Coca-Cola Femsa SAB de CV (KOF) 2009 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Coca-Cola FEMSA's Second Quarter 2009 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 can materially impact the Company's actual performance.

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

Good morning, everyone, and thank you for joining us today. Our Company's diversified portfolio of products, the strength of our core brands, along with our execution across Latin America effectively brought our continued growth under one of the toughest economic environments in recent history.

During the second quarter, our consolidated revenues reached more than MXN24 billion, off over 30% from the second quarter of 2008. Organic growth, driven by increased volume and pricing, accounted for more than 50% of our incremental revenues. The consolidation of REMIL in Brazil, Brisa in Colombia, and Agua de Los Angeles in Mexico represented less than 20% of our incremental revenues. And the effect of a positive exchange rate translation contributed less than 30% of our incremental revenue. Excluding acquisitions and the positive effect of the exchange rate translation, our Company is achieving more than 16% revenue growth in [our extraordinary] environment.

Our consolidated sales volume rose close to 10% year over year. Excluding REMIL, Brisa, and Agua de Los Angeles, our consolidated sales volume increased close to 6% during the quarter. This increase was mainly driven by the growth of the sparkling beverages in all of our divisions and our still beverage portfolio in Mexico and Latincentro.

Our gross profit increased close to 28% in the second quarter 2009. Higher revenues partially compensated for our higher cost of goods sold, which resulted from higher year-over-year sweetener costs across our operations, the effect of the devaluation of local currencies as applied to our US dollar-denominated raw material costs, and the integration of REMIL.

The lower cost of resin partially compensated for all these factors. Our gross margin declined 90 basis points during the second quarter of 2009.

Consolidated operating income improved 16% to MXN3.7 million in the second quarter. Revenue growth compensated for higher-level costs, mainly in Venezuela and Argentina. The effect of a positive currency translation provided approximately 30% of our incremental operating income. Our consolidated operating margin declined 190 basis points year over year to 15.2% for the quarter.

Our consolidated EBITDA rose more than 16% to reach MXN4.5 billion.

During the second quarter, our majority net income increased more than 70% to MXN2.2 billion. This increase was mainly due to our higher operating income and our lower net interest expense in the second quarter of 2009.

Now let me expand on our operations.

Our Mexico division delivered almost 7% volume growth in the second quarter of 2009, recording the highest volume growth in our Mexico division in more than three years.

Our sales volume of our sparkling beverages grew close to 3%, mainly driven by brand Coca-Cola in multi-serve presentations. The Coca-Cola category increased volumes by close to 5%, which more than compensated for the slight decline in our flavored sparkling beverages category.

In the still beverage category, the Jugos del Valle beverage portfolio continued to provide important incremental growth, reaching almost 40 million unit cases of these products for the quarter, almost three times the volume we saw in the second quarter of last year.

Our incursion into different beverage categories, such as the Valle Frut product line, has provided an important growth driver. Twelve months after we started to participate in this line of business, we were able to gain leadership in the orangeade category in Mexico. An important part of our organic growth has been driven by innovation in the still beverage category.

Still beverages, excluding water, have gained importance in our portfolio over this last year, representing now more than 5% of our total beverage portfolio in Mexico. Still beverages, including water, in personal presentations represent almost 11%.

Our water business grew close to 7% during the quarter. A slight decline in single-serve water was compensated by a 10% growth in our jug water segment, driven by the acquisition of Agua de Los Angeles and the expansion of the jug water business in the Valley of Mexico.

Our average price per unit case increased 0.7% during the quarter. This increase was mainly driven by the average price increases implemented last year in our Coca-Cola portfolio, combined with higher average price per unit case from the Jugos de Valle line of beverages. These increases were partially offset by higher volumes of our sparkling beverage multi-serve portfolio, jug water, and Valle Frut orangeade products, which carry a lower average price per unit case.

Our Mexican operations total revenues increased 7.8%. Incremental volumes accounted for the majority of our total incremental revenues.

On the profitability front, our higher cost of goods sold was mainly driven by third and final stage of the yearly increase in concentrate prices that we (inaudible) with our partner, the Coca-Cola Company, in 2006; increased year-over-year sweetener costs; and the devaluation of the Mexican peso as applied to our dollar-denominated raw material cost. Lower year-over-year resin price partially compensated for these increases. Our gross profit reached MXN4.9 billion, growing 5% as compared to second quarter of last year. Our gross margin in Mexico decreased 140 basis points.

Operating income grew more than 2%, reaching MXN1.9 billion. Our operating margin declined 100 basis points to 19.5%, mainly due to gross margin pressures.

