Coca-Cola Femsa SAB de CV (KOF) 2008 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Coca-Cola FEMSA's Fourth Quarter 2008 Earnings Results Conference Call. As a reminder, today's conference is being recorded. (Operator Instructions).

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 may materially impact the Company's actual performance.

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

Good morning, everyone, and thank you for joining us today. 2008 has proven to be a difficult year for businesses and consumers globally. In this environment, our Company produced another quarter of solid top- and bottom-line growth. Our revenue management initiatives across Latin America, supported by our multi-segmentation strategies, combined with our new avenues of growth drove our top- and bottom-line results.

In the fourth quarter, our consolidated revenues reached MXN22.8 billion, up close to 24% from the fourth quarter of 2007. Pricing and volume growth accounted for more than 40% of incremental revenues, the consolidation of Remil in Brazil contributed approximately 35% of incremental revenues, and the positive exchange rate translation effect provided the balance.

Our consolidated sales volume rose 7.4% year over year. Excluding Remil, our consolidated sales volume increased 1.8% during the quarter, mainly driven by brand Coca-Cola, still beverages, and our water business, including jug water. For the full year, our consolidated sales volume, excluding Remil, grew 2.6%.

Our gross profit increased 16.1% in the fourth quarter of 2008. Higher revenues partially compensated for higher cost of goods sold, mainly due to the effect of the devaluation of our local currencies as applied to our US dollar-denominated raw material costs, higher year-over-year sweetener costs outside of Mexico division, and lower profitability from the Jugos del Valle line of business, as expected during this year.

Our gross margin declined 310 basis points during the fourth quarter of 2008.

Consolidated operating income improved more than 25% MXN4 billion during the fourth quarter. This increase was mainly due to the operating leverage we achieved through higher revenues combined with lower administrative and marketing expenses.

Our consolidated operating margin expanded 20 basis points year over year to 17.8% for the quarter.

Our consolidated EBITDA rose more than 26% to MXN5 billion in the fourth quarter. For the full year, our consolidated EBITDA grew close to 19% to MXN17 billion.

In the fourth quarter, our majority net income decreased 70% to MXN585 million, mainly due to the significant impact of the devaluation of the Mexican pesos versus the US dollar as applied to our dollar-denominated debt during the fourth quarter of 2008 and a write-off of some fixed assets in our Mexico division.

Now let me expand on our operations. Our Mexico division delivered 3.9% volume growth for the quarter. The incremental volumes were mainly driven by the Jugos del Valle line of beverages and our water business, including the integration of our Los Angeles jug water operation in the Valley of Mexico. In the sparkling beverage category, brand Coca-Cola in multi-serve presentations helped us to partially offset lower volumes of flavored sparkling beverages.

Our average price per unit case increased 0.5% during the quarter. This increase was mainly driven by the average price increases that we undertook during the quarter in our Coca-Cola portfolio, combined with higher average prices per unit case of the Jugos del Valle line of business. These increases were partially offset by a shift in mix to multi-serve presentations across our sparkling beverage portfolio and the up-scaling of some of our core flavored sparkling beverages in multi-serve presentations to make them more competitive.

In 2008, our sales volume of sparkling beverages remained almost flat. Growth of our brand Coca-Cola portfolio was offset by a mid-single-digit decline in flavored sparkling beverages.

The integration of more than 150 new home delivery routes in the Valley of Mexico from the Agua de Los Angeles jug water business allowed us to deliver 13% volume growth in our jug water portfolio for the quarter. This acquisition has helped us to capitalize on the potential of this new channel and foster our learning experience to home delivery of our products.

In the still beverage category, the Jugos del Valle beverage portfolio continued to exceed our expectations. We sold more than 10 million unit cases from this line of products during the fourth quarter, increasing more than 50% the volumes we sold compared with the third quarter of 2008.

Innovation continues to play an important role in our growth in this category. For example, during the fourth quarter, we launched Nestea green tea to complement our offer in this category. In addition, we continued to roll out our Valle Fruit orangeade and Valle Fruit with high content of fruit pulp (inaudible) with great results, selling more than 6 million unit cases of these products during the quarter, representing more than 60% of the incremental volumes of the still beverage category compared with the same period last year.

Our Mexican operations' total revenues increased 4.5%. Incremental volumes accounted for the majority of our total incremental revenues due to volume growth from the Jugos del Valle beverage portfolio and our bottled water business.

On the profitability front, the lower cost of sugar year over year helped us to mitigate short-term cost pressure from higher resin and high fructose corn syrup costs when converted into local currency, mainly driven by the devaluation of the Mexican peso versus the US dollar. Our gross profit reached MXN4.3 billion, a 1.6% decline compared with the fourth quarter of 2007. Our gross margin in Mexico decreased 310 basis points. On a quarterly basis, we have seen resin prices decline more than 10% in dollar terms, falling short of compensating the large effect of the devaluation of the Mexican peso versus the US dollar. Operating income grew 7% to MXN1.8 billion, mainly driven by higher revenues and lower selling expenses, which more than compensated for cost pressures coming from our US dollar-denominated raw materials. As a result, our operating margin increased 50 basis points to 21.8%. Our EBITDA increased 10.1% compared with the same quarter of last year, reaching MXN2.3 billion.

