Coca-Cola Femsa SAB de CV (KOF) 2007 Q4 法說會逐字稿

Good morning, everyone, and welcome to Coca-Cola FEMSA's fourth quarter 2007 earnings results 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'll open the conference up for questions and answers after the presentation.

During this conference 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 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 will now turn the conference 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 another year of strong top-line and bottom-line growth in 2007. We generated robust revenues in almost all of our franchise territories as a result of record-breaking sales volume for our Company. We increased operating income, driven by Mexico's improved profitability, combined with strong performance for most of our operations in South America.

Profitability across all of our markets, including Mexico's best quarter of the year, expanded our business operating margin for 2007. The sustainable, solid incremental growth and diversified cash flow generated by our operations allowed us to deliver to our investors attractive earnings per share for the third quarter and for the full year. Our record-breaking sales volume grew 6.7% to 558 million unit cases in the fourth quarter.

This growth was driven mainly by a 5.8% volume growth of brand Coca-Cola, which accounted for more than 55% of our incremental volumes during the fourth quarter. Brand Coca-Cola continued to expand its volumes through the year, driven by our blockbuster launch of the year, Coca-Cola Zero, in Mexico, Brazil and Argentina. Coca-Cola Zero is the cornerstone of our [paradigm] challenged three-tiered cola strategy.

Coca-Cola Zero is a product with the refreshing taste of Coke Classic, without the calories. The successful implementation of our operations, targeted marketing strategies allow us to attract new consumers and to drive incremental volume growth across the cola category last year.

Flavored sparkling beverages expanded 9.2% across our territories and accounted for more than 30% of our incremental volumes during the fourth quarter. The still beverage category, excluding bottled water, continued to demonstrate its upside potential, delivering more than 9% growth. An exemplification of this growth is our juice-based line, Hi-C in Central America, which we acquired in 2005 from individual investors. Our volume for Hi-C has grown significantly since then. The secret to our success has been our focus on what we do best, revenue and portfolio management, distribution and winning point-of-sale execution.

In the fourth quarter, our consolidated revenues rose to MXN18 billion, the equivalent of $1.7 billion, up almost 9% year over year and rose 8% to MXN69 billion, or close to $6.3 billion, for the full year. During the full year, our consolidated operating income improved almost 12% to MXN11.4 billion, or more than $1 billion, and our consolidated EBITDA reached MXN14 billion, $1.3 billion.

Our majority net income for the year increased 30.5% to MXN7 billion, or $632 million, resulting in earnings per share of MXN3.74, or the equivalent of US$0.34 per share. Our continuous effort to generate strong consolidated cash flow in 2007 paid off, as it enabled us to finance our share in the joint acquisition of Jugos del Valle with the Coca Cola company and to significantly reduce our total net debt by approximately $345 million in the year.

Our balance sheet is stronger than ever, with one of the highest credit ratings among Latin American companies in our industry. Our gross profit increased 10% for 2007, increasing our gross margin by 90 basis points year over year, despite a volatile raw material environment. Lower prices of sugar in the second half of the year combined with lower PET costs, PET light-weighting initiatives and the appreciation of the Brazilian and Colombian currencies as applied to our dollar-denominated raw materials in those countries more than compensated for the higher cost of fructose in Mexico and Argentina.

Now, let me expand on our operations. Our Brazilian operation has been the one with the most consistent performance during the last two years, recording double-digit top-line growth and exciting bottom-line growth for the year. This quarter was the best quarter for Brazil. Much like in the rest of the year, we were able to deliver strong results through strong volume growth, combined with benefits of capturing profitable volume thanks to multi-segmentation strategies and lower raw material cost.

Excluding beer, our volume grew 14% in the fourth quarter, the largest growth recorded in over three years. Brand Coca-Cola accounted for over 65% of the growth, driven mainly by the spectacular performance of Coca-Cola Zero. In the flavored sparkling beverage segment, we posted over 15% volume growth, led by the successful launch of Aquarius Fresh, a no-calorie, lightly carbonated flavored water, and the Fanta brand, driven by the innovation in packaging and of flavor extensions.

The still beverage segment grew more than 40%. This growth was mainly driven by the successful penetration into new categories, including Minute Maid Mais and juice-based products, Aquarius still flavored water, Nestea and Kapo Chocolate [EMIL breakfast] product.

