Coca-Cola Femsa SAB de CV (KOF) 2009 Q3 法說會逐字稿

Good morning, everyone, and welcome to Coca-Cola FEMSA's Third 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 strong multi-category portfolio brands in a wide array of presentations, the continued growth of our new line of business across Latin America, and the price increases that we have implemented in our territories produced another quarter of strong top- and bottom-line results for our Company under a still-difficult consumer and economic environment.

Our consolidated revenues reached MXN26 billion, up more than 30% from third quarter of 2008. Organic growth, driven by higher volumes and pricing, accounted for more than 55% of our incremental revenues. The effect of a positive exchange rate translation resulting from the depreciation of the Mexican peso against our operations' local currencies contributed more than 40% of our incremental revenues. And the consolidation of Brisa in Colombia represented less than 5% of our incremental revenues. Excluding the acquisition of Brisa and on a currency-neutral basis, our Company is achieving more than 17% organic revenue growth in a recessionary economic environment.

Our consolidated sales volume rose more than 7% year over year. Excluding Brisa, our consolidated sales volume increased more than 5% during the quarter. This increase was mainly driven by the growth of our sparkling beverages in Mexico and the still beverage portfolio in all of our divisions.

Our gross profit increased more than 28% in the third quarter of 2009. Higher revenues partially compensated for our higher cost of goods sold, which resulted mainly from, one, the effect of the devaluation of our local currencies as applied to our US dollar-denominated raw material costs and, two, higher year-over-year sweetener costs across our operations and, third, the third and final stage of the scheduled Coca-Cola Company increase in concentrate prices in Mexico. The lower cost of resin partially compensated for all these factors. Our gross margin declined 110 basis points during the third quarter of 2009.

Our consolidated operating income improved 24% to MXN4 billion in the third quarter. Revenue growth partially compensated for higher operating expenses, mainly due to higher marketing investment in our Mexico and Latincentro divisions, combined with higher labor costs in Venezuela and Argentina. The effect of a positive currency translation resulting from the depreciation of the Mexican peso against our operations' local currencies provided approximately 45% of our incremental operating income. And the consolidation of Brisa in Colombia accounted for approximately 10% of our incremental operating income for the quarter. Excluding the acquisition of Brisa and on a currency-neutral basis, our consolidated operating income would have grown more than 10%. Our consolidated operating margin declined 100 basis points year over year to 15.2% for the quarter. Our consolidated EBITDA rose 24%, reaching MXN5 billion in the third quarter.

In the third quarter, our net controlling income increased more than 70% to MXN2.1 billion, mainly due to higher operating income recorded in the third quarter of 2009.

Now let me expand on our operations.

Our Mexico division delivered close to double-digit volume growth in the third quarter of 2009, successfully improving the volume growth we presented in the second quarter of 2009, which was the highest growth recorded by our Mexico division in more than three years. Our sales volume of sparkling beverages grew 8%, driven by a double-digit volume increase in brand Coca-Cola in both multi-serve and single-serve presentations. That more than compensated for a low, single-digit decline in our flavored sparkling beverage sales volume.

The still beverage category, mainly driven by the Jugos de Valle beverage portfolio, grew more than 80% during the quarter, reaching more than 60 million unit cases. Our successful Valle Frut product line accounted for more than 90% of the incremental growth in this category and has helped us to consolidate our leadership position in the orangeade segment in Mexico in a short period of time. Our water business grew close to 5% during the quarter. Our single-serve water segment increased more than 8%, and our bulk water segment grew 4%, driven by the expansion of our jug water business in the Valley of Mexico.

Our average price per unit case increased 2.6% during the quarter. This increase was mainly driven by higher volumes of brand Coca-Cola in both multi-serve and single-serve presentations, combined with the average price increases implemented last year in our Coca-Cola portfolio. These increases were partially offset by higher volumes of jug water and the Valle Frut orangeade products, which carry a lower average price per unit case.

Our Mexican operation's total revenue increased more than 12%. Incremental volumes accounted for close to 75% of our total incremental revenues.