During 2009, we expect economic activity in Mexico to show a continued slowdown and consumers being more prudent with their disposable income. Our portfolio brands and packages is wider and deeper than ever before. Our multi-segmentation strategies, along with our revenue management initiatives, allow us to offer many different price points for our consumers. Our innovation in still beverages, combined with more competitive flavors of sparkling, multi-serve packages and our returnable plays in brand Coca-Cola, will help us to provide valuable offerings for our customers under the current environment.

Our Latincentro division recorded a 2.6% decline in sales volume, mainly driven by lower sparkling beverage sales volume in Venezuela, where we faced operating disruptions during December. This decline was partially offset by sales volume growth of more than 3.6% in Colombia and 1% in Central America, mainly due to the successful roll out of the Jugos del Valle line of products in those territories, as well as the positive performance of our sparkling beverage segment in Colombia.

During the quarter, Jugos del Valle's line of beverages in Colombia and Central America continued to grow significantly, helping us to expand our still beverage category in those countries by more than 80%.

Our Latincentro division's total revenues grew more than 34% year over year to MXN7.6 billion. Higher average prices per unit case accounted for more than 40% of incremental revenues, and a positive translation effect represented the balance.

On the profitability front, higher revenues partially compensated for higher cost of goods sold, mainly driven by the devaluation of the local currencies as applied to our dollar-denominated packaging costs and to the higher cost of sweeteners across the division. This produced a gross margin decline of 360 basis points compared with the same period of 2007. However, our gross profit increased more than 23% to MXN3.1 billion in the division.

Our operating income grew 43% to MXN1 billion due to the operating leverage achieved through our higher revenues combined with lower marketing expenses, which more than compensated for higher-level costs in Venezuela. As a result, our operating margin expanded 80 basis points to 13% as compared with the same period of last year. Our EBITDA grew 41% to MXN1.3 billion, and our EBITDA margin expanded 80 basis points.

In 2008, we significantly advanced our strategy to build a more comprehensive, multi-category portfolio in Latincentro. In the second quarter of this year, we launched Coca-Cola Zero in Colombia, introducing a three-tier cola strategy in the market. At the end of the year, we also initiated the roll out of Coca-Cola zero in Costa Rica.

Through our Jugos del Valle joint venture with The Coca-Cola Company, we launched the Jugos del Valle line of products in Colombia, Costa Rica, Panama, and Nicaragua. We believe 2009 will give us the opportunity to continue leveraging our broad product portfolio. Moreover, our joint acquisition with The Coca-Cola Company of the Brisa water brand in Colombia, which we expect to close soon, will further advance our overall beverage strategy.

Now let's talk about our Mercosur division. Our Mercosur division net revenues grew 44.7% to MXN6.6 billion in the fourth quarter. Excluding beer, which accounted for MXN646 million, we increased net revenues 44.1% to MXN6 billion. Remil accounted for more than 70% of this growth. Higher average prices per unit case and volume growth provided the balance.

Our Mercosur division volumes grew more than 24% in the fourth quarter of 2008. Sales volume, excluding Remil and beer, improved 2.2%, mainly driven by sparkling beverage sales volume of brand Coca-Cola, which accounted for close to 50% of incremental volumes. Bottled water in Brazil and still beverages in Argentina provided the balance. The still beverage categories grew by more than 35%, mainly driven by the successful launch of Aquarius in Argentina.

On the profitability front, our Mercosur division's gross profit increased more than 43% to MXN3.1 billion. Higher revenues partially compensated for higher cost of goods sold, mainly driven by the devaluation of local currencies as applied to our US dollar-denominated raw material costs, combined with higher sweetener costs in Brazil. Our gross margin decreased 50 basis points to reach 45.3% in the fourth quarter of 2008. Our operating income grew 50.4% to MXN1.2 billion. Operating leverage achieved by higher revenues more than compensated for higher expenses, resulting from the introduction of coolers and the replacement of our distribution fleet in Brazil in conjunction with higher labor and freight costs in Argentina. Our operating margin reached 18.2% in the fourth quarter of 2008, expanding 60 basis points. Our EBITDA grew close to 48% to MXN1.4 billion, and our EBITDA margin expanded 40 basis points to 20.5%.

In 2008, our Mercosur division advanced significantly on its path of growth from the integration of Remil to important new product launches in the still beverage category, such as Aquarius in Argentina and a revolutionary, lemon-flavored [hydro-tonic] product in Brazil called (inaudible).

We are in the process to start generating important innovations under the Jugos del Valle (inaudible) in Brazil, which should amplify the current base of juice-based offerings under the Sucos Mais brand. We believe this platform will significantly enhance the result of our Mercosur division in 2009, allowing us to replicate the success we have achieved in other territories with these products.

Now let me walk you through our financial performance for the quarter and the full year.

2008 was a difficult year for everyone. We witnessed increased volatility in global markets that affected the balance sheets and cash flow generation of businesses. In this environment, our operations generated important cash flow, which allowed us to finance important acquisitions and meet our business plan. These acquisitions have diversified our sources of cash and, at the same time, prepared our Company to capture additional growth opportunities.