On the beer segment, our business continued growing. As I have previously mentioned, our short-term goal is to continue strengthening brand equity for Kaiser, build up brand equity for Sol and recapture coke customers in the market. Growing at a higher pace than the market leader confirms that our initiatives are working. In the fourth quarter of 2007, we post a 630 basis point expansion in our gross margin, driven by revenue growth management initiatives and higher efficiency in managing costs.

On the profitability front, we recorded 40% growth in operating income, our largest growth in a single quarter in more than two years. We achieved an EBITDA margin of 21.3%, the highest EBITDA margin recorded in Brazil since we acquired the franchise in 2003. The dynamics of the Brazilian market, combined with our redesign and intense go-to-market strategy and improved execution will continue delivering sustainable, profitable growth.

Moving on to our Central American operations, we post volume growth of almost 4% that was partially offset by a 2.8% decline in average prices per unit case during the fourth quarter. This decline was mainly driven by increased multi-service presentations volume and growth of the value protection brand, Frescolita, which carries a lower price per unit case.

Brand Coca-Cola and flavored sparkling beverages accounted for more than 75% of our operation's incremental volume. In the still beverage category, volume grew more than 10%, mainly driven by strong growth of Hi-C, our juice-based product line.

Our Central American operations total revenues increased close to 1%, lapping a 12.3% volume growth the same quarter last year. For the full year, this operation's total revenues reached almost MXN5 billion, a 5.5% increase compared to 2006. On the profitability front, our fourth quarter operating income increased almost 10%, to MXN205 million, due to lower operating expenses. Consequently, our operating margin expanded 130 basis points.

For the full year, our operating income posted a double-digit increase of 11.5% to MXN715 million, or almost $65 million, and generated an operating margin expansion of 80 basis points. Our Argentine operations volume grew 14% for the fourth quarter. The majority of this operation's incremental volume came from the sparkling beverages, supported by the successful launch of Coca-Cola Zero.

Brand Coca-Cola accounted for more than 60% of our operation's incremental volume. Flavored sparkling beverages, driven by Fanta, accounted for the rest. As a result, we grew our sparkling beverage business by 14% in the year.

A favorable shift in our product mix for our non-returnable presentations combined with some price increases concluded in better pricing per unit case for the quarter. However, Argentina continues to be the territory with the lowest price per unit case among our territories.

Our double-digit top-line growth was partially offset by higher sweetener and labor costs, resulting in 13.5% growth in operating income. The fourth quarter seasonality of this operation helped to drive higher fixed-cost absorption. For the full year, operating income reached MXN492 million, growing 11.3%.

Moving to Venezuela, we achieved 14% growth in sales volume for the fourth quarter. Our redefined portfolio, combined with the strong local consumption, led to more than 18% growth in the sparkling beverage segment for the quarter. Flavored sparkling beverages, driven by Hit, accounted for more than 70% of the growth, with brand Coca-Cola accounting for the balance.

Top-line growth, combined with lower PET costs and higher operating efficiencies, delivered favorable results. Our manufacturing efficiencies, SKU rationalization strategies and our ability to supply the market with more of our core products on top of our successful multi-segmentation strategy allowed us to increase our year-over-year profitability from a very low base. The operating income margin of Venezuela continued to be the lowest among our territories.

Our Colombian operation's top line declined 3% to MXN1.8 billion during the fourth quarter. Our total sales volume decreased 1.9%, mainly due to difficult comparables of 12% volume growth in the fourth quarter of last year. The average price per unit case declined 1.2% in the fourth quarter. However, for the full year, increased sales volume and higher average price per unit case equally [concluded] to a 7% increase in total revenues.

In the first half of the year, we deployed revenue management initiatives in anticipation of the entrance of a big brand beverage producer. In the second half, we started to face a more intense competitive environment. However, our marketing investment and revenue management strategies should help us to continue increasing our profitability.

At the gross profit level, our Colombian operations posted double-digit growth, achieving a gross margin expansion of 640 basis points in the fourth quarter. Lower sweetener costs and operating efficiencies combined with a strong appreciation of the Colombian pesos as applied to our U.S. dollar-denominated PET costs generated a 10% growth in gross profit. For 2007, our gross margin expanded 500 basis points.

