Coca-Cola Femsa SAB de CV (KOF) 2008 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Coca-Cola FEMSA's first quarter 2008 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 will 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 Chief Financial Officer. Please go ahead, Mr. Trevino.

Good morning, everyone, and thank you for joining us today. Our first quarter results again underscore our diversified cash flow generation, our winning execution across our territories and the growth opportunities that we captured in our different categories. Combined with operating efficiencies and lower cost per unit case produced double-digit increases in the operating income in all of our divisions.

We achieved more than 15% consolidated operating income growth and generated close to 12% EBITDA growth during the quarter. Our incursion into new beverage categories through Jugos del Valle contributed to Mexico's top-line growth for the quarter.

As of February of this year, we started distribution of these products in our Mexican territories through its regional channels and added close to 1% incremental volume growth in our territories. Going forward, we expect to continue capturing the benefits from this important acquisition, leveraging our distribution network and our innovations in this beverage category.

Now, before we explain our performance during the quarter in detail, I want to share some important information about the new non-inflationary accounting guidelines that we have to follow to disclose our financial information. Beginning January 1, 2008, Mexican financial reporting standards on the effect of inflation was modified. It now defines the following to economic environments to determine when to use inflationary accounting.

First, in an inflationary environment -- that is defined when the community inflation of three consecutive years is 26% or more -- the effects of inflation are recognized. Second, in a non-inflationary environment, when the community's inflation of the three preceding years is less than 26%, no inflationary effects are recognized.

Until December 31, 2007, we applied inflationary accounting for all of our operations. Beginning January 1st of this year, based on current levels of inflation, our company discontinued inflation accounting for its subsidiaries in Mexico, Guatemala, Panama, Colombia and Brazil.

For the rest of our company subsidiaries, namely Argentina, Venezuela, Costa Rica and Nicaragua, we will continue to apply inflationary accounting. According to the new accounting standards, we have restated the figures for 2007 in Mexican pesos with the purchasing power as of December 31, 2007, instead of March 31, 2008, which would have been the practice under the previous methodology.

The new accounting regulations should make our company's performance more comparable with that of our global peers across the world. We expect the information to be fully comparable beginning 2009. Additionally, as we mentioned in our press release, beginning with the first quarter of this year, we have decided to align our operations based on the way we manage our business.

We have grouped our operations into three divisions, Mexico, Latin Centro, comprised of our operations in Colombia, Venezuela, Guatemala, Nicaragua, Costa Rica and Panama and Mercosur, comprised of our Brazilian and Argentine operations.

Now going back to our performance during the quarter, our consolidated sales volume grew close to 4%, compared with the first quarter of 2007, driven by volume growth in all of our divisions. Our sparkling beverage volume growth was driven mainly by brand Coca-Cola, which posted more than 4% volume growth and accounted for more than 60% of our incremental volume in the quarter.

We continued to benefit from last year's successful launch of Coca-Cola Zero in some of our territories and now we are introducing this product in Colombia. Additionally, we continue to produce strong growth in the still beverage segment, mainly by the growth contributions of Mexico and Central America, with our total volume of 20% year over year.

The performance of our juice-based products in Mexico under the Jugos del Valle brand and in Central America under the Hi-C brand, combined with the strength of Powerade and Nestea in these markets contributed significantly to this growth.

During the quarter, our consolidated revenues rose more than 6%, to MXN17.3 billion, or approximately $1.6 billion. Our gross profit increased 9.5% in the first quarter of 2008. Higher revenues, combined with our lower cost per unit case, driven by the benefits captured from the cost of sweeteners in Mexico, Brazil and Colombia more than compensated for the second stage of the previously announced concentrate increase in Mexico and higher PET cost in Mexico and Argentina. Consequently, our gross margin increase was 140 basis points.

During the quarter, our consolidated operating income increased close to 16% year over year to MXN2.8 billion, or approximately to $265 million, as a result of stable operating expenses as a percentage of our sales. Our consolidated EBITDA rose to MXN3.6 billion, or $236 million, resulting in a solid EBITDA margin of 20.7%, a margin expansion of 100 basis points year over year.

For the quarter, our majority net income increased 31.8%, resulting in earnings per share of MXN0.88 per share, or the equivalent of [$0.83] per share. Now let me talk about our divisions. Our Mexico division posted 4.9% volume growth compared with the first quarter of 2007, driven by the strength of brand Coca-Cola, the distribution of Jugos del Valle products since February 2008 through the regional mom-and-pops sales channel, and the strength of our water brands here.