As of December 31, 2008, we had a cash balance of MXN6.2 billion, a decrease of MXN1.3 billion compared with yearend 2007. This decrease was mainly due to the cash we used to finance the acquisitions of Remil in Brazil and our Los Angeles jug water business in Mexico.

Our total debt decreased MXN242 million compared with yearend 2007, mainly driven by the maturities of our certificados bursatiles that were paid in April and July of 2008. As a result of the above-mentioned factors, our net debt increased MXN1 billion during 2008. Our short-term bank debt as of December 31 was MXN6.1 billion, and our long-term debt was MXN12.4 billion.

At the end of January 2009, we successfully issued a 13-month Mexican peso bond in the amount of MXN2 billion at a deal of a 20-day tier plus 80 basis points. This debt issuance underscores our Company's fundamentals, investment-grade credit rating, and ability to access local markets at attractive rates. The proceeds from this issuance, which we have in our cash balances, will give our Company the additional flexibility to pay the approximately $400 million maturity coming due in July of 2009. The majority of our remaining debt matures from 2012 or more. Our debt maturity profile underscores the flexibility we have to manage our cash sources and needs.

As of February 24, 2008, we had in our cash balances the equivalent of $651 million. More than 50% of this balance is already denominated in US dollars. These funds are more than enough to pay our maturities coming due in July of this year.

As of December 31, 2008, our net debt to EBITDA coverage ratio was 0.7 times, and our EBITDA to net interest coverage ratio was close to 10 times, highlighting the strength of our balance sheet. Our Company has one of the highest credit ratings among Latin American companies.

Our liability structure is comprised of a balanced mix of currencies. Approximately 50% of our debt is dollar-denominated, and the remaining 50% is comprised of local currency-denominated debt, mainly Mexican peso. Our total debt balance includes dollar-denominated debt in the amount of MXN712 million. As of December 31, 2008, approximately 30% of our debt had fixed interest rates.

The effect of foreign exchange fluctuation between the Mexican peso and the US dollars 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 up on the foreign exchange loss line. On 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.

As you may already know, on February 6, 2009, Coca-Cola FEMSA and The Coca-Cola Company received approval from the Colombian antitrust authorities to acquire jointly the Brisa bottled water business from Bavaria, a subsidiary of SABMiller. This transaction, which we expect to close very soon, will complement our beverage portfolio and increase our presence in the country's water business. Brisa sold 47 million unit cases in Colombia during 2008.

In several locations and generated by different factors, our operations have experienced difficult economic conditions in Latin America during the last ten years. We have learned to operate under challenging environments based on our talented team of professionals and the strong innovation capabilities, supported by the defensiveness of our industry and the brand equity of our products. 2009 will certainly bring challenges for everyone.

We remain vigilant to adapt our business to changing macroeconomic conditions in our market territories. During the first half of 2009, we will continue to benefit from our acquisitions, along with the stable results of our underlying operations. We will continue working relentlessly and focus to capitalize on our Company's strong fundamentals and extend our path for our stakeholders and investors.

Thank you for your continued trust and support. Now I would like to open the call for any questions that you may have.

(Operator Instructions). Lauren Torres, HSBC.

Hector, I hope-- You mentioned in your prepared remarks about offering better value to consumers, particularly in Mexico, this year. And I was hoping you could talk a little bit more about that with respect to pricing objectives. From a package standpoint, thinking about mix, opportunities for pricing, how do you get through an environment that's just going to get tougher as the year goes on?

What we have experienced in Mexico-- It's pretty similar to what we have commented on during the third quarter. We have, as you know, increased the price points of some of our cola brand products during the fourth quarter. Most of our competitors followed these increases. As we have mentioned in the past, Jarritos with the flavored products and also with (inaudible) stayed with the same price point of, basically, around MXN10 for a 2-liter presentation. But both Pepsi-Cola and Big Cola and some of the other competitors also increased their prices; basically, giving the effect that everyone has received in terms of dollar-denominated materials that have increased significantly because of the devaluation of the Mexican peso.

I think that one of the advantages that we have coming into 2009 is that we basically have from MXN4, which is what we call the mini-can, or the small-sized can - the 8-ounce can - all the way to MXN20 for a 3-liter presentation. We have basically a price point for every product within all that range with Coca-Cola products.

So, basically, the efforts that we are doing with our people here in terms-- with respect to pricing has to do with monitoring what our competitors are doing and putting the right package at the right geographic location, depending on the competition that we have in those places. And, certainly, returnable presentations will play-- We believe that returnable presentations will play a very key role during 2009, given the affordability that these presentations give to the consumer.

On the flavor side, we have seen strange movements. We have seen up-scaling of our products, basically moving from 2 liters to 2.5 liters and from 2.5 liters to 3 liters, without moving the prices; therefore, substantially reducing our price per ounce on flavored sparkling drinks. And, even though we have been doing that, the volumes of the sparkling beverages, as I mentioned during remarks, have come down mid-single digits in Mexico. But, strangely enough, we continue to gain a little bit of share on that segment.

What is happening is that now the consumer has a lot of different offerings, especially in non-carbonated products, that are similar in flavor without the gas, like the Valle Fruit orangeade that we are launching. And, obviously, our competitors are moving in that direction also. So, in a way, I think that the environment for next year continues-- I believe continues to be-- The environment with respect to pricing continues to be similar to what we have discussed during the last quarter. It's a tough environment. Raw material pressures we believe will help us to increase some of the price points in the future. And the (inaudible) what Jarritos or (inaudible) are going to do. As you know, and as we have mentioned in different conferences, they have stayed with this MXN10 price point for the last four or five years.

