Coca-Cola Femsa SAB de CV (KOF) 2008 Q3 法說會逐字稿

And welcome to the Coca-Cola FEMSA's Third 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 both based upon currently available data. Actual results are subject to future events and uncertainties, which may 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 third quarter results demonstrate our ability to capitalize on the benefits of our growing multinational company with a balanced portfolio [factors] to all of Latin America. Across the board, organic revenue growth combined with our acquisitions drove our top line results. Despite adverse macroeconomic conditions worldwide, we were able to increase our operation's total revenue by 14.5% and a near double digit consolidated operating income growth of 10.3%.

Among the main drivers of our top line volume growth were our new Remil franchise territory, and Jugos Del Valle juice-based beverages which together generated more than 33 million unit cases during the quarter. This alone represented more than-- more volume than the one generated by our existing Central American operations in one quarter or close to 75% of our consolidated volume growth in this quarter.

Excluding Remil, clear beverages, driven mainly by the Jugos Del Valle line of beverages in Mexico, continued with close to 45% of our growth. Sparkling beverage contribute almost 25% of our consolidated sales volume. And bottled water, including bulk water provided the balance.

Our consolidated average price per unit case increased 4.1% year over year driven mainly by nominal price increases undertaken in our Mercosur division. During the quarter, our consolidated revenues reached MXN19.8 billion. Our gross profit increased 10.9%, driven mainly by increased gross profit from our operations outside of Mexico. Higher sweetener and (inaudible) costs in some of our operations outside of Mexico combined with the effective lower profitability of Jugos Del Valle line of beverage during this year were partially offset by lower sweetener cost in Mexico.

Our third quarter consolidated operating income reached MXN3.2 billion. This increase resulted from lower operating expenses, which were 90 basis points lower as a percentage of sales than the third quarter of 2007. Our consolidated EBITDA reached MXN4 billion, resulting in an EBITDA margin of 20.3%.

For the quarter, our majority net income decreased 35.5%, resulting in earnings per share of MXN0.68 per share or 6.8 pesos per ADR. This decline was mainly due to the following reasons. One, a foreign exchange loss was (inaudible) in our indirect result of financing due to a foreign exchange situation as applied to our dollar-denominated debt. Second, a write-off of some assets in our Mexico division. And third, the reallocation of long-term employee benefits previously recorded as a long-term asset in the balance sheet as a result of changes in the Mexican Financial Reporting Standards.

Over the past 12 months, we have sold more than 2.2 billion unit cases, reaching almost MXN74 billion in total revenues and we have generated more than MXN15 billion of EBITDA.

Now let me talk about our operations. Our Mexico division posted 2.5% volume growth. Incremental volumes were mainly driven by the Jugos Del Valle line of beverages and the integration of our recently acquired Agua de los Angeles jug water operation.

In the sparkling beverage segment, brand Coca-Cola in multi-serve presentations continued to drive this category. Helping us to offset a high year-over-year comparison, resulting from the loss of Coca-Cola Zero in 2007. Our volumes of flavored sparkling beverages continued to decline in line with the industry over the past few years. One of our short-term priorities is to regain growth in these categories. Recently, we have scaled our multi-server packages for our core flavor brands. Toward the end of the quarter, we saw some improvement in this segment.

Our average price per unit case declined 0.8% during the quarter. This year-over-year decline which was partially offset by the higher average prices per unit case of Jugos Del Valle in our portfolio resulted mainly from lower volumes of flavor sparkling beverages and lower volumes from brand Coca-Cola Zero as compared with the third quarter of 2007.

In early October, we implemented an important price increase across our Coca-Cola brand portfolio, resulting in a weighted average price increase of more than 4% in our total portfolio. This initiative should improve the possibility of our sparkling beverage portfolio as we enter the final part of the year.

Each competitor within our industry faces the same raw material environment, leading us to conclude that they will have to follow price increases eventually.

The integration of new home delivery routes in the [buoy] of Mexico from the Agua de los Angeles jug water business enabled us to post more than 12% volume growth in our jug water portfolio for the quarter.

In still [diverse] beverage, the Jugos Del Valle diverse portfolio accounted for the majority of our volume growth here in the quarter. Our incremental sales volumes in these categories totaled more than MXN6 million. During the quarter, our order lines of (inaudible) dollars continued to deliver positive results. Nestea grew almost 35% and the new reformulated Powerade grew more than 27%.