Our EBITDA grew close to 1% compared with the second quarter of last year, reaching MXN2.3 billion.

Our Mexican business continues to produce positive results. This quarter we reached an all-time sales volume in Mexico, despite one of the most adverse economic environments in more than 15 years and the effects of the swine flu outbreak that took place at the end of April in Mexico City. Brand Coca-Cola and our (inaudible) growth allow us to continue outperforming economic trends in Mexico.

To reinforce our growth in the sparkling beverage category, we will rely on several new strategies in the marketplace. We will continue driving the availability of refundable packages, especially single-serve presentations through the duration of current market challenge to improve our prices, offering alternatives for personal consumption in this category and foster single-serve transactions.

We will leverage the strong equity of our core brands, our wide array of product offerings at different price points, and enhance execution at the point of sale to fuel our growth as we enter the second half of the year.

In July, our Mexican operations volumes are off to a very good start for the third quarter. Sparkling beverages continue growing, driven by brand Coca-Cola and the re-launch of Coca-Cola Zero. Innovation in our still beverage category continues to post double-digit growth, and good weather conditions in our Mexican territories are helping a lot, allowing us to generate double-digit volume growth for the month so far.

Our Latincentro division posts double-digit volume growth. This increase was driven by the sparkling beverages in Venezuela, the integration of Brisa in Colombia as of June 1, and still beverages in Colombia and Central America.

In Venezuela, we have a low year-over-year comparison due to the operating disruption that we faced in the second quarter of 2008.

In Colombia, the still beverage category continued to grow, reaching more than 4 million unit cases, driven by the Jugos de Valle line of beverages. Despite price increases implemented in May, sparkling beverages in Colombia remain almost flat for the quarter.

In Central America, we recorded sales volume growth of more than 2%, mainly driven by still beverages. Sparkling beverages remain flat as compared to the second quarter of last year.

Our Latincentro division total revenues grew more than 60% year over year, reaching MXN8.7 billion. Our higher average price per unit case and volume growth accounted for more than 55% of our incremental revenues. And the positive currency translation represented the balance.

On the profitability front, our Latincentro division's gross profit increased more than 68% to MXN4.1 billion. Higher revenues, combined with lower cost of resin, compensated for the higher cost of sweeteners across the division and the devaluation of the Colombian peso as applied our dollar-denominated packaging costs. Our gross margin reached 47.2%, an expansion of 120 basis points compared with the second quarter of 2008.

Our operating income grew close to 40%, reaching MXN1 billion. Higher labor costs in Venezuela and maintenance expenses in Colombia offset the operating leverage that we achieved through our higher revenues. The effect of a positive currency translation accounted for approximately 50% of our incremental operating income. Excluding this currency translation effect, our operating income grew close to 20%. Our operating margin declined 210 basis points to 12% as compared to the second quarter of 2008.

Our EBITDA grew more than 40% to MXN1.3 billion.

In our Latincentro division, we continued to expand our product portfolio during the quarter. As of June 1, we started to distribute the Brisa brand water portfolio, adding close to 3 million unit cases to our existing portfolio of water products in Colombia in one month.

Also, at the beginning of May, we started to produce the Jugos de Valle line of beverages in our Bogota plant. This new production line will give us the opportunity to increase our progress (inaudible), develop new juice beverage alternatives for our consumers, and complement our still product offers in Colombia.

Now let's talk about our Mercosur division. Our Mercosur division's net revenues grew close to 37%, reaching MXN5.7 billion in the second quarter of 2009. Excluding beer, which accounted for MXN614 million, we increased our net revenues by close to 35%, reaching MXN5 billion. REMIL accounted for approximately 65% of this growth. Organic growth, driven by higher average price per unit case and higher volumes, represented close to 30%. And the effect of a positive currency translation provided the balance.

Volume growth in our Mercosur division was off more than 18% in the second quarter of 2009. Our sales volume, excluding REMIL and beer, increased 3.4%, driven by low single-digit volume growth in Brazil and a mid single-digit volume growth in Argentina. In Brazil, our sparkling beverage volumes post low single-digit growth, despite unusually cold weather in (inaudible) and price increases implemented at the beginning of the year.

Growth in the still beverage category was mainly driven by the integration of the Jugos de Valle line of products, which helped us to grow our volumes approximately 50% in this category year over year from a low basis.

We have decided to integrate the Sucos Mais juice brand into the Jugos de Valle line of business in Brazil. We expect the combined strength of these two brands will provide the innovation platform to develop new beverage alternatives for our consumers.

