growth, lead mainly by our premium brand segment. In the aggregate, the premium light versions of Fanta, Sprite and [Cuachi] grew more than 30% in the quarter. Our [inaudible-highly accented language] continued to show important improvements from our strong promotional campaign and our multi-segmentation strategy. To date, this segment is almost twice as large as our volume [inaudible-highly accented language] segment in Brazil.

Our bottled water and non-carbonated segments grew more than 14%. Higher temperatures helped our bottled water segment to build on its 40% growth for the third quarter 2004. And, better execution [fostered] our non-carbonated beverage segments.

Despite the shipping our packaging needs to return our presentations, which carry a lower average price per liter, Diet moved to multi- [inaudible-highly accented language] presentations. Our average price per unit case remained almost flat.

On the profitability front, the year-over-year appreciation of the Brazilian Rial and incremental return on volumes more than offset raw material price increases, leading to lower costs per unit case for the quarter. After more than doubling the past two quarters, our Brazilian operation’s operating income continued to show impressive growth of almost 50% in the quarter, resulting in the market expansion of [420] basis points. This important growth is the result of the new business models that we implemented in Brazil over the past two-and-a-half years.

Our Brazil operations accounted for almost 40% of our incremental profitability and continue to represent an increasingly important part of our company’s consolidated results, comprising more than 9% of our consolidated income for the quarter. Brazil now represents 12% and 10% of our consolidated revenues and operating income, respectively, during the first nine months of 2005.

[Inaudible-highly accented language], as you already read our press release, the Coca-Cola Company has informed us that in a three-year period, beginning in 2006, in the case of Brazil, and in 2007 for Mexico, they will gradually increase [inaudible-highly accented language] prices for carbonated soft drinks. In Mexico, the change applies for all carbonated soft drinks, in our return on presentations. And, in Brazil, it’s for all the carbonated soft drinks.

Based on our internal estimate for revenues and sales, [inaudible-highly accented language] the incremental cost in Mexico is approximately $20 million for the first year. And the full effect, by the end of 2009, represents around $60 million, U.S. In the case of Brazil, based on the same estimates, the adjustment applies to all the current Coca-Cola Company soft drinks, increasing our cost by approximately $1 million in 2006 and reaching around $3.8 million in 2008. In order to offset incremental costs, we intend to reduce our contribution to marketing expenses in the Coca-Cola Company trademark beverages.

On the financial front, we paid down approximately 2.6 billion Pesos of Mexican Peso bonds on July 15, 2005. And in the third quarter, we had a net debt position of approximately $1.7 billion, an effective net debt reduction of $170 million this year.

At the end of the quarter, our cash position was close to $250 million, driven by our internal cash flow generation. We continue to maintain 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 75% of our total debt carries a fixed rate of interest. Today, Coca-Cola FEMSA does not face debt refinancing or foreign exchange [inaudible-highly accented language] risk and is well protected from the current rising [inter-rate] environment.

Our multi-segmentation strategy has helped us to increase per-capita consumption in the majority of our territories in a sustainable way. The development of the right [inaudible-highly accented language] and packaging portfolio is crucial to fostering demand and we have demonstrated our capability to develop a sophisticated portfolio very successfully.

We continually evaluate the way we go to market, always looking to capture the best from each market and to tailor our strategies in accordance with the needs of the more than 170 million consumers that we serve, and the more than 1.5 million customers that we reach. We have considerable opportunities ahead of us, to improve our [inaudible-highly accented language] using our methods and to continue creating value for our stakeholders.

Thank you for your support. Now, I would like to open the phone for any questions that you may have.

[OPERATOR INSTRUCTIONS] Jose Yordan, UBS.

Hi, good morning. My question is whether the reduction in marketing contribution to Coca-Cola’s marketing funds is going to fully, or only partially, offset the increase in concentrate costs. I mean, if you could just give us an estimate of what the net impact of both changes would be, that would be great.

Good morning, Jose. Well first of all, it’s important to mention that in the case of Mexico, which is the effect that is larger, in terms of the concentrated increases, that is going to start in 2007. So, obviously, we do have time to think a little bit more about the strategies that we need to form for that. We feel comfortable in saying that the first two years, even that is a gradual increase. We will be able to fully compensate for those increases.