The Jugos Del Valle platform has also provide us with innovation across still beverage category. We have been able to develop a strong presence in (inaudible) beverage categories in a very short period of time. We have launched new products such as Valle Fruit, Orangeade and Valle Fruit with high content of fruit pulp to serve the markets with alternative products to target different consumption locations. These two products represent almost 40% of the incremental volumes coming from the Jugos Del Valle line of business. Also, with our new (inaudible) line, we have acquired the capabilities to reformulate all sorts of the new Powerade. For Coca-Cola brand, we have developed new partitions for single-serve presentations, such as the new easy grade bottle for our 600 ml presentation designed to differentiate our package adding value and convenience for our consumers. And the 400 ml easy grade bottle to create a new and attractive entry point to single-serve consumption.

In the third quarter, our Mexican operations total revenues increased 1.8%. Incremental volumes from Jugos Del Valle diverse portfolio and our bottled water business supported this growth.

On the profitability front, we continued to benefit from lower sweetener costs which decline in Mexican pesos at a double digit rate year over year. This help us to compensate for higher PET costs and the effective low profitability of the Jugos Del Valle line of beverages in this year 2008.

Our gross profit reached MXN4.4 billion, remaining flat as compared with the third quarter of 2007. Our gross margin decreased 90 basis points. Operating income declined slightly by 0.5% to MXN1.6 billion. This decline resulted from the higher cost of goods sold, which was partially offset by lower operating expense. Our operating margin declined 40 basis points to 19.9%. Our EBITDA declined 2.4% compared with the same quarter of last year, reaching MXN2.1 billion.

As we stated in our second quarter conference call, our consumers continue to focus more on value-based transactions because their disposal income is somewhat constrained by a higher cost of food and lower remittances from (inaudible). However, with different economic dynamics in our territories with the state (inaudible) more dependent on remittances from (inaudible) and the states in the lower region experience higher economic activity related to the oil industry.

As we enter the fourth quarter, the economic slowdown from (inaudible) will eventually reduce domestic GDP growth. Nevertheless, we believe our Mexican operations will remain the most profitable. The new avenues of growth provided by Jugos Del Valle (inaudible) line of beverages will provide us with a broader growth portfolio to capture more consumption occasions. Originally, Agua de los Angeles jug water business will provide us with the opportunity to capitalize on a new competitive model.

Margins in Latincentro division grew 4.5%. Brand Coca-Cola accounted for more than 60% of our incremental volume. (inaudible) sparkling beverages accounted for almost 25%. And our still beverages portfolio in Central America and Colombia provided the balance.

During the quarter, we complemented our portfolio introducing Jugos Del Valle line of beverages in Colombia, Panama, and Nicaragua. These new products will help balance our portfolio with further alternatives to satisfy our consumers' consumption occasion.

As was previously announced in August, our company and the Coca-Cola Company agreed to jointly acquire the Brisa bottled water business in Colombia from Bavaria, a subsidiary of SABMiller. Once completed, this acquisition will expand our portfolio across the region. The Brisa brand is one of the most recognized and important water brands in Colombia. As per capita income improves, we see an opportunity to migrate consumption from [pouch] to single-serve (inaudible) presentations and increase the profitability of these categories.

Our Latincentro division volume growth was driven by a 2.2% increase in Central America and a 9.5% increase in Venezuela, which more than compensated for the slight decline in Colombia. Total revenues in our Latincentro division grew 6.7% year over year to MXN5.8 billion. Our other price per unit case in Mexican pesos increased 2.2%, driven by price increases implemented during the quarter. This increase more than compensated for our territory wide use in our packaging mix to multi-serve presentations and more competitive market dynamics in Colombia.

Our gross profit increased 3.3% to MXN2.6 billion, driven mainly by higher revenues, which more than compensated for higher sweetener cost in Venezuela and lower revenues in Colombia. Our gross margin declined 140 basis points compared with the third quarter of 2007 when we recorded the highest gross margin for the division in the last three years.

Our operating income grew 3.9% to MXN751 million. This increase was driven mainly by our tight control of operating expense in Colombia and Central America, which more than compensated for higher labor and freight costs in Venezuela. Our operating margins decreased 40 basis points to 13%. Our EBITDA grew 5.6% to MXN1 billion. And our EBITDA margin declined 20 basis points.

Despite bad weather in some of our Central America territories and a more competitive environment in Colombia, our Latincentro division has the ability to continue delivering profitable growth in the fourth quarter and next year. We remain concerned about the level of inflation of the growth of our territories and expect to implement price increases during the fourth quarter.

Now let me talk about our Mercosur division. During the quarter we continued to integrate our Remil franchise territory in our existing Brazilian operations. This new franchise represented an important part of our incremental growth on a consolidated basis. Our Mercosur division volume grew 28.8% in third quarter. Excluding Remil, our volume grew 4.1%. Brand Coca-Cola, including the strong performance of Coca-Cola Zero, drove this growth in Brazil and Argentina. Our volume growth was 44.3% in Brazil and 2.9% in Argentina. Excluding Remil, our volumes in Brazil grew 4.8%.