In Argentina, our sales volumes increased more than 5%. Sparkling beverages, mainly driven by brand Coca-Cola, grew low single digits, providing approximately 50% of our incremental volumes. The still beverage category, driven by the successful performance of Aquarius, our flavored water brand, represented the balance.

On the profitability front, our Mercosur division's gross profit increased close to 32%, reaching MXN2.4 billion. Our cost of goods sold increased as a result of the integration of REMIL in Brazil, the higher cost of sweeteners, and the significant devaluation of local currencies as applied to our US dollar-denominated raw material costs. The lower cost of resin partially compensated for all these factors. Our gross margin decreased 170 basis points to 42.4% in the second quarter of 2009.

Our operating income increased 31%, reaching MXN739 million. Our operating leverage, driven by higher revenues, more than compensated for higher labor and freight costs in Argentina. The effect of a positive currency translation accounted for less than 2% of our incremental operating income. Our operating margin declined 60 basis points year over year to 12.8% during the second quarter.

Our EBITDA grew more than 32% to MXN923 million.

As we enter the second half of the year, we will further develop our (inaudible) both the multi-serve and single-serve presentations to offer our consumers value-add alternatives for their consumption. To reinforce our presence in the core channel, we will increase our cooler coverage in the marketplace to improve single-serve transactions.

Now let's talk about our financial performance for the quarter.

For the first six months of the year, it has proven to be very difficult to everyone. However, our Company has been able to successfully adapt to current global economic conditions, reaching cash flow generations above our expectations. As of June 30, 2009, we had a cash balance of MXN11.4 billion, an increase of more than MXN5 billion compared with yearend 2008. This increase, net of $46 million that we paid to finance our share of the Brisa water business acquisition and the dividends of MXN1.3 billion that we paid in April, came from cash generated in the last six months and the proceeds of our January 2009 bond issuance in the amount of MXN2 billion.

Our gross debt increased MXN2.2 billion compared with yearend 2008, mainly driven by the previously mentioned bond offering. As a result of these factors, our net debt decreased by close to MXN3 billion during the first half of the year. As of June 30, 2009, our short-term bank debt was MXN10.1 billion, and our long-term debt was MXN10.7 billion.

As we mentioned on our last conference call, we had maturities coming due in the beginning of July. Of this, we already paid down a dollar-denominated Yankee bond in the amount of $265 million and a Mexican peso bond in the amount of MXN500 million. The majority of our remaining debt matures from 2012 onward.

As of July 23, 2009, we had the equivalent of approximately $590 million in our cash balance, net of the above-mentioned maturities that we paid. These funds are more than sufficient to meet our operating needs for the remainder of the year.

As of June 30, 2009, our last 12 months net debt to EBITDA coverage ratio was 0.5%, underscoring our solid financial position. Our net debt as of June 30 was MXN9.4 billion.

Our liability structure, considering the maturities that we paid in the beginning of July, is comprised of a balanced mix of currency. Approximately 30% of our debt is dollar-denominated, and the remainder is comprised of local currency-denominated debt, mainly Mexican pesos.

As we mentioned on our last conference call, as part of the Brisa water business acquisition that we closed in February 2009 with Bavaria, a subsidiary of SABMiller, on June 1, we started direct sales and distribution activities to consolidate this operation into our Colombia business. We included one month of Brisa in our Colombia and Latincentro operations.

This quarter's results represent another great achievement for our Company. We posted important volume growth in key markets under unusually challenging circumstances. Our sparkling beverages portfolio across our divisions is contributing importantly to this growth.

Our acquisitions are providing us with avenues of growth and innovation capabilities that would have taken us years to develop on our own. These acquired capabilities, especially in still beverages, combined with our in-house development of execution tools and our learnings from managing the various beverage portfolios in these markets, are amplifying the defensiveness of our business and providing our Company with sustainable growth.

As we enter the second half of the year, we will continue to focus our efforts on delivering positive results for our shareholders based on our proven ability to manage our Company for the long run and under continuously changing and challenging conditions.

Thank you for your continued trust and support. And, now, I would like to open the call for any questions I'm sure you will have.

(Operator Instructions). Lauren Torres, HSBC.

I was hoping you could talk a little bit more about the consumer environment in Mexico and, in particular, expectations for the second half of the year. Obviously, you had a great first half, managing a lot of these pressures very well. But I was curious. As we think about the second half-- I don't even know if you want to start talking about next year-- if you feel that your initiatives, be it from a package standpoint or a pricing standpoint, will keep the momentum that you have going, or do you need to be a bit more aggressive with some of your actions?

