Coca-Cola Femsa SAB de CV (KOF) 2005 Q4 法說會逐字稿

At this time I would like to welcome everyone to Coca-Cola FEMSA’s fourth quarter and full year 2005 earnings results conference call. This conference call may discuss 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 managed expectations that are based upon the 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 achieved another solid year of growth in 2005. Our performance again displayed an advantage of balanced geographic and diversified portfolio practice. More than 95% of our operations produced top line growth in 2005, with our Mexican and Brazilian operations accounting for almost 70% of our [incremental] revenues and for more than 80% of our operating income from this year.

We achieved these results despite variable [inaudible] costs mainly in CSD revenue across most of our operations. Our people were able to favor our portfolio of products and packages as well as our business processes to take advantage of the positive macroeconomic environment in the majority of our markets. We can proudly say that our people have delivered, rising up to the challenges that we have faced over the past three years.

In 2005 our consolidated revenues grew 5%, reaching a record $4.7m. Our consolidated operating income increased almost 9% and our consolidated EBITDA increased almost 80% to a record $1b.

The earnings per share increased 14% year-over-year. Excluding non-recurring tax effects that increased net income in 2004 and decreased net income in the beginning of 2005. We will detail more on these non-recurring effects in our fourth quarter press release.

Despite [inaudible] resulting from higher oil prices and [sugar cane] in the Gulf of Mexico, our gross margin improved by 20 basis points. Again it was driven by higher average prices for sugar cane in the majority of our territories, as well as relatively stable average for cost for sugar cane on a consolidated basis.

Lower sweetener costs in Mexico and Colombia, combined with the appreciation of the local currency to the majority of our territories as applied to our dollar denominated costs, more than compensated for PET price increases. We are starting to see resin prices come down from their peak at the end of last year. We expect average resin costs to decline further in 2006.

On a consolidated basis the Coca-Cola brand was by far the largest contributor to our international volume growth in 2005, accounting for more than 50% of the increase. Our revenue management and segmentation strategies, combined with our wider portfolio packages and more focused market of Sport, also contributed significantly to this growth.

Incremental volumes from the growth brand in Colombia, along with the [inaudible] [spike up] in Brazil, contributed the majority of our incremental [volume] calculated on the performance in 2005 representing around 18% of our consolidated incremental volumes. [inaudible] conservative basis in Mexico and in a conservative basis in Brazil contributed most of the balance.

Now let me talk about results in Mexico. In 2005 our Mexican operations produced record revenues and volumes of $2.6b, up more than 1b [pesos respectively]. Mexico also expanded its profitability in the face of summary guidance revenue posted in years.

In the fourth quarter of 2005, our revenues increased 3.5% on the back of a 3.5% volume growth and a higher year-over-year [inaudible]. The Coca-Cola brand continued its momentum this quarter, contributing over 70% of our incremental Carbonated Soft Drink volumes, and the majority of our incremental growth in [2 liter presentations.

These developments positively back up our strategy [inaudible]. For the quarter, CSDs accounted for slightly more than 55% of our total incremental volumes. In the flavored Carbonated Soft Drinks segment, our regional strategy is providing positive results. Regional brand flavors in that multi flavor and Fanta multi flavors, both increased their share of volume and revenues, gaining share from lower priced brands through the quarter.

These line extensions not only participate in and influence the growth and profitability of the local flavored Carbonated Soft Drink market, but also offset the incremental volumes coming from line extensions within the flavored category in recent years.

For the quarter, our Bottled Water volumes increased 5%, driven by the more than 40% volume growth in our single serve presentations and almost 80% growth in our jugged water presentations. Jug water contributed more than 20% of our incremental volumes in the quarter.

In our Non-Carbonated products, excluding Bottled Water, represented approximately 6% of our incremental volumes in the quarter. We added more than 2m unit cases, posting a year-over-year increase of more than 40%. Ciel Aquarius and Non-Carbonated Flavored Water that leverages over our [Ciel] brand. We have made a juice based product in different flavors and a more focused strategy in PowerAde contributed significantly to this growth.

In December 2005 as part of our continued practice in innovation, we initiated a practical rollout of 1.25m returnable flat presentations for the Coca-Cola brand in the Valley of Mexico with price points ranging from MXN7.00 to MXN7.50. Launched successfully in the key regions in the third quarter of 2005, these presentations strongly complement our multi-presentation portfolio, providing us with additional flexibility for our [pricing activity] in the Valley of Mexico.

Despite the peso [system] of our multi-serve presentations for the year 2006, we started the year positively as a result of initial implementations of our global [segmentation] models, which is based on market clusters, categorized by competitive intensity on socioeconomic levels rather than only the part of distribution channels.

We certainly believe that this [year’s] model is typically replicating our advantages of our [inaudible] systems.

On the costs side, the year-over-year increases in PET resin prices of approximately 10% in the quarter was more than offset by a 4% appreciation of the Mexican peso and lower sweetener costs resulting from lower sugar prices and our use of high fructose corn syrup. Together with better pricing, these factors support our gross margin stability. Going forward, as I mentioned, we expect resin prices to [inaudible] throughout 2006.

Our operating income for the quarter increased by 2.6% year-over-year and our operating margin decreased slightly, driven by a 1.5% higher SG&A facilities. However, our EBITDA margin achieved the highest level since we acquired Panamco of 28.5%.

In 2006 we expect our Mexican operations to benefit from a stable macroeconomic environment and favorable raw materials costs. Our multi segmentation and revenue management strategies, it can boast to increase our average prices in line with inflation.

Now, let’s turn our attention to our Latin Central division. In Central America, despite an extremely difficult competitive environment, marked by the entrance of new low priced producers and year long raw material costs pressures, mainly wages, our operations were able to sustain profitability year-over-year.