Operating income for our Colombian operation declined 6.6% in the fourth quarter to MXN310 million, compared with the same period last year. This decline was driven by increases in marketing expenses to reinvigorate our brands, higher breakage costs to sustain the returnable base we have in the market and incremental expenses for the maintenance of our distribution fleet. For the full year, Colombia's operating income expanded more than 39% to MXN1.242 billion, with an operating margin expansion of 410 basis points.

Our Mexican operations continued to improve their profitability by posting their best quarter of the year. Total sales volume grew 3.7% during the fourth quarter, driven by our sparkling beverage and bulk water volumes. We achieved 2.6% volume growth in the sparkling beverage category, with brand Coca-Cola up 3.6%, supported by the growth of Coca-Cola Zero.

Average prices per unit case increased almost 1% during the fourth quarter, mainly driven by price increases for sparkling beverages. Excluding bottled water, the average price increase was 1.1% in real terms, or close to 5% in nominal terms. During the year, we were almost able to keep prices in line with inflation. The pricing environment in Mexico is becoming more rational. Looking forward to 2008, we perceive an industry focus on profitability that and our correct revenue management and multi-segmentation strategies should allow us to continue this trend.

Total revenues for the quarter increased 4.4% to MXN8.1 billion, as compared to the same quarter of 2006. At the gross profit level, our Mexican operations achieved a gross margin expansion of 60 basis points, to 53.8% of total revenues for the quarter. This increase was driven by our light-weighting initiatives, which lowered PET cost year over year and more than compensated for higher sweetener costs. Gross profit was MXN4.4 billion for the quarter, an increase of more than 5% for (inaudible).

For the full year, gross profit reached MXN17 billion, an increase of almost 2%. It's important to highlight that during the first half of 2007, our Mexican operations faced a tough cost of sweetener environment, which eventually became more favorable toward the end of the year. Additionally, it was able to offset higher concentrate costs during the year.

Our Mexican territories delivered a 3.7% increase in operating income in the fourth quarter. This increase was driven mainly by top-line growth that we managed to trickle down to the bottom line by maintaining our cost and expenses in line with last year, resulting in operating margin in line with the same period of last year.

Now let me walk you through our financial performance for the quarter. Our financial performance continued to reinforce our strong balance sheet and well-balanced capital structure. Operations outside of Mexico delivered almost half of our EBITDA, underscoring our geographically balanced stream of cash flow. Consolidated EBITDA reached MXN3.9 billion, or $360 million, in the fourth quarter.

For the full year, our EBITDA rose to MXN14.4 billion, or the equivalent of more than $1.3 billion. Approximately 50% of our total debt is denominated in local currency, mostly Mexican pesos, and more than 65% of our total debt carries a fixed rate of interest.

As of December 2007, our net debt to EBITDA ratio coverage was below 0.8 times. Total net debt decreased approximately $245 million, compared with year end 2006. This debt reduction includes the $201 million that we invested in the Jugos del Valle acquisition, net of reimbursement received from other Coca-Cola bottlers as of December 2007.

As you know, in November 2007, Coca-Cola FEMSA and the Coca-Cola Company successfully concluded the tender offer to acquire Jugos del Valle, one of the leading juice producers in Mexico and Brazil through a new joint venture company, with all the necessary approvals from the Mexican authorities. This acquisition will advance our multi-category strategy and make us the largest producer of still beverages in the region, considerably increasing our Company's position in Latin America's fast-growing, underdeveloped juice-based beverage segment.

We are proud to announce that we have begun to distribute Jugos del Valle products in some of our Mexican territories in the past few weeks. Since we took control of the Company, we began implementing revenue management strategies, which, in our operational experience is key for creating value. Most of the Coca-Cola bottlers in Mexico are already part of this venture, with a few to follow.

Going forward, we expect to significantly develop this category across our territories. This is a great opportunity for us to give our clients and our customers a more complete and balanced portfolio, as well as a great result for our Company.

Consistent with our strategy of growing through acquisitions in 2007, we also announced an agreement to acquire the Coca-Cola Company's Remil franchise in Brazil. We are in the final stage of this process and expect to close this transaction very soon.

Our Brazilian operations are already delivering extraordinary results and with the consolidation of this new franchise, we will achieve scale and important critical mass in one of the most dynamic markets in the world. We are eager to implement our winning execution model in this additional franchise and reach the profitability levels of the rest of our Brazilian operations.