In the fourth quarter you said you took prices. On what percent of your volume in Mexico did you take those prices? I guess it's too early to tell this year, but thoughts about maybe rethinking or taking more of those types of increases later this year-- Is that kind of in the book and scheduled to happen?

Yes. If you split the soft drinks for volume, we basically increased prices, if you look at colas, around 8% in volumes. When you look at the flavored sparkling category within our territories, we have a reduction between 3% and 4% because of the up-scaling that we did in the fourth quarter.

Okay. All right. Thank you.

Robert Ford, Banc of America/Merrill Lynch.

Hector, I was particularly impressed with the SG&A reduction in Mexico. It looks like it's down about 362 basis points year on year. You compare against the-- I think you took down the coolers, if I'm not mistaken, last year in terms of-- You extended the useful lives and reduced the depreciation. So the basis of comparison is tough when you look at component of your overall SG&A as well. Can you expand this to what's happening? Is this just savings? Is this Coke showing you a little bit of love? Is this the combination of a series of initiatives to drive further efficiencies or a combination of those items?

Certainly, when you start seeing the environment deteriorating around you, you start trying to extract, as much as possible, costs out of the system in every aspect of the system, not only in costs but also in capital expenditures, because you need to be sure that what you're investing for-- that you continue to have the growth that you were anticipating. So we have become very cautious on how we spend our dollars and as a way of preserving cash flows.

With respect to the SG&A, it's a combination of different things. But we have gone into restructuring some of our organization, reducing somehow and cutting back on some of the workforce and reorganizing with different-- (inaudible) number of top management people in some of the areas.

But the most important element here, Bob, is the adjustment that we have done to the marketing expense. You have heard me in the past speak about Mexico spending close to 4.5% or sometimes all the way to 5% of revenues in the marketing line. And we were basically also anticipating somewhere similar, around the 4% or 4.5% for the full year. We ended up 2008 with a 3.6%, basically, marketing to sales ratio, which was mainly reflected in the fourth quarter.

What I'm trying to say is we anticipated a larger market than expected when we started the year. Once we closed the year, and given all the efforts to cut back on some of the marketing expenses, we adjusted the fourth quarter to the level that brings the full year more or less, as I mentioned, to a 3.6% or 3.7% of marketing to sales revenues.

I'm sure that the next question is - How repeatable is that going forward? I think that the name of the game and what we have disclosed with The Coca-Cola Company very openly as partners here is that we need to preserve flexibility for this year. We need to be very flexible and strong with our cash flows and avoid committing for long-term period-- like for one-year media, et cetera, without the flexibility of maybe adjusting that to a higher number if we feel appropriate or to a lower number if things are not working out.

So, obviously, the conversation with The Coca-Cola Company-- We both are in agreement that flexibility is important, and it's difficult to judge what is a good number for 2009. I would say that it's certainly below the 4.5% or 5% that we were spending in previous years but probably larger than the 3.6%. It's a possibility. We see opportunities because our competitors are not investing in the marketplace, and we see opportunities to capture value there. We'll probably go for that if we see returns on those investments there.

And, Hector, just to make sure I understood this properly, the first nine months, you're reserving at about a 4.5% to 5% rate in terms of your marketing spend. The full year comes in lower, so then you recognize the savings in Mexico and, it seems like, to a similar extent, in Latincentro as well and maybe to a lesser extent in the Mercosur division. That's what's accounting for the bulk of the improvement in the cost structure, firm-wide.

Yes. We were-- That's correct. We were basically anticipating, especially in the first and second quarter, a higher amount of marketing expenses. As we see the environment moving, we obviously start to slowly reduce some of the marketing expenses and activity, not necessarily in media but in what we spend in the marketplace in terms of promotional activities, the cooler placement, et cetera. And, to a certain extent, third quarter was a little bit lower, and then we obviously knew to adjust with our auditors the fourth quarter to the amount that was actually spent during the full year. That is basically Mexico and Latincentro. Mercosur was to a lesser extent, as you correctly pointed out.

Great. And then, Hector, I guess you mentioned that, despite the weakness in flavors and the up-scaling, you believe you're taking market share. So this suggests that the brand equity investments that you're making may not be inappropriate, even if they're reduced. You still feel comfortable with the brand equity in the business; it's just a macroeconomic issue, where perhaps the consumer is trading through-- downwards through these other opening price points that you have on your radar screen. Is that fair?

That's fair. I think that that is a little bit the macroeconomic activity, and I think it's also all the push or the success that you have seen in the marketplace with products like Valle Fruit orangeade, which, in a way, is cannibalizing some of these flavors. And, as you know, our competitors have similar products also.

Lastly, Hector, if I might, with the FX rate right now at MXN14.90, if it sticks here, what kind of a price increase are you going to need this year to maintain your gross margins in Mexico?

Let me look at that (inaudible). I don't have the number with me. We certainly need to increase a little bit more the prices to maintain margins. As we mentioned, resin prices are coming down, between 8% to 10% versus the previous quarter in dollar terms. But I don't have the number on the top of my head.