Volumes of brand Coca-Cola increased 4.4% for the first quarter, driven mainly by growth in non-returnable multi-serve packages. Our water business, under the Ciel brand, continued to deliver strong volume growth of 6.7% in our Mexican territories, accounting for almost 30% of their growth.

Supported by the introduction of Jugos del Valle beverage products, our still beverage volumes grew significantly during the quarter. This performance demonstrates our conviction to build a completely integrated beverage portfolio, delivering a balanced offer to our clients and to our customers.

As we have mentioned before, we started to distribute Jugos del Valle products in our Mexican territories to mom-and-pops beginning in February 2008. We will now incorporate the volumes sold and the revenue generated of the Jugos del Valle products through the traditional channels as part of the still category in our Mexico division.

During 2008, most of the profits will remain at Jugos del Valle for significant investment beside the brand and to improve the manufacturing facilities. In the first quarter, our Mexico division revenues increased close to 7%. Our bottling growth represented more than 70% of incremental revenues and the average price increase represented the balance. The increase in our average price per unit case included the effect of Jugos del Valle products, which carry a higher average price per unit case.

We continued to benefit from price increases implemented last year in some of our key presentations and expect to keep our revenue management strategies in line with Mexican inflation during the year. On the profitability front, our gross profit reached MXN4 billion, up 7.6%, resulting mainly from lower sweetener costs and then compensated for higher resin and concentrate costs this year. In Mexico, our sweetener costs decreased approximately 10% year over year, while resin costs increased around 8% in U.S. dollar terms.

Our improved operating leverage with operating expenses remaining stable as a percentage of total sales resulted in double-digit operating income growth for the first time in two years. Also, our operating margin expanded 70 basis points and our operating income reached MXN1.4 billion, or approximately $128 million.

Mexico has been able to translate its top-line growth, combined with the benefits of lower sweetener costs and operating efficiencies to bottom-line growth. EBITDA increased more than 9% to MXN1.8 billion in the first quarter, or approximately $169 million, and the operations EBITDA margin increased 50 basis points to 23.1%. Mexico remains our most profitable market, delivering sustainable cash flow generation, despite the U.S. economic slowdown, which has not had until now a significant effect on our Mexico division.

Our Latin Centro division posted 1.2% volume growth compared with the first quarter of 2007. The growth of labeled sparkling beverages in Central America and Venezuela combined with the growth of brand Coca-Cola in Central America, compensated for the decline in flavored sparking beverage in Colombia.

Volume growth across these franchises was 4.9% in Central America and 1.5% in Venezuela. Our Colombia operation volumes decreased by 1.4%. However, the successful launch of Coca-Cola Zero in Colombia helped to support the category in this market.

Total revenues in our Latin Centro division reached MXN5.35 billion, up 3% compared with the first quarter of 2007. In the first quarter, our average price per unit case increased 1.8%, driven by price increases and volume growth in non-returnable presentations, which carry a higher average price per unit case.

Our gross profit increased 7.6% to MXN2.4 billion, mainly driven by higher revenues and benefits captured from lower raw material costs in some territories in the division. Cost of sales as a percentage of total revenues decreased by 200 basis points. Operating income grew 27.6% to MXN750 million, driven by stable operating expenses compared with the first quarter of 2007.

Operating efficiencies across these territories, lower marketing expenses in Colombia, combined with lower expenses related to the introduction of bottle and cases in our Central American and Colombian territories helped achieve these results.

In the Latin Centro division, EBITDA grew almost 15% to MXN914 million. The 17.7% increase in D&A was mainly driven by the amortization of the deferred income derived from the sale of some of our Latin Centro region brands to the Coca-Cola Company during 2007.

The performance of the Latin Centro division underscored its capacity to generate incremental profitability despite facing tough comparables last year and a difficult operating environment in Venezuela. The main concern of the raw material cost pressures that we are facing in Venezuela and the labor union demands to increase salaries ahead of inflation in this country.

Our company believes in the growth potential of our territory in Venezuela, despite the difficult environment that prevails. Now let me talk about our Mercosur division. Excluding beer, our Mercosur division's margin grew 4.2% in the first quarter of 2008. The continued strong performance of Coca-Cola Zero in Brazil, combined with brand Coca-Cola in returnable multi-serve presentations in Argentina brought this growth.