Net revenues in the Mercosur division increased 56% to MXN5.4 billion for the third quarter. Excluding Remil and beer, our net revenues increased 12.1% to MXN3.6 billion. Our Brazilian operations contribute more than 60% of our incremental revenues and Argentina accounted for the [balance].

Our average price per unit case grew 18.4%. This increase was driven mainly by price increases implemented in the division and the positive packaging shift mix or single-serve presentations of sparkling beverages in Brazil. Total revenues from beer in Brazil including Remil reached MXN522 million for the quarter. Mainly driven by the migration of volume previously sold directly by (inaudible) to supermarkets in the (inaudible) which is now being sold by Coca-Cola FEMSA and of course by the incremental volume of Remil.

Our Mercosur division gross profit increased more than 54% to MXN2.4 billion. Our higher revenues were partially offset by higher sweetener and resin costs in Brazil and Argentina. Our operating income grew 59.6% to MXN747 million. Our operating levers, driven by higher revenues, more than compensated for higher expenses resulting from the introduction of coolers in Brazil and higher labor costs in Argentina. Our operating margin expanded 20 basis points to 13.7% for the quarter.

Our EBITDA grew close to 60% to MXN927 million. And our EBITDA margin expanded 40 basis points to 17%.

As some of you may know, a new tax law applicable to certain sectors of the Brazilian economy including the beverage industry was approved. This law included a new mechanism to collect top line taxes. Based on our information and after meetings between the main industry participants with Brazil's tax authorities, they have not reached a final decision on the parameters of the new law which we expect to have in November. Depending on the outcome of this initiative, we are considering different pricing scenarios as we enter 2009.

Now let us talk about the financial performance for the quarter and our debt structure. As of September 30, 2008, we have a cash balance of MXN3.5 million, a decrease of MXN4 million as compared with year end 2007 mainly driven by cash we used in the acquisitions of Remil and our Agua de los Angeles. Our total debt decreased MXN3.2 billion as compared with year end 2007, mainly driven by the maturities of our Certificados Bursatiles that were paid in April and July of this year.

As a result of the above mentioned factors, our net debt increased MXN835 million in the first nine months of 2008. During the year, our operations have provided us with the necessary cash to both finance our acquisitions and at the same time reduce our gross debt levels. Our short-term bond debt as of September 30, 2008 was MXN4.7 billion and our long-term debt was MXN11 billion.

Our debt maturity profile underscores the flexibility we have to manage our cash sources and needs. On July 2009, maturities will be repaid with cash generation and our excess cash balance. The majority of the rest of our debt matures from 2012 onward.

As of September 30, 2008, our net debt to EBITDA coverage ratio was 0.8 times. And our net interest coverage ratio was about 10 times, highlighting the strength of our balance sheet. In recent days, we have learned of the impacts of several companies that have used structure or exotic financial instruments. We want to share with you some light regarding our financial structure. Rest assured, we are not engaged in those type of transactions.

Our liability structure is comprised by a balance mix of Mexican peso-denominated debt around 40% and dollar-denominated debt close to 55%. As of October, approximately 47% of our debt has a fixed interest rate. KOF uses (inaudible) financial instruments with the objective of achieving the desired liability structure. Our total debt balance includes dollar-denominated debt in the amount of $795 million.

The effect of foreign exchange fluctuation between the Mexican peso and the US dollar as applied to our dollar-denominated debt is reflected in two lines on our consolidated income statement. On our debt that was contracted in dollars, the effect shows off on the foreign exchange loss line. And our debt that was contracted in pesos and swapped to dollars, the effect shows up on the market value loss on ineffective derivative instruments line.

Looking at our performance for the first nine months of the year, our operations outside of Mexico continue to generate the majority of our consolidated growth. Our balanced portfolio of assets represents a competitive advantage for our company. The strong cash flow generation of our Mexico division combined with the organic and non-organic growth prospects of our Latincentro and Mercosur division.

As we enter the final part of the year and despite the lower GDP estimate expected in the following year in Latin America, we have the most complete portfolio approach and have developed the most comprehensive execution capabilities to address the challenges and opportunities that lie ahead. We'll continue to benefit from our acquisitions' top line growth through the first half of 2009. We should also benefit from the higher profitability of Jugos Del Valle line of beverage combined with our underlying operations' stable results. We expect that our new lines of business, our recent acquisitions, and our organic growth will provide us with sustainable top line growth going forward.

We have the flexibility and ability to adapt and adjust our business to the evolving economic conditions. Coca-Cola FEMSA is a reliable vehicle for long-term growth with solid fundamentals and a proven track record of sustainable profitable results.