Let me give you some of the main trends that we are seeing here in Mexico. And then we can compare it maybe with some of the other operations. One of the phenomena that we have seen in Mexico that is different to what we are seeing, for example, in Brazil is that, in some of the other countries (inaudible), the authorities have reduced-- or fostered the consumption of durable goods, like automotives and household appliances and things like that, by lowering taxes. And, because of that reason, in areas, for example, like Brazil, we are seeing margins starting to be more flat compared to last year. And the same is true for Argentina.

In Mexico, we believe that one of the phenomena that we are seeing is that, as people started to spend less of their disposable income in these kind of products and durable goods, they have some extra cash for the small kind of luxuries like our products. So we are seeing very important growth that has, in a way, surprised us, especially in the last two months. And, as I mentioned during this conference call, June and July were very positive months.

We are relying a lot on the innovation of these products that I mentioned-- this idea of the Valle Frut, which is an orangeade that we launched, basically, 12 months ago. We now have leadership in the category. Continued to grow. We are trying to take control of those new categories as we do all the (inaudible). And, once we take control of the category, we'll try to meet these prices and start improving the profitability. We have reason to increase the price of this product importantly, close to 20%, because, obviously, as we have expressed in our conference call, the profitability of all this category is not the same as what we have in soft drinks. It's lower than what we have soft drinks. So our strategy is to capture this consumption of (inaudible) from the Mexican consumers and from Latin American consumers and, as we see an opportunity, start improving the net profitability.

In general, it's a tough question. What can we expect for the second quarter? We think that the government is facing a lot of pressure with the revenues and tax revenues and (inaudible) revenues. They will probably reduce. They actually announced today that they're going to reduce some of their expenses. And so it's a little bit tough to predict what is going to happen in the second quarter. The deep trend that we have that I was trying to explain is, as the consumer is just having a little bit more disposable income and they are moving away from durable goods, it seems that they are spending more and more on this kind of products like our products.

And, with respect to your competition in Mexico, are they following along your actions? Or is there any unusual behavior going on?

Well, what we have seen so far is that, in Mexico, you know the usual suspects. Some of our competitors have increased prices. [Real Kola] and Jarritos so far have stayed with the same prices that they had. In Big Cola, there is a competitor in this orangeade category which has increased prices also. Pepsi-Cola has also followed some of the price increases that we have mentioned. We believe that because of the cost pressure that we have-- Again, one of the big movements that we have this year is the effect of imported raw materials on our costs. We believe that the competitor will follow with all these increases that we have.

Thank you.

Robert Ford, Merrill Lynch.

Congratulations on the quarter, Hector. I had a question with respect to your franchises. You have several that-- where the agreements have expired or are about to expire. And you've been negotiating some of these for quite some time. I was curious as to whether or not you've gotten to the point where you feel comfortable saying that it's unlikely we're going to see a material change in the concentrate pricing. And I was curious as to what is taking so long to resolve these agreements.

And I was also hoping you could break out Venezuela, given how high the inflation is-- Venezuela in terms of the incremental value in volume in Mercosur, please.

The agreements-- Let me-- I guess that we can try to summarize the issue with the agreements. It's not the situation where we have agreements that are coming due and that we are not renewing or not signing. The (inaudible) is not in the radar screen either at Coca-Cola FEMSA or Coca-Cola. We both know, and we have been very open, that there are some clauses in the-- let me use the word, the so-called international-- the new international bottlers' agreement-- There are some issues that we are not in agreement. They know. And, basically, what we have been doing is renewing this on a very short-time basis and, sometimes on our quarter-by-quarter basis.

But, also, the agreement that we have in the two companies is that we don't need a bottling agreement in between the two companies to continue our relations. The negotiations that we have had with the top senior management in Latincentro and with our CEO basically reached a point where we said - Well, I cannot move on this-- these few articles or these few chapters of the agreement. And the other side then also doesn't have the authority to move because they are trying to implement a standard, international agreement for all the rest of North America or all the world. And it has been out of our radar screens for a few [years]. At some point in time, we need to sit down and finalize this negotiation, where we will both take involvement of Atlanta also on this issue.

The issues where we have this agreement, it doesn't have anything to do with pricing of concentrate. It has to do more with the role of the Coca-Cola Company in the operation of the business. And I think that everyone has a very clear definition of the roles that we do in the day-to-day operation in the marketplace and (inaudible).

If you remember, in 2006, when we had this announcement of the concentrate price increase, we mentioned that we had assurances from the CEO of the company in Atlanta that they will not revisit this issue for a long time. And we are still confident that that's the case.

With respect to Venezuela, it's a tough environment that we are dealing. We have very important inflation rate. In our estimate, it's between 25% and 30%. That has a lot of implications [in how we move your] pricing structure - how you try to work more efficiently.