As a reference to everyone, I just want to remind you that we basically spend around 4%, some times 4-1/2% of our revenues in marketing expenses. Not all of those marketing expenses are related to advertisement. Some of those are related to our own marketing activities in the market place. So, I mentioned those numbers to give you an idea, Jose. I think that the first two years of the increases, meaning 2007 and 2008, we feel very comfortable that we can fully compensate for these increases.

If the full effect of 2009, which as I mentioned is around $60 million, I think that given the fact that is a little bit more than three years away, we’ll find ways to obviously accommodate the rest of the value.

In the end, I mean, it’s like a $20 million net impact in the end, and that’s less than 2% of your EBITDA, or whatever. [Inaudible-away from microphone] really minor.

If we [can] compensate those additional $20 million, that’s the correct number.

OK, thanks.

Carlos Laboy, Bear Stearns.

Good morning, Hector. I was hoping you could think back a little bit in time here, and tell us, what has been your take of the profit split, in Mexico, historically? How has it behaved over the years? And how has it changed?

And, can you drive your returns on investment capital higher from here, if that profit split of the system doesn’t change?

Carlos, good morning. With respect to the profit split, it’s very difficult for us to try to do a calculation, or a computation of those because we do not know exactly what are the cost structures for all the variables that influence the cost of the [inaudible-highly accented language] for the company. In general, you often hear the mention of all the school guys saying that approximately 2/3 of profit split goes to the [inaudible-highly accented language] and 1/3 to the Coca-Cola Company. I honestly have never been able to check a calculation of that sort.

What I can tell you is that, in the past, we basically haven’t gotten any price increases on concentrate. The last time I remember was basically 12 or 13 years ago. We had some adjustments in concentrate, as we were introducing-not an adjustment but agreements in a new [inaudible-highly accented language] that has been introduced, agreements in concentrate that was going to be charged. And that might be—in those cases, it was a little bit different from the existing concentrate devices, usually, with very little concentrate present at the beginning, so that we could develop a new brand or a new product. And then, to start increasing the concentrate as those brands continued to grow and mature. But this is the first time in Mexico that we see a movement of this size in the last 10 or 12 years.

With respect to the cost of capital, I think that we do see opportunities in the market ahead, obviously. If we are referring especially to Mexico, which is where we have this big impact, we have our [inaudible-highly accented language] to develop this non-carbonated portfolio that, it has, as you know, potential to grow importantly. It is growing everywhere in the world and the same is happening in Mexico.

John [inaudible-highly accented language] team is working very closely to have a more efficient distribution system. They are segmenting by these different clusters. We think that we can do a little bit better on the revenue and the efficiency in the system is what we’ve got on this operational transformation in the way we work to market and how we better serve these remote areas in rural Mexico in a more efficient way of doing that. That can be achieved either by improving volumes for [inaudible-highly accented language] revenues, or by reducing the assets that we dedicate to this activity.

So again, Carlos, I think that I do see opportunities to grow revenue and some opportunities to reduce our cost structure going forward. That should help us raise our return on equity, on invested capital.

Hector, one other push back I’ve gotten this morning has been that, if you look at the present value of those $60 million, over the long-term, if you look at the present value of those $60 million, you’re talking about $1 billion to Coca-cola FEMSA. Is that the right way to think about it? I mean is this a $1 billion concentrate cost increase to the value of your company?

Carlos, I think that there are several variables there. If we were going to do a mathematical calculation of the increase, then you are right, the present value of $60 million of [inaudible-highly accented language] amounts to a very large amount of resources. We believe that by the adjustments that we are suggesting, that we’re proposing to our board of directors and the steps that we are taking, I think that we can compensate, as I mentioned, in the first two years with a lot of certainty and in the following years – I feel very confident. The question here, Carlos, is we are assuming in all these exercises that the Coca-Cola Company is going to continuing investing behind their brands. We obviously cannot second guess what Coca-Cola Company is going to do with the extra resources that they are getting from the concentrate.