On the profitability front, higher cost of goods sold was mainly driven by the devaluation of the Mexican peso as applied to our dollar-denominated raw material costs and the third and final stage of the annual increase in concentrate prices agreed upon with our partner, the Coca-Cola Company, in 2006. Lower year-over-year resin prices partially compensated for these increases.

Our gross profit reached MXN4.7 billion, growing close to 7% as compared to third quarter of 2008. Our gross margin in Mexico decreased 260 basis points. Our operating income remained flat at MXN1.7 billion. Our operating margin declined 220 basis points, reaching 17.7%, mainly due to gross margin pressures. Our EBITDA grew 1% compared with the third quarter of last year, reaching MXN2.1 billion.

Our Mexican portfolio is one of our industry's most complete beverage offerings in the world. We are able to target all consumption occasions successfully with our different beverage categories and presentations and, at the same time, outperform in an adverse economic environment.

Over the past months, we have bolstered our marketplace initiatives. We have increased the availability for sparkling beverage in returnable multi- and single-serve presentations. We have enhanced our execution across the Mexico division, increasing our cooler coverage. And during the third quarter we successfully re-launched Coca-Cola Zero. These initiatives supported our solid growth for the quarter, especially in the sparkling beverage category. At the same time, we have been investing to capture future growth opportunities in our industry, relying heavily on our innovative, still beverage portfolio to accelerate growth. We will continue analyzing the pricing architecture of our portfolio, considering economic conditions and competitive dynamics to evaluate making potential price increases in the coming months to offset expected local inflation.

Our Latincentro division posts double-digit volume growth. This increase was driven by the integration of our recently acquired Brisa bottled water business in Colombia, the continued strong performance of our still beverage portfolio in Colombia and Central America, and the growth of sparkling beverages in Central America and Colombia. In Venezuela, price increases implemented over the past 12 months designed to compensate for local inflation produced a low, single-digit decline in volumes. In Colombia, the still beverage category continued to post significant growth, reaching more than 4 million unit cases in the third quarter. This growth was driven by the Jugos de Valle line of beverages. Sparkling beverages recorded a low, single-digit volume growth, despite important price increases implemented in the territory over the past 12 months. In Central America, we recorded sales volume growth of more than 6%, compared with the third quarter of 2008. This increase was mainly driven by a mid-single-digit volume growth in sparkling beverages and more than 30% growth in our still beverage portfolio.

Our Latincentro division's total revenues grew more than 70% year over year, reaching MXN9.8 billion. Our organic revenue growth, driven by higher volumes and average price per unit case, accounted for approximately 50% of our incremental revenues. A positive currency translation resulting from the depreciation of the Mexican peso against our operation's local currencies represented approximately 45% of our incremental revenues. And the integration of Brisa accounted for the balance. On a currency-neutral basis and excluding the acquisition of Brisa, our Latincentro division revenues would have increased approximately 35%.

On the profitability front, the Latincentro division's gross profit increased more than 70% to MXN4.5 billion. The lower cost of resin partially compensated for the higher cost of sweetener across the division. Our gross margin reached 45.4%, an expansion of 30 basis points compared with third quarter of 2008. Our operating income grew 73%, reaching MXN1.3 billion. Higher revenues compensated for increased operating expenses, which were mainly driven by marketing investments to support our growing still beverage category and the Brisa water brand, combined with higher labor costs in Venezuela. The effect of a positive currency translation resulting from the depreciation of the Mexican peso against our operation's local currencies accounted for close to 40% of our incremental operating income, and Brisa accounted for approximately 15% of our incremental operating income for the quarter. Excluding the acquisition of Brisa and on a currency-neutral basis, our operating income grew more than 30%. Our operating margin expanded 20 basis points to 13.2% as compared with the third quarter of 2008. Our EBITDA grew more than 60% to MXN1.6 billion.

Our Latincentro division is an important driver of our Company's growth. Over the past 12 months, we have expanded various categories in which we participate and reinforced our position in the water segment through the acquisition of Brisa. Our sparkling beverage portfolio has continued to grow, despite increased pricing, which has helped us to compensate for local inflation.