Now I would like to open up the call for any questions that you might have.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Sohel Amir. Please proceed.

Good afternoon. I was-- my question was basically with regards to availability of financing. So, yes, given what's happening globally, in terms of corporations generally finding it difficult to roll over debt and finding new financing, do you see any such pressures in the territories you do operate in? And if so, how do you see this impacting your bottom line going forward?

Yes, good morning. We share with you the idea that credit is getting more scarce. I think that the positive thing about our company is that we have this maturity that is close to $400 million in July of next year. We basically have around $200 million already in our cash balances. And with cash generation for the next, for these four quarters plus the first two quarters of next year, we don't see any need to go to the financial institutions to look for financing. But we certainly are concerned about that-- this lack of liquidity in the financial markets in case we are presented with an opportunity for growth in the future. But with respect to the operations that we have, the present operations we don't have any need to look for resources (inaudible).

And just finally, are you reassessing perhaps some acquisition plans given what's happening at present?

Right now we don't have any strategic plan in our radar screens. We have always been open to opportunities. And it might be the case that because of these difficult situations that we see (inaudible) some opportunities open up for us because people will prefer to leave the business. And obviously in those cases, we will need to assess if we should continue or not to ahead with those acquisitions. I think that we should be opened up for any opportunity and analyze those and check those cases-- check those opportunities on a case-by-case basis.

Okay great. Thank you very much.

Your next question comes from the line of Lauren Torres with HSBC. Please proceed.

Hello everyone. This morning we heard from Coca-Cola Enterprises that they've been hit with a reduction in funding from the Coca-Cola Company and also a high single digit concentrate price increase. I was just hoping you could comment in light of challenging market conditions, what your current relationship is with the company? And if there's been any recent changes with respect to the support levels that you're receiving?

Yes good morning Lauren. We have not received any news of changes in marketing support. We have had a very positive dialogue with the Coca-Cola Company and I'll say that it's more I guess the word is us pushing for this dialogue because we think that it's important that given the situation for next year that we revalue the flexibility that we need in terms of marketing expenditures for next year. In other words, we need to be very careful in not engaging long-term commitment for example with TV stations that will take flexibility away from us to adjust the marketing expenses going forward. But it's a dialogue that has been started by Coke FEMSA and I think that the Coca-Cola Company in our operations have been receptive. And we found that they were basically in the same page with us saying that it's important that we maintain this flexibly.

As you know, we always share all these marketing activities on a 50/50 basis. And what we are evaluating right now is the level of fixed commitments with some of the expenses going forward so that we maintain this flexibility. In other words what I want-- what we want to maintain is that if we see that there is an important slowdown in volumes that we can adjust our marketing expenses accordingly. And maybe in some cases we'll decide to invest a little bit higher to capture in this market opportunity some additional marketing support so that we better promote our brand. Okay?

And you also mentioned the intention of taking some price increases in the fourth quarter. Can you just give us a sense of the magnitude of those increases?

As I mentioned in this call, we increase in October basically all our cola categories in Mexico in all presentations, either $0.50 or 1 peso depending on the package. And we have been evaluating the possibility of increasing flavor prices as well as some prices on (inaudible) categories because we feel that when you have all this turbulence in the marketplace if we are always being the leader if we move prices. We believe that some of our competitors or the majority of our competitors will follow through because we have uncertainty with respect to some of the raw materials, with respect to the future and we think it's important that we value that. We are doing exactly the same thing in every country where we are operating for different reasons. In Argentina and Venezuela because we have high inflation levels. In Brazil, we see opportunity to increase prices in some of the single-serve presentations.

But the signal that we have to all of our operations is to look at the opportunities on the pricing front and obviously to revalue all the capital expenditure problems that we have for next year with two main purposes. One is to be sure that we capture this additional free cash flow for our commitments. And second to revalue also and to be very sure what are the volumes that we are going to see in the future, the demand from the consumer so that we revalue and decided to increase capacity in some (inaudible) places.

Okay, thank you.

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

Hi, good morning guys. I guess the question was partly asked by Lauren but just wanted to get a sense when you reach your agreement with Coca a couple of years ago about not raising concentrate prices over a long period of time, did that apply only to Mexico or to every country where you operate? Because obviously the news on CCE and watching Coca-Cola stock price makes me a little nervous that there's going to be concentrate price increases for example in Venezuela, Colombia, Central America, those countries. So if you can shed some light on that, that'd be great.

Yes good morning Jose. The agreement is for Mexico. That is the straight answer because that's where we have the increase that created all this turmoil for several months in terms of the negotiations on the business relationship with the Coca-Cola Company. Contractually they can increase the prices in some other territories.

