Coca-Cola Femsa SAB de CV (KOF) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen, and I would like to welcome you to the Coca-Cola FEMSA first quarter 2006 earnings results conference call. 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 and are based upon currently available data. Actual results are subject to future events and uncertainties which could materially impact the Company’s actual performance. As a reminder, this conference is being recorded for replay purposes. [OPERATOR INSTRUCTIONS]. I would like now to introduce your host for today’s call, Mr. Hector Trevino, Chief Financial Officer of Coca-Cola FEMSA. Please proceed, sir.

Good afternoon everyone. Thank you for joining us today. This quarter our Company achieved strong consolidated results, reaching approximately 8% revenues, gross profit, operating income and majority net income growth year over year. This growth was mainly driven by operations in Mexico and Brazil.

Our Company’s consolidated margins remain stable, despite various [inaudible] costs outside Mexico, our higher percentage of revenues and lower resin costs on a year-over-year and sequential quarterly basis, compensated for any margin pressure.

In the first quarter 2006, we realized good profitability in Mexico, Columbia and Brazil, which together represent close to 90% of our consolidated operating income. We expect these three markets to account for the majority of our incremental profitability going forward. We will discuss these three territories’ performances in greater detail.

In Central America, our operations are retaking the path to revenue growth after a tough year of top-line contraction in 2005. In our view, these brands already reached Central America’s [low-counting] market share gains in 2005, and this year we should identify more opportunities to take advantage of segmented pricing throughout the region. In fact, we increased prices by around 70% at the end of the first quarter of 2006.

In addition, volume growth from brand Coca-Cola and innovation in flavored CSDs, combined with our strong growth in the non-carbonated segments, should foster revenue growth for the year.

We expect top-line growth and lower rate in cost to start translating into higher operating income in the coming quarters, offsetting 20% plus higher year-over-year sugar cost throughout the region.

In Venezuela, our operations are realizing the benefits of both improved prices and volumes. For the quarter, our Venezuelan operations revenue grew 8% year over year, supported by price increases implemented during the quarter and the second half of 2005. Additionally, our operations volume increased 1.7%, driven by strong growth from core flavored carbonated soft drink brands, Hit, Frescolita and Chinotto, which more than compensated for lower volumes from [inaudible].

Unfortunately, this revenue growth only partially compensated for higher cost and expenses across the value chain, from increased raw material cost to higher salaries, that significantly affected our operations, selling and transportation expenses.

As you have seen in our results, Venezuela does not have a top-line issue. The problem is more related to the cost and expenses across the value chain. That is why we are re-evaluating our regular structure and procedures throughout the value chain. As a reminder, Venezuela represented only 3% of our Company total EBITDA in the first quarter.

Despite three consecutive years of increasing revenues, our Argentine operations were able to post revenue growth of 2.4% for the quarter, driven mainly by brand Coca-Cola and our recent introduction of novelty flavored water brands Dasani and Kin. Our Argentine operation’s higher revenues partially offset increased [inaudible] transportation expenses, which resulted in lower operating income and margins.

Now let me talk about the operations that, together, represent almost 90% of our Company’s operating income, that is Mexico, Columbia and Brazil. Mexico, it is important to note that due to this market’s seasonal characteristics, the first quarter of the year is always the lowest in terms of our operation’s consolidated revenue and cash flow generation.

Bearing this in mind, our Mexican operation had an exceptional quarter, with revenues growing 7% and operating income rising more than 13%, despite the strong commercial and pricing activities of our main competitor in the [inaudible] of Mexico, our major market.

This performance was driven by, one, the Coca-Cola’s brand strong growth but which volume grew more than 6% year over year. Second, a robust incremental growth in flavored carbonated soft drinks of 12% year over year, driven mainly by the growth of regional brands Fanta and Mundet Multiflavors, which more than doubled year over year.

Third, strong single-serve and [inaudible] bottled water volumes which grew 7% and more than 10% respectively year over year, and [grew] more than 50% total growth in non-carbonated segments, driven mainly by flavored water brand Ciel Aquarius.

Our segmented strategies drove Mexico’s results for the quarter, highlighted by the performance of regional flavored brands, incremental volume of CSDs in single-serve packages, especially our 600ml presentation of brand Coca-Cola, and the roll out of our 1.25-liter returnable glass presentation also for brand Coca-Cola. Favorable weather conditions as well as one additional calendar year -- calendar date year over year.

