Coca-Cola Femsa SAB de CV (KOF) 2008 Q2 法說會逐字稿

Good morning, everyone. And welcome to Coca-Cola FEMSA's Second 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'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, Mr. Trevino.

Good morning, everyone. Thank you for joining us today. Our second quarter results continue to underscore the importance of our balance and diversified portfolio of assets throughout Latin America. In the face of different challenging situations across the board, including a particularly harsh rainy season in Mexico and Central America during June, operating disruptions in Venezuela, intense competitive dynamics in Colombia, and Brazil's short-term disposable income constraints on consumer in Brazil, we were able to increase total revenues by 6.7% and grow consolidated operating income by almost 9%.

In the quarter, we acquired from the Coca-Cola Company the territory located in the state of -- in July -- Brazil called Remil. We are including the month of June from this franchise in our results. Revenue growth in Mexico in our Mercosur division grow our top-line results, while balanced contributions from our Latincentro and Mercosur divisions grow our incremental cash flow generation.

Our still beverage portfolio was the main driver of top-line volume growth with Jugos del Valle contributing close to 5 million unit cases in Mexico. We shared the launch of this juice line of products in the month of June in Costa Rica and in July in Colombia. We expect that Coca-Cola FEMSA will sell and distribute these products in the Brazilian market soon. We want to remind you that Jugos del Valle has an important operation in Brazil and it's still operating as a separate entity.

Excluding Remil, our consolidated sales volume grew close to 2% compared with the second quarter of 2007. Consolidated incremental volumes were driven by strong bottled water growth and more than 50% increase to still beverages due to the new Jugos del Valle [line of close] in Mexico. In Remil, our sparking beverage portfolio remained flat for the quarter.

Our consolidated average price per unit case increased 2.5% year over year, mainly driven by nominal price increases undertaken in certain countries. During the quarter, our consolidated revenues reached MXN18.5 billion, or approximately $1.8 million. Our gross profit increased 7.7%, mainly driven by lower sweetener cost and the appreciation of some of our main local currencies as applied towards US dollar denominated raw materials.

Our consolidated operating income reached MXN3.2 billion, or approximately $309 million as a result of stable operating expenses as a percentage of sales. Our consolidated EBITDA rose to MXN3.9 billion, or approximately $380 million, resulting in a solid EBITDA margin of 21.1%.

For the quarter, our majority net income increased 3.9%, resulting in earnings per share of MXN1 per share, equivalent to $0.97 per ADR. Excluding non-recurring one-time expenses occurring in Mexico during the quarter, net income we have increased close to 11%.

Now, let's talk about our operations. Our Mexico division posed 2.8% volume growth, despite unusually bad weather in our main territories during the month of June. The initiatives we have taken through last year to expand our footprint in all the categories has been yielding very good results. Jugos del Valle, our Ciel brand water business, and the Coca-Cola category were important drivers of our incremental volume this quarter, balancing our growth.

Within the sparkling beverages, the Coca-Cola category expanded 1.4% during the quarter and helped us to partially offset a high single-digit decline in flavored sparkling beverages. Our average price per unit case showed a slight growth during the quarter, mainly as a result of the positive effect of the higher average price per unit case in the Jugos del Valle portfolio, which more than compensated for incremental volume growth coming from our Mercosur sparkling beverage presentation and the expansion of our bottled water business under the Ciel brand, which carried a low price compared with the rest of our portfolio.

In July, we closed a transaction to acquire the Agua de los Angeles jug water business in the Valley of Mexico. Subsequently, we will merge this business into our current water business under the Ciel brand. In this agreement, Agua de los Angeles jug water business is the number three player in the Valley of Mexico in terms of volume, with revenues of approximately MXN146 million and sales of approximately 21 million unit cases in 2007. This transaction will bring forth our [come delivered] jug water business. And at the same time, it represents a great opportunity to explore the delivery of other products from our portfolio.

In our single-serve water portfolio, we've captured the benefits of our new image and package for our products launched in this quarter. The results of a new marketing campaign combined with our reinforced execution of the point of sale allowed us to grow this category more than 8% during this quarter.

In the still beverage category, we continue to show extraordinary results supported by the Jugos del Valle portfolio. During the quarter, our incremental sales volume in this category totaled close to 5 million unit cases, with the majority coming from Jugos del Valle. The rest of our still beverage product line also continued to deliver positive results -- Powerade and iced tea, which volumes grew more than 30% each in the second quarter supported this growth.

During July, we launched Powerade with a new bottle and packaging image, while reformulating flavors under a new [cost seal] platform to capitalize on its growth momentum. Additionally, we launched the Glaceau VitaminWater line of products strengthening the high-end part of our still beverage portfolio.

In the second quarter of 2008, bottled water volume grew more than 8%, driven by our consistent efforts to incorporate [newer] routes in line with our strategy to aggressively grow this category. In the second quarter, our Mexican operations total revenues increased 3.2%. Incremental volume from Jugos del Valle's portfolio and our bottle water business combined with a high average price per unit case for Jugos del Valle's total price supported this growth.