Exacerbated by tough weather conditions posed by one of the worst years in history in the Gulf of Mexico, the fourth quarter of 2005 was a reflection of the story throughout 2005. Despite these challenges in plastics, the total packaging innovation of our Central American operations was significantly important. Our operations [inaudible] some value presentation packages and line extensions throughout the year, was part of our strategy to leverage the [message] of Coca-Cola and to strengthen our operations in the Flavored Carbonated Soft Drink areas into the Fanta and Swift brands. For 2005 we launched more than 25 new products and packages in Central America.

We also placed particular focus on lower brand flavors such as [inaudible] beverages with novelty flavors for the PowerAde brand, reduced [phased] products of the [inaudible] brand and still bottled water in our proprietary brand Alpina. Non-Carbonated growth increased more than 10% in the quarter and more than 20% for the year from a small base.

On the profitability front, our consolidation of the back office and human resources and procurement structures made our Central American operations one of our Company’s more successful cost reduction stories and underscores our propensity to integrate multi-national diverse operations in a profitable environment.

Our Colombian operations was our Company’s third largest generator of revenue and cash flow for the year. Our year-to-year strategy has enabled us to turn around the performance of our Colombian operations. In Q1, 2003 we focused on the streamlining and consolidating our operating system, paying particular attention to our employee relationships.

In Q2 2004, we concentrated in putting the right tools in place to re-vitalize the brand Coca-Cola. And in this year, the third year of this story is our nationwide launch of [multi] flavors. We have strengthened our competitive position and fostered demand in the Flavored Soft Drink category. At the same time, we have maintained the growth of the Coca-Cola brand by connecting with a broad base of young consumers. As a result we have increased our Served Water in Colombia by [inaudible] advantage [as we said] during the year.

For the fourth of quarter 2005, the Crush brand represented the majority of our Colombian operations’ volume growth, reaching more than 10% of consolidated volumes. The Coca-Cola brand increased 2% in the same period. Our bottled water strategy continued a positive trend 0f the third quarter 2005, and posts encouraging results.

Our introduction of No-Calorie Flavored Water of the Kali brand, combined with our [inaudible] brand of bottle water enabled us to achieve more than 20% growth in single serve water presentations for the first quarter and to offset the volume decline of our less profitable multi serve packages.

On the price front the increases implemented in the third quarter 2005, particularly compensated for year-over-year inflation and resulting average price decline of 2.8% for the quarter.

For the fourth quarter our cost of sales followed the trend of 2005, with our cost of sales [per unit case] increasing 1.9% as a result of a shift in our packaging mix to higher costs and lower [PET] presentations.

Incremental volumes came from non-returnable CSD packages that, along with the incremental revenue prices, resulted in a reduction of our gross margin. Our revenue growth partially compensated for these factors, resulting in a 2% decline in our gross profit margin. However, our quarterly operating income increased by more than 10% year-over-year driven by our lower operating expenses per unit case.

Our operating expenses were due to lower freight expenses and lower breakage expenses as a result of packaging mix [indiscernible] presentation.

In Colombia we expect our profitability to continue to increase in 2006. Both Colombia and Central America introduced strong Carbonated and Non-Carbonated product extensions in the first half of the year.

This year was a year of transition for our Venezuelan operation. Our top line growth, filled by the Coca-Cola brand could not compensate for high raw material costs, mandatory wage increases and the devaluation of the Bolivar. In the fourth quarter of 2005 we lagged some of operating endeavors that we enjoyed in previous quarters. Our Venezuelan operations’ revenue declined 5.3% as a result of a 7.4% decline in volumes, which was partially offset by a 2.1% increase in our average price per unit case. The increase in our average price per unit case was driven by price increases implemented in September and better product mix.

From a profitability standpoint, we continued to face incremental raw material costs into PET importantly. We increased labor and trade costs and a higher maintenance costs. We are disappointed in the results of our Venezuelan operations, that’s why in the second half of 2005 we are trying to [indiscernible] managers to lead our Venezuelan operations. With a stronger management team, a leader more flexible organizational structure and a more focused growth performance, we believe that we are better positioned to capture Venezuela’s growth.

We must bear in the mind that Venezuela generates a disproportionate amount of consolidated revenue compared with consolidated operating income. In this regard, our Venezuelan operations total revenues represent 10% of our consolidated sales. But than 3% of our consolidated operating income in 2005. This will offer us plenty of flexibility to implement the top line initiatives and cost reorganization strategies that are required to increase our profitability. Our operators need time and we can provide it to them.

Now I will talk about our [Argentina] division. Our fine multi-segmentation model enabled us to achieve strong top and bottom line growth in Argentina with a rolling increased consumption of our premium Carbonated Soft Drink brands and our core brands in returnable presentations. Those improved our core operating income despite a difficult cost environment. On top of positive results for the past two years, our Argentine operations achieved record levels of absolute revenues and operating income in U.S. dollars in 2005, achieving the levels reached before the macroeconomic crisis of 2001.

In Argentina, our Bottled volumes increased 6.4% for the quarter and 4% for the year. The Coca-Cola brand was the main driver of our incremental volumes in the quarter and the year, more than offsetting the decline in Flavored Carbonated Soft Drink volumes. Habitually, our multi-segmentation strategy can allow us to reach strong volume growth in our premium CSD segment, including the Coca-Cola Light and the Sprite brands, improving our sales volume mix for our lower profit [products].

Non-Carbonated beverages, including our Cepita brand juices, Kin, the Bottled Water brand and our recently launched flavored Water products such as Dasani and Cepita brands continue to post strong results. In the fourth quarter their volume grew an extraordinary 50% compared with the same period of 2004, reaching 2.5% of our total sales volumes.

Our Argentine operations’ high revenue fully compensated for higher expenses in the quarter and, for the first time in 2005, our operating income increased more than 10% on a quarterly basis.