Our Mercosur division, total revenues grew more than 20% to MXN6.6 billion in the third quarter of 2009. Excluding beer, which accounted for MXN642 million, our total revenues reached MXN5.9 billion. Organic growth, mainly driven by higher average prices per unit case, represented more than 35% of our incremental revenues, and the effect of a positive currency translation resulting from the depreciation of the Mexican peso against our operation's local currencies provided the balance.

Volume growth in our Mercosur division was up close to 1% in the third quarter of 2009. Our sales volume of still beverages across the division compensated for a slight decline in the sparkling beverages. Our Mercosur division's volume grew despite high, single-digit price increases implemented over the past 12 months in Brazil and Argentina and bad weather conditions during the quarter. Growth in the still beverage category was mainly driven by the integration of the Jugos de Valle line of products in Brazil and the continued strong performance of Aquarius, our flavored water brand in Argentina. The division's volume of still beverage grew more than 50%.

On the profitability front, our Mercosur division's gross profit increased 21% to MXN2.9 billion. Our cost of goods sold increased as a result of higher cost of sweetener in Brazil and the devaluation of the 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 increased 20 basis points to 43.8% in the third quarter of 2009. Our operating income increased more than 28% to MXN959 million. Operating leverage, driven by higher revenues, more than compensated for our increased cost of goods sold and higher labor and freight costs in Argentina. The effect of a positive currency translation resulting from the depreciation of the Mexican peso against our operation's local currencies accounted for more than 55% of our incremental operating income. On a currency-neutral basis, operating income would have grown more than 20%. Our operating margin increased 90 basis points year over year to 14.6%. Our EBITDA grew more than 30% to MXN1.2 billion.

In our Mercosur division, we are strengthening our efforts to build a total beverage portfolio, taking advantage of the opportunities we see in the underdeveloped still beverage category through the Jugos de Valle platform. In the sparkling beverage categories, we have been able to implement important price increases in our markets' local currencies and further develop our returnable base. As economic conditions gradually improve, we believe our consumers will be able to balance their disposable income and increase their spending on our products.

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

During the first nine months of the year, we have witnessed difficult macroeconomic conditions. Under these circumstances, our Company has been able to deliver strong cash flow generation. As of September 30, 2009, we had a cash balance of MXN8.9 billion, an increase of MXN2.7 billion compared with yearend 2008. Our gross debt decreased MXN2.9 billion, compared with yearend [2009]. Considering the proceeds of the bond issuance made at the beginning of the year in the amount of MXN2 billion, we have been able to decrease our gross debt, mainly driven by our July payment of the dollar-denominated debt coupon in the amount of $265 million and a Mexican peso bond in the amount of MXN500 million and our September prepayment of local currency debt in Colombia for an amount equivalent to $170 million. As a result of these factors, our net debt decreased by MXN5.6 billion in the first nine months of the year.

The strong cash flow generation that we have achieved during the year has enabled us to invest $46 million to finance our share of the Brisa water business acquisition in February, pay dividends to our shareholders in the amount of MXN1.3 billion in April, meet the previously mentioned debt maturities, and build a stronger cash position.

As of September 30, our last 12 months' net debt to EBITDA coverage ratio was below 0.4 times, underscoring our strong financial position. Our net debt as of September 30, 2009 was MXN6.7 billion.

This quarter, our Company demonstrated once again its ability to deliver solid top- and bottom-line results based on our balanced geographic platform of franchise territories across Latin America, the strong brand equity of our products, the benefit of our acquisition and new avenues of growth, and our talented team of professionals. We positively see that our product portfolio behaves in a very defensive fashion and continues to post important volume growth in our key markets, despite the lack of economic growth globally.

As we enter the final part of the year, our Company is in a very strong operating and financial position to capture the opportunity that we foresee in our industry in the coming years, relying on our proven ability to manage our business under difficult circumstances and, at the same time, take advantage of the economic turnaround, whenever it comes.

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

(Operator Instructions). [Antonio Gonzales], Credit Suisse.

I have two questions, if I may. My first question is on Argentina and this potential increase in excise taxes. Could you please give us some color on how likely do you think this increase is to materialize? And what kind of impact would this have on your cash flows generated in that country? And do you think any potential tax hike could be eventually passed on to final consumers?

