Coca-Cola Femsa SAB de CV (KOF) 2007 Q2 法說會逐字稿

Good morning, everyone, and welcome to Coca-Cola FEMSA's second quarter 2007 earnings results conference call.

(OPERATOR INSTRUCTIONS)

During the conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as a good-faith estimate made by the Company. These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties which can materially affect the Company's actual performance.

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

Good morning, everyone, and thank you for joining us today. Our operations generated strong results for the second quarter of 2007. We continue achieving double-digit operating income growth on a consolidated basis.

Double-digit increases in the operating income in the majority of our markets more than offset a slight reduction in Mexico, producing 10.5% consolidated operating growth for the quarter in real terms. Our total revenues increased more than 8%, driven by close to 6% growth in our consolidated volume, and a 2.2% increase in our consolidated average price per unit case.

This was the sixth consecutive quarter in which brand Coca-Cola contributed more than 65% of our incremental consolidated volumes. As we anticipated last quarter, the launch of Coca-Cola Zero is delivering extraordinary results, reaching almost 2% of our total carbonated soft drink sales volume in a very short period.

We believe that we are capturing new consumers with this product, while improving our average price per unit case. In addition, we continue to produce strong growth in the non-carbonated beverage segment across our franchise territories, with our total volume up more than 35% year-over-year.

POWERade in Mexico and Colombia, juice-based products in Central America and Brazil and the continued strong performance of Nestea in Venezuela contributed significantly to this growth.

For the quarter, our consolidated revenues rose to more than MXN16 billion, close to $1.5 billion. Our consolidated operating income increased 10.5%, to MXN2.8 billion, approximately $260 million.

Our consolidated EBITDA reached almost MXN3.5 billion, or equivalent to $320 million, resulting in a solid EBITDA margin of 21.2%. And our majority net income increased 130%, resulting in earnings per share of MXN0.94, or the equivalent of US$0.86. Now, let me talk about our operations.

Continuing the trend of the past year, our Central American operations achieved strong top-line results, posting 7.7% volume growth, compared with similar growth in the same quarter of 2006. This quarter, our growth was driven by single-serve non-returnable presentations, which carry a higher average price per unit case. Brand Coca-Cola contributed more than 40% of our incremental volume in the region.

Also, our broad, well-balanced product portfolio enabled us to capture market opportunities and drive volume growth of our flavored carbonated soft drinks. We continued posting outstanding results in the non-carbonated beverage segment, fueled by Hi-C and POWERade, which volumes grew close to 80% and 60%, respectively, in the second quarter. We are making great strides in this high-potential segment to stimulate the consumption of our products through the successful marketing initiatives and innovative new presentations.

Building on comparable growth last year, our Central American operations achieved double-digit bottom-line growth for the quarter as a result of our strong top-line growth, our effective execution and a more stable competitive environment. The region posted more than 50% increase in operating income in the second quarter. Our Argentine operations volume grew 2.5% for the second quarter. Coca-Cola Zero and our core flavor soft drink brands more than compensated for the volume decline investment value protection category, resulting in a 1% CSD volume growth, compared with almost 15% growth in the same period of 2006.

In the non-carbonated beverage segment, excluding bottled water, the strong performance of Dasani and the juice-based beverage products drove more than 100% growth of this category. Consequently, this segment contributed more than 3% of our Argentine operation's total sales volume and more than 40% of our Argentine operation's incremental volume for the quarter, providing additional top line as the average price per unit case of this product is higher than the rest of our portfolio, while participating in a category of faster growth. Despite the continued cost pressure in these markets over the past few years, we were able to maintain the stability of the product and profit level in the second quarter.

Moving to Venezuela, we achieved strong 16.1% growth in sales volume for the second quarter. Brand Coca-Cola was our main driver, growing almost 30% in the quarter as a result of a greater focus on the brand. Our defined product portfolio is reaping positive results, as exemplified by the 8% growth in the flavored carbonated soft drink category this quarter. In the non-carbonated beverage segment, we continued to post healthy growth, led by Nestea, which sales volumes in Venezuela is more than six times that of Mexico.

Improvements to our operating efficiencies, which are designed to adapt to the current economic environment, have proved successful, despite difficulties in procurement. With stress in raw material availability, we have been able to supply the market with a greater volume of our core products. Consequently, our Venezuela operation was able to double its profitability compared to a small base in the second quarter of 2006.

Our focus on execution supported by an improved Colombian economy drove the sales of our core brands in both the cola and flavor segments. Our Colombian operations posted a double-digit increase in revenues, driven by higher average price implemented throughout last year.

Brand Coca-Cola continued to outperform the rest of the carbonated soft drink portfolio, delivering almost 75% of our incremental volume growth in the quarter. Our flavored carbonated soft drink volume grew 3% in the quarter, driven mainly by marketing activities, focused on capturing growth in the flavored segment through brand Crush.

In the water segment, it is important to highlight that as a result of our marketing strategies in the year, our proprietary brand, Manantial, is now the Colombian market leader. A shift in our marketing mix to single-serve presentations has also made this segment more profitable.