Our Brazilian operations continued to outperform this year with the impressive revenues and operating income growth of 20% and 32% respectively. For 2005, our Brazilian operations played an increasingly important role in our overall results, accounting for more than 10% of our consolidated operating income, and reaching EBITDA levels of almost $100m. These are the same operations which were losing money just two years ago.

For the quarter our revenues increased 6.6% on the back of a 6.9% volume growth and slightly lower prices. Average prices per unit case was affected for the right reasons - the strong growth of our returnable packaging base which reached 10% of our total volumes in the quarter. A higher returnable base will give us the flexibility to design and deploy more segmented pricing strategies in the near future.

Our CSD volumes grows -- grew 5%. Our incremental volumes were driven mainly by the Coca-Cola brand which accounted for more than 80% of our growth. The roll out of our returnable strategy supported by the [inaudible] growth with returnable presentations accounting for the majority of our incremental CSD volumes in the quarter.

The decline in our Flavored Carbonated Soft Drink volumes, mainly driven by our value protection brands, was almost totally offset by the growth in our Lite brand segment. In [inaudible] the Lite version of Coca-Cola, Sprite and Quatro grew more than 10% in the quarter. Our Bottled Water and Non-Carbonated segments grew almost 35%, together accounting for more than 8% of our total volumes for the quarter.

It is thus it is important to highlight the Bottled Water business model that we are developing in Brazil. Our proprietary brand, Crystal, commands a wide preference among our consumers. Despite increasing prices of approximately 2% in real terms in the segment year-over-year, we stand to post more than 35% growth for the quarter, consolidating its market leadership for this category in Sao Paulo.

On the financial front, our improvement of cost efficiencies and year-over-year appreciation of the Brazilian real, more than offset raw material price increases and led to lower costs per unit case for the quarter. Operating income increased more than 40% for the quarter, despite tough year-over-year comparability resulting a margin expansion of 430 basis points.

On January 16, 2006 FEMSA acquired a controlling stake in Cervejarias Kaiser from the Molson Coors Brewing Corporation. As of February 2006, we agreed to re-assume the sales functions of Kaiser’s beer portfolio in the Sao Paulo territory, pursuant to the original agreements that regulate the relationship between Kaiser and the Coca-Cola bottlers in Brazil. We will leverage the execution capabilities in line with skills that have perfected in the past two years to compete fluently and [leisurely] in the Brazilian beer industry.

On the financial front, we effectively reduced our total debt by $257m in 2005 and achieved a total net debt level of $1.7b. Since our acquisition of Panamco in May 2003 we have successfully lowered our debt by close to $1b. At the end of the year our cash position was close to $184m, a decrease of $130m on February 2004 as a result of cash used to re-pay debt.

Our financial strength is reflected in our Company’s investment grade credit rating. Based on our leading market position throughout Latin America, our strong cash generating capacity and our maximum record [best] option in 2005, Moody’s rating updated our foreign currency rating to A3 from BAA2 and Fitch ratings upgraded our foreign and local currency rating to A- from BBB+.

We continue to maintain a strong balance sheet and a well balanced capital structure. Close to two-thirds of our total debt is nominated in local currency, mostly Mexican pesos, and approximately 95% of our total debt carries a fixed rate of interest. Today we do not face debt through financing or foreign exchange exposure risk and we are well protected from the current rising interest rate environment. We are also working to fully comply with all applicable rules and regulations, including those under the U.S. [inaudible].

Now I would like to remind investors that we will be holding our annual shareholders’ meeting on March 8 of this year. Right after this event we will be also holding a special shareholders’ meeting where we will disclose the results of our proposal not to cancel and make available to our Board of Directors of the Company, around 98m Series A shares [inaudible] to approximately 9.8m ADRs issued by resolution at the general extraordinary meeting carried out on December 20, 2002. These shares were not subscribed by FEMSA shareholders in exercise of their pre-emptive right at the price set by such [needing] $2.2 per ADR -- $2.2 per share.

Holders of Series A shares or ADRs if we want it by record date February 1, 2006, to be able to go through this proposal. The Bank of New York, our proprietary bank in the United States, and EBDA [Bancomer], our depositary bank in Mexico should have already sent you the approximate details for these meetings.

If the FEMSA shareholders approve these initiatives, these shares would be available to our Board of Directors for re-sale in connection with the future transactions and on the terms and conditions determined by our Board of Directors at an issuance price of no less than $2.216 per share, or the equivalent in Mexican currency.

This is not an offer for any shares and we have not made any intentions of our [fully] [inaudible] transactions in volumes and in [inaudible] shares.

If we look ahead, in 2006, we’ll see another year of macroeconomic stability in the majority of the countries that we operate. We will continue to evaluate and prospect the way we go to market. We aim to tailor our products, packaging and pricing strategies, so we can capture the most value from each of our market territories.

Simultaneously, we will like to evaluate truly and profitable acquisition opportunities in the Latin American beverages. Today, more than ever, our [inaudible], along with our initial incursion into [inaudible] offers various and ample opportunities for us to bring value for you.

Our valiant market position, among [inaudible] help us to generate even stronger a more stable cash flow. In the last two years we have become a more experienced multi-national operation with an unmatched knowledge of local market dynamics as well as the American beverage industry. This competitive edge should further our ability to continue our Company’s profitable growth.

In closing, we would like to stress our deep appreciation for the continued trust and confidence that you have placed in us. By multiplying the power of our brand portfolio we see continued opportunities to provide you with an attractive return on your investments now, and in the future. Now, I would like to open up the conference to any questions that you may have.

Thank you. [OPERATOR INSTRUCTIONS]. We’ll pause for a moment as questions queue up.

And your first question will come from the line of Jose Jordan with UBS. You may proceed please.