Well, every end of the year we have a little bit of this history, you know, when every government in the countries that we operate are looking to their budgets for next year. In the case of Argentina, there have been some conversations about potential excise taxes. Remember that we had that situation in the past. It was reduced substantially a few years ago. And the idea is that in Argentina, given the difficulties we have to increase prices because of the intention of the government to control inflation and the authorization that we need to get for any kind of price increases, we believe that, if we have some tax increases, we will have the perfect excuse to ask the authorities for authorization to price increases. We believe that the industry is on the same page, so we don't think that we would have a competitive problem. But, again, I believe that the whole industry will be looking to the authorities to try to pass these increases to the consumer. By the same token, we don't have clarity still of which way this potential tax increase might go. It is still kind of in the air.

Okay. Thanks. And, secondly, I'd like to ask you on this increased collaboration or integration you've had with FEMSA Cerveza lately. Could you give us an update on where you are right now? You've talked in the past, I think, about sharing marketing intelligence, best ways to serve your clients, and so forth. Could you quantify some of these results achieved lately? And how do you expect this project to evolve in the future, especially in light of this potential consolidation that we're seeing for FEMSA Cerveza?

What we have-- What we are seeing in Mexico is where we are advancing-- You know that Brazil we have a natural collaboration of beer and soft drinks because that's the way it has been-- We arrived to Brazil, and Brazil is a separate animal. Let me refer you to what we have been doing in Mexico. Over the years we have been trying to do a lot of integration of back offices and procurement. And I think that those stories have been successfully implemented in the past in terms of doing some of the easy things that you can do together with different industries, like sharing all of these back offices activities. The main focus on the marketplace has been some pilot tests that we have been doing in the state of Michoacan in Mexico, where we have been integrating a few routes. It is a very, very minor pilot project. In total, we have around seven [presellers] in the city of Michoacan that are doing sales effort for beer and soft drinks. And those seven presellers have-- are being served by three distribution routes that are attending these clients together.

As you can imagine, because of the presence of soft drinks in the marketplace in Mexico, not all of the clients that we serve with soft drinks are necessarily clients for beer. As a matter of fact, it's a very small number of clients. It's probably close to 20% or 25% of the clients we serve in these specific territories that we are doing this pilot test. And, so far, I think that the numbers are not conclusive. But you see some optimization of the routes because you can scale, and you get a little bit more of presence for these products and all of that. It's important that I clarify that this is a pilot test that we are doing in the state of Michoacan, and the idea is that we should continue with this testing.

With respect to the press release that FEMSA did a few weeks ago, I know that they have their conference call tomorrow. And it's appropriate for them to answer any question related to this situation tomorrow. From our perspective, we will continue with these tests and continue to share in these results with the guys from FEMSA Cerveza as they come about.

Okay. Thanks. That's very helpful. And congratulations on your results.

Lauren Torres, HSBC.

Hector, in your press release, you mentioned that the economic environment has improved recently. I was just curious to get your thoughts across your markets where you're seeing these improvements and, as it relates to the consumer environment, how things have changed, I guess, for the better over the last quarter or two and, I guess, as we kind of round out this year and think about next year, how you're thinking about sentiment and how you're thinking about potentially even stronger growth coming from your markets.

We have a lot of debate internally if we should express something like that in the press release. But I guess the general conclusion was that we are starting to see some turnaround. It varies market by market. I'm a bit more concerned on the turnaround in Mexico. In the rest of the markets, we are seeing a little bit more improvement in some of the economic indicators. But, in general in Mexico, we feel that, given the proximity to the US market and the importance of the US market to Mexico and some of the data that we have seen in the US, we believe that next year we'll start to see some growth. But it was a difficult call. In general, we believe that the consumer in Mexico-- that we have benefited from the fact that the consumer stopped spending a lot on durable goods. And that helped the consumer to have a little bit more disposable income for purchase like us-- like for consumer goods like our business.

And our hypothesis is that it is the reverse case in Brazil, where there was a lot of stimulus going into durable goods, and the consumer started to take a little bit more debt and spending on cars and (inaudible) domestics. And, because of that and maybe a little bit because of the weather, we saw volumes basically very flattish in Brazil. We have seen some statistics where you see this correlation of durable goods versus consumer goods, and there's this trend where you see in Brazil a bit more spending on these durable goods and less on the consumer goods.