On the pricing front, our average price communicates a decline in real terms by 1% year over year, and almost 4% sequentially. These prices also resulted from mainly two reasons. First, a greater growth of our regional brands, Fanta and Mundet Multiflavors, which represented around 35% of our incremental CSD volume, and second, the strong growth of our [inaudible] water business, which carried a significantly lower price per unit case than carbonated soda drinks.

In the same pricing environment, it remains stable to positive in our territories of [valley of] Mexico, which represents more than 55% of our Mexican CSD import. We believe that the aggressive pricing strategy of the present system in the [valley] of Mexico is affecting lower price position significantly, keeping them focused on a price war in the 3-liter segment, where we have not participated.

Over the past three years, we have implemented several successful initiatives involving our internal presentations of brand Coca-Cola and our original flavored brands which, based on our profitability, are evidently the right strategies for our Company.

Our successful rollout of our 1.25 liter returnable glass presentation of brand Coca-Cola in the valley of Mexico is shaping us to [fold] our segment and price points for brand Coca-Cola, creating a pricing floor for packages of [inaudible].

Our regional flavored brand strategy is working. We have successfully regained market share in the flavored carbonated soft drink segment in our Mexican territories. These brands complement our growth portfolio, providing our clients with a lower price alternative for [our customers].

We experienced a gross margin expansion of 130 basis points, mainly driven by lower raw material costs. Our sweetener cost declined by more than 8% year over year, and our resin cost declined by almost 4% in U.S. dollar terms.

Going forward, we do not expect to increase volumes at the same rate as the first quarter 2006. Second quarter of 2006 will not only have two fewer calendar dates, but also the Easter volume will have an adverse effect on regular consumption in Mexico City over those two weeks.

In Columbia, we faced difficult weather conditions during the quarter, which impacted our sales volume. We also faced a tougher year-over-year comparison, considering that we launched an aggressive marketing campaign as part of our introduction of course at the beginning of last year.

The marketing initiatives that we implemented in Columbia around brand Coca-Cola provided us with a healthy volume growth of 5% in the first quarter, mainly in multi-serve presentations. This growth completed offset the volume decline in our flavored carbonated soft drink brands. As for our future growth, we will continue to innovate and focus on our [partner’s] strategy in [inaudible].

And we recently introduced zero-calorie flavored water under the Fanta brand, combined with our existing [inaudible] and Ciel brand bottled water, enabled us to achieve more than 60% growth in our single-serve water presentations over the quarter. This growth was partially offset the decline of our bottled water volume in [inaudible] presentations, resulting in a 2% increase in our combined water volumes for the quarter.

On the price front, our multi-segmentation strategy we have been implementing according to the country’s particular characteristics, coupled with the price increases that we implemented for our multi-serve packages from the second half 2005, supported our 2.7% average price increase for the quarter.

In Columbia, despite cost pressures driven mainly by a more than 20% increase in sugar prices and higher packaging costs due to a shift in our packaging mix in all of our presentations, our gross profit grew 2.1% and our gross margin remains partially flat.

Our top-line growth more than compensated for additional ongoing expenses related to the corporate services provided by our Latin central division and resulted in a 10% increase in operating income and a margin expansion of [70] basis points year over year.

In Columbia, we expect our profitability to continue improving at a stronger pace over the remaining of 2006, driven by top-line growth on operating improvements.

In Brazil, continuing the positive trends of the past two years, our Brazilian operations posted strong results, with our revenues, excluding beer, growing more than 13%, and our bottle line growing more than 20% for the quarter.

In connection with FEMSA Cerveza’s February 2006 acquisition of a controlling stake in Cervajarias Kaiser, we agreed to resume the beer sales [formed] in this [former] territory of Brazil, consistent with the arrangement in place by 2004.

We had recorded beer-related revenues and costs on our income statement, where disclosing quarterly beer revenues for information purposes. We will not disclose volume comparisons until [inaudible] 2006. Accordingly, beer revenues will not be comparable until the first quarter of 2007, although we have taken further steps to improve our market execution, such as almost doubling the point of sales coverage of beer to 52,000 clients in just two months. We see this as a transitional year for our beer operations and [partner supplies].

