Coca-Cola Femsa SAB de CV (KOF) 2006 Q4 法說會逐字稿

Good morning everyone, and welcome to the Coca-Cola FEMSA's fourth quarter and full year 2006 earnings result conference call. As a reminder, today's conference is being recorded, and all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

During this call, management 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 can materially impact the Company's actual performance.

At this time, I would now like to turn the presentation over to Mr. Hector Trevino, Coca-Cola FEMSA's CFO. Please go ahead, sir.

Good morning everyone, thank you for joining us today. We achieved strong balanced top line growth, and solid bottom line growth in 2006. We generated robust revenues in almost all of our [transact] territories, despite a competitive environment in some of our markets, and the external realities of [wars].

Additionally, double-digit increases in operating income in our Central American and Columbian markets, along with operating income growth in our Brazilian territory, and the stable cash generation in Mexico, more than offset declines in Venezuela and Argentina.

More than ever our geographic diversification plays a major role in the potential value creation opportunities that our Company will achieve going forward.

Our total sales volume grew to almost MXN2b, up 5.8% from 2005, including comparable growth in our consolidated soft drinks business, as a result of sales volume increases in all of our territories.

Carbonated soft drink volume growth was mainly driven by brand Coca-Cola, which accounted for close to 70% of our incremental volumes. Brand Coca-Cola continues to grow strongly across Latin America, demonstrating its wide preference among our consumers and customers. The strong marketing campaigns, combined with our multi-segmentation strategies in our major markets, contributed to this growth.

Flavored carbonated soft drinks also were an important growth driver, accounting for almost [13%] of our incremental volumes during the year. Additionally, we continued to produce a strong growth in the non-carbonated beverage segment across our franchise territories, increasing 50% year over year. Flavored water in Mexico, Columbia and Argentina, coupled with juice-based products in Central America and Brazil contributes significantly to this growth.

Our consolidated revenues rose to $5.2b, up more than 7%. Our consolidated operating income improved to MXN9.5b, approximately $875m, up 2.6%.

Our consolidated EBITDA reached MXN12.2b or approximately $1.1b. And our majority net income increased 2.6% to MXN4.9b, approximately $450m, resulting in earnings per share of MXN2.64 or approximately $24 per share -- 24 cents per share.

Importantly, our successful debt reduction, approximately $1.1b over past four years, proves the ability of the Company to produce a strong, sustainable cash flow generations, along with our continued business investment.

Our gross profit increased 4% in 2006. However, our gross margin decreased 130 basis points, as a result of higher cost per unit case in all of our territories, [which is for] Mexico and Argentina. Higher sweeteners costs in all of our operations, especially Central America and Argentina, combined with higher packaging costs into a packaging mix shift in our internal presentations, more than offset higher revenues. We are starting to see resin prices come down by more than 10% on a year-over-year basis.

Now let me talk about our specific operations. Our Central American operation continued to deliver strong top line results, posting double-digit volume growth. In 2006 brand Coca-Cola accounted for half of our incremental volumes in the region, with well-balanced growth in single and multi-serve presentations and supported part our average price increases.

The performance of flavored soft drinks was also an important driver of our growth, thanks to improved execution. The performance of the non-carbonated segment of our beverage portfolio was also great. Thanks to the strong result of high [fee] in the fourth quarter, this segment represented 5% of our total sales volume; the highest percentage of all of our operations.

The bottom line performance of our Central American territories was also remarkable. Thanks to our strong operating leverage, combined with improvements along the value chain, the region post a 10.7% increase in operating income for the fourth quarter, and a 23.4% increase for the full year.

Moving to Argentina, our volume grew 9.9% during the year and 7.6% increase in sales volume for the fourth quarter. Brand Coca-Cola was the main driver of our incremental volumes, accounting for over 85% of our growth. Premium beverages represented almost 15% of our total volumes for the quarter, generating a strong growth of almost 33% year over year.

In the non-carbonated beverage segment, excluding bottled water, we produced positive results. This segment represented more than 3% of our total volumes in Argentina; almost triple in size year over year.