I think that that's basically the general perception that we are seeing in our markets. Colombia we are seeing good economic activity. Venezuela is obviously-- as always, obviously, our focus is continue working all of our supply chain with all the problems we have and surprises that we have every day. And Central America, after two very difficult quarters, we finally are seeing a third quarter that is improving in general. I think that Central America suffer a lot from remittances, much more than what happens in countries like Mexico.

The big question in Mexico is what is going to happen with all this tax package that is still being debated. And I think that that will be-- Once we have that, we'll have a clearer picture of how fast are we going to get out of this situation in Mexico.

And, if I could just ask you to clarify, as far as Brazil is concerned, seeing that flat volume or flattish volume in the quarter, do you feel that was more reflective of the pricing actions you took, or you are seeing some change in consumer behavior there?

I think it's a little bit of both. We took some pricing, but we definitely believe, and that's why we mentioned that that's an hypothesis that we have more because we don't have this early on the proof here still that the consumer dedicated a big amount of resources to durable goods because of the support that the government was giving to cars and electro-domestic investment to-- as a way of avoiding a major hit on those industries. So I think that there is a combination of the two things that we, having a pricing activity-- an important pricing activity both in Argentina and Brazil, but especially in Brazil because of these subsidies that went to cars and electro-domestics, we believe that the consumers refocused some of their resources to this industry as opposed to ours.

All right. That's helpful. Thank you.

Robert Ford, Bank of America/Merrill Lynch.

I had a question with respect to your comments on Morelia. And you seemed very tentative and you were very careful to say this is just three distribution routes with seven presellers. But, when I read the comment on the first page attributed to Carlos Salazar, he seems to be excited about the development and deployment of new go-to-market models which will enable you to maximize your clients' revenue potential. And I'm curious. I mean, is it really that tentative in terms of Mexico-- in terms of--? Is the improvement in terms of traction and profitability just marginal? Are you excited about it, because I would suspect that, if you have an opportunity to do this anywhere, it's Mexico, where you have potentially the biggest gains in terms of what you can do for the point of sale, what you can do in terms of investments in the point of sale, what you can do in terms of synergies, particularly with the market shares distributed across the country.

Yes. I think that there are two elements here, Robert, and one is related to just what I explained, this pilot test in Morelia, which, as I mentioned, is small in scale because it's only these three distribution routes and seven [resellers]. But what we are referring here is-- As we understood that the industry was moving to a much larger number of SKU within the soft drink industry and as we understood and tested in the past that the industry was also moving to healthier alternatives and the importance of water-- And then the next stage was juices and still drinks. And you see how important these other categories have contributed to growth. All our sales and distribution efforts starts getting a lot of complexity. Without taking any merit to the production facilities that are also very complex because of the numbers of SKUs and how you work in efficiencies.

Now, when you look at the numbers of Coca-Cola FEMSA for many years, you see that we have been-- We have been broadly a benchmark in terms of execution in several areas in production efficiencies. And when you look at the number of unique cases that we produce for any production plant and you see when we acquired (inaudible) how we immediately start closing a number of facilities and reducing-- I don't even remember. But we moved like from 50-plus plants to 30. That's the number of plants that we have. So, in terms of efficiency in manufacturing and production, I think that we have shown tremendous advances. In terms of how we spend our CapEx and the number of cases that we produce-- the new cases that we can produce and distribute for any new dollar of investment that we do, we track those numbers. And we have become very, very efficient on that. In the way we handle our procurement, I think that we also have-- Because of our scale, we have very, very good prices that, when we do benchmark around the world, we have-- we are happy with our results.

One of the areas where you have commented, all of you investment community in the past where we were lacking some of the efficiencies that you should gain with the scale when you go to sales and distribution because a lot of our structure-- If you have a preseller and a distributor, distributor meaning that truck that does the distribution, that handles or that carries, basically a very important part of the [salary] on a viable basis, then all your distribution and sales becomes viable. And then you have all these comments that you have a lot of growth in the top line. And then when you get to SG&A, you don't see the efficiency that you are achieving.