[Working] with FEMSA Cerveza, we are evaluating the introduction of a comprehensive packaging and portfolio in [inaudible]. Our Brazilian market was also an increasingly important component of our overall results, accounting for more than 15% of our Company consolidated operating income, which was driven, to a certain extent, by our [final] geographical [inaudible] overall.

For the quarter, our Brazilian operation’s revenues increased more than 13%, resulting from higher average prices and sales volume increases. Our marketing plan [across] our operations incremental revenue in the quarter, seeing as the majority of this growth came from our [immediate] consumption and premium growth, which varies [inaudible].

CSD volume grew 7%. Our marketing activities, combined with a good execution at the point of sale and a broader portfolio brand Coca-Cola continued to show positive results, accounting for more than 60% of our incremental volumes in the quarter.

A remarkable development was the successful performance of our premium brands, mainly [inaudible] Coca-Cola Light, which reached more than 10% of our sales volume in the quarter. The decline in our flavored carbonated soft drinks was partially offset by the growth of our low-calorie flavored products. To put things in perspective, core flavored brands are more than 10 times the size of our light flavored products. So this category will still have a lot of room for growth.

Our bottled mineral water and non-carbonated segments continue growing at the 30% level, and together accounting for almost 10% of our total volumes for the quarter.

On the profitability front, inclusion of beer revenues in our financial statements, as well as the increases in sugar prices, more than offset the benefits of our improvements of [inaudible] efficiencies and a year-over-year appreciation of the [inaudible] brand, resulting in a gross margin contraction of 280 basis points. However, our gross profit grew almost 50% for the quarter.

Our operating income increased more than 20% for the quarter, cycling from [150%] of growth in the same period 2005, resulting in a margin expansion of more than 50 basis points.

On the financial front, our gross debt levels remained practically flat compared with those here in 2005. We continued to gather strong [partnerships] on the well-balanced capital structure. More than 70% of our total debt is denominated in local currency, mostly Mexican pesos, and close to 90% of our total debt carries a fixed rate of interest.

By the end of the quarter, Standard & Poor’s rate our long-term corporate credit rating to AAA+, from BBB, and also rated long-term national corporate trade rating to AAA from BB+. This positive development was based on our strong business fundamentals, as well as our three-year track record of positive de-leveraging following the acquisition of [Vanane], and our robust cash-flow generation in our core markets.

In terms of dividends, the board raised the dividend 8%, to MXN0.376 per extraordinary share, or basically MXN3.76 per ADI.

Our results clearly underscore our successful business model which we have been implementing across all of our territories. We continue to deliver strong growth in the carbonated beverage segment, and we have plenty of opportunities for profitable growth. These opportunities include increasing our per capita consumption, continuously improving our execution, leveraging our unique sophisticated interest model and capturing potential growth in the non-carbonated low-calorie diverse segments, which still represent a very small part of our business.

Now I would like to open the call for any questions that you may have.

[OPERATOR INSTRUCTIONS]. Our first question comes from Jose Yordan from UBS. Please proceed.

Hi Hector. My question is you mentioned sugar costs and you mentioned other cost pressures. Could you give us a little more detail about what’s happening in each country in terms of sugar, outside of Mexico really because I’m pretty familiar with Mexico?

And also in terms of salaries, there have been some issues that you guys have mentioned about salary demand in Venezuela. I had read some stuff about salary increases in Argentina or other industrial players. Just in general what the outlook for salaries in each of your countries and then for sugar outside of Mexico. That would be great.

Good afternoon Jose. Let me get some of the numbers here. If we -- let me start very broadly to talk about the raw materials and then I can go onto the reported data on a per-country basis.

In general, the two main elements that have some influence on our results this quarter are, and as a general trend, we have sugar prices increasing everywhere except Mexico. And, on the other side, we have resin prices coming down, except in Venezuela because of the restrictions that we have in Venezuela. In terms of the importation of [inaudible] in Venezuela, we have a slight increase on the cost of our bottles.

To give you an idea, we have, in the case of Mexico, we have those options on a year-over-year basis in sugar of around 4 to 5%. And then we have increases in sugar in areas like Columbia, growing between 15 to 18%, Venezuela growing around 25%. And Brazil, which is an extreme case, only from a very low base of sugar prices, and Brazil increasing around 60%. So we have, as you see, a lot of different price movements with respect to sugar.

In general, resin prices in dollar terms, it’s more for an international price, we did have similar levels to what I mentioned for Mexico, around a 4% reduction in dollar terms.