Thank you very much. It's a complex business. I appreciate it.

Lore Serra, Morgan Stanley.

Just one clarification, first, from the comments up front. Did you say that on February 24 of this year you had the equivalent of $651 million in your cash account?

Yes, Lore, we have the equivalent of that in cash balances, and a little bit more than half of that is dollar-denominated. As you know, in July of this year we have to repay close to $270 million - the remaining guarantee bond that we have from the Pananco acquisition was a guaranteed bond that Pananco issued. So, right now, we have dollars in our cash balances to pay that guarantee bond. We have some other maturities that are local currencies that are mainly in pesos that we don't have any problem of comparing currencies.

So the message that I want to send right now is that, as of the end of February, we have the dollar amounts to repay the guarantee bonds, which are the only dollar-denominated indemnity that we have during this year. We don't have here to finance to complete-- refinance part of this payment; neither we'd need to buy more dollars to be able to repay that loan.

Okay. Thank you. In terms of just raw materials, can you review for us what your views are right now in terms of PET and sweetener costs in '09 versus '08? I know it varies by market, but if you could just give us your perspective in general.

And then if you could also comment on, in Mexico, your flexibility to move your mix back to sugar, given the FX effect on the high fructose, please.

Lore, what we have been seeing is-- As you said, in each country, it varies. Let me start with the big countries. In terms of resin prices, we think that we will see a continuation of the prices that we have during this fourth quarter 2008 and first quarter 2009, which are substantially lower than what we have-- Allow me to do a quick computation. We are basically saying close to 20% or 25% below, in dollar terms. Obviously, we have the impact of-- That's a dollar-denominated product, and we need to adjust to each country FX movement appropriately.

With respect to sweeteners, we continue to see some downward pressure on prices on sugar. High fructose is adjusting the prices in dollar terms, but the effect of FX is not compensating. The price reduction is not compensated in the effect of foreign exchange.

And, basically, with respect to the second part of your question, in Mexico, last year we were using close to a 50/50 mix of sweetener-- sugar versus high fructose. Our plans call for closer to 70% sugar and 30% high fructose during this year. And, if we continue to see this price differential between sugar and high fructose in Mexican pesos, we will continue to move the mix towards more sugar. Right now what we can anticipate during this year with respect to the flexibility that you were asking is that we can move the mix from 50/50 to basically 70/30 during 2009.

In other countries, like Brazil, it's very close to the international prices that we have. And, basically, we are around $0.11 or $0.12 per pound, and that's basically what the cost that we have in sugar. And then some of the other markets, like Colombia and Venezuela, usually other variables play an important role because then there's a scarcity of sweeteners and you see higher prices as we experienced in 2008 in Colombia and Venezuela.

Thank you.

Carlos Laboy, Credit Suisse.

Hector, I was hoping you could expand on the 50/50 JV for non-carbs. Maybe you can update as to what elements that you think are working, now that you've been in it for a while, and which elements might need improvement. But, more specifically, also on the outlook for '09 for non-carbs, could you expand on what you're looking at in both Mexico and Brazil and the plan for whether it's innovation, packaging, footprint expansion, et cetera?

The 50/50 joint venture is-- We have-- Basically, we have been working with that, basically, for a year. We had a lot of learning during the process, Carlos, as you might imagine. I think that we have different models in different countries, because, for example, in Brazil and Mexico, we are sharing with other bottlers. In Colombia and Venezuela and some of the Central American countries, we are alone in the country, so it's easier to have a different model. We have different models according to tax regulations in each of the countries. That also brings some complications or some potential efficiencies that translate into complications at the time of building the agreements with The Coca-Cola Company. But we are basically-- Now I can say that we are basically 100% on board with all the details being clear with The Coca-Cola Company.

The very difficult part was getting to an agreement on what-- How do you allocate the fixed costs that you have in the soft drink operation? How do you allocate costs, for example, for distribution - to sharing the truck, the coolers, administration, and all of that? And we have cleared most of that discussion with The Coca-Cola Company. Obviously, from their point of view, they would love to see this as a marginal activity where you don't have any other regional costs. But, from our point of view, we are using assets that are owned by Coca-Cola FEMSA to distribute and to manage and to produce sometimes in our plants products that belong to a joint venture which is 50/50 with The Coca-Cola Company. And we need to have the appropriate allocation of those costs.

So after all 2008 that was basically dedicated with a lot of detail to clear those understandings, I think that we are basically there, and both companies are now focused on how do we increase the volume and the revenue from this category. I think that we have plenty of opportunities. We are seeing double-digit growth quarter behind quarter - a lot of innovation. This product that I was commenting that is somehow cannibalizing our flavored sparkling category was basically an idea that was developed together with The Coca-Cola Company and Coca-Cola FEMSA for Mexico - this orangeade. And during the fourth quarter of 2008, we sold more than 5 million unit cases of that product, for a product that was not existent the quarter before. So I think that we have opportunities through innovation and launching new products and new packages to capture additional growth in this area.

This is very clear that, with the acquisition of Jugos del Valle, Mexico and Brazil were pretty much covered. Where we have space still to grow, and this is what we have been doing now in Colombia and some of the Central American countries, is to start launching Jugos del Valle's umbrella brand to grow on this opportunity. So I'm very hopeful that all the non-carbs in this 50/50 joint venture will work in our favor in the coming years to pass.