Volume growth across these franchises was 4.1% in Brazil and 4.3% in Argentina. Net revenues in the Mercosur division increased to 9.1% to almost MXN4.1 billion, compared with the first quarter of 2007. Excluding beer, average price per unit case increased 3.9%, mainly as a result of a positive price shift mix from our value protection brands toward brand Coca-Cola in returnable presentations in Argentina.

Excluding beer, net revenues increased 8.3% to MXN3.75 billion in the first quarter, compared with the same period 2007, driven by volume growth and a higher average price per unit case. Total revenues from beer in Brazil grew 36% to MXN324 million, compared with the first quarter of 2007, mainly driven by the migration of volume previously sold directly by Kaiser to supermarkets in the city of Sao Paulo, which is now being sold by Coca-Cola FEMSA. Gross profit in the Mercosur division increased almost 17% to MXN1.9 billion, mainly driven by lower cost of sugar in Brazil and by benefits captured by the appreciation of the Brazilian real applied to our dollar-dominated raw materials.

This increase more than compensated for higher sweetener and PET costs in Argentina. Cost of sales as a percentage of total revenues decreased by 260 basis points. Operating income grew 13.4% to MXN704 million. Operating expenses grew 19.1% and expanded 200 basis points as a percentage of sales, compared with the first quarter of 2007.

This increase was driven by higher labor costs in Argentina, combined with higher operating expenses in Brazil, related to our go-to-market initiatives. And EBITDA grew 14.3% to MXN833 million. EBITDA margin expanded 60 basis points to 20.1%. A 19.4% increase in D&A resulted mainly from higher amortization of coolers, bottles and cases recently introduced in the market.

In the Mercusor division, our efforts to supply our customers and clients with the right product at the right place for the right consumption occasion has reinforced our share of sales in Brazil and Argentina year over year. On a consolidated basis, our performance continued to underscore our ability to strengthen our balance sheet and generate balance sheet cash flow.

Our franchises outside of Mexico delivered half of our consolidated EBITDA with our Latin Centro and Mercosur divisions contributing 27% and 23%, respectively. As of March 2008, our net debt to EBITDA ratio coverage was 0.73 times. Total net debt decreased approximately $63 million compared with year end 2007.

Regarding our Brazilian acquisition, we have advanced in the process to close the deal with the Coca-Cola Company. We have begun to provide guidance to implement our strategies and execution model into this new franchise and expect to consolidate these results during the second quarter of this year.

It was another great quarter of our company. Our operators and management team continue to demonstrate that we can capture value for our shareholders across our territories. Thank you for your interest in our company and the trust you place in us. Now I would like to open the call for any questions that you might have.

(OPERATOR INSTRUCTIONS)

And the first question comes from the line of Lauren Torres from HSBC. You may proceed.

Good morning. I was hoping you could talk a little bit more about your continued improvement in Mexico. First, if you could just talk about the current market environment, particularly with respect to pricing, and then also just give us a sense of the opportunities that you see with the continued rollout of new brands there and how we should think about how that's going to contribute to your volumes going forward.

Hi, Lauren. Good morning. The environment in Mexico, as I mentioned, continues to be very positive. To be very honest, given all this noise that has been created with all the so-called remittance of the money that is transferred from construction workers in to Mexico during the first quarter, we were a bit surprised of the strength of our volume during the first quarter.

April has continued to provide good numbers, although a bit smaller growth than what we have in the first quarter, but it's too early to really know if this deceleration on the U.S. -- the size of the effect that the deceleration in the U.S. economy will have in Mexico. April, as you know, is an out month because of the holy week being now in March as opposed to April, and there might be some effect because of that.

But all in all we continue to see good volume growth during April. With respect to prices, given what we have seen in terms of the decrease in some of the raw materials, especially with respect to cost of sugar in Mexico, we are seeing that our competitors have more -- let me use this expression, more air to breathe, a little bit, and that probably will create some stabilization of the prices for a while. I don't see prices increasing during the next five to six months, and obviously it will depend a lot on how sweeteners and the rest of the raw materials behave going forward.

But as I mentioned during this introduction, our objective is to try to maintain prices with inflation for the full years. In terms of our specific competitors, we continued to see Jarritos and [Red Cola] staying with he same prices that they have. We saw some price increases on Pepsi and Big Cola over the end of last year, and those prices have stayed. And that's basically the environment I see in prices.

In Jugos del Valle, obviously, as you can imagine, those products carry a higher price per case on the territories and we will expect to benefit in the price and mix as we continue to improve the size of the volumes we sell to our mom-and-pop channels. It's important to remind everyone that all [modern] trade volume is going to be sold centralized to Jugos del Valle and every bottler in Mexico will take care of the traditional channel with the Coca-Cola distribution system that everyone has.