Our highly effective multi-segmentation strategy, which divides Colombia into several target markets, has completely refreshed our business model and allowed us to focus our marketing efforts more effectively. Colombia is one of our most consistently growing markets, posting double-digit growth at the operating income level for the seventh consecutive quarter. We almost doubled our operating income compared with the second quarter of 2006, expanding our margin by 690 basis points to 17.3%.

Our Mexican operations posted 3.8% volume growth. On top of the strong results, volume figures for last year, mainly influenced by the marketing campaign related to the FIFA Soccer World Cup, brand Coca-Cola continued to drive our Mexican operation's growth for the quarter. Our successful introduction of Coca-Cola Zero continued to add momentum to the growth of the cola category, accounting for the majority of the incremental volumes in this segment for the quarter and performing beyond our expectations.

Because the majority of the volume is sold in a single-serve presentation, Coca-Cola Zero is also providing us with more balanced growth between multi and single-serve packages. Our average price per unit case is also improving sequentially, as the majority of our cola growth came from non-returnable packages, along with price adjustments to our entire portfolio.

In our single-serve water portfolio, we are realizing the results of our improved execution at the point of sale, combined with a reinforced marketing campaign that features a renewed image for the brand. These initiatives helped us to achieve 15% sales volume growth in single-serve water for the quarter, while reinforcing our presence in the market. Thanks to our consistent efforts to complement and grow in our product portfolio, the non-carbonated beverage category continued to deliver extraordinary results, posting almost 40% volume growth in the quarter.

This growth was driven by the very strong performance of POWERade and Nestea, which volume grew more than 75% and 65%, respectively, in the second quarter, and the continued growth of the rest of our non-carbonated product lines.

Jug water volume growth was close to 10%, given the expansion in new territories in the Gulf of Mexico region. In the second quarter, our Mexican operations revenue increased 4%, in line with our volume growth, despite incremental volumes of our jug water business, which has a lower price relative to the rest of our non-carbonated portfolio.

As we anticipated, the pricing environment in Mexico is stabilizing. We increased prices at the end of the first quarter and the incremental volumes in the soft drink coming from the inclusion of Coca-Cola Zero are supporting this development.

On the profitability front, in spite of the increases in sweetener cost, which were on average 20% higher year-over-year, and concentrate prices, our gross margin declined only 130 basis points due to savings achieved throughout our [light weighting] initiatives.

Thanks to our ability to diminish the impact of higher raw materials prices through cost-cutting initiatives along the value chain, our operating income declined only 1.6% in the quarter. As we anticipated, we continued to face sweetener cost pressures in Mexico during the second quarter, but since sweetener prices peaked at the end of last year, we expect a more favorable comparison for the second half of the year.

We are confident that the improving trend in our profitability is sustainable for the second half of the year as a result of greater operating leverage that we are achieving through top-line increases and a more favorable raw material price comparison.

Our Brazilian operations have continued to generate sustainable top and bottom-line growth with close to double-digit growth in every quarter since 2004, one year after the acquisition of the franchise.

For the second quarter, our Brazilian operations achieved EBITDA margin of 16.3%, up more than twofold from 8.1% in the same period of 2004. The main drivers of these results are the improvements that we have implemented along the value chain combined with the economy's improved macroeconomic environment.

Excluding beer, our volume rose 11.1% in the second quarter, with double-digit growth across all of our product categories. Brand Coca-Cola continued to generate the majority of the growth, driven by the successful performance of Coca-Cola Zero. After only a quarter on the market, the Coca-Cola Zero and Coca-Cola Light brands increased on a combined basis more than 40%.

In the non-carbonated beverage segment, a strong demand across our product portfolio resulted in 80% volume growth for the quarter. On the beer side, we are moving in the right direction. We are working on building brand equity while recapturing consumers in the market.

In this regard, we are implementing certain point of sale strategies that in the short term are having negative impact on our average price, but we are confident that those will bring us healthy growth in the long run.

For the second quarter of 2007, our Brazilian operations revenue increased 13%, excluding beer, as a result of increased sales volume and better average price per unit case. Strong growth of brand Coca-Cola in single-serve presentations, combined with price increases implemented over the past 12 months contributed to the 2% improvement in our average price per unit case.

On the profitability front, we posted 24.1% growth in operating income, achieving, as I say, a 16.3% EBITDA margin for the quarter, an improvement of 190 basis points year-over-year.

Now let's talk about our financial performance in the quarter. During the quarter, we paid down approximately $170 million of Mexican peso equivalent bond that mature on April 20th, and we made a dividend payment of approximately $75 million.

We are reaching a net debt to EBITDA coverage of almost one time, underscoring the strength of our balance sheet. Our performance for the first six months of the year underscores the advantages of Coca-Cola FEMSA's balanced, geographically diverse stream of incremental cash flow.

Our operations outside of Mexico are now generating the majority for our consolidated growth. Looking ahead, we foresee a more favorable raw material environment for the second half of the year. We continue to build on the diversified portfolio of beverages and packages that we have designed and deployed over the past four years.