Obviously we have a very successful business that has been developing in very high per-capitas in a country like Mexico because 100% of the bottlers and the Coca-Cola Company have worked together to develop this market in the past. We believe that that should be something that we should continue working together to develop the market. The Coca-Cola Company has decided, and we cannot second guess the reason for that, to increase the concentrate price. They have the right to do it according to the bottling agreements that we have, and obviously, we as management of this company, we need to adjust our operations so that we protect the profitability of this company.

I think an important variable here to fully answer your question is not just the pressing value of the $60 million; it’s what the Coca-Cola Company is going to do with those resources and the fact that we feel that we can compensate for most of that by adjusting some other marketing expenditures.

Thank you.

Lore Serra, Morgan Stanley.

At the risk of sounding like I’m beating a dead horse, I guess I’m kind of confused. The fact that you’ve got this conflict and you’re mentioning it in your public release I think has signaled some issue with Coke. I’m not sure we can completely discount the 2009 risk. I guess that $60 million does seem like a lot of money. If I did the math right it’s something like 2% of your projected revenue, or something like that, in 2009. So if you’re putting 4.5% into marketing, you’re talking about cutting marketing down by half. So is this something that you anticipate as just being an issue of conflict that you are working through with Coke, or is this something that you think Coke is trying to shift the historical responsibilities of the bottlers so that they will do more of the allocation of the marketing budget, i.e., you will pay more in concentrate, but they will fund more of the marketing.

I think that – obviously very recently we received this letter from the Coca-Cola Company with these increases. We feel that given the fact that all the system in Mexico, and all the system in Brazil has a similar layer, and obviously among the universal bottlers there are not that many that are public, we felt that it was our obligation to report this with all this time advance. All these increases we are mentioning are more than a year away, but we have certainty from the letter we got from the company that it is going to happen, and there were 13 letters like that circulated in Mexico and around 16 in Brazil, and we wanted to avoid any problem of waiting for the last moment to announce something like that.

So I wanted just to mention that so we are not trying to say that because of this situation we have a specific conflict. We were surprised by the movement, it took us a little bit off guard, but we know by the agreement, and we have disclosed that in the past. In every single public document that we have we have this statement that the Coca-Cola Company can increase the price of concentrate whenever they want. We have not discussed it very openly still with them, because this letter is very recent, we basically received it 10 days ago, two weeks ago. We have not discussed exactly how we’re going to adjust all this marketing.

We believe they have been spending a little more on marketing in the recent months, but again I’m not trying to second guess the reasons for the increase. But they have the right to increase the price of concentrate, we are certain that it’s our right to protect the profitability of our business for our shareholders, and that’s something we need to introduce into the marketing expenses behind the brand Coca-Cola. I think it’s something that is very easy for us to do, we don’t have any specific obligation, and as I mentioned in the previous question, if the Coca-Cola Company embeds those extra resources in the marketing then we basically have a situation that’s a wash. We pay a little bit more for concentrate, pay a little bit less for marketing, and we are at the same level.

But just one final question, was the communication that you would be paying higher concentrate costs given together with any indication that Coke would be willing to increase marketing spend?

No, it was just a communication saying this is the new [inaudible-highly accented language] levels for these years. I really, one thing that’s positive that I have to mention here is that they gave us a lot of time, advance notice. They are mentioning this basically 15 or 16 months ahead of the increases.

OK, thank you.

Robert Ford, Merrill Lynch.

How does Coke justify the increase, and how did they react to your initial response, and how do you avoid this from spilling over into the theme of additional franchise acquisitions or greater coalescence of the various businesses?

The first question is related to the announcement that they made, and the reaction to our answer?

I think you have had concentrate fee increases, every time you grow sales you get concentrate fee increases proportionate with the sales businesses. So I disagree with that, the past 12 or 13 years you’ve had systematic concentrate fee increases every year.

In that respect you are right. As we are based on a need basis, we both, both meaning the Coca-Cola Company and the bottlers, we go up on prices they benefit from that, we go down in prices they suffer from that, which is a system that we believe is fair.