Cost pressure across the value chain, from raw materials to salaries, increased our operating expenses by 11%, and resulted in a decline in operating income of 9.5% for the fourth quarter.

Venezuela, despite these losses to our operations in October, we were able to post double-digit growth in sales volumes for the quarter, ending the year with a 6% increase. Brand Coca-Cola was an important growth driver for the quarter, and the year, contributed more than half of our incremental volumes.

Flavored carbonated soft drinks also posted strong growth in the quarter, thanks to our [skill] rationalization strategy. In the non-carbonated beverage segment we continued to post strong growth, led by Nestea and [Sun Pure], reaching 4.6% of our total sales volume.

During the quarter we started to realize the benefits of the initiatives that we implemented in the second half of the year, to [re-pave this] path to profitable growth. As we anticipated in the third quarter, we were able to capture part of our top line growth in the bottom line, posting operating income growth of 33% for the quarter.

In Colombia, our operations post 12% carbonated soft drink volume growth in the quarter, and 6% for the full year. During the year we have segmented the market, designing and deploying commercial strategies based on population and socioeconomic levels. Consequently, we have driven country-wide demand for our higher value Coca Cola brand beverage in both colas and flavors.

However, brand Coca-Cola continues outperforming the rest of our carbonated soft drink portfolio, delivering more than 70% of our incremental volumes in the quarter, supported by marketing initiatives implemented during the year, combined with better execution at the point of sale.

Additionally, continuing the previous quarter's strength, our volumes of natural single-serve water presentations increased over 35% in the quarter. Better execution drove these results.

In Colombia our lightweight initiatives, combined with manufacturing efficiencies improvement, helped us to compensate the more than 25% sugar price increase in quarter, resulting in an 11% gross profit growth in the fourth quarter 2006, as compared to previous years.

And our quarterly operating income increased by almost 40% year over year as a result of an improved rating leverage driven by our top line growth and obviously improvements throughout the value chain. Our operating income margin raised 280 basis points to 17%; the highest one since we acquired the operations in May of 2003.

Additionally, by the end of the year, we [took] prices in majority of our [sold] portfolio resulting in a 7.1 weighted average increase in nominal terms.

Columbia represents, under any operating or financial metrics, a remarkable successful story for Coca-Cola FEMSA.

Finally, let's move over to our two largest operations, Mexico and Brazil. In 2006 our Mexican operations achieved record revenue and volume of MXN2.79b -- sorry $2.79b, and almost 1.1b unit cases respectively, including more than 650m unit cases of carbonated soft drinks.

During 2006, our Mexican operations kept profitability relatively stable in the face of strong [inaudible] sweeteners and resin costs and a tough competitive environment in the multi-serve carbonated soft drink segment in the [Valley of] Mexico.

In the fourth quarter, our Mexican operations revenue declined half a percentage point, due mainly to a 3% unit price reduction year over year, which more than offset the 2.4% volume growth for the quarter. Two thirds of the real price decline was driven by lower carbonated soft drink prices, and one third was driven by our implemented jug water volume, which carry a lower average price per unit case.

Despite price pressures in the carbonated soft drinks segment, driven by a shift in our packaging mix and multi-service presentations, our Company continued to gain aggregate share of sales year over year.

The cola category has continued to expand over the past two years, and was the main driver of the carbonated soft drinks industry growth in 2006. Now, colas represent over 62% of our total volumes in our Mexican territories, versus under 69% -- 59% a year ago. Sales of brand Coca-Cola increased 3.7% in the fourth quarter and 5.6% in the year.

In addition, our turnover base increased 2.6% for the year and remained stable for the fourth quarter 2006, demonstrating the brand strength and successful innovative returnable packaging strategy implemented during the year.

The successful introduction of one quarter liter returnable glass presentation of brand Coca-Cola, combined with the performance of the 2.5 liter returnable PT presentations, offset lower flavored carbonated soft drink volumes in the quarter.

To continue the innovation behind brand Coca-Cola, and to reinforce its popularity among teens and young adults, we introduced Coca-Cola Zero at the end of January. Coca-Cola Zero offers a similar taste to Coca-Cola classic without the calories. These new products will divert single-serve consumption locations including mini-cans, regular cans, and 600ml non-returnable PT presentations, at similar price points to the Coca-Cola classic brand.