We believe that we have a very positive dialogue with the Coca-Cola Company. And we have steered away that this is not a guarantee Jose obviously we have steered away from design of increasing concentrate price but rather looking together for opportunities to increase the size of the pie that we are sharing. By doing all this in normative processes, we (inaudible) as I mentioned for example these two pros that we developed together with the Coca-Cola Company, (inaudible) those were lines of business that were not existent when the company was in the hands of [Alveran] family. And in one month, those two products were selling 2.5 million unit case. I think that with actions like that where we prove that we can execute in the marketplace with new lines of business that we are developing that we provide new volume and opportunity for growth to companies. We don't need to address those.

But the straight answer to the specific question is the agreement where we have the freeze of concentrate prices for a long period of time is in Mexico. And that's the answer.

And basically in every country, it's still an incidence pricing model including in Venezuela, right?

Yes. Every country where we operate is an incidence base model.

Okay, thanks a lot.

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

Hey good morning everybody. Hector I had a question with respect to the other charge that you took below the operating line, the 562 million. Part of that is stated to be reallocation of long-term employee benefits. Can you expand on that in terms of whether or not this is a defined benefit for employees, the nature of it, and what the projected benefit obligation is as well as its current funding?

Yes well I think that one of the main impacts is that-- is a change in the accounting principle. I believe it's called DS (inaudible) 3. Before 2008, you have a computation by an actuary that basically provides for pension liabilities and things like that as an estimate. And any excess over that estimate was taken as a long-term asset that was amortized according to the actuarial changes on over 14 years because that is the average life of an employee in Coca-Cola FEMSA according to the actuary. Starting 2008, the (technical difficulty) has been working in the company. So those provisions and the pension funds for everyone and the provisions are also for 100% of our employees is what is in this line. The only thing that we have-- the indemnifications are the real amounts and we are basically doing provisions according to the [authority exchange]. With respect to the pension fund, we-- for the total company, Coca-Cola FEMSA, we are more or less around 40% funded in the pension fund.

And Hector how do you fund those pension obligations? Are those equity investments that are currently in the marketplace? Are they largely--

No it's money that we place in a trust. And then the trust does investments in (inaudible)-- it's a third party that manages those.

And do you--

And they do investments in some equities and (inaudible) and all of that.

And do you have a sense today as to where that funding level is relative to the pension benefit obligation?

Well let-- I'm not sure. I don't have an idea right now where it is, what it is right now. But my guess is that we have funds basically around 40% of that. And we have cases like Brazil where we have another-- the fund is overfunded because of some of the problems that it has had in the past. So let me ask Alfredo to check those numbers with more of the data and get back to you.

Thank you very much Hector.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Alan Alanis with JPMorgan. Please proceed.

Hi good morning. Hector, a question regarding a potential shift towards returnables. Assuming that the economies in the region deteriorate, we-- I guess it's fair to assume that the mix between non-returnables and returnables is going to move more towards the returnables side. What-- I mean how should we think about the impact of profitability in each of the territories of Coca-Cola FEMSA if we start seeing this shift?

Yes Alan, I think that you raise an important question. In difficult economic times, returnable presentations have always provided us with a platform to have a lower price product-- a lower price point to the consumer. And as you are fully aware, basically 99% of our-- of the volume of our competitors is committed to one-way presentations. We still have and we have maintained, because of strategic reasons because we have such a large price gap differentials in comparable presentations. Remember that we are-- one of our competitors have 2-liter or 3-liter presentations in 12 pesos we sell the equivalent presentations in 17 to 19 pesos. We have used returnable presentations to present a good enterprise package to our consumers. In Mexico, around 30% of our volume is in returnables. It's a much higher number in Colombia and Central America, close to 50%. Argentina is also around 30%. So I think that we have the opportunity to continue using those presentations in difficult environment when the consumer doesn't have a large amount of disposal income. And it's basically the possibility of Coca-Cola FEMSA in these territories because nobody else has this presentation. We have some competitors like [Bosto] in Colombia that have returnables etc. but most of our competitors are fully committed to one-way packages.

When you look at the low-price brands, there is no question that they have the full effect of the pressure on raw materials because they are 100% in one-way presentation. So I think that strategically it has worked for us in the past. And I think that it will work for us in the future.

Now what would that do to margins? I mean what's-- what should be the impact on the margins or of the profitability of these businesses if we see that shift?

The [profitability] approach in our case is very similar to what we have in one-way packages. And the base if it's a large presentation, for example there is no question that in the small single-serve, one-way package we have a very high margin. In our one-way but it's when it's single serve. When you go to multi-serve, you have a lower margin on those products. But returnable presentation for us a very good-- has a very good margin between these two presentations that I mentioned, between single serves and multi serves. So nevertheless I'll say that we will maintain our margins basically.