We do have different effects from each country depending on the movements of each of the different currencies. For example, in the case of Mexico, we have the 4% plus positive effect because of the FX.

Sure.

And we have that positive effect.

With respect to salaries, I’d say that the two main regions where we have problems is Argentina, Venezuela, most of prices. In Venezuela we have increases in real terms, last year, of around [20%]. And remember that inflation was around 20% also in Venezuela. And that’s for last year. This year, we have already suffered some increases [inaudible] during the month of February. We were expecting increases of around 15% in May. That was our expectation.

After that in a speech [inaudible] in May, he mentioned that he was increasing prices [the reasoning which] by around 50% in February. So now our expectation is that we make another increase during the year. So Venezuela, in that respect, we might have some pressure on the cost and expenses side because of the [inaudible].

In Argentina, we have not suffered any price increase -- any further increase up to this moment -- up to this year. But the union are related to transportation to the strongest unit in Argentina right now, they are negotiating with the government a 19% increase in salaries. That is not just [level], it’s still to -- in our negotiations -- it has not trickled down to our negotiations. But we certainly will have some pressure on salaries in Argentina.

As a reference, salaries in Argentina increased around 24% last year. In real terms, remember it’s not -- as a reminder, Argentina face around 11%, so the number was in the 30s, large percent. And that’s [the answer to your] question.

Very helpful. Thanks a lot.

Our next question comes from Robert Ford of Merrill Lynch. Please proceed.

[technical difficulty] price war. Can you elaborate a little bit on when that really began and how you’ve been able to avoid getting sucked into it and --

Hi Bob.

Hi.

Hi. Apparently just part of your question we were able to hear. Can you repeat it again please?

I’d be happy to. I was asking a question with respect to the pricing environment in the Mexico City metropolitan area, specifically when it comes to the large 3-liter plus packages. Can you talk a little bit more specifically about when and what kind of an impact it’s had and how you’ve been able to mitigate that. And is there any evidence that that might already be easing somewhat?

Hi Bob. Well, the pricing environment in Mexico, as we expressed in the last conference call because it’s what started at the very beginning of the year with this strategy of serving 3 liters [inaudible] [MXN20]. Then we started with that pricing point really at the beginning of the year, very early in January.

What that [has] cost, that we feel very confident in our approach. What we have done is basically to use our, what we call, deductive pesos, that is the pricing on the resulting [cap] that reported some other presentations because only the [retention] is not 100%, and that helped us so that whoever is looking for a lower price would use the [inaudible], but someone who is not worried about that would not use it.

So in that sense, we have our 2.5-liter returnable. You can say that if someone uses the [MXN20] in some regions of Mexico City, they can get that presentation as low at MXN10. And there are some other areas of Mexico City where we have the same presentation of around MXN13, because from [one] [inaudible]. We have different prices -- segmentation of Mexico City for different prices.

And we have a strategy our market share in Pepsi Cola have very, very few package share price. But on the other hand, we feel that the brands are suffering because again, as I was mentioned in this month’s speech, we are not competing precisely on this to relieve our presentation. Now what is in Mexico City, you will see that the Pepsi Cola is moving from the 3.3 liters that they sell at MXN20. They are launching a presentation of 2.5 liters at MXN8. So it’s moving away a bit from the 3-liter bottle. And I believe it’s a very attractive price point for the consumer [inaudible].

On the other hand though, when you look at some of the results that for the first time I will say want to see some of the premium results for the quarter, and they mention some of the profitability or the operating income [they have achieved] in Mexico. I’m not surprised with that. They reported $2m operating income, if they report correctly.

With that [strategy] of three years at MXN20 is very tough to improve profitability. So my feeling is that this strategy is going to stay here for a few more months. I don’t know if at some point in time Pepsi Cola will start increasing their prices or move away from the premium.

They are rumored that they might launch their presentations in some other areas of the country. But again, it’s probably something that will get them some volume and some cases, but certainly not profits. So it’s a little difficult to read what the future environment is in that one.

We feel very confident that with the segmentation strategies that we have, with the different price points that we have for some of the presentations, would lead a quarter presentation [in glass] that have also the appeal of being a glass bottle as opposed to plastic, that has this special positive connotation for the consumer. I think that we are doing very well in terms of our strategy in Mexico.

And Hector, that price point for the 1.25 liter returnable glass, what is that again?