We want to share with you two important developments that have taken place lately. First, the Mexican Antitrust Commission recently announced its decision to approve the acquisition of Jugos del Valles, subject to certain conditions that we anticipate will be acceptable. We expect to receive the final notification from the commission in the coming weeks and thereafter initiate a public tender offer in Mexico for up to 100% of the outstanding public shares of Jugos del Valle.

Beyond the potential for significant synergies, this transaction will considerably increase the Coca-Cola systems presence in Latin America, fast-growing, underdeveloped non-carbonated beverage segments. And, secondly, in line with our strategy of expanding our footprint in Latin America, we have reached an understanding with the Coca-Cola Company to acquire REMIL, a franchise territory wholly owned by the Coca-Cola Company in the state of Minas Gerais, which includes Belo Horizonte, the third-largest city in Brazil.

The understanding with the Coca-Cola Company implies an aggregate value for this transaction of $380 million, including tax credits for $10 million. These valuations assume that REMIL will sell approximately 100 million unit cases of CSDs and water in 2007, generating an estimated EBITDA of over $45 million during this year, 2007.

This transaction will increase our presence in the growing Brazilian market by more than a third. As we mentioned in our press release, the terms and conditions are subject to confirmatory due diligence process, the negotiations of definite agreements, the approval from the Coca-Cola Company's and Coca-Cola FEMSA Boards of Directors. We expect to close this transaction during the first quarter of 2008.

With this, I would like to open the call for any questions that you might have.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Andrea Teixeira with JPMorgan. Please proceed.

Hi, good morning, everybody. I just wanted to, if you can, explain more about the acquisition. So the $10 million that you're including in this 380 plus the $10 million includes all the liabilities of the Company and then what you expect in terms of getting -- what are the EBITDA margins of this franchise in terms of synergies, if you can tell us how much you believe you can extract -- not synergies, but improvement, I would say, from these margins through your execution? Thank you.

Yes, good morning, Andrea. Let me just clarify the figure. The 380 includes the EUR10 million past credit, which is basically -- that basically is cash that is there and subject obviously to us reviewing that we can receive those resources and the price will be adjusted accordingly.

So, at the end of the day, the firm value, or the aggregated volume for the company has been set at $370 million. Plus, again, this $10 million past credit that we are mentioning. We just initiated due diligence at the beginning of this week, so we are in the process of analyzing and confirming some of the comments that we have received from the Coca-Cola Company with respect to budgets and projections and business plans.

We are very confident that, given the proximity that we have with this franchise, that we certainly can improve. In terms of synergies, we have not fully analyzed that department or that area of the evaluation, Andrea. Do you understand it's a little bit strange, in a way, because it's senior management of both companies agreeing that we should acquire this franchise, us understanding on the basis of conversation with the Coca-Cola Company really the projections and the anticipation that we have for this year in terms of volumes and EBITDA and cash flow generation, us being able to do some preliminary analysis with respect to the valuation that this franchise might have for us, but basically on our own desks, far away.

But, importantly, given the fact that we were starting due diligence this week, it was important to disclose that we have started this due diligence process so that the market knows that we are under this process.

Usually, we would have expected -- or waited more than expected, a little more time to release this information until we have a more thorough analysis of the acquisition and probably closer in terms of the confirmatory due diligence and all of that. But both companies believe that it was important, given that we have now people in Brazil working on visiting plants and offices, for this to be made public.

Sure, yes, I appreciate the disclosure. But in terms of the amount of sales, can you tell like how much you expect in '07, if you have a $45 million expectation for EBITDA? Like the level of sales?

In terms of sales, the estimate that they have is that they will do something around $340 million in sales.

Okay, great. All right.

And, as I mentioned during this call, the estimate is that they will sell close to 100 million unit cases in CSDs and water. They also have some other products they sell, including beer, that we need to evaluate once we organize.

Okay, perfect. And in terms of the Jugos del Valles acquisition, can you elaborate on the restrictions. I understand that they wanted to limit the exclusivities at the OXXO stores. I understand that it's only about 2% of your sales that would go through outside, within your franchises in Mexico. Can you comment on that, or what do you feel is the impact on the -- can you renegotiate the valuation based on the fact that the synergies will not be as high as anticipated before?

Yes, let me comment on the Jugos del Valles acquisition. The main concern that the Antitrust Commission has is that they think that we have very strong dominance with brand Coca-Cola in the marketplace, and they were concerned that we were going to do some kind of bottling of Jugos del Valles products with Coca-Cola brand or some of our CSD products.

So when the case was first presented to the authorities, the vote went two commissioners in favor of the transaction, and two commissioners against the transaction. And in case of a tie, both the President of the commission has a quality vote, and he was voting against the transaction.

So we had this -- let me use the word "appeal" process, which is you have one chance for your case to be reviewed, in Mexico it is called "recurso de reconsideracion", which is kind of an appeal process. So we visited again the commissioners, presented again our case and started the negotiation process of some of these conditions.