Okay, thank you. Thank you Hector.

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

Hi, thanks everybody. Can I ask about the Mexico volume outlook? And I guess when you look at these-- at your countries kind of out a few quarters, I mean the biggest GDP downward revision seems to be in Mexico with people actually thinking GDP will contract next year. And we've seen the last couple of quarters the margins contracting in Mexico, CSDs now for the last two quarters also contracting in terms of volume. I'm wondering why you guys are thinking or what's behind the price increase of 4% in Mexico. We've seen the brewers try to do a price increase in August and clearly the volume reflects a little bit more than we all thought. And I guess what I'm trying to get at is, are we kind at a trough right now in terms of kind of the volume, the organic volume trends? Are you concerned that this price increase might actually kind of be-- kind of push us into a little bit more than expected negative kind of contraction in the fourth quarter? And looking out, I know it's early days, in the first half I mean how should we kind of look at basic volume trends in Mexico?

Good morning Alex. Well yes you are right. I mean the decision for taking up prices is always hard. Especially when you have such a large margin versus your competitors in Mexico, such a large gap in pricing on the-- of our representations. But we believe that given the raw material pressures that we have received even though sweeteners have benefit us or the industry for the last few months, but we believe that with the cost of PT and labels and caps and all these things that are related to that that the competitor will follow. I think that the competitor who are desperate for us to give some room for them to move the prices.

It's a difficult balance that we need to find Alex and obviously there is always promotional activity that you can do around. But you are right in the sense that we're going through a slowdown in the economy. And normally trends would call for volumes either growing at a lower base or coming down when you compare it to the previous year. We have the benefit of all the other initiatives that we are bringing with the Jugos Del Valle transaction that we are bringing to the table.

So I think that when you consider all the variables here, our team felt that it was time to start moving prices. And I think that we feel comfortable at this time that it is a good move. In some other cases, we have reduced prices for example in flavors because as I mentioned during the conference call, we have been suffering over several years on that. So we reduced the prices. We have the positive effect of those prices. And now we're going to increase the prices a little bit on flavors. So usually it's a difficult decision but we believe that when you consider all the variables, it's the right decision.

Okay, thank you.

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

Good morning. I wonder if I could ask two questions. The first is if I'm not mistaken you're on track to spend something like $500 million this year on CapEx, which is above what your trend has been, which has been more I think in the $250 million range. As you're thinking at least preliminarily about 2009, can you give us a sense of what you think you might have as a budget for CapEx for '09? And then the second question is, you've talked a bit about the proclivity to take pricing because of the raw material environment. And I clearly understand that with currencies weakening that's going to cause some inflation in your cost. But at the same time I would think that some of the commodities might actually reverse like PET and aluminum. Can you talk about how much of your needs are contracted if you will at sort of older prices? And how quickly you'll see the benefit of falling commodity prices? Thanks.

Yes Lore. Well let me first give you some light on the CapEx and then we go into the commodities on the (inaudible). On the CapEx, we have basically a budget for the year for around $500 million as you said. But the fact of the matter is that of-- we measure actual cash flow that we have paid all the way through September 30th. We are around the $250 million mark. So my best estimate for the full year is going to be between $300 and $330 million, around that range. So we will be below the $500 million mark.

The variables that you have obviously to move that are easier and dependent on you in this industry is basically how much you spend in CapEx and that depending on how you see growth and your capacity going forward. And you can tighten the belt a little bit to restrict some addition of the cash flow. The other is the pricing lever and how much you spend in marketing. Those are the three easier levers that you have to try to adjust your company to the circumstance.

For next year, the call that we are doing to all the operators is to review their-- obviously we have already gone through business plan processes and have preliminary estimates of what we can expect for next year. But all of that happened before October and before the first half of September. And we are asking all the operators to revalue their capital expenditure needs for next year. In the meantime, we have, as you know, we have a centralized treasury operation and we are having a very tight control on the outflows. And we are asking operators that from here to July of next year and that's basically after we cover this debt payment that we have that I mentioned is around 400 million, the equivalent of $400 million. That they should review very carefully their CapEx programs and that they should basically adjust to the minimum that is necessary to continue with the operations.

We are also investing in some of the capital expenditures that were in process that have to do with (inaudible) for example in Colombia and Central America where we are much (inaudible) in volume, we have some investments there. But it's important that everyone revalues their analysis of capacity and excess capacity and demand, if the demand is going to be there for those amounts or not.