This was a great year for our Company. Every single one of our operations continued to progress in their individual ever-changing market environments. We are very excited about the challenges that lie ahead in 2008 and we believe that we are better positioned and with more knowledge of our market dynamics to deliver another year of growth and attractive returns to our shareholders and investors.

Thank you for your continued [close] and support, and now I would like to open the call for any questions that you may have.

(OPERATOR INSTRUCTIONS)

And our first question comes from the line of Tufic Salem from Credit Suisse. Please proceed.

Yes, good morning, everyone. Congratulations for the results. My question is regarding the Mexican operations. I wanted to get a better sense from you on the top line, in terms of pricing, if you can give us a better sense of how much is the actual price increase and how much is from a mix change in the quarter.

And, also, if you can please give us a better feeling about your experience in these price increases, how the competition followed. I guess I'm trying to get a sense of how this volume increase ties in with this -- what appears to be a softening macro backdrop here in Mexico. So maybe you can give us a better idea about that.

Yes, good morning, Tufic. I think that some of the key elements during this past year is that when you look at the very aggressive pricing environment that we saw during 2006, especially with when Pepsi-Cola was launching their three-liter presentation at very aggressive prices, which I've mentioned in the past, basically pricing at the same price point as Big Cola.

We were suffering on that pricing point, on the pricing front in 2006. Then, the first half of 2007, we started to see a lot of pressure on raw materials, and when you look at some of the profitability that has been achieved by some of the other companies, including Big Cola, that tried to do it, or some financing in bonds in Mexico, and therefore they did some filing of some (inaudible) the information.

You see that their profitability suffered a lot and that they were basically breaking even, no? So, with that in mind, we basically started to increase some of the prices, of the strategic prices of some of our -- basically, the large presentation in returnable -- the large returnable presentations that we have, that that clearly opened up the space for some of the competitors to increase their prices and grew a little bit the profitability. And also in the 600-milliliter presentation, which is one of the largest-volume presentations for us.

The reaction of the competitor was basically to immediately increase prices, also, with the exception of Jarritos that continues with the same price point in their two-liter presentation. They have not increased their prices, but the rest of the competitors have followed through. My feeling, a little bit (inaudible) to [figure it out] during 2008 we'll continue to have that trend of us doing some strategic price increases and some of the competitors following those price increases after we increase.

So if you ask me for 2008, which I think is basically the core of your question, I do believe that we will be able to increase prices with inflation during 2008 and that the competitors will continue to follow this price trend.

Okay, thanks. And in the context of what seems to be a softer consumer environment, in your experience on raising these prices last year and as you looking to 2008, do you feel that you don't expect a very big impact in terms of the volume performance, given the softer macro backdrop?

I think that we haven't seen a lot of reaction in the marketplace to all these moves about the recession in the U.S. or if the lower growth in the U.S. economy will impact Mexico's, no doubt about it. But I think that the industry where we are, it's a little bit more isolated from these impacts. I will say that we will continue seeing what we traditionally called CSDs, or the so-called now sparkling industry growing below single-digit numbers and with a very important growth in the new categories, where I do see double-digit growth.

So I think that we will continue to have good growth for this year.

Okay, great, thank you.

And our next question comes from the line of Andrea Teixeira from JPMorgan. Please proceed.

Hi, good morning, everyone. Well, congrats on the results. Just in terms of what you expect, Hector, in [OFID] in terms of, we discussed that before, in terms of the cost environment. And I know HFCS is up even though you had some positives in Brazil from the current hedge, you explained in your prepared comments. Can you elaborate on sugar and sweetener costs, in general, in Mexico? I was curious to know what the balance will be, what you expect for 2008. Thank you.

And, also on the Venezuela situation, I know it's very political, but just has the situation sort of changed since last week? If you can elaborate a little bit more on that, as well, thank you.

Good morning, Andrea. I think that in general what we have been seeing is with respect to sweeteners we have seen some reduction in the pricing. The one component of sweeteners that was behaving differently in the second part of last year was high fructose, where we saw some increases, mainly the market where we use high fructose, which is Mexico and Argentina. The rest of the cost of sugar has been experiencing some reduction.

And obviously we are -- we have been using less and less high fructose, especially in markets where we have that flexibility, like in Mexico. The importance of high fructose in our mix is reducing, although it continues to be the most-used sweetener for us. In terms of 2008, we believe that we will continue to see this reduction in prices of sweeteners. Basically, the decline that we have seen recently is somewhere around 10% decline versus what we had at the beginning of last year.