The main conditions are one, it's what you said about the exclusivities with OXXO. It's important to know that they are only concerned with brand Coca-Cola. They are not including flavors. It's just brand Coca-Cola, so it's only the cola segment that they want Coca-Cola FEMSA not to have exclusivities with OXXO. It's important also to mention that OXXO is not a participant in this transaction and they are not signing any single document here. It's just Coca-Cola FEMSA agreeing that we will not have exclusivities in OXXO stores for the cola segment. For the next five years, we will be reducing 20% per year, so that in the five year terms, the area for colas will be totally open.

And, also, we'll sell whatever is convenient for them. Okay? I don't have exactly the figure of the amount -- I know that for us it's around 2.3 for the total products, but I don't remember exactly how much is colas. It should be close to the number that you mentioned, around 2%, probably slightly less than that. For us, it's important to make the distinction about colas with the rest of the flavors, because obviously with brand Coca-Cola it's our most strong brand in our portfolio, and definitely it's an area where we feel comfortable that the strength of the brand will maintain a lot of the power.

In some of the areas of Mexico, for example, in the city Monterey and some other areas in the north, also already sales, some other competitor products. And what has happened there is that the volume of brand Coca-Cola has continued to increase as traffic also improves. So that's the only data that we have right now in terms of that. it's very difficult to predict exactly what is going to happen in the territories that we have.

But, specifically in the case of Monterey, when the stores were open for Pepsi, the Coca-Cola brands also increased in volume because of the additional traffic. Another important condition is that we will -- they are asking, since they were worried about the bonding of sales or forcing the sales of Jugos del Valles on Coca-Cola brand, they are asking for certain of the urban areas, where you have large clients and they are defining large clients, those clients that sell more than 10 unit cases per week of juices. We will go with a separate sales force.

So we have a preseller that will sell Jugos and a preseller that sells soft drinks. Distribution will use the same truck. They don't have any problem with distribution. They just want to structurally avoid the temptation of having a salesperson trying to force or to leverage the brand Coca-Cola to sell some of the juice products.

It's something that we feel confident also, because as long as we go through this definition of the large clients in urban areas, I think that it's also advisable for the health of the business to have this separate workforce. So that's one second, important condition.

Another condition is that they said basically that in those cases where the small mom and pop has one single cooler and this cooler is owned by Coke FEMSA that we should open the cooler, or part of the cooler, for potentially competitors to be there. The agreement, or the way we presented our proposal to the Antitrust Commission is that in those cases, again, where the small mom and pops have only one cooler available, we will replace that cooler with a cooler that has two doors.

The part that is above the cooler is the superior part of the cooler, will have 75% of the space, and that will be exclusive for our products and we have a separate door to be used by the store owner at his discretion. They might have dairy products, they might have vegetables. They might have competitor products. Or, if the rotation of our products is appropriate, they might have our products. But it's going to be the discretion of the store owner. For us, it was very important to divide this cooler into separate spaces, different from what you have seen in some other areas in the world when restrictions similar to these have been applied.

It's important, because we have what we call internally the picture of success, which is at the sign of healthy coolers should look like with our products, and we rate the performance of the preseller and the merchandisers according to the execution on that specific term that we use, the picture of success.

They basically need to take are of the space being clean, not contaminated by other products, including things that might have some odor, like vegetables or cheese or whatever, all the labels facing forward, the cans placed in the specific area for cans and the big bottles for the area in the big bottles. So for us it was very important to maintain the exclusivity on that specific area, even if the cooler has a separate door for competitors or some other products.

So, with that, what we are achieving is that our space will be handled only by our merchandiser and salespeople. We did an analysis of that and the number of coolers that are in that situation is basically around 15,000, 15,000. It's important to mention that that's less than 4% of our total cooler, because we have a little more than 400,000 coolers in our areas. So it's a small portion of the coolers that will be in that situation for five years.

It's also important that the obligation is for five years and we feel that compromise, that that condition is also acceptable for us.

The last thing that is important to mention is the idea of selling Barrilitos brand in Mexico. It's important also to mention there that we are doing the distinction about Barrilitos in Mexico and what happens outside of Mexico, where we mentioned -- where the Antitrust Commission doesn't have any influence.

So they are in agreement that we have a two-year period to sell the Mexican opportunities for Barrilitos brand. We are keeping a brand within the CSD portfolio that has the brand Del Valle. It's important, because it's exactly the same brand name that we have for the juices. And it was important for that brand to be kept by Coca-Cola FEMSA.

So, Andrea, those are basically the main conditions that are in the agreement. With those conditions, the commission went into a second meeting. This time around, there were three commissioners. The President, we understand, voted against the transaction and two other commissioners voted in favor.

It's important to note that one of the commissioners that voted in favor had voted against in the past, is one that changed, because now they feel that wit these conditions that we have offered, that they feel confident that the transaction is pro-competitive.

(OPERATOR INSTRUCTIONS)

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

Good morning, and thanks for that explanation. It was helpful. I wanted to ask a question on the Mexican operations. You talked in your opening remarks about delivering operating leverage or positive operating leverage into the second half of the year. The revenue growth this quarter of 4% was a good number, given the recent growth in Mexico, yet your operating expenses grew at a similar pace. So can you help us understand why you didn't get positive operating leverage in the second quarter, and why you expect it to be different in the second half of the year?