Related to that is also this question about price increases. We also prefer to have a regional price formula, especially when we think that we have the leadership on the industry and that some of the competitor will follow. And maybe adjust volumes a little bit to the downward trend and not to come to businesses (inaudible) of investing [relation] or capacity. And not to do this (inaudible).

With respect to the raw materials Lore, we have basically very few agreements with suppliers with respect to prices for short period of time. The only exception is in Brazil where we have committed with some sugar prices that are-- at a higher price where the markets or the prices on sugar that you have right now basically to cover and say around half of our needs in 2009 that are committed with prices that are now under the water. If we were-- if we needed to do like a mark to market of those agreements that we have with suppliers in Brazil, I think that the number would be around $5 million that-- $5, $6 million that we are below the water in that respect. In the rest of the territories, sometimes we have commitments for three months or one month in terms of price for some of the raw materials. So my feeling is that other than this issue with the sugar in Brazil, we benefit-- we will benefit from most of the raw material contraction in prices in our operations.

Okay that's helpful. And just a follow-up and maybe this is implicit in the way you're talking about the business, but I understand the importance of getting some price given what's happened. But is there a tolerance on your part or on the part of Coca-Cola Company in general to accept falling in declines? If volumes end up going negative as a result of your pricing actions?

The answer is yes from the part of our company. I know that the Coca-Cola Company in the past has focused a lot on volumes because they-- for them the volume number is very important. I think that as we have continued to evolve in our relationships over so many years now, the fact that they are on an incidence level in all of our countries, we think that they also appreciate the idea that an increase in prices also benefit them because of the share together with us as we have an easier formula. But the answer is yes, I think that from Coca-Cola FEMSA point of view, we do have tolerance to some reduction in volumes. And the reason we always need to look at the health of the brands and look at market share figures and all of that. But it's important that we maintain the profitability of the business.

Thank you.

Your next question comes from the line of Fernando [Alvera] with (inaudible). Please proceed.

Hello Hector. I just have a couple of questions. First, can you remind us the weight of our, in Coca-Cola FEMSA's consolidated sales and EBITDA? And second, I would like to know based on the current economic and financial turmoils in Argentina, if you can give us an idea of the impact that these will have in your results in 2009?

Can you repeat the first question? We didn't understand.

Yes, sure. Well I would like to know which is the weight of Argentina in Coca-Cola FEMSA's consolidated sales and EBITDA.

Yes good morning Fernando. Let me go first to the second question while Alfredo looks for the portion of Argentina in our numbers.

Yes sure.

Argentina obviously-- what is the environment there? I mean we have been commenting in previous conference call that Argentina-- that we see a lot of volatility on the market economics we use. Obviously the situation that we have there doesn't help at all, we-- during the year we have suffered blockading roads that have interfered with the supply chain, some raw materials getting to our production plants. We need to understand the final outcome of this decision to take over the pension funds and the impact that that would have on this consumer sentiment.

In the meantime, I think that we are having very good performance. We have been able-- we have pressure from the labor costs, as I mentioned during the press conference. Some of our labor contracts have had salary increases of around 25% during this year. That is more in tune with the-- let me quote unquote non-official inflation that we have in that country. But at the same time, we have been able to pass along some price increases and to grow in our volumes. So I think that it's too early to know what the full impact of, on the Argentine operations with all this turmoil. And basically the, regard to your first question, Argentina is--

Around 4.5%, 5% between revenues and EBITDA, it's around that level, as the weight of Argentina in our consolidated numbers.

Okay, thanks.

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

Good morning everyone. Hector to expand on your answer to Alan's question earlier, when you guys face macro dislocation, you expect package mix shifts. But you also shift retail mix and you hurt competition. Can you expand on retail mix opportunities and on market share opportunities that this economic slowdown might bring? And if you could do it by country it would be helpful.

Yes good morning Carlos. General the past experiences and I assume that it would be the same in these cases, what happens with packages is a movement to returnable presentations as we were saying with Alan Alanis' question. And then with respect to the channel shifts, in those locations we start seeing a larger penetration of this more mom and pops versus supermarkets. You start seeing shifts in the consumer patterns that they don't necessarily have a large amount of disposal income like to go to the supermarket once a week and then spend a big ticket on the week supply. And they start migrating again to the small mom and pop that is around the corner and they basically need the daily-- they buy the daily needs on a daily basis. So that's one of the areas where we think also that can-- that we can benefit from this trend as we have pointed out in the past for us, the fragmentation of the retail system and the importance of mom and pops, it's very good center to our strategies.