Well, one of the main areas-- All this in production is basically to comment that one of the areas of focus for this organization the last year or year and a half and that is going to be very important in the years to come is - How do we address the complexity that is generated by this proliferation of SKUs? And how do we achieve the efficiencies that we need in order for every additional dollar that we get at the top line-- for that dollar to trickle down to the bottom line? And that's what we are referring in that comment with Carlos Salazar is how we're go to market, how we classify our clients, how we look at our clients and the revenues that they generate for their own profit. And that, for us, is - How do we capture this revenue potential? You can argue that one additional SKU could be beer, and that's correct. I mean, we are preparing this organization to not only distribute soft drinks but also water and also juices and still beverage in an efficient way. Another product could be beer or another beverage product that could be delivered and sold to through our work force. And that's what we're referring to that comment with Carlos.

I don't want to play down this pilot test that we are doing in Michoacan with this route for beer, but that's the reality. It's [one type] that we are doing, and, so far, results are positive. But it's not conclusive because of the size of the pilot. We need to advance further in order to conclude on that point.

Great. Thank you very much, Hector. And, just as a follow-up, when do you envision kind of expanding the size of the pilot or trying it out in a different region?

I think that it was also related to one of the questions before. I mean, the fact that-- The comment that FEMSA did a few weeks ago certainly put some question marks on this. But, at the end of the day, we are doing that in Brazil. We learned from that, and we are experimenting with that. And we think that we should continue, regardless of a potential transaction or not. So I think that probably-- not by yearend certainly because we are basically there, but I'll say that middle next year we'll have a clearer picture if we should improve or not-- if we should not improve-- increase the size of this pilot test or not.

Thank you very much, Hector.

Lore Serra, Morgan Stanley.

I also wanted to ask a couple of questions in Mexico. As you mentioned in your opening comments, the volume growth in Mexico was really impressive, the strongest in many years. And I wonder if you could give us a bit more color on what you think drove the growth. You mentioned the relaunch of Coke Zero. How much of the growth came from that versus other factors? And I'm wondering if you could reconcile that very, very strong volume growth with your somewhat more cautious comments at the beginning of the call on evaluating pricing in Mexico. If volumes are that strong, why not take pricing up importantly in Mexico, given the fact that your pricing has really lagged inflation the last couple of years? Thanks very much.

Volume growth in Mexico has certainly been kind of a surprise for everyone here. It's not-- Obviously, under this scenario where you see other industries not necessarily growing, for us, posting record levels of volume-- As a matter of fact, July was the highest volume ever in a month in Coca-Cola FEMSA in Mexico, reaching, basically, 112 million unit cases. Usually, the month of May was the largest month of the year, but this time around, May was a record and then July was even larger than May. And it probably had to do a little bit with very favorable conditions that we had in the Valley of Mexico with respect to rain and all of that.

Now, having said that, it's important-- several elements here. One is that we are focusing a lot of our marketing expenses to the Valley of Mexico, and we have what we call the Valley of Mexico plan, which is basically aimed at regaining share in this market that, as we have commented in the past, has been the focus of attack from B brand producers. And we have mentioned in several conference calls in the past that Jarritos and [Red Cola] have been causing a lot of noise here in the marketplace in terms of the activities that they have and their share. So, with that Valley of Mexico plan, we will focus a lot of our marketing dollars that have to do with investment in coolers, with investment in returnable presentations, and trying to take advantage of the (inaudible) that we have as we were foreseeing that, because of the economic crisis, returnable presentations should be again important. And that was an element of this volume. So we had weather; we had the Valley of Mexico plan.

Now we have two products that have grown very importantly. One is Coca-Cola Zero. We compare that versus last year, it's growing around 80% versus what we had last year. But remember that we have like three different cycles for Coca-Cola Zero. We launched it 2007. It was a big success and, with all this negative internet campaign, came down very importantly. Then we tried again with the same formula, saying that it doesn't contain cyclamates. It didn't do a lot of volume. It didn't perform well. And, now, with a totally new relaunch design, image, new campaign in the TV and media, I think that we are on a very good track. So far, even though we grew 80% versus last year, we are still below the levels that we presented in 2007. We are probably 90% of the way, so we are 10% below the peak that we had in 2007. So Coca-Cola Zero is a very important engine of growth.