Good morning Hector. My question is about what you were just talking about, the debt payments and the potential issuance of shares. You’ve been paying back about $250m of debt every year and at some point, you’re going to get to the point where it’s not, from a capital structure point of view, convenient to pay back more and you start paying dividends. Could this -- is this proposal to extend the shares’ validity potentially lead to their issuance, in order to do one more debt pay down, and then to become a high dividend paying Company?

Good morning Jose. Let me just give a little bit, our thoughts in this area. We have been debating internally which is basically two issues. One is what we have expressed for a very long time, that we do believe, although we have never used this in discussions but, our shares could potentially be a good currency for acquisitions in some of the markets. In the past, we have never used it in this fashion but it’s certainly an alternative that we see in the future.

On the other front we felt always we repeat comments and we have very clearly understood also that the decrease of our shares is not at the most profitable level. So we’d also like to see a little more liquidity in the marketplace.

I fully agree with you that, at the pace that we are re-paying our debt levels, we’ll basically will reach levels below 1.5 debt to EBITDA pretty soon, by year end 2006.

Is that your stated target?

I think that if we get to that level, which is very comfortable with the ratings we have, and I think that that is something we also include the rating that we have in our debt. It is the only one of the two rating agency that have not moved our rating.

But the most -- probably the main reason for this request we say is that, as the regulation in Mexico has changed and now the authorities, when you call about issuing new shares, they like to see that you issue at the most 25% of non voting shares in that precise moment of issuance. Meaning the shares that you are issuing at the moment -- at that moment.

Right now, we do have the authorization to issue these shares and possibly pre-empted right. But whilst related to Panamco acquisition because remember [inaudible] moment in time, the Coca-Cola Company subscribed some capital and FEMSA subscribed some capital so we have the right for the shareholders.

In working capital these shares, we believe that we will have exclusivity to move ahead with potential increases of capital in the future, because of these regulations. So, in a way what I’m saying is, we have been grandfathered the authorization to issue these shares even though these shares would be 100% with no voting or limited voting rights. And if we cancel these shares while they are in Treasury – and we don’t want to get any more complicated to say the least that we will do some activity in terms of being able to raise capital in the future. We have to do it similar to the financial transaction [worth]. The Board of the Company FEMSA and the public all increase their ownership.

That’s very clear but -- the last part of the question was, would you consider doing one last debt pay down in order to issue these shares this year and, in that way, become a dividend paying company and fulfill your liquidity desires, to increase our liquidity of the stock and so forth?

So in the event of no acquisition, that no acquisition were to become available, would you still consider doing this as a debt pay -- as a final debt pay down and changing the inter-dividend profile of the Company?

Yes, certainly that’s a possibility. In the last Board meeting that we had two days ago, we discussed with the finance committee the idea of how soon we can do dividends going forward and, clearly, one of the messages that we are receiving from our Board of Directors is that, in the absence of acquisitions we should look at increasing the dividend payments of the Company.

We -- for this coming year, for 2006, we have already the impact for the -- do the proper litigation for the shareholders’ meeting. We will propose a dividend payment in that shareholders’ meeting. We are moving very rapidly from what we have paid in the past. But we have these calls very often with our Board of Directors. The idea that we will reduce our debt level further and, in the absence of potential acquisitions, we should be looking at increasing the dividend pay out ratio.

Okay, thanks a lot Hector.

Jose, just to make it very clear, we have not taken any decision as to the dividend pay out ratio for the future years though. But what is clearly --

It has to drift in that direction.

Exactly.

Yes, okay thanks.

Thank you sir. And your next question will come from Ronaldo Santana]with Deutsche Bank. You may proceed please.

Yes, good morning. I would like to hear from you what’s your pricing forecast in the several markets you operate for 2006? What you’re seeing in the competitive environment in Mexico, for example, in the first quarter. If the price increases that you implemented late last year have to stick, and what has happened to the multi-size presentations in Mexico?

And also in Venezuela and Argentina, what are you seeing in terms of price environment for 2006?

Yes, good morning. The pricing front, we have seen some activity lately. We didn’t raise some of the prices of our single serve presentations at the end of last year and also the price of the large presentation of multi-flavors in broadly speaking terms for Mexico.

And then we have seen very important reaction by our competitors. Those of you that have traveled to Mexico City, you will see that Pepsi Cola is selling a 3 liter presentations at MXN20, which is -- to give you an example, this Coca is selling 3.3 liters of this Cola at MXN13. So, right now, the price point of Pepsi Cola is below this [inaudible].

But that case -- it’s an important change in the competitive environment. What we have seen and this as at the very beginning of this year, I believe it was January 2. What we have seen in January and February is that, previous to what -- contrary to whatever one might expect, our market share numbers continued to improve, even with those prices from our competitors. I think that the strategy is not exactly working for them.

So, to answer your question, we believe that our pricing that we did at the end of last quarter is sticking and is there and we will continue with that pricing format -- with that pricing formula.

We believe that, obviously, with our volumes we have to be very careful and analyze the market basically on a day to day basis and do the appropriate changes if necessary. Again, always focusing on the areas, the socioeconomic areas and the challenge, and the specific packages as opposed to lowering all of our packages.

I think that the liter and a quarter glass presentation that have been introduced in the Valley of Mexico is a great weapon for us to cover those specific areas that are looking for a very strong Coca-Cola. Remember that we sell that liter and a quarter at MXN7 to MXN7.5 depending on the area. With the added benefit of being in a glass container that has, from the consumer point of view, a preference that is important for the consumer.

So in general terms, my feeling is that we look to have prices during the year moving according to inflation. I do not expect real price increases for Mexico. But I'm not expecting to have our results in the other branch, either, later during the year. In direct to the countries obviously Venezuela and Argentina are complicated by concepts in the pricing front because of revenue -- everyone restarting the total, a lot of pressure on companies to increase prices to supermarkets and to supermarket stores. Part of that pressure to us, and in those two countries we do see the inflation at a higher level. So it's a complicated equation.