On the profitability front, lower sweetener cost declining at a double-digit rate year over year in Mexican pesos helped us to compensate for higher PET cost and the second states of the previously announced concentrate increase. Our gross profit reached MXN4.7 billion, a 2.6% growth as compared with the second quarter of 2007. Our gross margin decreased 30 basis points compared to the same period of last year, mainly as a result of high cost from our still beverage portfolio.

We delivered operating income growth of close to 1% in the second quarter, reaching MXN1.9 billion, or approximately $180 million. And our operating margin declined [50] basis points to 20.5%. Our EBITDA remained flat compared to the same quarter of last year, reaching MXN2.3 billion, or approximately $220 million. Our EBITDA margin declined 80 basis points as a result of the previously mentioned effect of the still beverage portfolio.

As we have explained before, an important part of the profit generated by Jugos del Valle volume sold to our operation, we remain at the joint venture level for reinvestment purposes during the first year. As a consequence, margin will be affected during this quarter and the rest of 2008.

As we noted earlier, we experienced unusually bad weather in the month of June with record levels of rain that negatively impacted our consumers. As a result, we cannot conclude that our performance was affected by an economic slowdown. However, we have seen consumers focus more on value-based transactions and constraints on disposable income, given food inflation and lower remittances from abroad.

Nevertheless, we believe we have the most complete array of products, packages, and presentations to target consumers with the best possible position in the marketplace. And the strength of our brand will continue to leverage our performance.

Our Latincentro division posed a 1.1% volume decline compared with the second quarter of 2007. Mid single-digit volume growth from our Central American territories combined with the strong performance of Coca-Cola here in Colombia and flavored sparkling beverages across the division helped us to compensate for a volume decline in Venezuela.

During the quarter, we faced disruptions in our Venezuelan territories, which negatively affected our operations. In Venezuela, we also faced a high volume growth comparison with the second quarter of last year of more than 15%.

Consistent with our strategy to continue growing the portfolio that we offer to our customers and clients, during the quarter, we launched Jugos del Valle products in Costa Rica with excellent results. We also began to distribute these products in Colombia in early July.

Volume growth across our Central America franchise territory was 5%, with declines of 1.9% and 4.3% in Colombia and Venezuela respectively. Total revenues in our Latincentro division reached MXN5.3 billion, stable compared with the second quarter of 2007. Our average price per unit case in Mexican pesos increased 1.3% driven by price increases implemented during the quarter and the positive currency impact driven by the Colombian peso, which more than compensated our package and shift mix to multi-serve presentations in Central America.

Our gross profit increased 3.6% to MXN2.4 billion, mainly driven by lower sweetener cost in Colombia, the year-over-year appreciation of the Colombian peso as applied to our US dollar denominated packaging cost, and the lower cost of sales in Venezuela during the quarter. As a result, our gross margin expanded 150 basis points compared with the second quarter of last year.

Our operating income posed significant growth of 18.9% to MXN747 million, mainly driven by our tight control of operating expenses and operating efficiencies across our territories. Our operating margin increased 220 basis points to 14.1%.

In the Latincentro division, EBITDA grew close to 13% to MXN952 million, or approximately $92 million. Our EBITDA margin expanded 200 basis points. Our Latincentro division underscored our capacity to generate incremental profitability, despite unusual events in Venezuela during the quarter and a more competitive environment in Colombia. One of the main challenges that we foresee is to increase prices along with inflation. And we foresee higher levels of inflation across the division.

Now, let's talk about our Mercosur division. Here in the quarter, we closed the acquisition of the Remil franchise territory. We foresee great opportunities and synergies to take this asset to the profitability levels of our current Brazilian operation. We believe that within a 12- to 18-month period, we will be able to increase profitability significantly.

Our results of operations in the Mercosur division include one month of Remil results. In order to provide you with comparable figures, we will discuss our results with and without Remil. Excluding beer, our Mercosur divisions volume grew 9.6% in the second quarter of 2008. Excluding Remil, growth was 2.4%.

The continued solid performance of Coca-Cola here in Brazil combined with double-digit growth of brand Coca-Cola in returnable multi-serve presentations in Argentina drove this growth. Volume growth across the franchise territory was 11.1% in Brazil and 6.9% in Argentina. In Brazil, excluding Remil, volumes were flat for the quarter.

Net revenues in the Mercosur division increased 25.8% to almost MXN4.2 billion compared with the second quarter of 2008 (sic). Excluding Remil and beer, net revenues increased 12.7% to MXN3.5 billion. Our Argentine operations contributed more than 60% of our incremental revenues, excluding Remil and beer.

Our average price per unit case grew 12.4%, mainly driven by price increases implemented across the division. Total revenues from beer in Brazil, excluding Remil, grew more than 30% to MXN328 million as compared with second quarter of 2007. This increase was mainly driven by the migration of volume previously sold directly by [culture] to supermarkets in the [middle of Sao Paolo], which is now being sold by Coca-Cola FEMSA.