And so you think you're going to be able to sustain strong double-digit volume growth rates over the next couple years?

On that category, yes, Carlos. And I think that-- One other important element that I think is important to clarify, especially for Mexico. In Mexico, as we have said, we are not reflecting any profitability from the Jugos del Valle line of business during this year. And that's also a reason why our gross margin is coming down. And I think it's important to clarify that. When you have, because of tax considerations and because of the investment that is needed in Jugos del Valle, it needs to leave profits in the joint venture-- that is this manufacturing joint venture that we have in Mexico. Then you end up with a gross margin that is well below what we have in soft drinks in Mexico. So we expect now, starting in 2009, that most of the profitability will stay with each of the bottlers. And the Jugos del Valle manufacturing joint venture will have basically a minimum margin more as a total manufacturing kind of business for 2009. And we expect that this trend also reverses and also shows a little bit more positive results for this year.

This year, basically, what we have is through the equity method in other income before the operating line, we have a participation in the net income that Jugos del Valle reported for 2008. So we basically reported, if I remember correctly, around MXN80 million in other income which is, basically, 20% of the net income that Jugos del Valle reported.

Next year, I hope that this line is closer to zero and that, in our operating line in sales and revenues and operating income, we will reflect a more reasonable margin for the Jugos del Valle operation.

Thank you.

Alan Alanis, JPMorgan.

A quick question. To the extent that you can tell us, how fast are you seeing a shift from nonreturnable to returnable presentations across your territories and from the modern channel to the traditional channel? And, more importantly, Hector, how should we think about the changes in profitability, given that shift, and changes in working capital, given that, during the last few years, your working capital indicators have been pretty much stable?

I think that, if you look at fourth quarter versus third quarter, we haven't seen a significant shift in returnable versus nonreturnables in the markets. Well, we have probably a little bit more in Brazil. And Mexico is, as you know, a bit more stable. Because of the experiences that we have had in the past, we believe that this trend will accelerate in the future. Suffice to remind everyone that, when we have Argentina during the 2000/2001/2002 crisis, returnables were basically nonexistent. And it came out to 25% or 30%.

By the same token, what we expect, and we haven't seen yet in markets like Mexico and Brazil-- In moment of economic situation, you see a trend where the consumer starts going more and more to the corner store to buy the daily needs as opposed to doing a big pantry load every week or every two weeks on the supermarket. So we haven't noticed that yet. But, also, speaking about experiences that we have in Mexico in the past and Argentina during this last crisis, we see a big shift from supermarkets to mom and pops as consumers try to spend less on a daily basis as opposed to a big ticket at the end of the week. We haven't seen those trends yet, Alan, I need to clarify. But that's what we'd expect during the next-- I don't know-- 18 months or 24 months.

Working capital? I think that if we see a trend, more as we are expecting towards the smaller mom and pops, our working capital, which is not a problem for us-- It's basically positive as we collect most of our revenues in cash. But (inaudible) a bit because, basically, credit is given to the large supermarkets and convenience stores.

With respect to margins, we have been working on part of the reorganizations that I mentioned that are taking place. It's to try to improve our capabilities in each of these markets and dividing the really small mom and pops that need a very differentiated service because maybe sometimes they don't have a cooler or they cannot afford a cooler because of the electricity bills. And how do you serve those markets? And how to differentiate that from a very customized client that is more like a large convenience chain or a supermarket, where you have a lot of electronic transfer of information, et cetera. So we are learning because we believe that, long term-- Even though the short-term trend will be probably towards more mom and pop, long term, we expect that the key accounts, or the large supermarkets, will continue to grow in importance. And it's important that we have better or similar profitability that what we have with the mom and pops.

And I think that we're getting very close to that with specialized distribution trucks doing very large truck sizes, telemarketing, a lot of electronic transfer of data. And a lot of layers of opportunity that are more complex as you increase the of number of SKUs. For example, one of the things that we are learning with Jugos del Valle is that, when someone takes three or four packages of different flavors, sometimes in the supermarket, the cashier will ring one and then put six of the same. And they are not the same, because they are different flavors. So you have a lot of learning and adapting that we need to do together with the key accounts so that we have the appropriate inventory replacement and the appropriate shelf presentation. So there are a lot of learnings in that area that we believe will be more two years from now that we need to be ready as supermarkets continue to grow.

But is it fair to say then that in the short term, if the trend towards returnables and mom and pop accelerate, that would be a general positive for your margins?

Yes, it would be positive for our margins. And I think that, more importantly, it will give us a competitive edge because our competitors are not there with a returnable presentation.

Thank you.

Celso Sanchez, Citi.

I've got a couple of questions. One is a follow-up to something that was asked earlier. With respect to Jugos del Valle, can you talk a little bit about, more specifically, the market opportunities and the competitive dynamics in Latincentro? You talked a little bit about how you've rolled out and that's starting to help incremental volume growth. But can you talk to us about the structure of the market, who you're up against, what sort of medium-term goals might be realistic in terms of market share and size of market, and things like that, please?