We expect to foster important single-serve transaction growth and to continue expanding our share of revenues in the single-serve segment.

On the profitability front, our gross margin remained relatively stable, declining 30 basis points. And gross profit declined 1.1% as a result of higher sweetener costs and lower revenues, which were partially offset by lower resin costs.

In Mexico, our sweetener costs increased by approximately 5% year over year, and our bottle costs declined approximately 6% year over year.

At the [AG&E] level our operating expenses increased 6.7%. The increase was mainly driven by higher marketing expenses occurred in the quarter for brand [billing] initiatives implemented during the year, including strengthening our presence in the modern [trade], combined with higher holiday promotional activity to support core Coca-Cola brands. Consequently, our operating income declined 11.8% year over year.

During the quarter, after a thorough analysis conducted by a third party, we also modified the useful life of our coolers from five to seven years in our Mexican territories. This decision was based on the benefits of our ability to better manage our cooler platform, and the improved quality of equipment. This modification reduced our amortization expenses by MXN127m, and benefited our operating income by a comparable amount in the fourth quarter.

Mexico's continued dynamics remain firm and promising. Our pipeline of innovation remains strong and will address every important beverage category in 2007.

Our new collaborative agreement with the Coca-Cola Company to aggressively expand our position in the juice-based products, will provide us with new avenues for growth, and strengthen our long-term [organization] base significantly. Together, all these factors should help us to confront a potentially difficult higher sweetener cost environment and to generate a strong solid cash flow in Mexico.

Our Brazilian operation continued to achieve record levels of revenues and profits. Total revenues for the year reached approximately $730m and generated more than $120m for EBITDA. Excluding beer, our volume grew 6.4% during the year and 5.2% in the fourth quarter, mainly driven by a strong volume growth of brand Coca-Cola. Our execution at the point of sale and more aggressive media campaigns also fueled strong volume growth of our Crystal brand mineral water, which is the category leader in our Brazilian market. With our introduction of Minute Maid brand juice-based products, we have posted 30% volume growth in non-carbonated beverage for 2006.

Since we resumed the sale and distribution of Kaiser beer portfolios [in] Sao Paulo Brazil in February 2006, we have made significant progress, including more than doubling the point of sale coverage while improving the distribution channels [profit].

Together with Kaiser and FEMSA Cerveza we are developing a differentiated product of package and portfolio. As part of this strategy, we launched a new version Sol in multiple presentations. By leveraging our [existing distribution] level and point of sale execution we are well prepared to introduce new products quickly, and to improve our profitability across all of our Brazilian market segments.

As we have noted before, our financial information for the quarter and the full year in Brazil is not comparable with previous years, because in 2006 we resumed the sale of Kaiser brand and changed the way we report in our financial statements.

For the fourth quarter 2006 our Brazilian operation revenues increased 5.8%, excluding beer, as a result of sales volume increases and better average sales per unit case. Single-serve presentations contribute almost 50% of our incremental revenue in the quarter, mainly driven by a [7.5%] [supporting] growth of brand Coca-Cola, and its lines extensions.

Our bottled water brand, Crystal, sales volumes continued growing on an annual basis of almost 13%, driven by a more aggressive media campaign and our execution in the point of sale. Additionally, non-carbonated beverage volume increase almost 60% from our low base, including incremental volumes from the recently introduced Minute Maid brand juice-based products, and the [Capo] brand for [cheap] juice-based products.

On the profitability front, despite higher sugar prices and incremental expenses in connection with the beer operation, we post operating income growth of 3.5% for the quarter.

Our vision of becoming a one-stop shop for our customers and clients is gradually materializing. We are working together with the Coca-Cola Company and FEMSA Cerveza to capture those opportunities.

Now let me talk about our financial performance in the quarter. In November 2006 we paid down approximately $329m of maturing bonds. Year over year, it will reduce our net interest expense by 20%.