It’s 7.50, Bob.

7.50. And then just lastly, with respect to Argentina again, I hate to return there, but has there been any change in the environment with respect to price controls?

Yes. Last time I [inaudible] that question, and we mentioned that we have Fanta 1.5 liter under price controls. Presently we have Fanta a 1.5 liter, and 0.25 liter [and a half] under price controls which are presentations that are important in terms of having that presentation to the consumer, but are not that important in our revenue mix.

In Argentina, part of the positive look is that we are growing some of the premium brand segments, with the light -- what we call the local light or the light segment. We are starting to represent the same strategies that we have in Mexico to some of these other areas, like Brazil and Argentina.

And I think it’s important also to mention about that, with respect to the previous question in the [valley] of Mexico, important that Mundet Multiflavor is having in the development of -- or in the protection that that strategic presentation and flavors are giving us in the valley of Mexico.

You remember from previous conversations, we mentioned in the past that [Caritos] was a very important player, even more important than [Pepsi Cola] and growing more importantly [inaudible] and especially in the valley of Mexico. And with this strategy that I said that Mundet Multiflavors have followed [inaudible] since a year ago. And obviously that has an impact on our pricing and I referred that it’s one of the main reasons for the 1% real terms [plan] that we have with the pricing in Mexico in general.

But, on the other hand, we have increased very importantly, basically taking share away very importantly from Caritos. So in context with that, you have a better picture of Mexico City.

I sure do, Hector. And it’s just my understanding, at least anecdotal evidence would suggest, you’ve been able to maintain your operating momentum in terms of volume growth through April, despite the Easter shift and perhaps despite this new launch of big Cola 2.5 at MXN8. Is that correct?

Yes. April is come in with very strong volumes. Yes.

Great. Thank you very much.

Thank you.

Our next question comes from Lore Serra from Morgan Stanley. Please proceed.

Good afternoon. I had one quick question on Brazil and then I wanted to go back to Mexico for a second. I noticed in the 20-F that your franchise agreement in Brazil expired at the end of 2004. And I know there is an element of perpetuality about the franchise agreements, but I guess it’s a bit unusual to have an 18-month gap in terms of renewing the franchise agreement. So I wonder if you could comment on that first.

Yes, Lore. Good afternoon. We have not finalized the renewable franchise agreement, that means [inaudible]. We have -- let me go a step back this year to [say the recent] [inaudible], so not really worried about this. When we have Mexico and Argentina, we have exactly the same bottling contract for Mexico and Argentina. And it was a 10-year automatic renewal and so all the conditions are in a normal agreement.

When we acquired [inaudible], we ended up with contracts that have different conditions than what we have. And basically, as they became -- we really started the number of positions to remove the sponsor because we have some time for the maturity of the contract. But as this contract has been maturing, we have been in conversation with the Coca-Cola Company to try to have one single [total] appointment for all of our operations. And we have not been completely successful in that so far.

We have been working with lawyers, and you know when lawyers are involved they start [inaudible] and all of that. I don’t have it. We do not foresee any problems with respect to this franchise appointment. We continue to release the Coca-Cola bottle for those regions. It’s just that we are in all these meetings with the legal work of trying to adjust the agreement so that we have a standard agreement for the operations, and that’s the reason for some of these delays in the renewal of the contracts.

Okay. And just getting back to Mexico for a second, I guess I’m interpreting from the pricing trends as well as the volume trends that the industry and yourselves are becoming more promotional. And you mentioned that you’re expecting lower volume growth for the balance of the year, although you’re saying that April was a strong month.

I wonder if you could talk about whether you still view pricing with inflation as your goal in Mexico over 2006, and whether you see opportunities to take rate increases, or whether we should expect this sort of more promotional environment to linger so that we’ll see more volume, less price?

Yes. In general, Lore, you know that we have been very stable over the years with our policies. We try to -- difficult times in the competitor environment to [inaudible] we are facing. We try not to lower the price of the presentations -- the individual presentations. We try to extract a positive price movement as we try to segment better some of the markets or the areas, to launch new products or new categories that will help us deliver on the pricing front.

But, at the end of the day, the pricing for the year will depend on how much promotional activity we have, for example, if we start selling a little bit more of 1.25 liter, or a little bit more [inaudible] water, or larger presentations that carry lower prices than the single-serve presentations, it will have a negative effect in pricing at the end of the year.