Gross profits in our Mercosur division increased more than 30% to almost MXN1.9 billion. Excluding Remil, gross profit increased 19.7%, mainly driven by the lower cost of sugar in local currencies in Brazil and the appreciation of the Brazilian real, which more than compensated for high fructose corn syrup and PET higher cost in Argentina. Our gross margin expanded to 44.1% from 42.7% in the second quarter of 2007, and increase of 140 basis points. Excluding Remil, our gross margin would have grown 20 additional basis points.

Operating income grew 29.1% to MXN564 million. And excluding Remil, our operating income grew 22% to reach MXN533 million. Top-line growth and gross profit expansion more than compensated for incremental selling expenses, which were driven by an increase in our sales force to strengthen our presence in certain retail segments, the introduction of coolers, and the replacement of our distribution fleet in Brazil, and higher labor cost in Argentina. Our operation margin expanded 20 basis points compared with the second quarter of last year.

EBITDA grew 28.8% to MXN698 million. EBITDA margin expanded 30 basis points to 16.6%. Excluding Remil, EBITDA grew approximately 20%. The 27.6% increase in the depreciation and amortization resulted from the inclusion of Remil, higher amortization of recently introduced coolers, bottles, and cases, combined with the replacement of our distribution fleet in Brazil.

On a consolidated basis, our performance underscored our continuing ability to strengthen our balance sheet and to generate balance free cash flow. For the first six months of this year, our operations outside of Mexico delivered almost 80% of our incremental consolidated EBITDA with our Latincentro and Mercosur divisions contributing almost equal.

We expect that our new lines of business, combined with our recent acquisition will enhance our top-line growth going forward.

Now, I would like to open the call for any questions that you may have. Operator, we are ready for the call -- for the Q&A.

Yes, sir. Due to large volume of participants, we ask that questioners limit themselves to one question. You may reenter the queue after your initial question has been taken. (OPERATOR INSTRUCTIONS).

Your 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 the current consumer environment in Mexico. You gave us some remarks or some comments in your prepared remarks with respect to the consumer and a possible slowdown here. And you also talked about bad weather in June. I don't know if you could give us an update. Are we seeing a pickup in July? How are you thinking about volume going forward in this market?

Good morning, Lauren. Right now, we have -- we are back to normal for this quarter. We have very good April, very good May. And June, we had a very bad June. July continues to be slow. And as I mentioned during the remarks, from our perspective, it's still too early to really understand if this is being affected by some of the rainy season that we're experiencing in the southeast of Mexico and Mexico City. And by the way, the same has been during [certainly] in Central America.

But at the same time, we recognize that most of the trends that we see in the economy signal to us smaller GDP growth, probably half a percentage point speaking of Mexico. And we have also seen a trend of consumers purchasing more multi-serve presentations.

Because of all the variables that we're analyzing, it's still too early to really fully understand if this is -- again, if it's [talking] weather related or if it's more of a macro-economic trend. We don't have any doubt that in general, the macro-economic environment is tougher, that we have inflation -- higher inflation everywhere in all the countries we operate.

The economy [is the victim] lower GDP growth in every country we operate in, probably between half a percentage point to probably 0.8 percentage point in different countries. But we don't -- it's difficult still to predict what will be the impact in our industry. I think that next quarter, we'll have a better picture of how [cost volumes] from the consumer standpoint.

One of the variables that was also affecting some of this trend from our perspective that makes this a little more difficult to predict is that last year, we had very good performance of single-serve presentations because of Coca-Cola Zero. And then, we started without changing the formula process. And when you look at volumes of single-serve presentations, this year's slowdown, that is certainly pretty much affected by Coca-Cola Zero. And that's why it's a little bit harder for us to understand if these trends are here to stay or if it's more something that will pass away.

The positive news here also is that we are seeing very, very good growth in our new categories, as I mentioned in the remarks, categories that are more expensive per unit case, as is the case of Nestea and Powerade and certainly Jugos del Valle. It's also having very, very good results in terms of volume and profitability because of all the integration.

The complicated part here is that, as I tried to explain last quarter and in the remarks this quarter, Jugos del Valle will have a negative impact this year because most of the profit are staying in the joint venture, the Jugos del Valle operation, for reinvestment behind the brand and in agreement that we made for all the [cost] facilities and the refurbishing that we are doing to the facility.

So next year, we'll start seeing this impact in our results during 2008. Although, we'll basically show this increased profitability in Jugos del Valle through the effort [metal in the participate] in the 20% participation that we have in this joint venture. And this will be reflected below the operating line all this year in other income or expense as an equity participation.

So, it's still a mixed market, Lauren. So, that's why we were hesitant to have a very clear position with respect to if this is more of a slowdown from the consumer or if it's more weather-related.

Your next question comes from the line of [Tustick Spelling] from Credit Suisse. You may proceed.

Hi. Yes, good morning. My question in regards to Jugos del Valle -- can you give us a sense of what operating margin in Mexico would look like without that negative impact that you talk about? And also, if you can give us a sense of the 140, 150 basis points improvement in gross margin in Mercosur and Latincentro, if you can give us a sense of how much do you believe is that improvement due to an improvement in the F-Ex rate or favorable improvement in those countries.