With respect to PET, it's a little bit the reverse. During 2007, we experienced some reductions in PET and lately we have seen some small increases, basically around the 5% level versus what we had towards the middle or end of 2007. And I think that's basically the environment that we will have with respect to some of these raw materials for 2008.

With respect to Venezuela, we have this problem that has been, for quite some time, with us, where we have advanced in that front. It's basically regulations to some ex-distributors or ex-concessionaires that some of them were in our opinion legally indemnified, some of them more than 25 years ago, actually when this was a Pepsi bottling operation.

And we have won in every single instance in courts for what they are claiming that basically they were not appropriately indemnified at that time and they have the support of basically a couple of congress people. We have the support from the authorities and the government and at the end of the day, basically the result of these one-week closings of some of our facilities is that close to 30% of our operation was closed for one week and that we are back again to the same negotiation table that we have, where we are trying to negotiate not the compensation that they are claiming, or basically some additional benefits that we can have with these people that used to work for the companies a long time ago and that they might need some additional medical expenses and things like that.

That's basically where it's on the table. It's more a solidarity kind of funding a small program for medical purposes, rather than going through all these complicated schemes of looking for a different indemnification of what has already been settled in the courts and everything.

And we are back to normal, and I think that negotiation table should continue working and we hope that with no problem in the future.

Great, Hector, but can you give us an idea of how many people will be involved and how much will be the expense if you go ahead and try to pay as you pointed out? So, as a token to get this situation over, how much would be -- obviously it wouldn't be the $500 million, but give us a sense of how much will be the provision for that?

Yes, Andrea. In some of the claims that they presented to the press, they say that they are looking for indemnification for a figure somewhere around $500 million, which is totally out of any reasonable calculation. The resources that we have been offering to this negotiation table, it's somewhere on the order of $3 million to $4 million for some, to cover, as I mentioned, some of the medical expenses.

As I mentioned, it's more of a solidarity issue with these guys that used to work for this company a long time ago, but never going to the computation of indemnification according to law, because that has already been clear and paid and every single instances that we have gone is an agreement that the indemnification was correct at that point in time in the past.

Okay, Hector, thank you very much.

Thank you, Andrea.

And our next question comes from the line of Reinaldo Santana from Deutsche Bank. Please proceed.

Hi, good morning. My question is related to net debt expected for 2008, if you should continue to see a reduction in this level, to what, approximately? And also related to CapEx expected for 2008 and, one additional question, if the debt related to Remil is already in the fourth quarter results or do you expect additional debt coming from this transaction?

Reinaldo, yes, if you look at the numbers of the year 2007, basically, if we isolate the acquisition of Jugos del Valle, which I mentioned was around a $200 million figure, but also for December, we basically generated around $500 million of resources after CapEx, after taxes, after interest and dividends. That should be, like, the cash flow that was available to repay debt and acquisitions. We happen to have the acquisition of Jugos del Valle, and that's why we used this to (inaudible).

Next year, we'll have a CapEx figure that will be a little bit larger. 2007 was around $250 million. Next year, we will be looking somewhere around $400 million in CapEx and we are planning basically to fund Remil with the cash balances that we have. In that instance, we have the cash balances of December and we will use that cash balance as soon as we close the transaction, and we will reduce our cash balances, but we will not incur additional debt for the acquisition of Remil.

I think that will answer most of the questions, yes.

Yes, thank you. And when do you expect to start consolidating Remil operations?

We are very close, right now. I think that it should not take more than 30 days from this day. We are working some of the [recommendations]. As you know, we have an agreement on the price. We have an agreement on how contingencies are going to be handled and everything. It's just basically the implementation process that is taking a little bit more time than anticipated, as we start to write the agreements and everything. But my expectation is in the next 30 days.

Okay, great. Thank you, Hector.

Thank you.

And our next question come from the line of Bob Ford from Merrill Lynch.

Please proceed.

Hey, good morning, everybody. Good morning, Hector, and congratulations on the quarter. With the exception of Central America, every territory saw an increase in selling expenses that led revenues, and I suspect that part of that was Zero. But I was curious if there was anything else and what you expected in terms of selling expenses for territories in 2008.