If the consumer starts using more [inaudible], that I mentioned a figure around 40% redemption. If they start moving to 60%, that will clearly affect our price. In general, we will not see a [resorption] on the price of our presentation that we have in the marketplace, but rather in launching a new product if we need a special price, like 1.25 liter, or some kind of promotional activity for the consumer, where we try to [cross] a little bit more volume.

So, at the end of the day, I think that is going to be very difficult to keep prices with inflation for this year, especially when we refer to Mexico City. I am not seeing the same problems outside of Mexico City. We are seeing some more flexibility towards prices. Mexico City has been the area where Pepsi Cola has been focusing a lot of its promotional activities.

We are trying to promote 600ml and the presentations have been going for the first time last quarter, and this quarter also -- we also have important increases in that that have been also [inaudible] the pricing volumes. So, as a general trend, I would say that when we try to see prices with inflation, but I would not be surprised if we are slightly lower in real terms.

Great. And lastly in Mexico, the SG&A spending was steady as a percentage of sales. But given the strong volume growth, one would have expected a little bit more cost leverage -- operating cost leverage on the SG&A line in the quarter. Can you comment on whether there was anything that was boosting up the first quarter SG&A spending levels above where it might have been otherwise?

Yes. I think there is, in general, there are two or three basic things here in the SG&A. One is that -- and when we review 2004, we have in our accounting for the [inaudible] for personnel, we were anticipating better bonuses for the year 2004, it was not a very good year for bonuses. So we ended up canceling some of the reserves in the fourth quarter of 2004.

And we have started the first quarter of 2005 with very low provisions for some of these bonuses. And then 2005 ended up being a year where the salaries and bonuses increased slightly versus 2004 because the performance was better.

So, if you look at last year, first quarter was a little bit unusually low because of these reserves that we were creating that were lower than -- and then we have to step over with our [growth] in the year.

So one of the three things that I wanted to mention is this issue about bonuses and salaries. The other issue is that we have a problem with the canning line that we have in [Taluca] that was out of circulation for a couple of weeks. We have to bring Coca-Cola from [Tereto], and that increased our freight costs around $1.5m during the quarter. That’s basically the effect that we have on sales costs. And third, because of all the go-to-market initiatives that [inaudible] has for Mexico City, we have encouraged some additional expenses related to advisors that are helping in that process, and also especially on IT. That’s what has bumped up a little bit these additional expenses for this quarter.

I do expect that further element to be present probably for the next six months because this [operation] will take some time to fully deploy in Mexico. At the end of the day, our expectation is that we will have lower sales expenses because of these -- [we did not ignore] the procedures and the way we go to market going forward. So we will incur some expenses up to September and then hopefully we will have some savings going forward as we remain [to the strategy].

Great, thank you.

Thank you.

Our next question comes from the line of Ronaldo Santana, of Deutsche Bank. Please proceed.

Yes, good morning. I have basically two questions. One, regarding Venezuela, what should we expect in terms of margins for Venezuela, given the current environment, especially in terms of expenses and what do you, or when do you expect new strategies to start benefiting results and what do they consist of?

Then second, if you could please elaborate a little bit on the outlook in terms of volumes in Colombia, considering tough comps for the rest of the year, and as far as I understand, also price aggressiveness from [Posta 1]. Thank you.

Good afternoon, Ronaldo. Let me start with Venezuela. Venezuela, as I mentioned during this small piece that I did at the beginning, Venezuela is a strange case because it’s not a problem of volume or prices. As you can imagine, there is a lot of money in the marketplace as a lot of social programs are implemented with the very high oil prices and the government is spending a lot of resources in Venezuela.

So the consumer has more, so we have a situation where our volumes have been growing. Importantly, we have also increased prices, so revenue is growing. If we go back a few months we were having problems with manufacturing facilities, because remember, we closed down an important number of plants when we acquired [Fanapto] and we were having problems with manufacturing because bottling was growing very fast.

We adjust that with some of the local currencies that we have there, as a way of protecting the value of our cash balances rather than having [inaudible]. We prefer to have some [inaudible] and we did some investments, picked some of the volume mix, and we believe that manufacturing is okay.