Good morning. Let me -- the first question, Jugos del Valle -- when you look at the numbers that we're reflecting here, what I'm trying to -- what I'd like everyone to understand is we have - we are reflecting volume, revenues, and cost of goods sold, and expenses related to selling Jugos del Valle to the traditional channel. But at the same time, given this agreement with the rest of the bottlers and the Coca-Cola Company to leave most of these profits in Jugos del Valle for reinvestment, so we (inaudible) an increase in the EBIT or EBITDA figures (inaudible).

But what I can tell you, sir, is that for the first semester, the participation that we have on the net income of Jugos del Valle is basically equivalent to around MXN30 million, basically around MXN15 million to MXN18 million in the first quarter. Second quarter is MXN18 million. That's what we have as part of our other income below the operating line.

I'm not sure that that's exactly the effect that we'll see next year. But that's basically the final net income impact that we have from being a 20% -- having the 20% ownership of Jugos del Valle. That obviously includes after taxes and after all the expenses and financial expenses that we might have in Jugos del Valle joint venture, no. So, I don't know exactly how that would translate into an additional margin in that at the EBIT or EBITDA levels in Coca-Cola FEMSA.

With respect to the growth margin in Latinocentro and Mercosur, we have -- let me start with Mercosur. We had very good performance from Argentina, certainly increasing the margins there because of tighter control on some of the raw materials and their negotiation. In Argentina, basically no effect because of F-Ex. In Brazil, we do have a positive effect of the appreciation of the Brazilian real. That's translated into Mexican pesos. The Brazilian real appreciated basically around 16% during this year.

And when we move to Latincentro, we have surprisingly enough a positive result in Venezuela, even though we were closed partially for almost one month in some of the operations. But still, with that and some of the managing the business condition for expansion, we were able to post some growth in Venezuela.

And in the case of Colombia, we also have a positive effect of the appreciation of the Colombian peso. In that case, the Colombian peso in the quarter versus the same quarter last year, we had an appreciation of around 11% in the currency there. But sales in terms of how we buy raw materials as a total denominator, and also we have that those Colombian pesos are translated into Mexican pesos.

Thank you, Tustick.

Okay. I just wanted to confirm. So, you said it's about MXN18 million this quarter on the equity income line from Jugos del Valle. But you don't -- you can't give a specific amount on the drag that you get on the operating margin. Is that correct?

Yes, that's -- yes, what I'm trying to say is MXN18 million is the effect on net income this quarter. But I don't know exactly how that translates into EBIT or EBITDA margin.

Yes, Tustick, if you look at the quality performance during the last second half of the year, the margin that we had in Mexico was probably about 150 basis points higher than what we have seen in the first couple of 2008. Probably, if we will be getting the revenues from the line of business of Jugos del Valle that we are reinvesting in the JV, probably the margins of the growth level could look similar to what we had in the second half during last year.

Okay. And just going back to the impact of F-Ex, is there an amount that you can quantify of those 140 to 150 basis points? I mean, do you think half of that is explained by the positive impact of F-Ex and raw materials? Or is it a quarter of that? Is there any way you can guide us through in that sense?

Not specifically at this point, Tustick, but I believe, I mean, an important part of the appreciation of the Colombian peso is reflected at the gross margin in Latincentro. As the -- or rather than giving you a back-of-the-envelope estimation probably around 40% in Latincentro. And in Mercosur, the number is lower because remember that we're including the one month from Remil.

Okay. That's great. Thanks.

Your next question comes from the line of Robert Ford from Merrill Lynch. You may proceed.

Hey. Good morning, everybody. Hector, I had a question with respect to some of the efficiency opportunities that you continue to have with FEMSA as you coalesce some of the back office admin systems and other functions. Can you give us an idea of what those efforts could bring this year and over the foreseeable future?

Let me look at the numbers. I mean, not that we have savings on that. But I don't have it on the top of my head what are the savings related to all this centralized service centers and all of that. Let me take a look at those numbers. And I'll answer that later.

Okay. And then, could I ask one other question? It was a simple one. There's an unhedged derivative gain on the operating line. I was curious as to what that was.

(inaudible) -- we have two procedures with respect to rates and currencies. And we have mixed results on that for the positive effect is -- I mean, we have a positive effect at the end of the day. It's basically what we have been doing with derivatives. We look at the separate, but we also have some sugar hedges in Brazil, as we have explained in the past, that it's possible to get in Brazil, given the fact that it's closely tied to [in directional] prices.

And in those cases, we have the effect is shown in the cost of goods sold. But to the ones that you're referring is totally related to the positions that we have with respect to rates and currencies as we manage our liability, as we manage our debts.

Great. Thank you very much.

Your next question comes from the line of Tomas Lajous from UBS. You may proceed.

Thank you. Good morning, gentlemen. Thank you for the call. My question relates to dealing with rising PET prices and inflation. Are you doing anything to try and mitigate this, new presentations, new bottles, or anything else of that kind?