So if we can stay with inflation or slightly below inflation it would be a very good achievement for those two comps.

In Brazil it's just one of the very large operations for us. What we have seen so far is that we have been adjusting as we have of our pricing mix for the returnable presentations and that’s why we saw more reductions in the quarter.

It was more something that, as we mentioned during this conference call, is more desired by us because it can change forwards or forward presentations. But we believe it will put to increasing in penetration in our mix. But in general again, I think that it will stay -- in Brazil I would expect prices to stay with inflation for the year.

[indiscernible] I'm sorry.

The other market that we see important for us is Columbia. In Columbia we saw suffered a little bit on the pricing front because we were introducing large presentations that really carry a lower price per unit case. And in there the target is also to move, together with inflation, as opposed to what happened this year where we were below inflation.

Okay, thank you. Just to confirm, you launched the 1.25 returnable glass presentation in the Valley of Mexico and in [inaudible] was this in January?

In the [Bastille] we did it in the fourth quarter of last year and in the Valley of Mexico it was introduced during January of this year. So it’s a presentation that is very recent in Mexico City.

Okay.

And it's important to understand that it is not for deposit or return. It's a very targeted presentation that again, thanks to our information systems and our segmentation, we can pretty much target and execute properly in the market place.

Great, thank you very much.

Thank you sir. And your next question will come from Lore Serra of Morgan Stanley. You may proceed please.

Just one follow-up first, on the issue of the 9.8m ADRs that you're asking to keep in Treasury, If that's approved is there a time limit by which you have to act on those shares or will there -- will they just stay outside of Treasury for an extended period of time?

There is no time limit on that Lore it will stay there interest-free.

Okay.

The only restriction that if they are placed in the market place they have to be at a higher price than what was offered to the shareholders.

Okay. Just next are a couple of quick questions. Can you just clarify where your pricing is right now on the 2.5 liter non-returnable and also in the quarter we saw your depreciation and amortization come up a lot. It also seemed like there might have been some small restatements in the fourth quarter '04 numbers, at least visa vie the release of a year ago. So can you just comment a little bit on that was there anything sort of changed? And as we look at the depreciation and amortization I'm assuming that most of that incremental amount went into the operating expense line. And just wanted to clarify if that was the case and whether or not that spending is continued into '06?

Yes Lore, let me go first with the pricing of this 2.5 liters and then we go into the depreciation and amortization. I follow the same order. On the -- we're discussing 2.5 liters where we have in to Mexico, is that right --?

Yes, yes.

Okay, we are selling the 2.5 liter, one-way Coca-Cola, at MXN16. And the returnable 2.5 liter Coca-Cola brand is between MXN11 and MXN13. We have what we call this promotional activity, under the cap, where the [differentiality] is about 100% and we have MXN1 price that is under the cap. So in some cases a consumer can get access to a returnable 2.5 liter presentation of brand Coca-Cola for MXN11 where the official price is MXN13 in the market place though.

For Flavors 2.5 liters one-way sells for MXN13 also. That compares basically with MXN13 for the big cola, for 3.3 liters and MXN12 for Pepsi Cola on 3 liters.

Okay, but those pricing levels that you mentioned, they, they -- I'm thinking they were unchanged at the end of the year. Or I guess I thought someone mentioned there had been a price increase in the multi-service, I wanted to clarify.

Yes, I did mention that we increased a little the price of the multi-flavor, the Mundet multi-flavor --.

Okay, I understand then. Okay.

This is categorized to give you all of the products.

I've got it.

Okay. Now on the depreciation and amortization charge, we do have a adjustment at the end of the year. If you follow the D&A line for the different quarters you will go MXN650m on a quarterly basis and the fourth quarter the number was close to MXN450. The main reason for that had to do with breakage of bottles and let me explain to you, we have two things. One is an adjustment of the 2.5 liters, returnable presentation. That, we were basically running a little bit below the "quality controls" that the Coca-Cola Company requires, on packaging materials. That’s because they need to stock it, which is the lines that are formed by the friction of the bottled when they turn around when they are in the line. So we increase a little bit the amortization of the breakage percent of those bottles to adjust to what it should have been during the year.

And with that which is very comfortable going forward in terms of the quality controls the Coca-Cola Company requires. And the other is related to the 20-liter jugs, presentation. We are changing the presentation for that with that [indiscernible] that require us to change the inventory that we have of these containers. So we have -- it was appropriate to take that charge for that reason there.

My expectation is that going forward we will have a number below the [550], but probably closer to the MXN400m on a quarterly basis, so a little bit higher than what we have on the first two quarters, but no where that in the fourth quarter.

Does that answer your question Lore?

Yes, that's fine. Okay, and just quickly in Venezuela, can you help us put the quarter and maybe year into perspective from a market perspective. I mean what I'm specifically looking for is some sense of where you see the market growing, what you see -- how your share is performing? And I guess given, as you mention, the high rate of inflation in Venezuela, can you give us a sense of the size of the pricing you took in September and what you think is a feasible strategy relative to competition for '06?

Yes Lore, in Venezuela the beautiful part here to operate in this country, where you have restrictions on buying US dollars for some of your suppliers or raw materials or spare parts, to -- what to buy, you get into bank exchange problems.

Now either the production, that's what our problem in second and third quarter. The fourth quarter it was logistics. We were okay with production as we were -- we didn't have any lack of production for what was required by our clients. But the trucks, third-party trucks that we were having were breaking down and not serving us properly. We are considering actually sending some of the other trucks that we have in the other countries, into Venezuela by way of better having a more stable service in terms of freight for this market.