So how do they justify the price increase?

When I’m saying that they haven’t increased in the last 13 years is meaning the percentage that they charge on revenue. They didn’t justify anything, they just sent a letter saying this is our right, and this is the new table starting in 2007, then 2008 and 2009. We answered very recently to that, saying basically that we understand that and that it was important for us to communicate to them that we were thinking of adjusting the marketing expenses in the same proportion. We haven’t got a reaction yet, because that letter was basically communicated to them two or three days ago.

So this is all being done written, you guys aren’t even talking to each other right now; it’s all being done by correspondence.

No we have been talking, obviously. I mean for example one day deliver the letter, they ask for a meeting and during the meeting they communicated this increase and we had a conversation over that issue. They heard our arguments, we heard their arguments, and that’s it. But as to the letter, they were not explaining anything to us, no.

Then to get a sense, what are their arguments in terms of justifying the price increase?

Things that they have mentioned in the past is that in Latin America they have a different system than in the rest of the world, they did mention that in Mexico concentrate cost is substantially lower than in other areas, things like that. We are not sure, obviously, of those other rates. I think that it is important to bear in mind that we don’t know the reasons behind these increases and these are questions that you guys should be asking the Coca-Cola Company.

I think that when we receive a communication like that the reaction that we are having is the right one, we need to find ways to protect the profitability of our operations, the operations that we are in charge of. At the end of the day we are being paid to grow the value for our shareholders in Coca-Cola FEMSA. So that’s a variable that is being moved, and we need to adjust some other variables to try to protect that profitability that I mentioned.

I don’t have any doubt that we’ll continue to work very closely with the Coca-Cola Company, we have a very successful history. I think that not only Coca-Cola FEMSA, but the rest of the bottlers have very good businesses in Mexico. We need to find ways to continue working together and continue the success story that we have. At the end of the day, when you go to the marketplace you see a bottle of Coca-Cola being sold at a substantial premium over any other brand of soft drinks on Mexico. I think that’s a reflection of the investment that has been done for a long time behind the brands and in the marketplace and in the communication with the consumers and the service that we give to our clients.

So at the end of the day it’s a system that is important that continues to work in coordination.

Thank you very much Hector, and congratulations.

Joaquin Lopez, Deutsche Bank,

I just wanted to ask, how big of a discount does the Mundet flavor portfolio sell out versus the Fanta multi-flavor portfolio?

Are you referring, Joaquin, to the multi-flavor portfolio in both brands?

Yes, that’s correct.

We are using Mundet in the valley of Mexico and Fanta in the rest of the territories, for obvious reasons, because Mundet is a brand that is well recognized in the valley of Mexico. When I say valley of Mexico we also are referring to some of the neighbor areas like Touluc, Puebla and some of the areas Mexico City. There are some other territories around that have nothing to do with Coca-Cola FEMSA. We are using similar strategies, in the case of Mundet we are basically at parody with Caribtos [ph] which is a brand that has been growing importantly in the valley of Mexico in the flavor segment.

We believe that for the first time in these past two months we have seen positive press because of the Mundet multi-flavor strategy, positive press meaning seeing the market share of Mundet growing and the market share of Caribtos coming down. Caribtos had a story that was basically alone in the segment, core brands and value protection brands, and it was important to be there.

Fanta is being used very similarly in all areas versus other regional brands like [inaudible-highly accented language] in Oaxaca and things like that. So between the two brands there’s not much price range, between Fanta multi-flavors and Mundet multi-flavors.

Sadly, because of this concentrate increase you’re facing, do you have any plans to reposition Mundet or perhaps overemphasize it versus the Coke flavor portfolio, especially Fanta, which seems to have a very similar pricing strategy?

Well I think that going forward, assuming that Mundet stays with the incidence as it is, we basically would have an advantage in the cost structure of Mundet.

But do you plan to exploit that advantage?