Yes, Bob. It's different in each territory, Bob. But let me give you one thing that was common to most of the territories, that we have some extraordinary adjustment, especially when you look at the fourth quarter, that has to do with -- remember that we have variable compensation for the executives that is based on economic value added, and certainly most of them, for all of the operations, are going some of them strongly above the expectations that we have in the year, for example in the case of Colombia. Some of them, in line with what we were expecting. That was basically the case of Mexico.

And that gave us the need to do a provision in the fourth quarter for this extraordinary variable compensation that will be given to the executives (inaudible) performance for the year, because it was a surprise and some of the provisions, although we were improving quarter by quarter, the operations continued to improve at a faster pace than what we were anticipating.

In some of the other operations, we have, and probably most important than this first issue, is some additional marketing expenses. That was especially the case in Colombia during this fourth quarter, and that has to do with the presence of a new B brand competitor, the reaction from Postobon on lowering the price of our very important presentations for them and all the marketing activity that had to be performed in the fourth quarter.

Still, when you look at the numbers for the full year, I think that that also conveys the very important performance of the Colombian market during the full year. And in some other cases, we had and that was also true, for example, in Colombia, additional interruption of returnable bottles and cleaning up some of what we call [business gouging], or cleaning up some of the old bottles so that we have a better presentation to our consumers and reinforcing the presence of returnable as a way of competing when you have B brands being introduced into the marketplace.

So I think that those are the main characteristics that you are going to see in the SG&A line in some of the territories.

So, Hector, just to get it straight, in terms of what's recurring and non-recurring, I would have anticipated part of this to be a big increase in advertising to support the launch of Zero in several franchise territories, but it sounds like it's not necessarily. Is that correct?

I think that it's not necessarily. I think that a lot of these increases are non-recurring. In the marketing side, we will continue to have probably a little bit more of marketing expenses in some areas like Colombia. But I think that the majority of these are a one-time effect in the fourth quarter.

And then with respect to the light-weighting initiative that you had, particularly in Mexico, and I think it was a 600-milliliter presentation that you light-weighted by about 18%, can you give us the timing of that increase, because that was extraordinary?

Yes, the light-weighting, as you correctly pointed out, was basically in the 600 milliliter and it has to do with a total redesign of the bottle, including using a shorter cap. That also saves us in the plastic content of the cap. We are testing some of the larger presentations and obviously every time we change that design of the bottle, the Coca-Cola Company does an extensive analysis of the quality of the product, so that is maintained. And, as you can probably guess, it has to do a lot with preserving the carbonation and the rotation that you have of the product in the point of sale so that the shelf life is appropriate.

The 600-ml, I think that it was introduced basically in the first quarter. It was around -- it was at the beginning of the year, probably, I don't remember exactly the date. And I think that we will have some additional light-weighting during this year, in the larger presentations. And we are trying to replicate that in every market.

Obviously, when you go to rural markets, the Coca-Cola Company is not as comfortable with the light-weighting initiatives, because the transportation, the temperature and the longer time that the product stays on the shelf, we have to balance those equations. But it's a very important -- has been a very important initiative for us in the past.

Great, thank you very much, Hector.

And our next question comes from the line of Lore Serra from Morgan Stanley. Please proceed.

Good morning, Hector. A question for you in terms of the volume outlook for 2008, and I know you don't like to give specific volume forecasts, but can you talk a little bit about Coke Zero. If I'm not mistaken, you launched it around a year ago in Mexico. And as you go through the different countries, particularly in Mexico, Brazil and Argentina, it seems like it was an awfully important contributor to the strong volumes in 2007. So, if you look at 2008, how much do you think that the operators can build on the momentum of the brand in 2007? Or do you think we should see slower volume growth as you lap the launch in the different markets? Thanks.

Yes, Lore, good morning. I think that, again, we have different cases for the different -- on the three countries where we launched Coca-Cola Zero. In Brazil and Argentina, it continues to be a very important element on the volume growth, and you see a trend that continues to increase month over month.

In Mexico, we are in the process of re-launching, as we speak. Basically, I believe that two or three days ago was the re-launching of Coca-Cola Zero. We had an issue with some of the elements in the formula that the authorities in Mexico were not very happy with that, because it's approved to use in most of Europe and it's a formula that has been used in Europe, but in the U.S. it's not approved.