I'll share a statistic, I'm not sure if it's correct or not. But some of our guys are telling us that the number of trucks that are available in the market, in Venezuela, as compared to two or three years ago, the physical -- the number of physical trucks that exist in Venezuela, is 40% lower. It's a very large number. I'm not sure that it's correct, but one thing that I know is that the freight space is increasing importantly because of this lack of [offer].

We -- that is also combining with some of the roads problem, the highway problems that probably you have read in the press a lot. A bridge that has separated part of the country and that is not going to be fixed until mid next year. So all of that, what I am trying to say is that the -- to work properly and on the balancing from getting raw materials all the way to having the products to the consumer, it's a complicated matter. It's a complicated issue in Venezuela because, in my opinion, because of lack of investment, because lack of a [indiscernible] to do both investments. So -- and obviously restrictions for some of the companies to -- for companies to get resources outside of the -- because of the change controls.

Now on the commercial front we do see a market that is very competitive. With [indiscernible] and maybe that is in the hands of [Pular], but behind that was pressure for a long time, they see 100% in Venezuela for a long time. We continue to work very well with Brand Coca-Cola. We have been suffering some of the flavors.

And I think that in general it's a market where, as I mentioned during the conference call, we believe that we have one of our top managers, in terms of the knowledge of the market place, and knowledge of the business. And I -- we will have to give him some time to start getting results.

But it is a complicated environment in general in the country because of all these reasons that I've just mentioned.

Okay. Thank you.

Thank you.

And your next question will come from [Saile Amire] with Lucent Research. Please proceed.

Good afternoon gentlemen. My question was more with regards to sugar prices. First of all, are you seeing an increment over there and how do you -- and if you are seeing increment, how do you plan on countering it? Do you expect to increase your HCF content for example?

Yes, in general and related to Mexico, we should say it is the largest market and that's where we have this issue with the high fructose costs here.

First of all we do have -- we have in place the usage of high fructose, on a quarter-by-quarter basis. In general, prices of high fructose have increased slightly, I would say around 2%.

At the same time prices of sugar, even than in other parts of the world, have declined slightly, in Mexico. So this quarter we did have the benefit of those two facts in our -- the refined sugar prices that we buy are coming down and a bit more usage of high fructose, but in general thats a lower price than the refined sugar. But we are seeing some increase in high fructose, very small.

In general what we have seen is that as these raw materials are being used also as part of an energy -- as raw materials or energy problems, we have seen some increases in the rest of the markets, important increases, especially Brazil. Still very low prices compared to what we have in Mexico, but we are seeing some pressures on sugar that have affected for some of the [entities].

Right. Over -- as it applies to 2006, how do you expect any possible increments in sugar prices to affect your gross margins? For instance, how many basis point erosion could you possibly see if prices were to go up?

For 2006, in Mexico we are expecting some decline in sugar costs. In the mix that we have because we are seeing still some reductions in sugar prices in Mexico. And in Brazil we are expecting that there will be some increases in sugar, sugar costs, for 2006.

Now in terms of the gross margin the higher cost of sugar in Brazil could be offset by the lower pricing on [pricing] and the incremental growth of the returnable glass presentation as the total -- as part of the total percentage of our growth.

All right. Thank you very much.

Thank you sir. And as a reminder ladies and gentlemen, due to the large volume of participants we do ask that you limit your questions to just one.

Your next question will come from Tufic Salem with Credit Suisse. You may proceed please.

Yes, good morning. A couple of questions, well actually very brief. In Brazil what is your outlook for the market, the growth in the CFC market? And also in Central America if you can just help us separate what is the one-time affect from the hurricane and what is the general competitiveness -- being part of a general, very competitive environment in the region?

In Brazil in the industry, we continue to see growth in the industry as is reflected in our results. We do expect to continue growing in [indiscernible]. Obviously we are putting a lot of attention to non-carbonated products. The Tropical part is growing very interestingly, but there is a regard to anticipate in general what is a -- or to give you a number of what is the goal for our operations going forward.

In terms of America, I think that the competitive environment is -- it's a very competitive environment because we have Pepsi Cola in Cost Rica and we -- [inaudible] which is that used to compete with us in Guatemala and now is in Nicaragua. That has forced us to adjust our packaging mix etcetera and that’s why we have some reductions in our pricing in this region.

I think that in respect of hurricanes, more than the effect of the sideways and boats that were destroyed and that three-week waiting we had from obstructions to the infrastructure.

But the -- going forward we do think that the competitive environment in Central America [inaudible] is as the rest of the market, it's a complicated industry it's not the same that -- the goal we had a few years ago.

So only we believe that with the investment and training that we have with our people and the presentation capacity, that we are very well prepared to deal with those conditions in the market.

Okay. All right thank you.

Thank you sir. And your next question will come from Robert Ford with Merrill Lynch. You may proceed please.

Good day everybody. And Hector thank you for not reporting on the same day as FEMSA, I really appreciate that. I had a question with respect to the agreement with the Argentine Government. My understanding is that the Coke bottlers have agreed to freeze prices for 12 months on three products. Can you give us a sense of what percentage of volumes that represents and what kind of an impact it could have on your profitability over the next 12 months?

Robert, I didn't understand your questions to freeze prices of what?

I think the report said three products, in Argentina, but there is an agreement apparently with the [Kirschner] government to freeze prices for 12 months on -- product?

I thought you were referring to Mexico, sorry. No, in Argentina the -- I'm not that familiar with the agreement information like that. Let me tell you what I -- the information I have received. The government is putting a lot of pressure because they are worried about the inflation rates going up in Argentina. And they are putting a lot of pressure on some of -- especially on the consumer-product segment which is what is important for us, through supermarkets and supermarket passing that pressure to suppliers.

And that -- I believe that essentially is what -- that is basically what I can provide. I am never totally familiar with some striking agreements. In general what we have mentioned to authorities is that on one presentation, which is Fanta, the 1.5 liter that we should use that as a basic product for the consumer and in that we have agreed not to increase prices. But I don't know if that's what you're referring to as well?