In Latincentro, I think that one of the main opportunities that we have is, obviously, Colombia and Venezuela because of their sizes. We have strong competitors in Central America, especially with the brewers and the soft drink producers there that are also involved with juices in those areas. But those are markets that are not insignificant but are much more smaller compared to Colombia and Venezuela. Obviously, we're competing against the same usual suspects - Postobon and the Mendoza family in Venezuela. And I don't have right now an estimate of market share objectives and things like that. But, as we continue to improve, maybe we can start sharing some more of that information. I mean, we are just starting in those territories and growing very fast but from a non-existing participation at all.

Okay. Thanks. Maybe I can follow up offline with some of the bigger-picture market values and so forth.

And then, also, with respect to the systemic approach in Mexico now, the Coke system, that is, we heard Coke last week at CAGNY talk about not wasting this crisis. They're referring, obviously, to the global situation but specifically to Mexico. You talked about some of the initiatives in terms of shifting in returnables and things like that that you've done in the past. But can you talk about other initiatives? You've got the system level, ideally, or even at the Coke FEMSA-specific level that we might not be thinking of as obviously that are different from how you entered crises in the past, whether it was Mexico in '95 or Argentina in 2001. Anything that you might be doing differently as a system now that you think puts you in a better situation than you have been in the past? I guess one of the things that comes to mind is that you've discussed a little bit some of the work you've done with specific mom and pop channel types in terms of helping them fit their store and drive traffic and so forth. If you could elaborate on that, please, that would be great.

I think that different than the last different crises that we had - for example, in Argentina and Mexico and what Pananco was facing in Brazil a long time ago-- I think that, at that moment, we were fighting a little bit to (inaudible) with The Coca-Cola Company's strategy to compete with low price for consumers. And all these concepts of value-protection brands and flankers and all of that-- We spent a lot of time discussing those issues with The Coca-Cola Company. So I think that having the returnable presentations in place, having some fighter brands, like (inaudible)-- these are waters in the marketplace-- it's one area that I think that we will be much flexible and fast to react than in the past.

(Inaudible). It's important to bring to your attention both The Coca-Cola Company and Coca-Cola FEMSA are placing big bets on innovation. And, for that, Jugos del Valle and the whole non-carbonated products is an opportunity in that area that we need to cut.

A third element is that, as I mentioned, we spent less in our marketing expenses during the fourth quarter of the year - ultimately, the full year - when compared to 2007. But we should not mistake this. That doesn't mean that we will not continue to build behind the brands. I think that (inaudible) advertisement media will continue to singular levels. What we need to adjust is a bigger portion of the marketing expenses, which is of the marketing that is spent in the marketplace with promos, with samplings, with cooler placement and go-- Given the cooler placement that we have and the macroeconomic situation, we need to [evaluate] really how much profitable it is to invest in an extra cooler in the marketplace.

So we agree with The Coca-Cola Company that we need to take opportunity during this crisis. And, because of that, we will continue to invest behind the brands. But, as to total marketing expenses, what we need to maintain is flexibility. So, on these two elements, I think is important here is that the agreements on all the discussions that we have had in the past with respect to returnables, (inaudible). I think that we are more rapid to respond with that. Innovation and everything that has to do with Jugos del Valle as an extension of the category and in the community that we have agreed to cover marketing expenses, knowing that we need to invest behind the brands (technical difficulty).

Okay. Thank you.

Alex Robarts, Santander.

Thanks, everybody. I wanted to go back to Mexico, please. On the OpEx and marketing expense issues, I definitely appreciate you guys flagging that marketing expense issue to us a few months ago. I wanted to make a clarification. So, in the end, can we assume that, as we get into, let's just say, first quarter, that marketing spend will go back or be higher as an absolute expense than it was in the fourth quarter? And, as you think about kind of adjusting that 4.5% level of marketing spend vis-a-vis your sales in Mexico, is the negotiation or kind of the thinking so much to change the absolute level or to perhaps change the mix on who contributes in terms of you versus the Coke system? It seems to me as we-- the trading down risk in Mexico is higher right now because of the economy. You've had Big Cola come out with new products, like Big Agua recently. There's a lot of innovation among the BP brands. That marketing spend is kind of key. So, if you could give us your thinking on that, that would be great.

And the second question is just going back also to the Jugos del Valle question. The double-digit growth is clear, but there's a change here, which is that, I guess, a couple of conference calls ago, you mentioned that KOF would be able to recognize EBITDA from this around May '09. And, now, you're saying that you're going to recognize EBITDA in 2010. But is that changed because you're seeing that there's more plow-back necessary with the infrastructure buildup to [hot field lines] and such? Is expansion happening longer, or is it a market dynamic that has made you postpone your expectation for getting and booking that EBITDA for Jugos del Valle?

Okay. Let me start with the first question. On marketing, it's certainly a negotiation we go through, through our project process with The Coca-Cola Company, where we review media expenses as well as all what we call the operating marketing expenses? And in those conversations that we had for the end of last year, both companies agreed that it's important to maintain this flexibility.

First quarter of 2009 marketing expense costs will be higher than what we had in the fourth quarter because fourth quarter was kind of, as I mentioned, an adjustment for the full year. But it's important to mention as a general trend that, as a percentage of revenues, normally, we have been at 4.5% or 5%. Last year was more-- slightly below the 4% - around 3.6% to 3.7%. My expectation is in 2009, somewhere around 4% will be a good number. So it's lower than what we had in the previous year but probably higher than what we had in 2008.