I think that’s it’s too early to know that Joaquin. In this case I was debating internally, given the fact that measure was in with so much anticipation that we should be so close [inaudible-highly accented language]. Or waiting a little bit more because of the reasons I mentioned, not having any complaints from a disclosure point of view, we decided to disclose this. The announcement of this increase is very recent. I think that you’re right, we certainly would have an advantage in the cost structure of Mundet vis-à-vis a brand like Fanta multi-flavors, and it’s something we need to explore. We have not taken any position so far.

OK, thanks.

Alex Robarts, Santander.

Just a couple of more clarifications, sorry, on this concentrate thing. First of all do we have any indication, or did you guys get any indication from Coke that the buck stops here, in the sense that would Mexico’s returnable presentation be up for an increase at some point, and would other countries in Latin America also be subject to a change as part of this kind of Brazil/Mexico movement. I guess the second part of the clarification is really on your response, you mentioned that the biolink contract, franchise agreement, does give them the right to do this. I guess the question is, how much flexibility do you have to change the marketing expenditures on their brands? Does your specific request for them to change that imply a specific new contract or bottling franchise agreement, or change to that agreement?

Let me see if I can answer all your questions. The bottling agreement that we have, it’s very clear that they can increase the price of concentrate. It doesn’t have any specific amount of marketing that we need to invest. So in that sense we are free to adjust our marketing expenses. Obviously we need to be very careful in how we do that, because we need to be sure that we are protecting the business for the long term, in what is on our side. For example, part of the marketing expenses that we have is the introduction of returnable bottles, when we feel that is necessary to market, because as you know these bottles start to break or get lost, or are used for some other purposes. So once in a while we need to do an introduction of returnable bottles in the marketplace. That is a very comparative investment that accounted as part of the marketing expenses, and we need to be very careful of how we adjust that.

Cooler investment is part of the marketing expenditures. It is an area that we have to be very careful in analyzing, as we have always done. We introduce so many coolers, we track each cooler’s performance and if the cooler is not giving a specific return, we move that cooler from one store to another. Fortunately at this time we have a very, very high penetration of coolers so maybe we won’t have to invest so much in coolers going forward. We would need to keep the fleet up to speed with maintenance and all of that, and maybe some replacements. But we basically have a very large fleet of coolers already in the marketplace.

Again it’s important for me to mention very clearly, the Coca-Cola Company has the right to move the concentrate price. I don’t know what they are doing with other countries in Latin America. We know that we have a small increase in Brazil. There is no guarantee that they would not move the price in Mexico again in the future, because the contract basis, as it is right now, they have the authority to move it. At the same time it’s important that you have very clear that we don’t have a specific restriction on marketing expenses in our [inaudible-highly accented language].

Returnables versus one-ways, as they are moving the concentrate costs for non-returnable presentations only, vis-à-vis equilibrium that we have up to this moment between non-returnables and one-ways, there is clearly a movement in the direction of having a little bit more attractive, the returnable presentations from our perspective. Meaning we are receiving, starting in 2007, an increase in the cost of incidence on one way products and returnables will stay as they are. So there is a tilt, if you will, in favor of returnable presentation going forward because of this cost structure.

I don’t know if that answers the questions that you have.

OK so in terms of returnable, nothing has been mentioned about that for Mexico. In other words, there’s a possibility that we could see some change in the incidence there.

Nothing has been mentioned. Let me tell you Alex, and I think it’s important to clarify that also, historically remember 10 years ago, 13 years ago; the business was basically a returnable business. Then when one ways were introduced, the formula that was introduced was a formula whereby you were charged the same incidence and then you were subtracting the value of the packaging material, because obviously one-ways at that time had a very high price to the consumer because of the cost of the bottle or the can.

So historically you have had a lower percentage being applied to one-ways because in a way you are selling also the packaging material in the transaction price. So now they are adjusting only the prices of the one-way products and they have not mentioned anything about returnable presentations at all.

OK, thank you.

Vin Kwatkowski, with [inaudible-highly accented language]

Just a very trivial question, in terms of what you reported in the consolidate income statement, the ‘other expenses’ line. You had other income in the second quarter of ’04 and now you’ve got other expenses in the third quarter of ’05. Could you just briefly outline what those are?

Are you referring to the accumulated for the nine months?