So at the end of the day, we started [two-stream] approach around mid February, so the effect that you have there is basically 2.5 million unit cases of Jugos del Valle products basically take us to, on a normalized quarter, somewhere around 5 million unit cases of Jugos del Valle cases versus what we should be selling. And that, as I mentioned, will have a slightly positive effect, because still the number of cases is a bit more, but it will benefit the pricing mix.

Okay, thank you.

And the next question comes from the line of Robert Ford from Merrill Lynch. You may proceed, sir.

Hey, good morning, everybody. Thank you for taking my question, Hector. Congratulations on the quarter. I was curious, with respect to the improvement on the expense ratio in the first quarter, how much of that is just cycling the big campaign around Zero, and if you could expand, you are saying that Zero is a big portion of incremental Coke volumes. Can you discuss a little bit about how the brand is starting to recover from the unfortunate incident with the sweetener?

Good morning, Robert. Yes, I think that certainly larger, in the first quarter, we were pushing very hard for Coca-Cola Zero, speaking specifically about Mexico and then we'll go to Argentina and Brazil and there were big expenses related to that introduction last year.

The sweetener thing in Mexico has not worked in our favor, obviously, because we were in a way confronted with a decision of continuing with a product that was authorized in Mexico but had created a lot of attention among our consumers with respect to the formula. So even though it's a formula that is being used in Europe and a bunch of other countries, there was a big revolt -- let me use that word -- in Mexico with respect to the use of this sweetener.

So the Coca-Cola Company, after a very thorough analysis, and we agreed with that conclusion, has decided also to change the formula. And we are recouping some of the volumes that were lost towards the end of last year as this change occurred.

When you compare the volumes of Coca-Cola Zero now versus what we were selling last year, the volumes are very low compared to last year. Obviously, we have the effect of the big introduction during last year and now it's a product that has been in the market for a year and that has a little bit of effect. But there is no question that the sweetener [re-ban] has caused a good number of cases in the case of Mexico.

And just, hector, year on year, the delta that's associated with the change in the launch from Big Cola, or maybe you could give us a sense, how much of the 30 basis point decline is just the cycling against the launch of Zero next year, in terms of the expense ratio?

Bob, I don't have that specific information right with me. Let me check with Alfredo. Alfredo is with me. We'll check the numbers and see. Certainly there were more expenses last year but I don't think that the whole effect is related to the expenses related to Coca-Cola Zero last year versus what we have right now.

Fair enough. Thank you.

Thank you.

And the next question comes from the line of Lore Serra from Morgan Stanley. You may proceed.

Yes, good morning. Hector, I just wanted to ask about the change in disclosure. And I think that in general it's not positive when people, or companies, rather, move from more disclosure to less disclosure.

And given the inflation differences and given the currency differences, do you recognize that by making this move you are making it more difficult for analysts and investors to understand your company? And given that, why would you make a decision like this, to change the disclosure so much?

Yes, Lore. I fully recognize that this is going to be a very difficult year, especially with the transition of going into inflationary and non-inflationary accounting. We have followed these rules with the Mexican accounting standards. And certainly I recognize that we are complicating things much more by closing off some of the information.

At the end of the day, the decision was taken because we believe that, given the dynamics that we have in each of our countries, that this is in the end in the best interest of our shareholders. This is the way we manage our business.

This is the way we present the information to the Board of Directors and recognizing that it's a difficult year with all of the other movements that we have in terms of being able to compare numbers, the decision was taken because, as I mentioned, balancing all of this, we thought this was in the best interest of the shareholders, Lore.

No, and I'm not a big fan of guidance, but then why don't you issue guidance? Because it's extremely difficult from our end to forecast Latin Centro, you can appreciate when you've got all the different cross currencies in your different franchises?. So if you're going to pull back on information, why don't you support the investment community by giving guidance, then?

Lore, point well taken. Let me think about that. But I mean, the policy of the Company has been for many years to steer away from providing those specific guidance. We basically give some information or guidance into the volume and CapEx numbers and sometimes on the pricing environment that we see. I'm sure that everyone will understand with the passage of time that this is in the best interest of shareholders.

Okay, thanks.

And the next question comes from the line of Celso Sanchez from Citigroup. You may proceed.

Hi, good morning. I just wanted to ask, actually, a slightly unusual question related to the debt structure. Can you give us a bit of an idea of the floating rate debt that you have, how much of that's related, if any, to LIBOR?