Thanks. Hello?

Yes, Lore, I'm here. Sorry. Hello?

Yes.

Yes, I think that what we are seeing -- operator, are we okay with the line? I'm hearing a beep here.

We can hear you clearly, sir, go ahead.

In Mexico, I think that the main factor here, Lore, is that we have gone through a transformation -- we go to market and that has created some pressure on some of the operating expenses line, but I think that we have basically finalized that process. What I am anticipating, if we continue growing with this kind of volume growth and with the price performance of our products that we have achieved, that as you know it's the first time that we are seeing in several quarters an improvement in the CSD average price per unit case, that improvement in revenue, together with a more convenient, or more favorable raw material scenarios, I think that will help a lot to leverage that top-line growth.

In terms of the operating expenses, I do see that those will be a little bit more flattish going forward. Again, we have gone through a transformation process that John Santa Maria has basically finished in terms of reorganizing the way we go to market, and I will expect for the second half of the year to have a better leverage on that top-line growth.

Thanks.

Your next question comes from the line of Alex Roberts with Santander. Please proceed.

Hi. I guess my one question would just be about top-line in Mexico and your selling price. I mean, you basically got some multi-serve price pickup in the end of first quarter. We've seen Coke Zero come out as well, and I'm just kind of looking at -- I would have thought you would have gotten some real price increasing in Mexico in the quarter.

Can you tell us what you're thinking about for the second half, as far as that selling price in Mexico? Is it safe to assume that you can get above inflation, or is that going to be an aggressive assumption?

Good morning, Alex. I think it's important that we made the distinction or to understand how the total pricing that we see in the P&L is behaving. It's important to notice that since the end of 2005, this is the first time that we see a positive price increase in real terms when you look at the CSD portfolio.

When you include the fact that jug water is growing 10% in the quarter, which is certainly faster than the rest of the combined portfolio, that is holding down a little bit the prices for the total mix of our products. Just as a reminder, price for unit case of jug water is very low compared to the rest of the portfolio. You're basically probably close to 10% or 12% of the price of a unit case is where we are standing.

So every time that we see jug water and jugs growing importantly or a higher phase than the rest of the portfolio, we will see that effect that in the total pricing formula, our price will come down slightly. So it's very important that we do the distinction which is a total effect related to mix.

On the CSD front, what we are seeing, as you correctly pointed out, we have an increase at the end of March, large sizes, that have a total effect in the portfolio for around 2.5%. We have in production of Coca-Cola Zero that, as you know, is basically being sold in cans and 600 ML. That also helps a lot in the pricing.

Coca-Cola Zero is performing very well, as I mentioned. So those two effects are helping the pricing for CSDs during the quarter. What can we expect going forward? I think that what we have seen in the market is that we increased the prices at the end of March.

We saw some of the competitors, not all of them -- basically Pepsi, Big Cola, move the prices several days or weeks after we did it. Barrilitos has not moved their prices. So you have now a two-liter, excuse me, a three-liter of [RED Cola] being sold at MXN12, and you have 2.5 liter of brand Coca-Cola on one-way being sold in MXN16 or MXN17, depending on the market.

But we still have a very large gap in terms of price gap versus our competitors. I have to also mention, which is important, that both Pepsi and Big Cola also increased their prices. Because, as you know, there has been some raw material pressure on the industry.

How long is Barrilitos and RED Cola going to stay with those prices? We don't know. I think that some of the strategies that we have followed are in the right direction in terms of trying to carry the price in this industry at a higher price level as opposed to us killing each other at a lower price level, no?

I think that it's also important to mention, Alex, the effect of the flavored category in the industry, which is not growing. Basically, the growth is coming from colas, which is also in a way positive for us because of the strength that we have in brand Coca-Cola.

So you have to consider all of these issues together when you look at the pricing formula. The very good news for me this quarter, in Mexico, is that we have turned the trend to a positive trend in terms of pricing in CSDs, because we have several quarters with production in average price per unit case of CSDs, as we were going to the multi-serves. And now, for the first time since the end of 2005, we are seeing a trend the other way. That's I think very important.

Second point, very important, we are achieving very important volume growth, which are also relevant in this industry as you leverage -- these last cases are always the important cases for profitability, no?

I don't know if this is helpful, Alex.

Yes, thank you very much. That's great.

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

Yes, good morning. I would like to know if you anticipate the approval of Jugos del Valles in Brazil to happen in the next month, and also if you expect similar conditions in the case of juices in Brazil because of higher concentration of market share there? Thank you.

Yes, good morning, Reinaldo. The filing with the Antitrust Commission in Brazil was made basically at the same time as in Mexico, in January of this year. It's different that in Mexico we cannot proceed with the acquisition until we get clearance from the antitrust authorities.

In Brazil, you can go out there with the acquisition, and then CADE, which is the antitrust authority to either abolish or approve the transaction. So we are expecting to hear from them towards the end of this year, or at most, in January of last year. But that's the way it works in Brazil.