No, just in the third quarter. you’ve got 96 million pesos other expenses in the third quarter of ’05.

Let me read that, I don’t recall exactly what that is.

Thanks.

Tufic Salem, Credit Suisse First Boston.

A couple of questions, first of all it’s about the PET prices, you mentioned 10% for the end of the year, and I just wanted to see how comfortable you feel about that curve, that it’s going to come back down in the first quarter, if you have seen any changes to that assumption. Then the second one is to get a better feel about what’s going on in Venezuela after all the management changes and assessment, how long do you think it’s going to take to readjust the portfolio and the operations down there?

Let me give you some numbers on the PET. The tricky part here is that this year we have seen, starting in the third quarter of last year, we have seen a lot of increases. For example in the second quarter of 2004 prices per pound for resin were around $0.64. then third quarter of this past year was around $0.70 per pound. In the fourth quarter the estimate that we have is around $0.77 per pound. The tricky part is that the fourth quarter of last year was around the $0.70 per pound, so fourth quarter last year was the same price that we have in third quarter of this year, after we had some increases through this year and the price was coming down to this $0.70, as I mentioned, in the third quarter.

Now the price is around 10% above that price, which happens to be 10% above the fourth quarter last year also. So when we do the comparisons on a sequential basis, we have a 10% increase during the fourth quarter and year-over-year it goes up 10% because of the way that went. For 2006 we are expecting some reduction from the fourth quarter level, probably around $0.73, around that level. That’s what we’re expecting.

OK, then on the Venezuela operation?

The Venezuela operations, we basically, the changes that we have, we have the same person that was in charge of the Venezuela operations in the financial position; we changed basically on September 15. we’re very near to starting to see some changes. He is in the process of designing the strategies for next year. We have already disclosed some of the strategies for next year, but it is too early to start noticing some changes. I think that, as we advance next year, we’ll start to see some of these improvements.

OK.

Celso Sanchez, Citigroup.

Hi, good morning. Actually, I have some questions about some of the territories, but can I just start off by doing this concentrate [bogus]? Does it ever come up in the negotiations that, according to their own numbers, they make 50% operating margins in Latin America, which is almost twice the corporate average for Coke? Is that something that’s been discussed, or is brought to their attention, or it [might be?]

Yes, in conversations we have. Obviously, we’ve noted that information and we have shared that with them.

OK. Just to talk a little bit about the Columbian operation, to get a better sense, it seems like there have been some adaptations to the competitor, in terms of their pricing strategy, as well as perhaps on your packaging side, both pushing returnables, but also some non-returnables, if I understand correctly. Can you elaborate a bit more on how you see that evolving?

At one point I thought the main push was going to be in a sort of returnable glass, but that was like the market offering opportunities in other packaging as well.

Let me go ahead on that. Columbia is a strange case, in the sense that Colas [Saniludos] represents around 48% of the market. It is the only case where we have flavors with a larger penetration than Colas does. Obviously in that 48%, we have a very high market share in Colas Saniludos, about 90%-plus. And in flavors, they are very, very strong, with 8 million [Pepsi-Cola] One which is the Pepsi Cola distributor over there also, the Pepsi-Cola bottler.

With that in mind, the acquisition of Panamco, we’ve started to work well with the Coca-Cola Company in designing a copy to try to better tackle the flavor market. We designed this strategy for [inaudible-highly accented language], which was a lot of focus on young adults and teenagers that, to our advantage, the [Pepsi-Cola] One brand was more in the top of the mind of other adults.

So, we took advantage of that, introduced it very successfully across. We have gained, within the flavor markets, something around 12% to 13% in market share, which is very important growth in that [inaudible-highly accented language] area. It was a very, very successful introduction. It rivaled [inaudible-highly accented language] an introduction successful at that.

We have pushed a lot the non-returnable presentations with that, but in our case, in Columbia, you look at the numbers of returnables, basically, you have a stake in this with the same number of cases. And most of the growth is coming from one way. The positive thing here is that [one-ways] are not necessarily cannibalizing the returnables. Returnables are staying with the same base of cases that we have. And this growth we are experiencing with one-ways are not necessarily cannibalizing the returnables. The returnables are staying with the same pace of the cases that we have.