It probably is. My -- the report said there were three products and there were several bottlers that had committed to freezing on three different products. So there might be a little bit more in terms of the additional happening over 12 months.

I'm only familiar with Fanta 1.5 liter. And the proposal is let's focus on these as a start to the basic, practical consumer. And [indiscernible].

And can you give us an idea of what that represents of your total production in Argentina?

Give me one second. That is -- Fanta is around 5% for us, the total for Fanta. With that presentation, and it's only in supermarkets, the agreement. It's probably I'd say around 1% of our mix. I don't think it is more than that.

Great, thank you very much.

Thank you Robert.

Thank you sir. And your next question will come from Timothy Ramsey with Bear Stearns. You may proceed please.

Good morning Hector, my question is on Brazil Beer. I was wondering in what percentage of your points of sale, where you sell soft drinks, do you also sell beer? And for comparison purposes could you tell us what was it, at it's peak under Panamco, and what you're targeting going forward, perhaps out over the next year? Thank you.

Good morning. I'm not that familiar with [others] because we just got this division of beer this month so we have been there only for 20 days. And I need to look at some of the numbers. I'm sorry I to say I don't have those numbers.

What you were saying about the Panamco, were you referring to the market share numbers or -- I didn't get it at the start of the question.

No. I was referring to the percentage of your points of sale, where you sell soft drinks that you also sell beer at. If you knew what that number was, at its maximum under Panamco and if you were targeting getting back to that level or exceeding it etcetera?

Let me look into that, the reason is I don't have any number on the top of my mind for that piece.

Okay, I'll follow-up off line. Thank you.

Yes.

Thank you. And your next question will come from Andrea Teixeira with JP Morgan. You may proceed please.

Hello, good morning everyone. I just wanted to follow-up on the divisions of shares. I understand you have -- FEMSA has plenty of right on those. So if there are at the question now, are you going to keep those on Treasury? If you use as an acquisition that would, at the end of the day, dilute Coke on their percentage. So that solves the problem or are you going to have all of FEMSA, keeping those shares?

And another question that I have, in terms of Beer Brazil. Do you -- I see in terms of market share of CSVs – we just saw ImBev reporting yesterday some gains in market share. How are the market shares behaving in Sao Paulo? Thank you.

Good morning Andrea. The issuance of shares I did not understand the question, because it doesn't have anything to do with FEMSA. I would just to remind that FEMSA holds a different series of shares that those that are in Treasury right now. And the same is true for the Coca-Cola Company. FEMSA has series A shares. The Coca-Cola Company has [indiscernible] and these shares could be sold in Treasury, if it's approved, will be -- I would say as used [as dollars].

But you can use them over -- can you exchange those shares towards the ones that Coke had and have the gentlemen's agreement that's the one for the [inaudible]?

No, no, this is impossible. The only instance where we can change from one's to the other is between B and A shares. In other words, if Coca-Cola were to buy some shares from FEMSA they can be changed into the same share that Coca-Cola has and the reverse is true for FEMSA. But not with the A shares.

Okay.

No, there is no deal in purpose on these. If we use it this year as we mentioned for currency for an acquisitions in the future, or as you mentioned every -- earlier in the morning, as a way of reducing a bit more, the debt. Or improving the liquidity in the market place. But we don't have any other purpose other than those that I mentioned.

Okay, perfect. And can you comment on -- more on Brazil in terms of how it's behaving, your market share, if you are seeing any further competition?

Hello Andrea, this is Alfredo. What we have seen in the market is that yes, AmBev has increased a little with its share of volume, versus bottlers, with – versus the other players. We have our [fee] increase, but it seems like they have lost a little share of sales versus others. So not necessarily their growth of volume is consistent with their growth of sales. It does have to do with some of the pricing initiatives there, to in the market place.

Okay, so you see this trend continuing in terms of your share in Sao Paulo going forward, right?

That's correct.

Okay, and Alfredo just to follow-up on the cost side. In terms of the EBITDA rising, the comps were kind of easier this -- like the last trimester because it was fourth quarter of '04 was sort of the peak of that year, right? But going forward you're thinking there may be a bit more of a tough comps on that end, right? So how are you going to balance the sugar? How do you feel like in terms of cost pressures going forward in 2006?

For what, for Mexico or for Brazil?

Well for Mexico first and then for Brazil, that would be great, yes. I think so.

Okay. In the case of Mexico they -- we believe that resin prices will come downward throughout the year. And I think we will reach a peak during the fourth quarter like last year. The earlier first quarter levels would be similar to pre-Katrina or pre-hurricane season, similar to the third quarter of last year, in the terms of resin.

Prices of sugar have been coming down on a year-over-year basis, but they haven't stabilized. So I don't see a story that Mexico will face a tough raw material environment.

In the case of Brazil, you have that -- the resin cost is following the same train that the other territories. It's going to start trending down and again it reached a peak like in Mexico, probably toward the third, fourth quarter of last year. And my impression is that lower resin costs in Brazil will be for 2006 combined with incremental volumes from our returnable glass presentations will help offset a higher raw sugar cost in Brazil.

Okay, that's great. In the Central America it's had a non-recurring effect, was also one of the reasons why Central America, part of why it was flattish. Can you -- that would in the consolidation perspective would be cancelled out right? Like extraordinary sales --?

Yes, let me explain a little bit on that Andrea. We have -- we do have, as you know, organized our Latin Central Division with it's one headquarter in Costa Rica. And we are receiving some comments from our auditors saying that some expenses for that headquarter operation were not exactly deductible in Costa Rica because Costa Rica was providing some charges to our accounts.

So that's why we had to start last year charging some overhead expenses to [inaudible] and secondly to Columbia and some of our Central American countries. As you can imagine Venezuela it is impossible to charge any strategic fees because of the strict controls that we face.