Yes, [we're going to Meder]. We have several initiatives. Well, first of all, given the last two weeks that we have with oil prices coming down, we expect that we have some variation of the PET price increases, no. But in general, what I can tell you that we have increases basically during the quarter when we compare to the same quarter of last year of around 8% in dollar terms because of resin. But at the same time, we have been doing a lot of initiatives in terms of saving or bringing benefits to our Company in terms of savings on that.

We have the lightest 600-mL bottles in the whole Coca-Cola system on a worldwide basis. There is not another bottler that uses as light a bottle as the one that we use in Mexico. And that has to do a lot with working together with the Coca-Cola Company for authorizations in terms of going to new technology, using shorter caps. And the savings that we anticipate, just to give you an idea, assuming that PET prices stay the same, we'll have savings on an annual basis of close to $10 million.

We continue to evolve in that. And the next stage is what can we do with large presentations that will bring a similar amount of savings if we are successful in implementing this lightweight initiative? And not only that, the savings that it brings to us is also the fact that we are avoiding or helping to preserve also the ecology by stop bringing so many tons of plastic into the environment.

At the same time, we are working with all these recycling companies that we have together with us and the Coca-Cola Company that we have in Toluca, which is a very important recycling center for PET. We are using an important amount of our PET needs from recycling plastic from this facility. We are using up to 25% of recycling materials in some of the bottles. And right now, my estimate is that we're using around 5% of our budget comes [of our budget of the] -- of the stuff that we buy from PET comes from this recycling plant that we have in Toluca.

So little by little, we have initiatives that are bringing, as I mentioned saving to us and also savings to the environment, no. At the end of the day, the estimate that I was presented with a couple of weeks ago is that the light -- because the lightweight initiatives just in Mexico City, just in Mexico, the country, in the operations that we have, we are saving close to 7,000 tons of PET versus the previous years. And we continue to advance in that.

So, I think that the prospect for PET, although we have a very volatile environment with oil prices, there are also good news in terms of how we are working with a lot of innovation to have some savings on that front. I hope that this has answered your question.

Yes, it does on the cost side. But in terms in the nexus of sales, are you looking to move more to larger sizes or anything in particular to try and mitigate cost and inflation?

Yes, well, in that [front], from the market's perspective, obviously, we want to, again, to refocus our attention to returnable presentations. We believe that in a situation where you have inflation or a potential to slowdown in the economy, it's important that we have our packaging strategy very clear and ready to cover these opportunities also.

We have always been very in favor of using returnable presentations with the different parts of the world. And I think that if we go through this environment where you have inflation and economic slowdown, it's important that our strategies in that form are perfectly aligned.

Okay. Thank you, gentlemen.

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

Good morning, Hector. Yes, keeping with the theme of raw materials, we've also seen some increases in sugar and presumably with corn. High fructose could also increase as well. So, can you give us a bit of an outlook on your view on sweetener cost, maybe into second half '09 and more importantly into 2009? And generally speaking, what is your level of confidence that as you look out over the course of the next year and you have pricing or pressure in I guess PET as well as the sweetener cost, how confident are you that you're going to be able to get pricing/volume gains to offset those raw material pressures?

Yes, Lore. Good morning. With respect to raw materials, especially sweeteners, we are seeing a slow -- a reduction in the prices in the marketplace. And again, if this reduction in oil prices continues to hold as what we have seen in the last two weeks, that also will have an impact on sweetener cost.

So far, what we have seen is prices of the sugar coming down and prices of high fructose because of corn coming up a little bit. And as we have explained in other quarters, we are trying to switch between this different sweetener as appropriate given what the capacity we have in the production plant [in Toluca].

Now, going forward, I think that sweetener prices are reaching basically the levels where it's very difficult that it goes below those levels. So, I'm seeing probably slightly lower sugar prices and then staying at those levels around $0.11, $0.12 per pound. Obviously, each country, as we have also explained, [back out] the different levels of pricing. But especially in Mexico, we have seen this reduction in sugar price.

Going forward, what we see is obviously a very difficult competitive environment and, as we have explained in the past also, with pricing. If we speak about Mexico, the main competitors have not increased prices. We have a substantial price gap. So, if these increases in raw materials, especially PET or potential increases in sugar [in the cap], I think that will put some pressure on our competitors and therefore will help us a little bit in improving our pricing mix.

If prices of raw materials stay where they are right now, I see a very difficult possibility of increasing prices substantially. So, we will be fighting to keep prices with inflation on individual packages, no. Obviously, as we have also explained in the past, we'd like to see the shift of mix to our [stroves] that have higher price per unit case and obviously the Jugos del Valle portfolio and will help in that respect.

Okay. I just want to make sure I understand because I'm talking a little bit more into '09 versus '08. And I would've thought you would've hedged some of the sugar at lower rates. But if I understand what you're saying, as we look forward into '09 versus, let's say, where you are right now, you would expect some pressure on PET and less pressure on sweetener. And you think you can mostly offset that with efficiency gains and volume gains. But it might be a struggle.