As you correctly pointed out, there is a slightly higher concentration there in terms of the players. The industry is not as large. I mean, we are talking that Jugos del Valles is the number one player, selling 15 million unit cases in the whole country, so it's not a huge operation.

But right now we are not anticipating any problem with the acquisition, but we basically have to wait and see what the authorities would say.

Okay, great, thank you.

And I think that the fact that the Mexican authorities have made a pronunciation in this direction, I think that it will also help, because at the end of the day all the agencies around the world are communicating.

Okay, great. Thank you very much.

Your next question comes from the line of Sohail Ahmer with Lusight Research. Please proceed.

Good morning. Just a question on the acquisition in Brazil now. If I got my numbers correct, it seems that your return on invested capital on this investment is in the region of 13 to 14 -- that's 13% to 14%, compared to what you have been earning recently, which is significantly higher than that.

So I'm just thinking for this acquisition, did you face a lot of competition in terms of buying these assets? Were there other bottlers that were looking to acquisition this asset in Brazil? And if so, in the future do you anticipate that when you do make acquisitions you will be facing a lot of competition there?

Yes, good morning. I think that the answer is to a specific question about competition is no in this case. We know that the Coca-Cola Company have stated publicly in the past that they were looking to divest of some of the assets that they have in bottling operations. I think that the fact that we have been performing very well in Brazil during the last four years helps us also to have a very good rapport with them in terms of being the selected bottler for this acquisition.

They didn't perform an auction process within the rest of the bottlers in Brazil. It's just that in the conversation that we had with them, we expressed our interest in buying that. They said I think that you are the right bottler and we started conversations with them.

As I mentioned, the agreement is basically calling for those facts that I mentioned about the size of the operation and the price that has been agreed in principle, and we have started due diligence at the beginning of this past Monday. In the future, can we find competition in some of the territories, yes, depending on how these assets are being sold. I think that it's easier to find competition for an acquisition when the asset or when it's owned by a bottler, because it's probably looking for a bottler that is selling to leave the system.

The interest is getting the highest price possible, because they will no longer be involved with the Coca-Cola system when they exit. In the case of the Coca-Cola Company, I think that it's important to make that distinction, because they will stay as the owner of the brand with whoever buys the assets. So for them it's very important to be sure that whoever is buying the asset is the most appropriate bottler either because it's close to the operation or because of proven track record in terms of turning around the businesses and improving the execution.

What they are looking at this is not to have the asset and to have someone that is an expert to continue multiplying the volumes and for them to profit from some sale of concentrate. So if in the future, we might find a situation where we are billing for an asset that is not by a Coca-Cola Company or a separate company and a family. And in those cases, we do anticipate to find competition.

Right, so I take this to mean that, in the future, growth is going to come at a high price. Just a quick follow-up. Are there any other bottling territories or assets in Brazil that you believe are up for sale?

Well, let me just -- with the explanation I mentioned, I didn't mean to say that the Coca-Cola Company is not trying to get as high a price as possible. They will look for that balance of getting the highest price they can when they sell the asset. They have a fiduciary responsibility with their own shareholders, the same that we have to buy as low price as we can achieve, and there is always this tension of where do you walk away from an opportunity like that? And that balance is important to find out.

I think that in the past we have been very diligent in our valuation processes and in the way we approach the valuation. So I'm not sure that that business is already implied that in the future the acquisitions will be more expensive. I think we might find a little bit more competition and by definition we might have a little bit more pressure on the price, but I will not say that is just the straight formula to buy a separate bottler and you pay a higher price.

Usually, when you go to a private bottler, the synergies that you can create because of the proximity to the opportunity for synergies is also a very important element of who ends up buying those assets.

In terms of if there is another opportunity to buy something in Brazil, we have tried a few small things, small operations that are around there. One of the very positive things about this valuation process also with the Coca-Cola Company, which is also important to impress here in this conference call is that we are doing a transaction with someone that will continue to be next to us in the future. It's someone that is our partner, because they own a percentage of our company, someone that we have a very strong and very large relationship in the rest of the world.

So we have a very good understand that as a partner we won't face the kind of contingencies that we have found in the Brazilian market, especially with respect to Taxes. When you go to a separate franchise that is owned by a third party in Brazil, our experience is that deals start to complicate when you start asking for rights and warranties and when you start asking for funds to stay as an escrow for potential contingencies.

In this case, we have a very comfortable situation with the Coca-Cola Company because being there they have been a very well-organized institution that has all their books and everything in line as opposed to sometimes the families that are a little bit more disarrayed in terms of how they have their books and their records with respect to taxes.

And we have the commitment that if something arises in the future that was in their period, it would basically be covered by them. So that also at the end of the day it's a very important element in how much cushion you have in terms of putting a value in a transaction like this, because of basically no contingencies that we face in this case.

Your next question comes from the line of Carlos Laboy with Credit Suisse. Please proceed.