So we changed the formula, we are in the process of re-launching. But when you see that Coca-Cola Zero had a tremendous positive impact during the first part of the year when we launched it and it was reducing its importance because of the negative press of that element. And the Coca-Cola Company, together with the bottlers, decided to do a full re-launching of this product. It's too early to say the impact of the re-launching, because, as I mentioned, it was re-launched at the beginning of this week. And that there are a lot of marketing dollars being behind this campaign and we are using a different formula that is used in a different part of the world. I think some other country from Europe, Belgium or something like that. It's not the U.S. formula, it's a different formula.

The authorities in Mexico weren't convinced that the element was not harmful, but they didn't like the battle initiative that was being run by some individuals over the Internet and the newspapers and it got very negative press in Mexico.

So, with that said, I think that it would be very achievable, Lore, to get, as I mentioned, some low single-digit growth in CSDs during 2008 in Mexico, in Mexico and in the rest of the country, no. And with most of the larger growth in terms of percentagewise coming from all the introduction of new products and the successful launching of Jugos del Valle on our platform.

Just to give you an idea, in some of the territories in Chiapas that were the first ones where we were carrying Jugos del Valle in some of our trucks, as we successfully discontinued most of the distributors that were handling Jugos del Valle from the previous owners, in three days we basically sold what the guys in Chiapas were expecting to sell in one month. Obviously that has to do with all the filling the pipeline and the trade, no, and still it's too early to know what the impact of this will be. But what I'm trying to convey is that I think that we have a very big area for opportunity with juices and juice-based products.

That is new for the Company and that (inaudible) we have for the first time this year. We were launching some experiments with Minute Maid in the past, but I think that this is different this time.

Perfect, and just a second question, in Colombia, you've talked about how 2007 played out. You priced at the beginning of the year and then the market, as you anticipated, changed during the course of 2007, and we saw a good year in Colombia last year, but obviously not a strong finish to the year. Can you talk a little bit about your outlook for Colombia in 2008? How do you see the competitive and pricing environment as you start the year, and how you see it evolving?

I know the volumes were negative in the fourth quarter, and they were off a difficult comp, but I would have thought the entrance of a low-priced player would grow the whole market and that wouldn't affect you, necessarily, as much as in a market that would be growing less, for instance.

I think that you correctly describe the outlook for 2007. We had a very good year overall, but certainly the quarter was not very -- the fourth quarter was not very positive in that sense. We have this distortion created in the SG&A line with what I explained a few minutes ago about some additional bonuses for executives and things like that. But in the competitive environment, what is what we have? We have a new competitor that delayed a lot their entrance because of regulations in their factory, in their plant.

They launched the product. To our surprise, Postobon, they launched a product at a price that we were comfortable with, because we have increased prices at the end of 2006 and beginning of 2007. We set a platform that we have always said is not the same. And when you're going to have a war on prices, it's better to have it at a higher price than at a lower price.

So we said the environment to have this was at a higher price and Big Cola started with a comfortable price for us. As a matter of fact, the price differential, it was not close to what we have in Mexico or some other markets. But, to our surprise, Postobon reacted very aggressively with one product, and I don't remember if it was a three liter or three-point-something liter, 3.25, I believe, at a very aggressive price, under-pricing Big Cola. And that has to get a lot of attention in the markets, in the competitive environment.

We have gone through a lot of marketing expenses and promotional activity to support our brands. I do see that activity continuing at the beginning of 2008 and therefore Colombia is -- I think that we will continue to post good results, but the comparison versus the previous year will not be as favorable because of this competitive environment.

Do you see any possibility of taking any pricing in 2008, or will 2008 be a year where you just protect your current price points?

It will be more a protection of the current prices, Lore. Colombia has an inflation that is higher than what we have in some other countries, but I think it will be difficult to fully pass prices with inflation in Colombia this year.

Thank you.

Thank you, Lore.

And our next question comes from the line of Alex Robarts from Santander. Please proceed.

Hi, everybody. Thanks. I wanted just to start off on the Mexico pricing issue. You give us some confidence or you seem to say, Hector, that Mexico this year, the average pricing seems or can possibly get inflation or be in line with inflation. I mean, that would be a big achievement, I mean, looking at the last four or five years. And I guess my thought is when you look at the bulk waters growing at five times the rate of CSDs, it looks like Jarritos has not increased pricing in line with your increases. And then you have this three-liter kind of pilot launch, which I guess in an average selling case, price per case basis, will have an impact at some point. What makes you feel kind of confident about getting inflation this year in Mexico?