On the strategic front, and in line with the new collaborative framework with the Coca-Cola company that we described in our previous conference call on December 19, the Coca-Cola FEMSA and the Coca-Cola Company announced an agreement with the controlling shareholders of Jugos del Valle, a leading player in Latin America, juice nectar and juice-based beverage segments, to acquire through a Public Tender Offer in Mexico up to 100% of the outstanding public shares of Jugos del Valle for approximately $380m in cash. The aggregate value of this transaction is $470m. The Tender Offer will be launched once the regulatory approvals have been obtained.

As was mentioned last December, we will invite the rest of the Coca-Cola [inaudible] and in Mexico to participate in this transaction under the same basic terms and conditions.

Beyond the ample opportunities for production and distribution savings this transaction well positions our Company to capture considerable value in the fast growing, under-developed non-carbonated beverage categories.

Thank you for your continued support. By leveraging our market intelligence, innovative operating structure and a strong growing relationship with the Coca-Cola Company, we see ample opportunities to provide you with an attractive return on your investment now, and well into the future.

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

Due to the large volume of participants we ask that questioners limit themselves to only one question. You may re-enter the question queue after your initial question has been taken. [OPERATOR INSTRUCTIONS]. And your first question comes from the line of Robert Ford with Merrill Lynch. Please proceed.

Good morning everybody. I feel like I've won the lottery to get picked first. Hector, I have a question with respect to depreciation and amortization. When I look at the difference year on year it's a little bit bigger than the 127m in Mexico; its closer to 207m. And I was wondering if there were any other changes in any other regions, particularly Colombia, that may also have had some change in depreciation and amortization practices?

I don't remember any other specific thing that we have in addition to the coolers. Let me as Alfredo to review this number and maybe get back to you.

The other issue that we did is that, we also adjusted, that we shouldn't have any negative effect here, the residual value of our assets and we -- so that we avoid having write-downs as we were saving the asset. Because usually, we say to allow your value that we can realize, now we are taking all the assets to a [fewer] value at the end of the life.

But at the same time we reviewed the life of these assets and we extended the life depending on the categories [to a few] years. And the total effect of that movement is basically neutral. So, let me ask Alfredo to [read] that and get back to you with more detail on that one. But we -- the main impact on the depreciation period is the life of the coolers.

Reducing residual value, as long as their fully depreciated, that wouldn't have had an impact, right? This has to be something different.

And then, on the same theme, this is just for financial accounting purposes, its not for tax accounting purposes this does not impact cash flows at all, is that correct?

No, no just for financial purposes. We -- as we say, we got a company to do an analysis of all the coolers that we have in Mexico. And on average they were coming a little bit -- with a life expectancy a little higher than seven years. We've been also some benchmarking of some of our beers. Some of them are reducing 10 years, some of they are reducing five years.

So, we -- the main thing we have [inaudible] and the decision was taken to take the life of the coolers to seven years. We decided to be very open about this so that is very clear on our numbers. And that's why we are describing a reduction in our operating profit of 11.8 as opposed to [inaudible] that you would see with the numbers, as they are in this [street]. And that, Robert, is very important that we mentioned that. It's not that we are changing this policy that we have for depreciation, but we are changing the estimates after we have done extensive investments in controlling the coolers.

In the past, it was often the case that when a store was closed or -- basically, we could not find the owner of the store or the cooler. Now we have a much stronger control on that. The cooler has a plate that is controlled, a tag that is controlled with our [current] computers. And obviously [that's fine], plus [inaudible] so the quality of the cooler that we are buying is much better. And also, at the end of the day it is not a change in the quality, but rather a change in the estimate that we have for the life of the coolers.

Thank you very much, Hector, thanks for the transparency, and the explanation. Take care.

Thank you.

Your next question comes from the line of Lore Serra, with Morgan Stanley. Please proceed.

Good morning. I wanted to ask a couple of questions on Mexico. In the conference call for the third quarter you talked about having taken pricing in September on the 2.5 liter returnable coke, and the 2.5 liter non-returnable flavors. And we really couldn't see that pricing in the fourth quarter. And you mentioned the switch to multi-serve.