This growth that we are experiencing with one-ways is actually taking over market share from our competitors.

In fact, Celso-this is Alfredo Fernandez-if you look at the information during the quarter, the returnable base is growing around 2%. And the non-returnable base is growing over 25%. That’s why the growth is shifting, but not because the returnable is contracting. I think we have a very strong base of returnable packages, around the 24 million unit cases. And if you look at where the growth is coming from in terms of multi-service and single-service, it’s coming quite balanced, 50/50.

With Crush growing importantly, the 600 amount, and in multi-service package, we have 1.25 one-way package of Crush growing and 1.25 returnable glass of Coca-Cola growing tactically throughout the country.

OK, thanks. And just in terms of the roll-out of Crush, as we sort of cycle the year-over-year comps, is that going to mitigate a lot of the compression we’ve seen on the gross margin? Or, is that really something that is accounted for elsewhere?

Well, I think we probably will see some of that pressure towards the third quarter, because the steel Crush is [inaudible-highly accented language] in comparison of the fourth quarter of the previous. [inaudible-highly accented language] Orange Crush, at some point during the first quarter. So, the fourth quarter is still going to be affected for some of that.

Right, but in terms of the gross margin impact, is it fair to say that most of the shortfall is related to these one-time intro expenses, or is it a fair amount?

No, that is correct.

Can I just follow up with one more question? I know the call is going on long. Just, in terms of Kaiser, can you give us a sense of what Kaiser volumes have done? Or did I miss that in your comments earlier, in the third quarter?

I don’t have that information here. If you want, I can get back to you on that.

Thank you.

Andrea Teixeira, J.P. Morgan.

Hi, I just wanted to—hello, hi. I just wanted to follow up on the cross [inaudible-highly accented language]. In terms of the HFCS, can you still try to increase the percentage? How much of HFCS is used in your [inaudible-highly accented language]? And I know there is a certain limit on how much you can use, at around 60%, and if that is sort of, or will be revised if we have this concentrate pricing phase? Thank you.

Good morning, Andrea. In terms of the uses of High Fructose, we have been lately using around 40% of our needs. As I have mentioned in the past, the sweetener used in Mexico is going through a lot of difficult processes. It’s a very politically and socially sensitive issue. Right now, we feel that that’s the [inaudible-highly accented language] that we should be using, going forward.

There have been many attempts in Congress to pass different regulations, with respect to the so-called Sugar Cane law. As you probably are aware of from some of the press, there have been some farmers taking over some of the Sugar mills and closing the access to some to some of the sugar mills. We feel confident that we have a good supply of sugar for the next month. But obviously, we can always use High Fructose, no, the corn syrup.

There is still an advantage in that, similar to what we’ve mentioned in the past. The High Fructose is obviously the cane sugar and obviously that’s an element, as you correctly pointed out, that’s an element where we can extract some extra profitability in case we need the numbers. But, we have to be very careful in how we move ahead in the future with the level of uses of High Fructose. [Inaudible-two people talking].

I’m sorry; with the tax ban on HFCS, I mean, it’s not approved yet but if that is the case, then the HFCS price will go up, internally, and probably will mitigate the price differentiation between HFCS and sugar.

Yes, certainly. With the business, [inaudible-highly accented language] the question is, if the tax is repealed, then we will use more High Fructose and we’ll have that cost advantage. Or, the question is, if the High Fructose will increase the price.

Well, I think it probably will increase, but the question is, apparently there is some excess capacity of HFCS and you can always import from the U.S. So my question is, in your view, the [inaudible-highly accented language] price between sugar and HFCS will probably move higher than it is right now. Because even though you don’t--are probably not going to have this price difference show up to 15% that it used to have, right? What is your view on that?

My sense is that since the High Fructose producers in Mexico, they do have good profits with the prices they have right now. Remember that, because of the sugar cane law that we have in Mexico, prices for refined sugar or raw sugar in Mexico, cane sugar, are very, very expensive compared to other standards. So, I’m sure that the guys that are manufacturing High Fructose have a very good profit margin, because they have a big cushion.