Now, the second stage is that we are carrying some shortfalls in terms of products being in the stores when the consumer wants that, because of the primary distribution, primary meaning from the plant to the distribution center. We tried to bring some trucks from Mexico to Venezuela, and we even got a [permission] from the government because they think that’s a way of [striking] some local currencies, part of the exchange control that we have there. If you want to bring trucks into Venezuela they have to be [new trucks]. We have problems with the highways. The most famous case is the bridge that connects the airport was [inaudible]. That created a lot of problems there.

Ronaldo, what I’m trying is we have a very good operation in terms of volume, price. We have a good competitor with [inaudible] so competition is good. It’s important. We cannot be distracted from that. It is important that we are focused on our competitor.

But at the same time, all the value chain is very complicated because of the lack of investment from some of the suppliers that we have, if we have -- if one of the [inaudible] goes down, or if it takes weeks to fix because there are not the spare parts, etc, and the same is true for distribution [parts] and all of that.

So given that environment that we have, is that we have a specialized team that is looking and in addition to changing the top management of the operations that we did a year ago, we have now this taskforce, analyzing what we call reinventing the way we do business in Venezuela. That might bring -- and we have several areas where we are looking at. Since the growth for volume, the pricing formula that we have there, how we do the [ordinary] initiative process, we control that, we have on those [institute] process. We need to review all of those steps, and start from zero and do what is appropriate for Venezuela.

With that in mind, this year is going to be a very tough year because obviously we will not be implementing those changes. It will take some time for this taskforce to give us something back on the things we need to do. It is very difficult to predict a number for margin in Venezuela and this is why we have a [81%] margin, operating margin.

I think that the -- I don’t see a lot of improvements in Venezuela in the coming months until we go into this -- until we come almost to this -- the results of all these analyses that are being performed by this taskforce. And for that reason, I was also trying to reflect on this idea that Venezuela, at the end of the day, is an operation that is important because [inaudible]. We have been exposed to these kinds of conditions in the past, here in Mexico and Argentina where we have gone through difficult prices.

We think that we have the expertise and we are very prepared to extract as much money as possible out of the operation in Venezuela, and to repair this trend in profitability in the future, but at the end of the day, Venezuela, out of the [four] different countries that we have, wastes around 3%.

In terms of Colombia, this quarter we were citing very tough conflict because of the introduction of [inaudible] in the first quarter of last year. What happened is that we have an interesting growth in brand Coca Cola, around 5%, [inaudible] but the rest of the players, importantly coming down, because of the very aggressive strategy of [inaudible] with respect to basically not so much with prices, but maybe with the introduction of new productions following the strategy of what is called [inaudible] in and out, in other words, the last ones in the product and the flavor has some success for a few months, and then they would terminate or just finish that process and start with a new product.

We are also evaluating at [inaudible] some of the flavors and that’s another portfolio that we have, and start experimenting with some in and out strategies also. So after a very successful last year in terms of gaining share from [Postabon], in the flavored market, this year, first of all [inaudible] and starting to do this strategy of in and out, and that is creating some of the flavors. Again, if [Cross] continues to grow, which is important to us, and Coca Cola brand continues to grow.

Great, thank you very much.

Ladies and gentlemen, due to the large volume of participants, we ask that you limit your question to one. Our next question comes from the line of Timothy Ramsay of Bear Stearns. Please proceed.

Thank you, my question was already answered.

Our next question comes from Alex Robarts from Santander. Please proceed.

Hi everybody. I wanted just to start off going back to some of these raw material issues. I guess, Hector, you’re saying that during the quarter, on the sugar side, we saw 20% higher prices, year-on-year, and I just want to get a better sense of where we are in the pricing trend. Looking at some numbers that we have, is it safe to assume then that you have further increases in your cost of sales in that sugar item into 2Q? And at this point, where would you say, on a consolidated basis, sugar is as a percentage of your total cost of sales?

Alex, the first part of your question is a bit tough in the sense that if you can tell me where oil prices will be in future then I can [inaudible]. Maybe I can be a bit more precise in my projection of prices of sugar. Remember that, as I was mentioning, sugar prices, especially in Brazil have increased, importantly, because it is being used as a substitute for gasoline, so they are using that a lot.

I was in conversation with Mr. [inaudible] who as you know is a board member, and he tells me that as we speak, there are 90 more plants more refining sugar for car purchases [inaudible]. So if oil prices continue to increase, Alex, I have no doubt that we have some additional increases in sugar prices. My prediction right now is that we will continue to have some slight increases in sugar prices going forward. That’s what we are anticipating. But if oil prices continue to increase, importantly, then the strategies in Brazil, where you have these cars are using [inaudible] for a long time on a very large float of cars that use that, well, we will see, more importantly, increases in Brazil.