If we go on a country-by-country, this is more or less the same trends that we see in every country. We can just remember when we have the prior practice in Argentina when supermarkets went from above 50% in our sales mix to around 18% or 15%, if I remember correctly. So our expectation is that if business slowdowns continues during the next year, year and a half, we will see some reversal of the trends that we are seeing with respect to the higher penetration of this supermarkets again moving towards traditional channel.

Hi, Carlos. This is Alfredo Fernandez. (inaudible) explanation as well. On a country-by-country basis, revenues or volumes that go to supermarkets in Mexico around 7%. And they probably doubled during the last 15 to 10 years. And in Central America probably would be something around 10% and in Colombia and Venezuela, probably around 5. In Argentina, like Hector was saying, after the crisis around 2001, 2002 our mix of revenues there went from like 40% to around 15% to date. And our returnable mix went from probably 1% or 2% to close to 30% today. So in the recessionary environments, sometimes there-- the mix, the composition of retail and the composition of packages is trends the fundamentals of the business. In Brazil, the number hasn't changed much. It's around 25% to 30%. And just developing on the explanation of Hector, certainly would see that in a scenario of a slowdown, we tend to sell and grow more to-- our revenues to mom and pops.

Thank you.

And your final question comes from the line of Celso Sanchez with Citi. Please proceed.

Hi, good morning. Just to clarify an earlier comment that you made with respect to returnable margin versus non-returnable, I think I understood you to say that they're about the same margin and I always understood returnable to be more profitable actually. And I would have thought especially with the concentrate increase in Mexico at least and the weaker peso now that would certainly return to being the case, if it hasn't been the case more recently. Can you just confirm that that's the right understanding or are they really-- are you indifferent to the presentation package as opposed to size?

Yes, no let me clarify that Celso. In general, returnable presentations are more profitable. What I was saying is that when you take for example a 400 ml Coca-Cola or a Coca-Cola in a can presentation, usually those one-way, single-serve presentations are more profitable than even the returnables. What I was trying to say is that given the fact that we have a mix of single serve and (technical difficulty) and one-ways that I don't see a big change in the margins because of an increase in returnable presentations. But at the end of the day, it depends how the single-serve presentation moves and the multi-serve presentation moves into with respect to one-way presentations. But just to clarify, in general returnables are more profitable, single-serve one-ways, if you look at the margin contribution of those (inaudible) are higher than on returnables (inaudible).

Okay that's clear. Thank you.

And then just a-- my main question was just a simple one, cash management, Argentina and Venezuela, can you give us a sense of what your current policies are and what you might be doing to ensure that you have the ability to take cash out of those countries? I guess I was referring more to Argentina right now, given how things are starting to look.

Yes, let me-- in general and I don't know if this [two] model will change a little bit, the rules of the game. But so far what we have been doing is in Argentina we have the ability to take out $2 million per month and we have been doing that, extracting $2 million per month out of that country plus dividends whenever we have the profits to pay the dividends. And we have been doing that on a regular basis when you have to go through all the computation of this is the profit that I have and the fiscal profit and all that.

In Venezuela, it's more sporadic. It's when we have opportunities to buy bonds that are issued by the government or by (inaudible) that are denominated in dollars that you can pay [Bolivars] and then you exchange those bonds in the market and you'll get the dollars out.

The other day I was doing a computation of the money that we have extracted in Venezuela since we enter there. And the number is around $90 million of actual dollar that we have taken out of the country through this exchanges of bonds and some repatriation of money that was authorized in the control market by the authorities. One important element in Venezuela is that we receive two days ago also the, what is called the labor solvency, which is a requisite to ask for the dollars in the (inaudible) which is the agency that manages the dollar exchange in Venezuela. So that means that we can again reinitiate that work process to buy dollars at the official exchange rate to pay raw materials and if authorized to pay dividends, then we have a request to-- before the authorities for an authorization to pay dividends that have been there for a few months. I hope that with this labor solvency being arranged that that process continues and maybe at supporting time they authorize those dividends to get out. But that's basically general sense how we manage Argentina and Venezuela.

But just to clear, Argentina the dividend payment, that's, you have to make that computation. You do it once a year or is it at your own discretion in terms of timing? And is there a limit on the order of magnitude of that dividend?

It's once a year and the limit is whatever your profits are.

Okay.

Your profits in the computation that you have to do there. So in other words, you have to have the profits there in and pay the taxes there in order to extract the dividends. But if you have more profits, you can extract more dividends.

And the timing of that dividend usually is first quarter, fourth quarter or what-- how does that usually work?

I'll say that it's usually first half of the year.

Great, okay. Thank you very much.

And that concludes your Q&A session. I would now like to turn the presentation back over to management for closing remarks.

Well thank you very much for your attention to this conference. And Alfredo (inaudible) would be ready to answer any more questions that you might have during this time. Thank you.

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