So, what I'd like to understand is did the price increase get rolled back? Or did the switch to multi-serve just dominate the pricing you took in multi-serve? So, that's the -- sort of the question, but if you could also talk a little bit more generally about your pricing outlook in Mexico for '06 that would be helpful?

Yes, Lore, good morning. I think that, in general, we did some price increases, as you correctly point out, during the fourth quarter. And -- but we were facing a much more competitive environment, especially the value of Mexico. During the fourth quarter we extended the life of our promotional activities that we called [inaudible]. You remember, this is one of the peso price under the cap for some of our package -- multi-serve packages.

And I think that in general, what I can on the pricing front is that, out of the 3% reduction that we had on real prices in the quarter, around 1% -- a 1, 2 percentage point has to do with an increase in the mix for jug water.

And the fact that, as jug water is being introduced in new territories, we have a reduction in the price of the jug water also, an important reduction which has [inaudible] efforts. And, therefore, there is a -- the remainder is around a 2% reduction in the real price for the quarter, for Mexico.

The good news is that we have been able to maintain, through this promotional activity, and also to a bit larger marketing expenses in the fourth quarter, we have been able to maintain and improve, and actually increase our share of sales in the territories. We know the difficult market that we have in Mexico. As you can imagine, [inaudible] in Mexico, is certainly the value of Mexico that where we have one of the largest market penetrations in terms of absolute numbers. And that's where the competitive environment is starting a little bit more suffer.

We do have the presence of [Favitos] and [Red Cola] with a lot of marketing activity with TV advertising and everything in the Valley of Mexico especially. And, therefore, we were -- we decided to dedicate a little bit more resources to these promotional activities and to our marketing efforts during the quarter.

So, as I say, the good news is that we have been able to defend of our markets, and actually increase the size of our market penetration during this period. Obviously, the negative part of that is the effect that that has in the profitability of the Company. As I mentioned, we have suffered a little on the price front. We have suffered a little bit more from the operating expense line and we have spent a little bit more on the marketing side.

The other positive stream is about this marketing activity that we are seeing, is that when you look at the numbers that brand Red Cola is getting, where they have a very large price gap vis a vis our products. The main player that is being affected here most of the volumes that Red Cola is getting is from, actually, from the colas. At the end of the day it does have an impact on [Pepsi Cola] and ourselves so the main target affected by this activity is in the cola.

The remarkable part about increasing market share is that when we compare it versus the same period of last year, the price gaps that we are sustaining are actually increasing when you look at the cola category. Right now, when you look at the total industry, excluding the prices of Coco-Cola FEMSA, you have -- we were around 19% price gap all the industry all products. And right now we are closer to 30%. So, in that very tough environment, where we have a substantially larger price gap being able to increase our share of sales, it is I think a remarkable thing for our guys in Mexico.

Going forward to 2007, I do see a -- from the pricing [trauma] competitive, certainly a competitive environment. I don't see a lot of price movements. Certainly, we were a little surprised by the inflation numbers in the last quarter. It was -- if you look at the focus on inflation for the full year, actually, 1.5% of that, or those [four] points were happening just in the fourth quarter. So, when you do anything in real terms the comparison looks a little bit more unfavorable, because you are adjusting last year prices and numbers with the inflation.

Internally, we have done some analysis, obviously, when we hear our competitors' report. And, clearly, we work to report from the U.S. GAAP in U.S. dollars, numbers would look much better, [growth] numbers because, obviously, you have an effect of currency and the effect that you are inflating larger numbers with a 4% number.

But, in general, say that the environment in the pricing front for next year is a tough environment. We have been under this environment for the last two or three years. This is not new. There is a new player. It's a -- you are getting a little [pressure] from our other competitors. I think we are defending our market very well. And, obviously, initiatives as I was saying in this speech of launching Coke Zero in single-service presentations mainly, we will hope to have some traction again in the single-serve category and we are going to start growing that -- those [sizes] again.

Okay, and just one follow up, and maybe this is partly unfair. But the disclosure has gotten very difficult Hector but, given the big misstatement of D&A in the quarter, and we don't really know who much of your D&A is in operating expenses and how much of it is in gross -- is in cost per sales. But if I just assume it is all in the operating expenses, which I understand is unfair, but I would come to a view that your cash SG&A went up 15% in the quarter year on year.