As I mentioned, in Mexico it’s the reverse because we have such a high price in sugar that with all the high fructose as a [inaudible] to using that fructose is obviously bringing the sugar prices down a little bit.

With respect to how important is sugar prices in our cost of goods sold, I would mention that around between 15% to 17% is a good number for sugar prices. Obviously if we have a big jump in sugar that number will increase notably. Okay?

Okay, and just going back on the PET, to understand, the prices then, of your resin, you are saying, on a company-wide basis, in the quarter, you are saying are lower than what they were in the first quarter of ’05? Is that correct? Did I hear that right?

Yes, Alex, it’s slightly below 4%, almost 4%. This is what we are saying in [inaudible]. But these [inaudible] in dollar terms.

Yes, Alex, this is Alfredo. Just remember that we’re going back to [inaudible] levels in the third quarter of last year, and also, the levels of the third quarter last year, at the end of the second were similar to the ones at the end of the fourth quarter ’04. So that is a reality that we’re seeing right now.

Okay, so part of that is currency?

No, not this. When I’m saying 4%, it’s in dollar terms.

Okay.

But for example in Mexico, we have the additional [inaudible] a few percentage points. It’s around 2% the effects, the exchange rate effect on Mexico. So in Mexico we will have, between the two things, we will be closer to 6%.

Okay, and assuming that the prices are, right now, where they are today for the rest of the year, what would be your sense, on an average basis, of what those resin costs might be, ’06 versus ’05, your best sense?

They will be -- they could be lower than the second quarter of last year, similar to the third quarter, and lower than the fourth, because the [inaudible], they peak during the year.

Okay. Fair enough. We can talk more on this offline, but I guess that gives us a good sense, and the second question, and final one I had was just to go back here talking about the average selling price outlook in Mexico versus inflation, and how do you think about that, Hector, when you think about the jug water growth?

And I guess we’ve been seeing a very strong, two or three times multiple growth jug water versus CSB. Do you think it’s fair to assume that this type of jug water growth rate can go into, let’s say, ’07? And to the extent that you’re cautious about average selling prices being versus inflation, is that a part of your cautiousness, the fact that you do have this very strong growth of the jug water?

Yes, Alex, jug water, remember one thing, that prior to a balanced position we were having in jug water, [whatever] so we inherited that business from [Bananco]. We were not happy with the performance. We analyzed the business with a lot of detail. We found a piece of the business that is attractive to all, which is selling at a higher price and trying to be a way of this very, very tough competition, local competition from people that [refill] these containers in local shops.

So the effort is how to represent a product that is well received by the consumer, that we can sell at a high price, and at the same time, technologically how can we [re-brand] a package that cannot be used by some of these re-fillers?

With [inaudible], we think that we have a very profitable jug water business. We have a team that is focused 100% [inaudible] and they are only focusing on jug water, not into the [inaudible]. They have presented to the board of directors a few strategies of moving to different geographic areas, these operations, also so not moving or introducing jug water to other geographic areas, rather, including the [Valley of Mexico], and we think that we continue with the success that we have had in the [inaudible] region of where we are selling at a good price the volume of these jug waters.

You heard that the volumes that we have now are substantially below what we had when we acquired Bananco, and we came to a very strong production in volumes, just clearing out all this volume that was not profitable for us and now we stay with the cream of this business.

The [expenses] that we have on the pricing front is that if we continue to sell more jug water on average, that would have an effect on the pricing for Coca Cola FEMSA in Mexico, because obviously [you sell it] at 90 liter presentation at a very low price compared to CSB.

So 30% of total Mexico volume being jug water is something that we could maybe see if this plan happens to go into other territories, let’s say, in a year or so? Is that something that might happen?

No, no, Alex. Right now, if I’m not mistaken, it’s around 15% but I do not see that kind of growth, like the volume [inaudible]. I might see that up 20% level or something but not 30.

Okay. Thank you very much. That’s great.

Mr. Trevino, at this time there are no more questions in queue.

Well, thank you very much for your attention and as always, Alfredo and Julieta will be able to answer any further questions you might have today or in the next few days. Thank you.

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