Yes, I think that -- first of all, as I mentioned, we have done some hedges in Brazil with the sugar, even up to 2009. And -- but that's correct. I think that we are looking obviously for efficiencies in every part of the budgeting. We have a very important leg of our planning process for next year based on innovation and things like the savings I was mentioning in PET.

And again, we need to remember that the price gap that we have, even with Pepsi-Cola, which is a very good brand, are very large right now. So, what I was trying to say is if we don't have -- if we have movements in some of these raw materials, then maybe we'll see some space to move prices because the competitor will have also a lot of pressure. If we don't have this pressure, either from raw materials or salaries or whatever, we see it very difficult to increase the price gap that we presently have.

Okay. Understood. Thank you. And just a very quick thing -- I don't know if you want to talk about specific trends in July. But the weakness ex-Remil that you saw or the flat volumes you saw ex-Remil in Brazil, do you anticipate that picking up? And same story in Venezuela with the strike behind you, are you seeing better volume trends in that market as well?

Yes, yes, I think that in general, Brazil during July is behaving -- is better than June. It's not the case in Mexico. When I say that we have a slow July, I was referring basically to Mexico and Central America because of all this -- the weather. And you know that we have now this hurricane in the Gulf of Mexico that is also causing some disruption.

Venezuela volumes are improving. Obviously, the disruption caused a lot of problems. In Venezuela, what we need to be very careful is that we might have disruptions in the future again. But assuming that we have stable operating platform from the disruption point of view, I do see volumes in Venezuela picking up.

Terrific. Thank you.

Thank you.

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

Thanks. Hi, everybody. Hoping to go back just to Remil. And clearly, now that you've gotten your teeth into this franchise and territory, wanted to probe into this. So I mean, it's kind of a two-part question.

But maybe you could give us some color on relative to your pre-deal territory in Brazil, basically Sao Paolo, I mean, what could be kind of some of the differences in that territory vis-a-vis I guess a couple of factors that I was thinking about -- beer as part of your sales mix, the B-brand market share levels, the product price levels between Remil and Sao Paolo, and the channel mix as well? I mean, maybe some kind of compare and contrast.

And I guess the second part of the question really is you've talked to us about Remil as a revenue-driven transaction as opposed to synergies. And you've kind of just said now to us that over the next 12 to 18 months, you'd like to close part of the five points of EBITDA margin gap that exists it seems, according to my numbers. What -- I mean, how do you think you could kind of -- what kinds of things do you think you could kind of start doing to close that margin gap?

Yes, Alex. Good morning. In terms of beer -- and it's very similar to what we have in Sao Paolo in terms of the mix -- I think that we might have some opportunities there. Remember that it is more -- it's a larger territory that has some rural areas around. But it has a very large city, Belo Horizonte. So, when you look at Belo Horizonte regions, Sao Paolo, it's very similar to -- in terms of channel mix and product mix as we have in Sao Paolo.

The rest of the territories is a little bit different. And we do see Remil and we have also Mato Grosso, which is more of a rural area. And when you compare Mato Grosso versus the rural area of Remil, we have a huge differential in terms of the profitability that obviously we need to analyze and see if we can bring that to the level that we have in those operations.

The main opportunities that we see is, as you mentioned, are in the profitability of Remil, although it has been improving since we started to look at some of -- or work into [everything] Coca-Cola Company in this transition period. There is still a 5 to 6 percentage point differential versus EBITDA margin versus what we have in the previous Coca-Cola FEMSA Brazil, Sao Paolo, Mato Grosso.

The main areas of opportunities -- we need to do some investment. We have a plant that according to our standard is not very efficient. We need to take distribution out of that plant. And for that, we'll buy and move this distribution warehouse in the [Resulta]. In the new one, we are buying a piece of land and buying -- and building a distribution center. And with that, we think that we can bring about a lot of efficiencies in the plant that are not present there.

And then obviously, market-related transactions where we think that we can execute in the marketplace different from other bottlers in the world and hopefully bring this execution that will bring top-line growth into the equation, no. So, my general sense is that probably a year or a year and a half, we are on target for the guys that our managing this operation is to bring the profitability of Remil to the levels that we have in Sao Paolo and close that gap. And for that, we are giving this a year, a year and a half to establish.

Okay. I mean, closing that gap -- okay. That's interesting. And I'm just wondering -- I mean, is it safe to think that in -- I mean, as you arrive that the product price levels are on -- I mean, generally lower than what you have in Sao Paolo? And just to understand what might be just generally the B-brand penetration in this part of the country versus the Sao Paolo region, higher, lower, I mean, just some kind of indication?

With respect to the prices, Alex, I have a clear picture there. It's -- Remil doesn't have a lot of water in the portfolio. Therefore, when you look at the total price per unit case, it looks a little bit higher. But it's tricky because once you look at individual prices, there's improvement that we can do that.

And that was one of the main things where Coca-Cola Company, while it was operating the business improved once we started the negotiation process, what we call this transition period. We discussed with them the opportunities that they have in terms of pricing. And they have been improving the pricing mix of the CSDs in Bela Horizonte.