And I guess I'm not sure that you can explain that kind of a jump by some higher brand marketing initiatives. So I'm sure that 15% is elevated, right? I would have a better idea if I understood how much of the D&A was in each part, but it seems like there was some pressure on the SG&A that wasn't completely explainable. Were there other factors as well that drove the operating expenses in the quarter?

Yes, Lore, let me explain to you. If you see the speech I mentioned that the majority of those expenses is related to marketing, but let me -- if -- and I'm talking here out of my memory. If we say that it increases around MXN150m and say that around half of that is because of marketing and probably a little bit more than half of that. And it's important to mention that, at the end of the day, we are ending with [what] marketing expenses for the full year around 4.6% of revenues. That's a little bit of the high side of our estimate.

We always try to be between 4, 4.5% and our budget even defines that we have the World Cup during this year, it was a little bit closer to the 4.5%. We were not getting the traction in the revenue side that we had anticipated and, therefore, the number was a little bit higher than what we have in our budget. Our budget was basically [open] for marketing expense to [revenues].

We also have some additional expenses, mainly related to information technology. We have upgraded, importantly, our platforms as we have continued to prepare this Company for growth. And, very importantly, we also are spending, and this is our current expense, in IT. We were spending -- [inaudible] in that line because most of this equipment is leased, but we are also having expenses related to disaster recovery plans that we felt was important to have so that the systems and all of our offices can continue to work in case of a disaster.

And there was also one extraordinary movement of around MXN20m to MXN30m related to a new estimate from the -- a new [retirement] estimate for pension funds. That is an adjustment -- a one-time adjustment that we have to make as our [external] estimates which came out a bit higher than what we had in the previous years. And I think that those three components basically cover for this MXN150m that I have just described to you.

Okay. And just, what is the MXN150m?

The gross operating expenses quarter-to-quarter, year-over-year, Lore.

Okay. Thank you.

You're welcome.

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

Good morning, guys. My question relates to sugar outside of Mexico because you mentioned in the press release that you saw sugar increasing -- sugar costs increasing in Brazil and in Columbia, I believe. And if you look at the [Endina] results for the fourth quarter, their gross margin jumped three to four percentage points from quarter three to quarter four as one might expect, given the big decline year on year in the sugar price in the [York 11] contract, or whatever. What happened to -- why was [Endina's] result different than yours in Brazil, and I guess if the same explanation as -- if Columbia has the same explanation, great, otherwise I'd love to know what happened there.

Yes, Jose. In the case of Brazil, we did sell during the year and it's affecting, basically, every quarter. We did enter to some contracts with suppliers. They were not financial contracts, but rather contracts with suppliers where we were anticipating purchases of sweetener. Given what happened with the cost of sweeteners in some of the market -- in the Venezuela markets, it ended up costing us a little bit more than it should. In other words if we have bought sugar at free market every quarter we will have a better cost of sugar in our case.

Normally in these operations, this was a decision by our operators in Brazil. They saw a lot of pressure in sugar prices at the beginning of the year. They saw an opportunity to lock off a cost at which they felt comfortable for the rest of the year and they were -- they entered in some agreements then actually bought some sugar in anticipation and it was actually in our warehouses. That probably would cover some of that. At the end of the day, for us, when you look at Brazil and basically every other market, we have had significant increases in sugar. In the case of Mexico, it was also the case. It was around 5%.

A special case, I know. I was just more interested on Brazil, but --

Yes. In Columbia, we have very high increases in sugar. Venezuela was the highest of all because of the scarcity that we have in Venezuela. We have got our trucks stuck in the roads because there is no sugar in the country. So the sweetener environment in general is a complicated environment, Jose.

And in Brazil, how -- what's the expiration of those contracts? I mean are you still hedged at a higher price than spot or when does -- when will you be able to take advantage of the low spot prices?

If I remember correctly, it should be towards the end of the first quarter or middle of the second quarter, Jose.

Great.

We have some of those contracts in place. After that, we should benefit from the decline of sugar prices for sugar [inaudible].