And the other is this product in the line of Jugos de Valle, which is this orangeade with low juice content that is having a lot of traction, especially during the morning hours for the consumer as a way of something to share with breakfast. Remember that we were not present there. We have our initial steps in the categories larger. That category is also growing very importantly. The growth coincides, basically, with the growth Coca-Cola Zero is growing, around 80% of those volumes. And I have mentioned how the volumes of orangeade is very important.

Now (inaudible) trends here that are important to mention, and they're of concern to us and we need to focus. One is that we are achieving this leadership in the orangeade category that we were looking for-- that it would take the territories that we cover in Mexico, we are the number-one. We are still the second player in the Valley of Mexico on this category, and we need to work hard. But that category is, in a way, probably, cannibalizing a little bit the sparkling, flavored drinks. If a guy is drinking an orangeade from Valle Frut, he probably is not drinking the Fanta product or a Sprite. And that's why we see volumes of Coca-Cola brand, including Coca-Cola Zero and Coca-Cola Light and the red cola, growing more than 10%, double-digit growth. That probably is the biggest surprise of all when we look at the trends all around the world when you see sparkling beverages coming down. And you have flavors with a mid, single-digit or low, single digits, around 3% reduction in volume in flavors that I believe has been, in a way, cannibalized by Valle Frut.

Important activity on the pricing front as we are increasing prices on some of the cola products. And we are-- Most importantly, we are increasing prices of the orangeade by an important amount. We were selling those products in the Valley of Mexico, the 600-ml around MXN4. We are moving that to MXN5. So it's basically a 25% increase in the orangeade price. And, in the two-liter presentation, we are moving from MXN10 to MXN11. There are some other areas in the country where the orangeade is being sold at MXN7, the 600-ml. So we still have room. But, certainly, the most competitive market for the orangeade is the Valley of Mexico, and we need to measure the consumer dynamics.

So, if I summarize a little bit here and try to give-- summarize the answer, we had tailwinds with respect to weather. We had very good performance of Coca-Cola Zero and the orangeade, and we are-- As you correctly pointed out, we are looking at the pricing equation on some of the products. And we are refocusing some of the investments to marketing and, especially, what has to do with returnable products.

Thanks. Just a follow-up. I understand some of the dynamics in orangeade. But, if you look at just the core CSD portfolio, you've had pricing below inflation for a while. Right? And you've got some really strong volume trends in the sector. So, realistically, is something changing in terms of your price gaps or the competitive behavior or the consumer behavior that makes you more optimistic that, if we look forward to 2010, you can have pricing closer to inflation, because it hasn't been that way. Or is this just kind of the weather was warm, but the underlying dynamics on the consumer or the competitive side remain similar?

No, Lore, I'll state that consumer-- competitor dynamics continues to be a concern, obviously, because some of our competitors have not moved prices for many years. I'm mainly speaking about Jarritos and Red Cola. And some of the other competitors have moved their prices. So price gaps have continued to widen. We believe that, because of the strength of the brand in brand Coca-Cola we have space. That's why we are increasing prices as we speak. We believe that in orangeade there is room to increase, and that's why we're increasing. And especially if the orangeade is cannibalizing some of the sparkling beverages, we need to increase the margins of these products, and that's where we are moving. We believe that, if we sell-- Assuming that these prices that are mentioned in this (inaudible), we will be getting very close to the profitability of multi-serves in flavors with this orangeade product. They are still below sparkling beverages, but we are getting closer and closer.

Great. And just-- I'm sorry.

What I want to say is, if you think of the way we manage the businesses, with the opportunities to increase prices, we'll take it. Our objective is to be equal to inflation or slightly ahead to inflation as we can. And sometimes when you look at the pricing equation on a global basis for the results, you will see that we are not getting necessarily-- that we are not getting inflation, as you say. But, when you look specifically at, for example, colas or water or flavors, we are probably a little bit softer on flavors. Water we have been able to increase prices. Cola we have been able. When you look at the mix of products that we're selling, the total mix certainly brings the average price down. But it is important that we distinguish the pricing activity in each category.