So, we still have some additional opportunities in CSDs. But again, the mix of products -- the total mix of products in Remil, since they don't have much water, they have -- it looks as if they have a higher price per unit case. But it's not the case.

With respect to [Tujienas], I'm not sure, Alex. I think that it's nearer to what we have in -- that something would be similar to what we have in Sao Paolo, probably lower penetration of Tujienas in the rural areas. But I need to check on that, Alex. I don't have a clear picture on that front.

No, thank you. That's helpful. And I guess just the last thing -- and I know it still probably is early days here, but one of the things that we talked about with you guys last month was the new tax regime that is coming into place in Brazil. And I guess we understand that for beer and soft drinks, that really starts to be implemented in January of '09. And I mean, is there any color that you can give us about how you plan to implement that and what you might think about passing that onto the final price?

Yes, Alex. Just as really as a background, the [forever Gorman] in Brazil -- they lose revenue from the banking tax that they have on all transactions. And the excuse is that they are trying to recuperate part of that lost revenue from other sources. And one of the sources is obviously a tax -- a change in the tax law for beverages. The idea here is that instead of having a fixed amount per liter of soft drink or beer or other categories that you will have a formula where prices in [soft drink] better than the formula was more a tax on the revenue rather than on a per liter basis.

So, you have two fronts here that are lobbying still with the authorities. One is all the B-brands that would like to have a tax based on revenues and then the established companies, beverage companies, that would like to stay -- precisely because of all the tax evasion that was present before -- that would like to stay with slow meters and having a very tight control on the liquids being consumed in production plants on something being produced or beer being produced.

It's very difficult right now to predict the outcome of that. But certainly, I mean, if there's any change in law, it will affect the whole industry. And my expectation is that that will be passed to the consumers [over, if they ever raise the nexus] tax that's precisely (inaudible), so a tax on consumption. But the size of that change, if there is any change at all, it's still too early to know.

Okay. Thank you.

Thank you, Alex.

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

Hi. Good morning. I just wanted to get a bit more color if we could on the bulk water purchase and if you could talk a little bit about. Was that more of an opportunistic purchase? Or is this perhaps part of a bigger strategy in Mexico to fill in some gaps and acquire some regional brands that could strengthen the Ciel portfolio?

And I guess related to that, can you give us a sense of the package and mix within that? Obviously, characterize bulk water as your larger packages. But certainly, we've seen 5 L. Is this purely a 20-L size business? And is there room to improve that mix obviously as you re-brand it with Ciel?

And I guess a secondary related question also is what was the role of Coca-Cola Company in this if any in your Jugos del Valle JV? How should we think about that in terms of the strategy going forward? Is bulk water going to continue to be separate from the other still portfolio in terms of how you approach the joint venture?

Yes, good morning, Celso. Let me give some flavor to this transaction. Agua de los Angeles is a brand that was owned by the Coca-Cola bottlers from Toluca. As you know, Toluca is a neighboring -- very close to Mexico City. We actually have a -- the largest production plant that we have in the system is there in Toluca. But we don't sell in product in that territory.

So, many years ago when the system was not focused on jug waters or water at all, the operators in that territory established this brand in Toluca and Cuernavaca. And many years ago, they installed a production plant in Mexico City and some distribution centers. The Coca-Cola Company has worked with this bottler to change the brand from Agua de los Angeles to Ciel. And I don't know what it is, the specific arrangement that the Coca-Cola Company has with them.

But the Coca-Cola Company is not very much focused on jug waters as something that is important for the bottlers. And the Coca-Cola Company is not that focused on the 19- and 20-L presentations, no. So, the agreement that they have with the bottler is that they were having an agreement on the Agua de los Angeles in personal size. So, the bottler has continued doing this jug water business wherever they have it, which is basically Cuernavaca, Toluca, and Mexico City.

So, since we were entering with jug water to Mexico City recently, and we have been here basically for two years now, we started conversations with this bottler and the Coca-Cola Company [thinks] that [more] profit for two different bottlers of the same system competing -- versus each other in this territory. And we basically have a friendly agreement to acquire these assets. We are not acquiring the brand. The brand is now owned by the Coca-Cola Company for personal sizes.

And the idea is that we'll be changing this brand in the next 12 to 18 months. We'll start having Agua de los Angeles by Ciel. And then, we will change the name to Ciel. Important thing here, Celso, is that these operations because it's had many years here in Mexico City have grown important.

And as I mentioned, they have a production plant and a couple of distribution centers. We are acquiring those assets. We are staying with the workforce and all the routes, the home delivery routes that they have. It's basically office and home delivery. That's it. That's what they've got. And for us, it's basically a [slip] on the size of the operation that we have in the Valley of Mexico for jugs. And what we are looking here is capturing the synergies of this -- of having this additional scale, no?

It's important for us also because, as you know in Mexico City, we don't do a lot of home delivery. We were starting to do something with jugs. But we believe that we only look at the growth in new categories, the proliferation of SKUs that we have. At some point in time, having contact directly to homes will probably open up new opportunities for us that we'd like to capture. That's basically the story behind Agua de los Angeles, Celso.