With respect to the U.S. dollar rates, most of what we have in float -- in the case of U.S. dollars, we have a substantial portion which is float. And I don't remember, exactly, but it's somewhere around 60%, and all of that is basically based on LIBOR. It's being held by lateral loans that we have with banks that are based on their LIBOR rate.

In which case, given that we've seen a pretty big step up in LIBOR and some controversy around the calculation of it, is that something that might influence the way you structure your debt or the degree to which you try to fix out debt, or how should we think about that?

Yes, we constantly monitor if there is an opportunity to hedge either the currency or the rate and we have a couple of people that are basically looking all day about that and we are monitoring those movements, Celso, and we certainly will act accordingly if we feel that there is an opportunity to move in that direction.

What has basically happened to us lately is that although spreads have opened in case we need -- in case we were looking for additional resources, the days rates have lowered substantially. So we have -- probably, if we were to look for new money during this year, probably it would be a bit more expensive than last year, but probably similar to what we have two or three years ago because of the low days from where we are calculating this price, no?

Sorry, just to be clear, though, my understanding is that the base rate itself has actually reset higher because of this calculation issue.

Yes, in the case of LIBOR -- in the case of LIBOR, sorry, what I'm trying to say is that if we were to -- and we have all of our financials in place, so we are not looking for any refinancing. What I was just trying to comment is, if we were to look for additional money during this year, the all-in rate will be a little bit more expensive than 2007, but probably similar to what we have in 2005, the all-in rate.

But even your existing debt, I guess was my question, that resets.

The existing rate probably will have some -- you're right. On that portion of the U.S. dollar-denominated debt, which is around 40% of our indebtedness, and on 60% of that we basically have a floating rate that is based into LIBOR.

Okay, so we're talking basically a quarter of your debt here, roughly, that is exposed to this LIBOR increase.

Yes.

Okay, that's helpful. Thank you.

(OPERATOR INSTRUCTIONS)

Our next question comes from the line of Alex Robarts from Santander. You may proceed.

Yes, hi, everybody. I missed the early part of this call, so hopefully this question hasn't been asked, or if so, I apologize. Going to just the PET trends, I wanted to understand a little bit more there the Mercosur versus non-Mercosur.

The lower cost in Mercosur, can we assume it's for PET strictly a currency issue? And what was the kind of magnitude of Mexico and Latino Centro? And then kind of the synthesis here is what was your PET consolidated cost movement in the first quarter and what do you think it might be on average for the year, if you could give us a range?

Good morning, Alex. Let me give you some flavor here on the -- in general, PET prices, when you compare first quarter with what we had the first quarter of last year, in general I would say that PET has increased around 8% in dollar terms.

What has happened is that in countries like Brazil or Colombia, where you have a very strong appreciation of the currency, the local currency, around 16% in the case of Colombia and around 14% in the case of Brazil, when you translate the cost of PET volumes into the local currency that is embedded in the financial statements that we have, we have a reduction -- an actual reduction on those two countries and the cost of PET.

Going forward, given the oil prices that we are seeing, our specialists are indicating to us that we should be expecting somewhere around 5% increases on PET during the next two quarters. And that's pretty much the environment that we see with that, Alex.

And obviously, depending on each currency and how that behaves going forward, you might end up having -- even though you might have a higher PET price in dollars, you may end up having a similar or even lower cost of PET in local currency.

So the 5% on average this year is a consolidated number for you in pesos.

No, what I'm saying is, first quarter, we have already an 8% increase in dollar terms and we will expect another 5% in dollar terms for the rest of the year.

Another five. Okay.

But then, for example, in Mexico, where the currency has appreciated a little bit, instead of -- the total effect in dollars is 12% or 13%. In Mexico probably the effect will be 10%, because we have an appreciation of 2%, 3% in the currency. And in the case of Brazil, that has a very strong reevaluation of the real, then the PET cost in local currency will be lower than what it was last year.

Okay.

Is that clear, Alex?

No, that's helpful. And I guess in this new era of disclosure here, maybe I can kind of go a little bit further vis-a-vis sweetener. And is there a way that you can kind of give us a sense of where the sweetener would go this year on a consolidated basis?

And right now, today, on a consolidated basis, how much are you sugar versus high fructose? I mean, obviously, there are certain countries that are a lot more geared to either one, but do you have that number, breakdown?

Yes, let me give you some trends that we have here. In general, we have seen a very stable sweetener cost environment and in countries like Mexico, seen an important reduction, as I said during the conference, around 10% reduction versus the previous -- the same quarter last year.