But, again, it's important that we understand that we have embedded in our budget, for the first time, flexibility that we never needed before in these negotiation processes with The Coca-Cola Company. So, if things start getting very tough, then we might end up around 3.6% of (inaudible) to revenues or even lower. Again, maintaining (inaudible) what you say is important, although Big Agua is not relevant for this sector of the market so far. There are competitors and there are B brands. And (inaudible) is an important player and Big Cola and (inaudible). We need to continue investing in the brands.

With respect to the second question, Alex, maybe I mis-expressed myself. When I was referring to this year, I was referring to 2008. In 2008, we didn't reflect any profit or margins from Jugos del Valle into the numbers. We are expecting that, starting 2009, we will start to reflect EBITDA. So we continue with the idea that during 2009 EBITDA from Jugos del Valle will be reflected in Coca-Cola FEMSA.

Okay. Great. Thank you very much.

(Inaudible) 2010 and 2009. Sorry for the confusion.

All right. Thank you.

Jose Yordan, Deutsche Bank.

Just a clarification of your earlier comment in your prepared remarks about how much volumes were down so far in the year. I just didn't catch what categories, or was it total, and what countries?

And, then, my second question is related. Obviously, we're talking about flexibility about lowering marketing expenses because perhaps you need to preserve margins and so forth. But nobody has talked about it; how much of a volume decline are you willing to take for the year in the name of preserving margins? I guess I would be interested in how you guys are thinking about that, because, with sharply higher prices in colas and lower marketing expenses, I would look into at least a sort of 5% or 6% decline in volume, similar to what the Coke system is seeing in the US. Is that the sort of base case that you guys are working with?

We certainly are not expecting 6% declines in volumes, although it's (inaudible) to understand what the macroeconomic situation would bring to each of regional markets. It's important also to mention that what I'm saying about flexibility-- I'm not necessarily speaking that we will reduce marketing expenses. As a matter of fact, I mentioned that, as a percentage of revenues, we would probably be higher than 2008. And what we need to preserve is this flexibility that, if things deteriorate more and we see our competitors not investing behind the brands or our marketing dollar is not bringing revenues-- top line growth as we expect, we might be adjusting those numbers during 2009. And I think that important the concept that I'm introducing here is that, in these negotiation processes with The Coca-Cola Company of the budget for the year, this is the first time that I see flexibility embedded and both parties agree on this flexibility in these quarters. I think it's an important element that is new.

Now, in Coca-Cola brand, where we have a substantial leadership in terms of brand preference and with indicators that continue to lead us to thinking that we continue to improve those indicators of brand preference and all the indicators that the marketing guys bring, we will continue invest. It's an important brand, and certainly we'll not abandon brand Coca-Cola. Probably it's important for us to understand that (inaudible) marketing expenses-- a very important part has to do with cooler placement, and a lot of the marketing activity that we've had in the past marketplace. You have models that are supermarket sampling approach or the housewives-- or people will come and sample products and things like that that we need to be adjusting just to have the appropriate level of margins on returns that we feel are appropriate.

So that I think that it's important, Jose, that we keep those elements in line. We might reduce a little bit these marketing expenses behind some of the flavored brands but continue to investing behind brand Coca-Cola. And all the (inaudible) are already shared with The Coca-Cola Company, so they are in charge of all the (inaudible) advertising of (inaudible). First of all, I'm not saying that we'll reduce marketing expenses. I think that we will spend more than 2008. It's important to capture the opportunity that this crisis will bring. And the element of flexibility that I mentioned (inaudible) important element here.

With respect to the volumes trend that I think was referring to your first question, when you look at these tables that we have on the last page of-- the previous-to-last page of our press release, you will have every detail - volume numbers for sparkling water and bulk water.

General trends, I would say, CSDs were flat or slightly negative in most of the territories. When you exclude acquisitions, especially Remil. Jugos del Valle brings a lot of growth to the non-carbonated products (inaudible) beverage. And in water we have the positive effect of Agua de Los Angeles that, even without that, you show some growth. Those are the general trends with respect to volume.

What will happen in 2009? I think that, as I mentioned, it's kind of a crystal ball to understand how volumes will react to these macroeconomic situations, and that all has to do with the pricing formula that we have with our-- for our products. But I think that, with our portfolio, especially with brand Coca-Cola, where we have every price point from MXN4 to MXN20 covered, it's us having the intelligence from the marketplace to see where we place each product in each specific customer or geographic location, according to the competitive intensity and needs of each of the marketplaces.

Okay. But, just to clarify, you had not commented on what volumes were down so far in the first quarter.

No. No.

I just misunderstood from earlier.

Sorry. If you want some light on that, January was a good month. We had positive results. February, we are struggling a little bit more. But it's flattish numbers during these first two months.

This is throughout the Company?

Yes.

Okay. All right. Thanks a lot.

And this concludes your question and answer session. I would now like to turn the presentation back to Mr. Hector Trevino, CFO, for closing remarks.

Thank you so much for your interest in our Company. And always, the entire team are available to answer any other questions that you might have. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Have a great day.