Okay. Thank you very much.

Your next question comes from the line of Jose Yordan from Deutsche Bank. You may proceed.

Hi. Good morning, everyone. I just had a quick question about the other income and expenses. It's given when excluding the PTU, it's increased quite a bit over the last year. Can you give us any color as to what's causing that and what kind of other income and expenses are going in there?

Yes, Celso (sic), let me look at what we have in [the organizing] that we have in other income and expenses is the participation that we have in Jugos del Valle that we are already showing as -- to the equity [measure]. And since this quarter we are reflecting basically MXN30 million of Jugos del Valle, MXN18 million for the second quarter and MXN12 million from the first quarter, we haven't -- we didn't register anything during the first quarter because we were just in the process of understanding how we would account for that. So, we have this MXN30 million in back of Jugos del Valle.

And we have also learned that we've -- and we reported that in the press release -- the impact of this lease that we have from penalties that we have from the antitrust authority in Mexico, very old cases from year 2000 and year 2003 that we have 12 different cases.

Excuse me. Let me correct that. It's two cases, one for Pepsi and one for -- from [Big] cola that dates back to year 2000 and 2003. But in each case, we have six different entities within Coca-Cola FEMSA that were being sued. And we have lost nine of those individual cases. And we are still working on three. We have not received the final notification from the judge or the antitrust authority. But by what is published by the judiciary system in Mexico, they publish if this injunction was approved or denied. And it was denied for us. And it was the last system.

So this quarter, we are presenting around MXN130 million as a reserve for these fines that, as I mentioned, around MXN90 million we know that we have to pay. And we are still pending on MXN30 million, MXN35 million of the original fines. But they already registered in that line of operation. I think that that will explain the majority of the change.

Well, if it was -- if you had equity income on Jugos del Valle and MXN130 million on the antitrust, that's a net of actually about MXN100 million, which is less than a third of the other income in the quarter. Some of this is sort of ordinary -- I mean, I guess that always goes in there. But I'm just trying to get a sense for how much is -- ?

Let me -- we also have -- we also expressed in the press release [increment] that we have this fixed cost of the -- related to the shutdown of Venezuela is also related -- is reflected there in the other line with the idea that to have a more comparable numbers in the Latincentro division. That's probably around MXN50 million.

Yes, and if you want to go in detail to everything that affected there, you have -- this is Alfredo Fernandez -- you have the MXN126 million related to the antitrust commission fines. Then, you have the MXN50 million related to the shutdown, the fixed cost related to the shutdown in Venezuela, MXN50 million. I'm sorry. And then, you have a loss in share of fixed assets of around another MXN50 million. And that describes a significant part of the explanation. If you want the line, we can go in detail about the other.

Okay. No problem.

Never mind.

That's clear. Some of it is one off. Thanks a lot.

Yes.

Your next question comes from the line of [Alan Auner] from J.P. Morgan.

Hi. Good morning. Quick question regarding net debt and just to -- how much of the net debt do you have unhedged in dollars terms just to calculate the benefit of the strengthening of the peso? That's the first question. And the second question also really quickly is -- even with the acquisition of Remil, you're paying down debt in an accelerated way. What is your preferred use of cash for the next couple of years? And what would be the criteria you would use to analyze further acquisitions? Thank you.

Good morning, Alan. Of the total debt balance that we have, we basically have around half of that in pesos and around 40% or 45% in dollars. And we have some minor numbers in Argentina and Brazil and Venezuela because we believe that it's appropriate sometimes to finance in these territories, some of the small creditors we have over there.

For the acquisition of Remil, we basically used cash that we have on hand. And really, when you look at the net debt that we have in the -- and speaking basically about some approximate numbers, the net debt of June increased because of the acquisition of Remil. But we are basically around $1.3 billion.

If we exclude the money spent on the acquisition of Remil and the acquisition of Jugos del Valle, so much as a strategic considerations for the acquisition or use of cash, we basically, the net will be around $850 million as of the end of June. So in other words, we have continued to de-lever the Company. And obviously, at the end of last year and during -- and with the base acquisition of Remil, we have decided to use some of the cash balances for that.

Now, with respect to your question about uses of cash balances and how we'll go about acquisitions in the future, we obviously are open to continue growing. We believe that it's in our DNA to continue growing through acquisitions as part of the -- in every planning process that we have, we look at opportunities in that respect. We feel that we have a debt level that is very, very appropriate to say the least. And we feel that we can leverage the Company in case we have an important acquisition. And in the meantime, we will continue to maintain that to increase our cash balances as well as we continue generating cash.

We did have an important payment of debt -- some of the [certificado los Angeles or the Mexican] (inaudible), it's only couple of weeks ago. It was June, July. We paid basically around $250 million of the equivalent of that in bonds. It was MXN2,500 million, no.

Thank you.

Thank you.

Mr. Trevino, we have no further questions at this time.

Well, thank you very much for the attention to this call. And as always, Alfredo and [Justine] will be ready to answer more questions in detail with more detail. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.