We are using in Mexico a mix close to 50% high fructose and 50% sugar. And we are seeing costs of these two products coming down during this quarter and we don't see a strategic hike in the cost of these sweeteners going forward.

We see a little bit of risk with respect to high fructose because of all the relationship with corn and corn prices, but the environment in Mexico -- remember that Mexico has a very, very high cost for sweeteners. The environment in Mexico, I feel positive about that for the rest of the year.

In the other countries, we have in Brazil a situation where we have prices very similar to what we have the first quarter of last year, but they're higher than what we have during the fourth quarter, so Brazil I see a little bit more of risk of prices of sweeteners going up a little bit, because it's that much linked to the international prices.

In other countries, like Argentina, we use basically 100% high fructose, and in there we have suffered a little bit on the increase on sweetener prices, on the high fructose. Basically, we have seen somewhere around 4%, 5% increase the first quarter versus the same quarter of last year.

So in general, then, to conclude, do you think that this first quarter, Hector, had - might have among, or might have the highest raw materials pressure year on year or the lowest, or we'll still kind of -- it's too early to say kind of this quarter versus the rest of the year, in aggregate, what the margin pressure is coming from raw materials.

In general, Alex, I would say that this quarter is very favorable with respect to raw materials, because we have a very important improvement in the cost of our sweeteners that more than compensated the second step-up in concentrate cost in Mexico that was announced two and a half years ago or something like that.

And also the increases in PET that were not that significant in some of the countries because of translation, because of the weakness of the dollar versus some of the other currencies. So I'd say that in general this has been a very favorable environment in this quarter with respect to raw materials.

Okay, thanks. And the last thing, just kind of switching to Jugos del Valle, and I understand how you've explained it to us, which is the difference of accounting vis-a-vis the mom-and-pop channel and the supermarket modern channel and your interest in really putting back a lot of profit into SG&A, can you give us a sense this year whether at the EBITDA level the Jugos del Valle business for you would be net accretive in EBITDA or would it be breakeven? Or might we see EBITDA being positive in aggregate for that business?

Yes, Alex, let me try to explain this and -- in general, the model that we are using in Mexico for Jugos del Valle is that modern trade has been served by Jugos del Valle centrally and all of the bottlers are shareholders on this company and the Coca-Cola Company is a 50% owner of that company.

So at the end of the day, once we finalize of the transfer of shares, Coca-Cola FEMSA will own around 20% of this company which is called Jugos del Valle, which we will be in charge of manufacturing and we will be in charge of selling to the modern trade.

That, the profit that will arrive from that portion of selling to the modern trade will be reflected through the equity method because we will have a 20% equity participation and that will be below the operating income line, in the other expense, other income line.

With respect to the traditional channels, given the fact that this is a transition year where we have to finalize the acquisition of the company, do the integration with all the rest of the bottlers, and because some tax planning reasons also, it's split out of the different companies that will serve each of the different 13 bottlers in Mexico will have their own company, their own piece of the company that will serve the traditional channel and they will share individually 50-50 with the Coca-Cola Company in its territories.

What I was trying to say is that this first year, which is a transition year, because of the fact that we would like to reinvest most of these profits back to invest behind the brands and to completely redo the manufacturing facilities that were kind of in a messy situation, we are putting state-of-the-art technology so that we can bring a lot of innovation with new products and everything.

The decision was taken that all of the profits this year would stay in Jugos del Valle, which is the company that we own 20%. Whatever profit we have in 2008 will not be reflected in the EBITDA level. It will be reflected in the other income, other expense line, as an equity participation.

My sense is that starting probably May of next year, that model will change so that each of the individual bottlers will start having profits reflected in the operating income and the EBITDA of their P&L and sharing that with the Coca-Cola Company individually.

For this first year, basically, from April-May of this year to April-May of 2009, you see a strange effect because you will have volume reflected in your volume figures. You will have revenue in your P&L, but you basically have costs and transfer pricing that is very similar to the revenue figures that you have, except for what is actually the cost of distributing the products. So we basically will break even during this year when you look at the P&L of Coca-Cola FEMSA or each of the other bottlers.

Okay, thank you. That's very helpful.

And at this time we don't have any further questions in the queue. I will now turn the call over to Mr. Hector Trevino for closing remarks.

Thank you for your interest in our company and Alfredo and his team will always be available to answer any remaining questions you my have. Thank you.

Thank you, ladies and gentlemen. This concludes the presentation for today. You may now disconnect.