Yes, good afternoon, Hector. Two quick questions. One is, how do you see the process going forward for defining the value that Mexican and Brazilian bottlers are going to have to pay for Del Valle, and when does that process begin? And the second issue relates to the Brazilian acquisition. What type of investments do you think this acquisition is going to require? Do you think you'll need new plants, new truck fleets? Are there any M&A considerations for adjoining territories that you'd have to make before you decide how you reinvest in those fixed assets?

Yes, good morning, Carlos. With respect to Jugos, your first question, we have already done the road show to present this transaction to the rest of the Mexican bottlers. We basically have established with the Brazilian bottlers and the Mexican bottlers what are the value of the assets for Brazil and for Mexico.

I think that everyone is basically in agreement on that. We are discussing how we are going to manage Jugos del Valles going forward, because remember that in this case we have this new model for everything that is non-carbonated with the Coca-Cola Company, and it is a little different of the way the CSD operations are being managed basically in Mexico and Brazil.

Remember that in this case the Coca-Cola Company will stay a shareholder of the production. Basically, the idea is that everyone will maintain the rights to their franchise for everything that is the traditional market and in those cases leverage the strength that the system has in terms of the distribution and the way to go to market through the traditional channels.

And in the specific case of non-carbonated products, what we call modern [trade], meaning the OXXOs, Wal-Marts and supermarkets, et cetera, it's a more important part of the mix for non-carbonated products. That market is going to be managed centrally, by an organization similar to [Solesco].

We are basically in the discussions with all the bottlers and with the Coca-Cola Company to fully align the governance for that part of the equation. So the case has been presented to all the bottlers. As we speak, we continue to have discussions with them.

I don't think there is an issue with the valuation of the assets and the allocation to each of the bottlers of this valuation, which is basically in line with the volume they sell for a combination or a formula of what they sell in juices. And what Jugos del Valles sells in its bottlers' territory, plus what each bottler sells in terms of soft drinks, so it's a formula related to that because of the allocation.

And the idea is that once we receive the official notification from the Antitrust Commission that we are expecting in two or three weeks, we ill start a tender offer process that will by law have to reopen basically for 20 working days in Mexico. It's basically a month that we have to have that open. And once we close that, the idea is that tall the bottlers will start buying from Coca-Cola FEMSA a portion of these assets.

So right now, the first step is Coca-Cola FEMSA and the Coca-Cola Company buying 50-50 and then Coca-Cola FEMSA reducing its ownership to the corresponding level by selling to the other bottlers.

Obviously we have to take considerations for all the tax considerations and we don't have a lot of taxes in our organization like that. And that's basically what we are anticipating on the Jugos del Valles front.

In Brazil, I'm not sure that I understood your question about the M&A considerations before doing the investments, Carlos, but basically this operation has one plan. And it has five or six distribution centers and I think that the plan will continue to be one. We might find some opportunities to work on the distribution centers and generate some appreciation there. That is something that we need to analyze as we start all this process of doing the due diligence and analyzing it.

I don't have to make a lot of investments with respect to CapEx. They have a very well-run operation right now.

So you don't need a new plant there?

No, not at the beginning.

Thank you.

Your next question comes from the line of Celso Sanchez with Citigroup. Please proceed.

Hi, just wanted to check on the status and if you could give us some color on the Jugos del Valles business, but also the Sucos Mais and the Mata Leao in the territory you'll be acquiring. Is it reasonably well developed there relative to the rest of the country or certainly relatively to your existing territories? Or is there a lot of room for improvement in that business, as well, in the new territories?

Thanks.

Yes, good morning, Celso. Yes, I think that in terms of Jugos del Valles, we have to consider first the following thing is that we announced the transaction on December 19. We are basically seven months after that. It has been a very, very long time and our expectation, we have a little bit more -- several things happened, but two important.

One is that Jugos del Valles [related] in Mexico on wholesalers and distributors, and obviously these third-party individuals or companies have been worried about what is the future of their business with Jugos del Valle, if the Coca-Cola system buys this acquisition. So some of them have been abandoning the operations and looking for an alternative product, anticipating that some Coca-Cola bottler will be doing the distribution or the sales in their territory.

That obviously has hurt a little bit the performance of the volumes and I'll have to say that Jugos del Valles has lost some market share during this period, this seven-month period.

On the other side, the positive trend is that in the dialogue we have had with them, we have convinced them that it's important to maintain a better price formula for their products, and they have been able to maintain improvements in the pricing that have been sustained and some of the competitors have started to increase prices.

So, on the one hand, we are suffering a little bit on the market share. That's what we have analyzed and I have to clarify that we do not have full 100% access to the numbers. It's just the conversations that we continue to have with them. Obviously the transaction was not approved for all this time, the access to information is quite limited, no, because they were not sure about the transaction being completed or not.

So on one side we have lost a little bit of market share. But on the other hand, the pricing mix has been moving in the direction that we would like to see the pricing mix moving, the pricing formulas.

So I think that we have some kind of mixed feelings here in Mexico. But that obviously our anticipation is that when they covered our operation to start improving importantly on volumes and also to start capturing some of the synergies, close down some of the facilities distribution centers, all of the normal things when you do an acquisition.