Yes, Alex, good morning. Obviously, we have to get used to this idea of having bottled water in the territories where we have that, which is basically in Mexico. Bottled water is a reality here. We are growing the business. It's an important element for us to defend our industry. It's a very offensive -- for us, it's an offensive strategy, also, because we believe that some of our competitors get a lot of their profitability from the bottled water category and I think that it's important that we compete in that area and not to leave our competitors alone in that category.

Having said that, as bottled water grows, certainly the price per unit case, when you compare that, it's a different story from CSDs or juice. What I'm saying is that I see a positive environment, is that when you look at the financial results of PBG, when you look at the financial results of Big Cola, you see that they are basically breaking even or just making a very, very small profit, Alex.

I do see some pressure on them to gather additional profitability, and that's why we were -- I think that correctly envisioning the price increases that we saw in CSDs during 2007, and that were immediately followed by these competitors. Because we should remember that the raw material environment is very different from what we had a few years ago, and you are correct when you said that we have had a very difficult price environment over the last three or four years.

But also the raw material environment has changed and it has put a lot of pressure on these competitors. So on one side we have water that will certainly affect the average price per-unit case when you look at the total cases and total revenues, no doubt about it, but when you isolate that affect of water, I think that we have a positive environment in Mexico for us to strategically improve the prices of some price points in certain packages and for our competitors to follow that.

And the third element here, Alex, is all these new categories that we are just starting to develop. That in a way brings a new formula or a new equation to this pricing formula, which are juice-based products, Powerade, teas and all of that that we have been very successful from a very small base and obviously those products are the opposite of bottled water. They have a higher price per unit case than the CSDs.

So it's very difficult to look just at the -- and to predict what the outcome of the revenues divided by cases will be as a price per unit case. But when we speak about the strategic segments that we have, I think we have a very positive environment on CSDs because of the reasons I explained about the raw material pressure, the profitability or the lack of profitability of some of our competitors. We have the new environment on juices and juice-based products.

For example, as soon as we took over Jugos del Valle, we have increased the prices 10% in most of the portfolio in Jugos del Valle. So that certainly will have a very positive affect on us, and that was followed by Jumex also. So I think that we are in a new environment, Alex, that maybe it's going to be very difficult to analyze just on a revenue per total unit case. We will have to dissect a little bit more this information when we look at the prices going forward.

Okay, that's clear. And just to confirm, the three liter launch that you did in 2007 in CSD, I mean, is that tactical and maybe a response in certain lower socioeconomic areas to demand, or could the three liter in CSD become something a little bit more relevant in your product portfolio?

Yes, it's a very tactical presentation I think that has been good for us, Alex, because of one reason, we are selling three liters in the low socioeconomic areas of Mexico City and also in different areas, including high socioeconomic areas when you go through seasons like Christmas where you have all these Posadas and the Christmas parties.

But the important element here, that we are selling that presentation at MXN20, which is a very different economic proposal for the Company than what you have with Pepsi or Big Cola at MXN13.

Okay, and just the second and last thing is going back on the sweetener, you gave us a nice overview of Mexico and Venezuela, and I wanted to ask about sugar in Brazil. The gross margin expansion clearly being very significant in the fourth quarter in Brazil, as well as in the full year. What was your average sugar cost decline in 2007 versus '06, and kind of what's your initial sense of where sugar prices could be on average in '08?

Yes, Alex, in 2007, during the prices for us in Brazil were probably -- I'd say around 20% below what we have in 2006, around that level. And we are starting to see -- when you look at the fourth quarter versus the fourth quarter of 2006, we are seeing a small increment, around 5%. But when you look at the full years 2007 versus 2006, we are seeing an important reduction -- I'd say 18% to 20% reduction in the sweeteners in Brazil.

And, Alex, we will benefit the first half of 2008 from lower cost of sugar, because you remember we locked prices in '06 for the third quarter of '06 and the first half of '07. So the benefit in gross margins, you already started seeing that in the third quarter '07 and the fourth quarter '07 that we showed today. So we will still be looking at significant benefits from that in the first half of '08 in Brazil.

Okay, thank you.

And I show no further questions in the queue at this time. I would now like to turn the presentation over to Mr. Hector Trevino for any closing remarks.

Thank you for your interest in our Company. And Alfredo and his team will be available to answer any remaining questions you may have. Thank you.