We have the new issue-- or the more recent issue that the availability of dollars to pay for raw materials is getting very, very complicated. So far, up to the second quarter of this year, we have been able to get dollars at the official rate for most of the raw materials. There is a new regulation, or quite new, or at least two months old, where, in order for you to get dollars at the official rate, you need to get what is called the certificate of non-local production. We have to work through that process for all of our raw materials, including (inaudible) concentrate, including PET, including sugar, et cetera. And, obviously, we do have some of our services that are also paid in dollars, including services that are paid to Mexico-- to Coca-Cola FEMSA Mexico.

We believe that the environment to get these dollars at the official exchange rate is getting more and more complex. There have been talks by authorities that they will provide more liquidity to this in the future, probably through a parallel-- through a dual exchange rate mechanism, where they will leave an official exchange rate for things that are more basic and are probably parallel exchange rate for the other stuff. And that will certainly put some pressure on the way we translate the bolivares into Mexican pesos, as well as the numbers of bolivares that are spent to buy some raw materials. Right now, the parallel exchange rate is, basically, three times the official rate. So you can imagine the impact that that will have in the costs.

And, as a matter of fact, if you look at some of the G&A figures that we had in Latincentro, already affected by that, because we have some services that are charged by our headquarters in Mexico that haven't been paid because the official rate has not been authorized. And we have had to register the effect of paying for those services at the parallel exchange rate, which is, you know, basically, as I mentioned, threefold the size of that.

So, Venezuela, in summary, is a very complex environment. Volumes are growing; prices are growing. And, again, the complex environment is [ to build] with the uncertainty of having raw materials, the uncertainty of having dollars to pay for some of the foreign raw materials. And that creates a lot of pressure on the day-to-day operations in Venezuela. And I think that's a good summary for Venezuela.

Thank you very much, Hector.

Alan Alanis, JPMorgan.

I had a question regarding your results in Brazil. You're showing there organic growth. If my calculating is correct, overall, it's mid single digits, or up 5% to 6%. What kind of trends are you seeing in beer, and what would explain the difference of the beer performance over there in Brazil, Hector?

Alan, I know that, in beer-- I know that we had a good performance in Sao Paulo, growing our volumes, as we mentioned. And I know that the total number for the country is that they are going through flattish or probably slightly negative volumes, but I don't have the details. I'm sure that (inaudible) cerveza will answer (inaudible) strategic answers and questions. I believe on Monday is when they have the conference call.

But I can tell you that I know that some of the areas are growing; some are coming down. In general, I think that the volumes are kind of flat or slightly negative. And Sao Paulo is growing.

Okay. Now, if I might ask you a different question regarding non-carbonated soft drinks in Mexico; specifically, Jugos de Valle. Jugos de Valle is the number-two player in juices, or it was up until last year. How-- With the kind of growth that you're achieving in Jugos de Valle, how far are you from taking over Jumex? And, if you can update us in terms of the kind of market share that you have in Mexico; specifically, in juices and in general with non-carbonated soft drinks, please.

Alan, I don't have specifically the numbers of market share (inaudible). But what I know is that they are not participating in the orangeade category so far. They have some products, but they are not very strong in that area. And that's an area that we have grown important. For us, if you look at what we acquired last year, which was what we call the juices and nectars, we are still trailing Jumex in market share, not for long. You have probably, I don't know, 4 or 5 percentage points differential in market share, Jumex having about 40% and we slightly below 40%.

If we add all the innovation that we have created over the last year, I'm sure that we have surpassed, by far, the volume that they have. But, again, it's a little bit difficult, and it's not how the numbers are being measured in the marketplace. For example, in orangeades, we are competing mainly against Big Cola and some of the milk producers in Mexico that were very strong on that. And then you have some of the (inaudible) brand.

So, just to summarize, in juices and nectars, which is the area that we bought, we are still trailing Jumex with that kind of margin that I mentioned, or 4- or 5-percentage point differential in market share. But we have grown very importantly, more than doubling our volume with all these innovations where Jumex not necessarily participates.

Okay. Thank you very much.

Alex Robarts, Santander.

I wanted to go into the OpEx in Mexico. That was a higher-than-expected increase for me. And, kind of looking at it, it has been slightly outpacing your volume growth first quarter and, then, again in the second quarter. But somehow the year-on-year increase, almost 7% there, is the strongest increase in four quarters. I'm just wondering if this is a reflection just simply of weak CSD demand and what has to be spent in the marketplace to support volumes. Could it be something maybe, perhaps, associated with-- as non-carbs become a bigger piece of the sales mix? Are they necessarily carrying that much more OpEx per case? And is this something that we could see going forward? Or, I mean, I guess, could this just be kind of a Coke reimbursement issue vis-a-vis that selling and marketing expense? If you could help us get a better understanding on that going forward, that would be great.