In Brazil, as I mentioned, even though it's the number one player, it's a small operation. It sells around 15 to 17 million unit cases. Sucos Mais is already integrated in the operation, which is the second player in Brazil, and the Coca-Cola company recently did the Mata Leao thing. The Mata Leao, it's very important on the tea segment. It's certainly the leader. And in there we are participating with Nestea in that market. Mata Leao also works a lot with its little bags for the [hot dealers] and they are certainly the leaders in that area, also.

But that's an area where we don't have any experience or we are working powders and bags. So I think that there will be opportunities to improve there, because the market doesn't have the per capita that we've seen in other regions. So I think that in that are it's more integrating the synergies. In Brazil, it's getting the synergies through the value chain and increasing the per capitas and growing volumes. That's my anticipation for this transaction in Brazil.

Okay, but just to get the nuanced question, I guess, is is the opportunity for the non-carbs in the new territory perhaps greater than the opportunity on a relative basis than in the areas you were already operating with some of these products, i.e., your existing territories?

I think that if you are referring to REMIL, REMIL is operating on a very similar basis with what we have in terms of mix of different products that we have in our regions. Clearly, Sao Paulo is large -- REMIL has some other areas that are more like some there areas in Mexico where you have small cities and rural areas, et cetera.

Taken into consideration that there are some differences on that, I think that the execution in terms of REMIL on non-carbs is similar to what we have, no?

Your final question comes from the line of Robert Ford with Merrill Lynch. Please proceed.

Hi, Hector, and congratulations on the acquisition. I had a question with respect to the sell-through rates right now on Zero and cannibalization or lack thereof across territories and what your package and your pricing strategies are trending towards?

Yes, Bob, let me give some information here. In general, we have basically Coca-Cola Zero in Mexico, in Brazil and Argentina. In the three markets, the growth that we're getting because Coca-Cola Zero is very important, we are truly thinking that we are getting new consumers into the marketplaces.

The three areas we are ahead of our expectations. In some of the areas, for example, in Mexico, Coca-Cola Zero, you look at a picture right now, it's close to 60% of the volume of what we sell for Coca-Cola Light, which is very important. And it's not because Coca-Cola Light has increased significantly in size. We have affected a little bit Coca-Cola Light, but if you add Coca-Cola Zero and Coca-Cola Light together you are drawing important. So I think that the good news here is that we have a presentation that is attracting consumers that are either drinking some other stuff, or consumers that had stopped to drink brand Coca-Cola, regular Coca-Cola, because of weight consciousness or health concerns, and they'd like to start improving a little bit on their diet in that respect.

So at he end of the day, I think that it has proven to be a very important introduction for us in those three markets. As I mentioned, in Mexico, it represents around 2% of the total mix of our products. For example, in Brazil, it's very close to 80% of the size of Coca-Cola Light, but both categories have improved significantly from the Light category in Brazil was basically around 11% last year. And now it is close to 14%.

So just to give you an example, so we have [Soffer] if you look at the volumes of Coca-Cola Light alone, separate, you are seeing Light in the lower volumes of Coca-Cola Light. But Coca-Cola Light plus Coke Zero, it's certainly improving the performance in the three territories where we have it.

So we have very good -- we are very happy with the performance of Coca-Cola zero up to now, Bob.

And thus far, Hector, just available in personal sizes, but are you about to put it into multi-serve soon?

Yes, I'm not certain about the dates, Bob, but I know that we are doing some pilots with the larger multi-serve presentations in PET. I'll check a little bit more on that information and share with you the next quarter and keep you obviously abreast of any new development on Coca-Cola Zero. We are analyzing that also for some of the other areas that we don't have what we call the Latin sell-through division. We're analyzing how should we square with that. There are very interesting areas of opportunity, just to share with you an additional thing, for example, in Venezuela you know that there are concerns about the availability of sugar in the future, just in general in the country, because of the way the market has operated over there.

So we are looking at Coca-Cola Zero as an alternative to have the product available in the market without depending of a scarce raw material like sugar in Venezuela.

Interesting. And, just out of curiosity, where would you price the three-letter RED product in the market. Prices are so much pressed. Do you feel they have to follow in terms of price increase? What's that package costing them right now?

We have been doing some in and out testing with three liters on regular Coca-Cola in Mexico and we have priced that at MXN19.

No, but do you understand what I'm trying to say is what is it costing them to produce and deliver that at the point of sale, just to understand where you think they start to feel the squeeze.

I'm not sure that I follow the question. Just speaking about the cost of producing a three-liter presentation?

Of sugar-sweetened cola in Mexico and delivering it to the POS?

I don't know. You are getting me -- I don't have that detail with me right now, Bob. I need to check on that.

All right. Hey, thank you very much.

Thank you, Bob.

And, ladies and gentlemen, this concludes the Q&A session for today. I would like to turn the call back over to Mr. Trevino for closing remarks.

Well, just to thank you for your attention during this time and obviously Alfredo and Julieta will be available to answer any further calls. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes the presentation. You may now all disconnect and have a great day.