Okay. Thanks a lot.

[Inaudible] Jose. I think that it is fair to say also, as a way of expressing, very often we hear that in the case of the area where we use high fructose, we are experiencing very high increases in the first quarter of this year, so we still see a very volatile market on sweeteners in general in the consumer [world].

Okay.

Your next question comes from the line of Andrea Teixeira with JPMorgan. Please proceed.

Hello. Good morning. This is actually Andrea Teixeira from JP Morgan. Just one question regarding the environment for -- just in general for raw materials. So you see -- continue to see price share on the margins going for the -- at least for the first half of the year, correct? Because you're having -- you're going to -- the comparison is going to be tough relationship, the sugar price, especially in Mexico, right? And also in terms of the top line. So you should see in the market spending, you should see still a decline in margins, at least in the first half of the year, correct?

Hello Andrea. We are experiencing, as I mentioned, some pressure on sweetener costs in most of the countries. We are benefiting from lower rates in costs in most of the countries, also. And, in some cases, one movement will offset the other. And I think that also I'd like to point out the fact that the top line growth that we are experiencing without the market segmentation in [prices] where we can increase price in some of the countries.

I think that we have a remarkable top line growth for this quarter. So what we are anticipating is that top line will continue to grow and we will have some pressure on some of these raw materials, yes. Maybe in some cases, depending on resin prices, some of that will be offset with a lower resin cost. The most important case is Mexico for the increases in sweetener because, as you know, we are heavy users of high fructose.

We probably need to change our mix of sweeteners. We are in the process of doing that and of the three sweeteners that we use in Mexico, mainly raw sugar, refined sugar and high fructose, high fructose is the one that is increasing while some of the others are coming down. So we will continue to work in all the value chains to look at the most profitable cost structure for us. But we -- definitely we are having some pressure on the cost side. But, contrary to what you say, I do think that we will have important growth on the top line.

Okay. But on the margin front, you're going to see some pressures on -- [at least] in the first half of the year, correct?

Yes.

Okay.

It's the first half of the year where we are seeing the volatility on the raw materials.

And lastly, on the marketing spending we saw you guys and [Arka] announcing that you had reached somehow of an agreement that is not disclosed but in terms of sharing back the market spending and that rebate from Coke. Just -- that is only going to be used for the non-carbonated or the new categories, right? So that rebate is not going to alleviate your increased market spending going forward. Is that a fair assumption? Most of it is going to go to capital expenditures?

I would say, Andrea, that in general we need to look at the more efficient way of using those dollars. It's not totally married to a category or to a [specific] capital expenditure. The agreement is that, in our case, both companies, the Coca Cola Company and [inaudible] will sit down and decide how to spend the [inaudible] of resources but there's no pre-agreement that it has to be spent in a specific area.

Okay great, Hector. Thank you very much.

Your next question comes from the line of [Reinaldo Santana] with Deutsche Bank. Please proceed.

Yes. Good morning. Most of my questions have been answered except do you expect the reduction in PET prices to be sustainable for the rest of the year of around 10%? And the other question has to do with Columbia. Is -- has [peak cola] already arrived in that market and how should it change the competitive environment there? Thank you.

Yes. With your first question, yes, we are seen a sustainability of reduction in PET prices of around 10% versus 2006. And with respect to [peak cola] in Columbia, we are expecting their entrance around the second quarter of 2007. That is, basically, the news that we have on that front.

Great. Thank you.

[OPERATOR INSTRUCTIONS]. And your next question comes from the line of [Beselto] Sanchez with Citigroup. Please proceed.

Hello, good morning. Just to go back to the marketing expense issue in Mexico, can you help us understand how much of this was -- I understand that you did it for competitive -- partially for competitive reasons in the fourth quarter. Is this something that we should think of structurally as, given the 30% price gap you have now, as more baked into the cost to compete or is this -- because you mentioned, at least by way of explanation in the press release, that it was associated with initiatives implemented earlier during the year.

So I wonder if it was just an issue of timing and some payments came due or what it really was in terms of timing there, how that would reflect or suggest we should be thinking about it going forward for 2007 and on.