I think that, when you look at the operating expenses in Mexico, you have several issues that are maybe difficult to explain, given the fact that is a number that summarizes a lot of expenses. But let me start by the areas that are extraordinary this year.

We have added important routes to market because of all the non-carbonated products. And we continue to cover all this volume that I was explaining in the previous question. Obviously, (inaudible), in some cases, specialized routes. And you can argue that some of these routes were already present because Jugos de Valle started our operation in February. We started selling Jugos de Valle in February of last year. But we have continued to increase that as volumes continue to increase.

We have continued to spend-- Again, something very extraordinary is the inclusion of 400 people as we took over Agua de Los Angeles, just to distribute this jug water business into the Valley of Mexico. We have increased in addition to that as we continue to foster this factor of selling jug water to home delivery and office delivery. So that has created some additional--

I'd say that those are the two main things that were not last year but are now present.

Now, you go to other lines, you have marketing expenses. But we expect-- Remember that last year we had-- For the full year, we ended up with a fourth quarter that was adjusted to a lower extent as we were protecting our-- the Company for this very difficult financial situation-- that we reduce our marketing expenses. This year with the re-launching of Coca-Cola Zero and all the activity that we had in Jugos de Valle and all these products, we believe that marketing expenses are going to be a little bit higher than what we had for the full year last year. And we are providing for that quarter by quarter.

We have a very, very strong program to introduce coolers in the marketplace. We believe that that's a very strong tool for our-- for promotion of our products in the marketplace; again, as we have mentioned, trying to promote single-serve consumption through this coolers program. And that (inaudible) additional expenses to decline.

So, in general, Alex, I think that, when you look at the number, it continues to come down as a percentage of revenue, which I think is important because that's a signal that our margin is improving a little bit. But I agree with you that, when you look the growth of OpEx and compare that to just the growth of volumes, not the growth of revenues-- the growth of volumes-- we have similar numbers. And, in general, I think that those things is what explains this trend.

Very helpful. Thank you.

Jose Yordan, Deutsche Bank.

A couple questions; one on your gross margin outlook. As sugar continues to increase in international markets, as well as creeping up in Mexico and, potentially, resin prices may begin to inch up as well, now that the world is out of crisis mode and economies are beginning to improve, the oil price is rebounding significantly. So how are you protecting yourself against this now? Are you taking any new hedges? Or what's your strategy to face this environment over the next year?

And, if you could, comment on or clarify what's happening in the Mexican congress regarding excise taxes as it pertains to soft drinks, because we've heard some rumblings about that as the government tries to find new revenues for next year.

Gross margin. Well, obviously, that's an area where we don't have necessarily a lot of control to try to move the pricing leverage. And we think that we have been quite-- I'll say quite successful in implementing all across our operations price increases that were seen like very risky when we were taking those price increases. But, given the fact that the majority of competitors have followed these price increases, we believe that it has proven to be the right strategy.

Right now, I'd say that, basically-- And let me start with Mexico, because they are a little bit different from the rest of the countries. Sugar prices have increased. As you correctly pointed out, we have pressures on some of the costs of sweeteners here in Mexico. In the past, that was also-- In a way, we were compensating that by using high-fructose corn syrup in some of our products. You remember we used at some point in time a 50/50 mix of high-fructose and sugar because we were still kind of managing the cost-- the impact of sugar price increases in Mexico to that process.

Unfortunately, this last year, we also had the effect of a very strong movement of the exchange rate. And high-fructose is quoted in dollars. So, even though the price in dollars of high-fructose has held (inaudible) versus when you compare it to the cost that we have in dollars last year, the effect of the exchange rate is not helping at all this time of-- this part of the year. So we have lowered our mix to, basically, 70% local sugar versus 30% high-fructose. The 70% part of the equation is growing probably around 4% or 5% versus last year. And it has basically been flat second quarter versus first quarter. We do see pressures on (inaudible) for the second half of the year. And the idea is that, obviously, we will need to try to see if, now that we have a more stable exchange rate, we can try to offset (inaudible) that effect using a bit more high-fructose. At the end of the day, we'll try to find the right mix of sweeteners for our operation in Mexico.