And just remember, in Mexico, we are buying sugar, cane sugar, close to $600 per ton. Where, for example, in Guatemala, which is next to Mexico, we are buying it between $250 and $300. It’s a huge differential vs. international prices. That’s not to mention the prices we have in Brazil now, which are now around $200.

So, Mexico is selling at three times, in terms of sugar vs. other [inaudible-highly accented language]. So my feeling is that the producers of High Fructose have a very good cushion for profits with the prices they have. They are not necessarily going to raise the prices because we have more demand for that.

OK, great. Thank you.

Chris O’Donnell, [Paxton].

Good morning and thanks for taking my question. Hector, to the extent that you can, could you please comment on how you see the current state of alignment, to use an old term, between the Coca Company and its global bottlers? You know, on the one hand, the company has been very clear on the need for its bottlers to improve their returns on invested capital. But on the other hand, your returns have long exceeded the global system average. I guess, if they were going to start raising prices somewhere, you would be the first to see it. Can you kind of comment on how you see the health of the global bottling system and whether you think the Coca-Cola Company is being fair in the price increase they’re seeking?

Yes, good morning. I think that—I don’t know; it’s difficult to judge fairness with these movements. I mean, rather than going to those complicated issues, I think it is important that we mention that they have the ability to do those price increases, according to the bottling contract we have.

And, obviously, we have the flexibility to adjust some of the variables that are under our control to try to preserve our profitability. I think it’s very important that we mention that, if you take a look back at the margins that we had a few years ago. It’s something we have been constructing, because a lot of the efforts that we have been doing generally, in terms of efficiencies and capturing market share from our competitors, I mean, when I arrived here back in 1993, market share vis-à-vis Pepsi-Cola was very close to 50/50. And a few years back, Pepsi-Cola was larger than that. Now, we totally dominate the market and that has to do a lot with the efforts of execution from our side.

So, what I’m trying to say with this is that, a lot of the improvement that we see, that we have seen and have experienced in the return on invested capital, is because of the efforts that we have put in place in the market places in Mexico and some of these other countries. Other than that, [inaudible-highly accented language] to comment on fairness or not on this movement.

With respect to the relations with other bottlers, I think that, I mean, we continue to have meetings and so-called talk-to-talk meetings where we meet together with the Coca Company and their five or six bottlers around the world. We meet every six months. I think that we have very close coordination in most of the areas of procurement and systems and other areas.

And I think that we should be very careful in trying to preserve the harmony that is needed for the benefit for the whole system, not only the Coca-Cola Company, and not only the bottlers, but for the whole system. It’s important that we keep this harmony that it will allow us to continue to expand the size of the market, grow the areas in non-carbonated [inaudible-highly accented language].

So, I think there is a lot of opportunity where we can work together and benefit from those market opportunities. In the past, we have been very, very successful, especially in Mexico. We believe that the success of the Coca-Cola system, between the bottlers and the Coca-Cola Company is based on the fact that we have worked together, we meaning both, for many years developed in consumption per capita in this market, and in developing a very strong brand.

And it’s both things. It’s what they do, with respect to advertisement and maintain trust, publicity, etc., and here some [inaudible-highly accented language] preference. And it has to do a lot with the effort that is done by the bottlers in the market place. And, by having a very good service to the consumer, having cold produce near the consumers, etc.

So, I think that’s important to bear in mind that that we believe that is important to preserve this strength going forward.

I completely understand. Just a related follow up, to your knowledge have any other bottlers received notices concentrate price increases?

We know that every single bottler in Mexico received the same letter. And, we know that in Brazil, every single bottler in Brazil has received the same letter. So, in other words, my feeling is that the Coca-Cola Company is continuing with their practice of having the same price of concentrate for specific country, for all the bottlers within that country.

Understood; thank you very much.

No further questions at this time. Back to Mr. Hector Trevino.

Well, thank you very much for researching the company. We will continue to communicate to you how we have evolved in these coming quarters. And Alfredo and Julietta are available, as always, to answer any further questions that you might have. Thank you for your attention.