Yes. Good morning, Beselto. I think that in general [at least] in some of these specific accounts, as it happens sometimes at the end of the year, you are doing some provisions during the year and then, for example, in this specific case with marketing, our revenues were slightly below what we were anticipating when we started the year. So we ended up having to adjust the fourth quarter, but most of the -- but that's not a very important number. There is a timing issue there involved in this high number for the fourth quarter.

But, again, the way we work is that we agree on a [portion] with the Coca-Cola Company at the beginning of the year. Usually that number is around 4 to 4.5% of revenues, the part that corresponds to Coca-Cola FEMSA and you know that the Coca-Cola Company spends a similar amount on their side.

This time around, because of the World Cup towards the high end of that range, around 4.5%, and also the marketing activity related to this event that is every four years. And we ended up with a 4.6% for the full year when you look at the numbers. I think that even this [inaudible] that we are seeing somewhere on the high end of the range, closer to 4.4 to 4.5% is what we should be expecting for 2007. Some more structure level of investment given the competitive environment [this year].

Okay. And looking ahead to '07 as we talk about these agreements with Coke, does your agreement have any contingency in terms of the amount of the marketing spend that Coke reinvests from it's increased fees for concentrate? In other words do they reinvest a contingent on you spending a similar amount an increase that you kind of hit twice? Or is it really, they get their gain from the concentrate increase and the certain percentage of that they agree to reinvest in the market on ways that you both agree to, but that doesn't necessarily require increased spending from you?

No, it's as you were saying at the end. It's -- we have to continue spending similar amounts, again, agreeing a budget between 4 to 4.5% as I mentioned probably more in the 4.4 to 4.5% due to the competitive environment, and they will be spending a similar amount of that. And, on top of that, they will spend only themselves an additional portion of marketing expenses because of this increase in the concentrates. So in other words part of the concentrate revenue that they will get will be only spent by them. We will not be putting a similar amount on that specific issue. Is that clear Beselto?

Yes, that's very clear. Thank you very much.

Okay.

Your next question comes from the line of Michael [Schrab] with Arthur Capital. Please proceed.

Actually, my question has been answered. Thank you.

Please stand by for your next question. And your next question comes from the line of Lore Serra with Morgan Stanley. Please proceed.

Yes, sorry to ask so many questions on Mexico, but I'm going to go back there. I thought you mentioned in your opening comments that your returnable mix has gone up with the 1.25 liter. And if I look on page 16, it looks like your returnable mix is down 60 basis points, so I wanted to make sure I got that right.

And second, I don't know if you'll answer this question or not, but there are a lot of things going on right now in Mexico between the competitive environment you've talked about, the evolving raw material environment, the Coke increase which is out there but we're not exactly sure how much. What's your level of confidence that, as you look out to 2007, that you can hold the margin at the 26 percent-ish level that you earned last year in terms of EBITDA margin looking for -- looking out to 2007?

Lore, let me [read] those numbers on the returnable. I think that we might have a difference between the full year versus the quarter and I don't know exactly what the difference is you were referring, but in general, if I remember correctly, on our [returnable] growth when you look at the full year, it's increasing a little bit.

And in the case of the [sales] quarter specifically, we are having some success with the 1.25, although the 2.5 returnable is coming down a little bit, so I'm not sure exactly how the fourth quarter -- the returnable base is increasing as a percentage of the total volume is declining because the one-way products are growing more than the returnables.

Now, let me go back to [inaudible] [total sales]. I think, Lore, that in general our objective will be to increase that margin and certainly, as you can expect, we have high hopes on -- again, I expressed that idea at the beginning that we will be able to increase the top line substantially to offset some of the pressure there on raw materials. The very large variable that we have here is raw material prices and how we can compensate sugar or not. And that will be the driving force behind us being able to maintain or increase a little bit the margin that we had in 2006.

Okay, thank you very much.

And this is all the time we have for questions. I would now like to turn the call over to Mr. Hector Trevino for closing remarks.

Well, thank you all for your interest in the Company and, as always, Alfredo and Julieta are available to answer any remaining questions.

This concludes the presentation. You may all now disconnect. Good day.