And that has been basically compensated during this year because of the reduction in PET prices that, again, because of the exchange rates, have not been that large. We have resin prices in US dollars, probably, around 25% or, in some cases, 30% below last year in dollars. But, because of fluctuations in the exchange rate around those levels, we basically have flattish or slightly negative resin prices in pesos. If we assume that the exchange rate stays more or less where we are, we will isolate the effects and start (inaudible) a little bit more directly the dollar movement of the PET.

What I was saying is that Mexico is different than the rest of the countries because-- especially on the sugar part. The other big country, Brazil, sugar is very linked to the international prices. I think there we do have some hedges against the sugar price. If we worked to do, like, an exercise to do a mark-to-market of the hedges that we have in Brazil, the value of the mark-to-market of that is around-- I would say around $20 million positive because we have contracts, some of them expiring October and some of them expiring next year. And we even have some small contracts that go all the way to 2011.

We are continuously evaluating strategically the case in Brazil because that's the only one that we see that is more like a perfect hedge vis-a-vis the international price.

Well, that's more or less the environment on this.

With respect to congress, we have heard the same rumors that you hear. It's an issue that every year is present at the table. You always see taxes on cigarettes, beers, sometimes liquor, although they have very large excise taxes right now, and soft drinks. So it's kind of early to know. They announced that, if I remember correctly, that by October they will have a new budget presented to congress. And we will see from there, Jose, if (inaudible). But every year we are in the limelight with these taxes. It's a variable that is very easy to have access to this industry for revenues-- for tax revenues when the situation is tough. And you know what has been the history in the past.

Okay. But no concrete action yet?

We haven't received any specific proposal or action or comment from the authorities. Remember that we just had election less than a month ago, and half of the congress were actually new there. So I might believe that we will start receiving some news about that. We are very (inaudible) in those plans (inaudible).

Great. Thanks a lot.

Lore Serra, Morgan Stanley.

Yes, a couple things. Let me just, firstly, follow up on Venezuela. Hector, if you were forced to run the market rate on the bolivar through your results today, would you still be profitable in Venezuela?

Yes, Lore. I think that-- The answer is yes. If we have to move everything there, we'd probably have an increase-- I'd say around 30% in our cost of goods sold. That would be, basically, the impact of moving everything to the parallel exchange rate.

What percentage of your COGS are imported materials in Venezuela?

It is basically aluminum and resin, and that's around 20% of our COGS.

Celso Sanchez, Citigroup.

On the Jugos de Valle discussion earlier, you mentioned, if I heard you correctly, that prices were pushed up 20%. We had heard in some other parts of Mexico that they had been pushed up substantially more than that and that volumes-- They seem, at least initially, to still be growing, despite the price increase. So, I guess, could you give us some color in terms of when you did the price increase and what kind of volume performance you've seen since then and, in that context, if you think there's more room to maybe move prices a little bit more in the months ahead, given, presumably, the resilient volume?

You are right. This product is probably the area that has more competition in the Valley of Mexico. We basically are at a price-- a MXN5 price point in Mexico City, and that was taken during July-- during this month. So it's something that we will see for the second quarter. The effect of that will be reflected in the second quarter. We had a MXN4 price point, and we moved it up to MXN5. There are some cities in the north - for example, in Monterrey, where this same product is being sold at MXN7. So I do believe that there is still room for price increases. But I have to recognize that the (inaudible) market in that specific category is being-- being fought in Mexico City.

It's important that we have this pricing flexibility or that we can improve this pricing because, obviously, as you can imagine, when you have-- In orangeade, part of the (inaudible) other flavors in soft drinks. So it's important that you get very close or even more than the competitor you have in CSDs in flavors.

Okay. Thanks. And, maybe, could you characterize--? I know it's very early. But one would normally expect a price increase to be accompanied by volume decline. Is that the case here in the early stages, or was there even, potentially, still volume growth despite the price increase?

We continue to see growth in the category still in our volumes during this. It's [very difficult] to say because the price increase was at the beginning of July. But, so far, we continue to see growth in our product despite the price increase.

And, then, just on Jugos de Valle more broadly, can you talk a little bit about the coverage in your territories? How much of an opportunity still do you see expanded coverage of points of sale, or is it really more just within the existing points of sale that are pretty well covered rolling out a broader SKU portfolio?

It's more the latter, Celso. Please, we have been working with this brand, basically, for a year. We believe that most of the-- our client base is being covered. [Not a lot] of them are buying the product because (inaudible)-- you know, the size of the store or whatever. But we are present in basically all of our clients right now.

So we believe that innovation is going to be a big goal and launching new packages, new sizes, et cetera-- The usual activity that we have in the marketplace when we try to move on every category - changing packaging, sizes, packaging materials, and innovation with new products, which is a new area of the segment for growth for Coca-Cola FEMSA since we (inaudible).