And we did these adjustments during the fourth quarter. But in general you actually take that effect from a comparative basis, Central America as a unit, would look substantially down compared to what we are reporting. But Columbia will be much better than what we are reporting if we have to make those fees. But those fees will be -- will continue next year. The only difference is that we have a one-shot in the fourth quarter that is very similar to what we should be charging for. This MXN40m that you see in other in revenue in Central America, that basically is what we expect to spread out during the year, next year.

Okay, perfect. That's perfect.

Is that clear?

That's clear now, perfectly clear. Okay, Alfredo, thank you. Thank you Hector.

Thank you.

Thank you. And your next question will come from Celso Sanchez with Citigroup. You may proceed.

Hello, thanks for taking the call. The question that I had really was related to SELSCO. Just wondering if you could give us an update. I know it's still relatively early, but you've had a few months now, how do you think it's progressing -- well first of all, with the channels that it's dealing with, but also in terms of interaction with Coke and the bottlers? And should we interpret other bottlers’ expansion into the non-soft drink businesses, announced as of late, as potentially an indication that things are not looking as optimistic as one might think for the non-carbs going forward?

Celso, in that -- partially of the question, and I [inaudible] what sense?

If somebody goes into a food business -- rather than waiting around to see how sales goes, do I wonder if that means anything?

Okay, let me talk a little bit about SELSCO first. SELSCO, as you correctly point out it's still too early. The results so far have been very slackish, nothing -- as they say, nothing to write home about.

I think it is good in the sense that we have organized on the bottlers in Mexico over our system and that everyone is in agreement with. That's to [share a modern phrase]. I think that has not been very successful so far for a number of reasons. One is the normal revenue curve of that operation and importantly more important going forward is the success or not of the product that we are launching to [inaudible].

We presented to you some numbers about some of the product that we are launching. We do see a little better performance of PowerAid, Ciel Water, more or less, Minute Maid is moving [forward]. It has not been supported importantly on the advertising side. So that is something that we need to work, but it's a work in progress. As we entered this category, I will not say that the success is not working because of the design of SELSCO. My feeling is that so far it is probably already because the [cafe] that we are launching still needs some more time to steep with the consumer and we then [inaudible].

In terms of the volumes that we are seeing of those products in our organization we take a turn is quite similar to the one that we have in SELSCO. Yes, we are growing the volumes from a very small base but we think that we can do much better with more support in terms of the promotional activities and other types of -- and support basically with TV and the consumable side a lot better, brand recognition and [inaudible], in that sense, though.

In general I do think that this -- the positive thing that we have is that it's improving little-by-little still [inaudible] in terms of the performance on SELSCO per se. We will have to look at a P&L for SELSCO, isolated. It's already still is starting to break even.

But the most important element here Celso, is that we have a vehicle that is working and that has all the [products] in line in that respect. We have an example of what happened in the U.S. as a way of seeing that we are following which are important for us.

With respect to the investments of some of the other bottlers, it's very difficult with us to -- it's a different bottler to give an opinion on that. But I think that everyone is [inaudible]. But I think there is -- [inaudible] to ask that question directly.

I guess I meant more do you sense any change in commitment from any of the other bottlers? This was just an example. Obviously, as you said, results haven't been going as great as one might hope, at least in the early stages.

[inaudible] working with this industry and with these problems which are [inaudible] for so many years. And now this is a very good cash flow generator for [inaudible].

I do see as we have discussed in the past that the business is not as easy as it used to be, a few years ago in terms of lower competitive level and the lower regulation and things like that. So [inaudible] a little, some of this infrastructure resistance and information technology. In order to be very effective you have to keep the liquidity that we achieved.

And we are seeing some other small bottlers will have more difficult times adjusting to the competitive environment. You need to develop some new products in one way presentation and you don't have the capacity for that -- the investments are quite large for a very low budget. So we are seeing some cooperation amongst all of the smaller bottlers in Mexico. And because of that, as I have mentioned, we think that there might be opportunities for acquisitions. I think that the chances for bottlers being at the maturity point to sell are greater now than it was four or five years ago just because the industry is a little more competitive.

But I think that in general you see a lot of commitment from the bottlers to the branches of the Coca-Cola Company which helps [relief] and we are setting a very good business for all of us for a very long time.

Just to finish up. The advertising point that you made, that sounds familiar with respect to the -- one of the stalling points I thought of Ciel a few years ago, is that where the advertising didn't seem to quite match the ambitions for the growth of the brand. Is that something that seems to be an issue here as well again, or do you think it's just a question of so much too do and not enough time to have done it?

I think it's a combination of many factors. It doesn’t always happen like that. I think that we do have some good. I think that it has to do more with the fact that we have been investing a lot of resources behind Brand Coca-Cola in this past year. And that is why you are seeing the very important goals of Brand Coca-Cola in most of the markets.

So one of the aims for this year is to put volume behind Brand Coca-Cola it grows, and when it grows in an important way.

And the other part of the equation is that we have competitors that are investing a lot in these categories. For example, [indiscernible] very large discounting to the retailer. It's not so much to the consumer or at the end of the day the consumer pays the same price but the [indiscernible]. And you do see [inaudible] take over 65 days of the year in [inaudible]. And it's not the case of Ciel Aquarius and, or Minute Maid or some of the other products.

So we need to find the right balance for that one. So it's a combination of all the factors related to promoting the products and carrying the products at the top of mind of the consumer.

Okay. Thank you.

Thank you Celso.

Thank you sir. And ladies and gentlemen this does conclude the question-and-answer portion of your conference. I would like to turn the presentation back to Mr. Trevino for closing comments.

Okay, thank you everyone for your interest in the Company and as always Alfredo and [Juletta] will be available to answer however many questions as you may have. Thank you.

Once again ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a great day.