And just, finally, did I understand correctly that that is a priority for not just the long term but, also, particularly the second half of the year in terms of that SKU proliferation?

Are you referring to priorities to innovation, Celso?

Just the expansion of-- innovation, whether it's packages or brands. More, I guess, on the packaging side, my understanding was that (inaudible).

It's certainly a priority. This is just one of the top-of-mind activities that our operators have. We have in all aspects-- Not only Jugos de Valle but also in CSDs we have more ideas with different packaging materials. And the re-launching of Coca-Cola Zero has proven to be very good so far. It's a new thing again. Remember that we had a lot of problems last year with all the recall and everything and the problems that we had with the formula. But, so far, Coca-Cola Zero is going very well, and I include that into innovation as we are trying also to foster single-serve consumption. Returnability is a big push also because we believe that that's a strength that's very specific for Coca-Cola FEMSA as opposed to competitors. And this difficult economic environment [in the past] is going to be good leverage for our products.

Thank you.

Lore Serra, Morgan Stanley.

I wanted to ask a more general question. As you say, you've done a really good job in the past year of putting through price increases, and the volume trends have been, I think, very encouraging in light of that. Yet, still, if we look at the first half performance, your margins are down 170 basis points. And you've always stressed that you're a profitability-oriented company. So, as you look out over the next-- I don't know if it's 6 months or 12 months-- how do you get to stabilized margins? I mean, it sounds like currencies will get a little bit better, but you're going to see more sweetener pressure. I'm not sure how much more pricing power you think you have. So, what are the levers for you to get to more stable margins? And can you give us a timeframe when you think you might be able to do that?

Well, certainly, this question comes very often on our conferences. Sometimes we experience a very good top line growth, but it doesn't [make that to come] down all the way to our bottom line. I think that, as you correctly pointed out, we have been very successful in continuing to show organic growth, number one, and also continue to grow through acquisitions or innovation or (inaudible), which are also helping the top line.

And I believe that this year in particular has been a very tough part because, when you have such a large impact on FX and some of the raw materials, it's very difficult to adjust for it - in fact, to take the full impact of that on the price.

We have very few levers to move the profitability. It's either to improve prices or to become more efficient in terms of costs. But we are always looking for those areas. And we have many examples of using less PET in each bottle that we produce or the lightweight (inaudible) that we have been doing, reducing the size of the cap, reducing cost of labels.

We are also working very thoroughly in or developing new ways to market. It's not only the cost of production, but you also have-- A big chunk of our cost is also related to sales and distribution. You probably have heard that we have been working in redesigning our way to market because of the complexity that we ourselves are generating as we increase the number of SKUs in our Company. But that complexity is what is giving us also the top line growth. So we believe there are opportunities to be more efficient in the marketplace. We are re-analyzing the complexity of our organization. We are doing some downsizing in the organization in some of the areas where we see some fat.

And, in general, the message we want to send is we will continue to look at striking opportunities because that's in our DNA. That's just in there since the IPO of this Company. We will continue to look for a more efficient way of doing-- of going to the market and provision our products. We're always looking at all these aspects. We have targets for our operators in terms of savings that they have to bring in terms of payrolls, in terms of cost of raw materials. In every aspect, we do follow up every indicator very closely. And the message I want to send is that we'll take the opportunities to grow top line. Sometimes it implies bringing products that have either a different business model vis-a-vis the Coca-Cola Company, where we share, for example, in the case of (inaudible), 50/50 the profits. And, therefore, it has an implied reduction in the profit pool, although it has an implied reduction in the assets or the investment that is committed by the Company.

And sometimes you go into lines of business like juices that have raw materials that are very different from what you have in soft drinks, where you have to buy in fruits and you have to buy-- and to lever the volatility that these costs have for us, with probably smaller margins than we have stressed in the past. And our goal is how to improve these margins to get into very similar to what we have in CSDs, especially if we are seeing some cannibalization of, for example, in the case of (inaudible). But in cases where we don't see any cannibalization but we see a different consumption location, we are glad to take extra margin, even if it's not extra cash profit, even though it might not be at the same margin. But it's something that is additional to the volume (inaudible) that we have.

And I'd say that is the explanation I can give you, Lore.

Great. Thanks, Hector.

Ladies and gentlemen, this concludes the question and answer session. I would now like to hand the call back over to Mr. Trevino for closing remarks.

(Inaudible) to thank you for your interest in our Company. And, obviously, we will be open for any more questions that you might have for this quarter.

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