Great. And just two quick follow-ups. Can you just give us what you think the weighed-average increase in CSD pricing is that you're putting through currently? And then, just quickly, in Mexico, we're seeing the sugar prices spike. And that was clearly one of the sources of the gross margin pressure in the second quarter. Do your current costs of sweetener in Mexico, and I know you use high-fructose as well as sugar, reflect the current market prices? Or, as we move to the fourth quarter and the first quarter, should we see higher sweetener pressure than what we saw reflected in your third quarter figures?

Lore, with respect to prices, basically, the prices that we have been implementing is probably around a 2% average because we are not increasing all of our presentations. We are taking a little pricing in the [2.5] returnable presentations and a little bit on the 600-ml. That was taken in the third quarter, but it is going to affect the fourth quarter. And sugar prices, we see-- It's a complicated environment. We are probably going to use a little bit more fructose as we move to next year because we have a price-- or a cost advantage by using more high-fructose than corn sugar. And that will probably help us a little bit on the equation. But I'll tell you that it's safe to assume that what we have in terms of pricing for sweeteners in the third quarter is what we are going to stay for fourth quarter and first quarter of next year.

Just to clarify-- This is Alfredo Fernandez. The price increases that we have taken so far in the month of October have been mainly on multi-serve presentation of colas and in the orangeade of Valle Frut.

Alex Robarts, Santander.

I want to go back to the Mexican sweetener issue. I guess I'm trying to understand here. I can see that we have had some clear pressure from COGS. But, as I understand it, most of the sugar or sweetener that came through in the third quarter really has been purchased under contract in prior quarters and that the spike that we've seen-- I guess it's been 80% in sugar and 30% in high-fructose. But, as we-- I understand you're doing some purchases now such that we will see, likely, a step-up in the sweetener starting at the end of the year and early next year. If you could confirm that and kind of talk to what type of magnitude could we be looking at--

And the second question is really more of a strategic one, which is calling back to this Michoacan pilot. Is it safe to assume--? I mean, obviously, it's the complexity that your distribution system is going through now as you've launched into multi-category, which you kind of unveiled for us last year. Is it safe to assume that that's really the priority as opposed to beer? I guess, with a 25% hit rate on three routes in Michoacan for beer, probably-- I can see how it might not be that conclusive, the impact. And, in the end, that decision to say that we've got through this multi-category phase, and now let's look at beer more seriously-- To what extent can the Coca-Cola Company just basically balk on that and basically give thumbs down? Is that a risk? Do they hold some power in that final shift?

In general, what we have, especially in Mexico, and that's where we have a little bit more volatility in the sugar markets, and let me briefly touch on some of the other countries. Brazil is very similar to international taxes, although I do know we have some-- In Brazil, we have the opportunity to hedge some of the exposure on the sugar because it tracks very closely to international markets. So, in general, we have half of our sugar in Brazil with a contract that has been negotiated for many months before.

Venezuela, there is a lot of (inaudible) sugar. Sugar has increased more than any other country in Venezuela because there is no sugar, and we have low inventories. And it's a very difficult market to operate. And the important thing there is that our plants have sugar at any cost so that we can continue producing. And you have in third quarter versus last year's third quarter sugar (increase)-- 40% to 45% in Venezuela. Colombia is also a market that is important for us. But, in general, it has behaved a little bit closer to what we've seen in Mexico.

In Mexico when you look at the prices of the third quarter, we basically have increases, let's say, around 25%, which is much lower than international prices, and that's because we have been able to work with the different mixes of using pure cane sugar or high-fructose. When you look at the price of high-fructose, that has come down in dollar terms. The impact that we have is that that variation, which is a mid, single-digit reduction in dollar terms in high-fructose in Mexico-- You have a 20-something-percent devaluation of the Mexican peso, then the cost of sweeteners in general has increased around 20% to 25% in Mexico. And I believe that those-- that these kind of cost pressures will [now] be very similar to what we have in the fourth quarter and in the first quarter of next year.

In some cases in Mexico, when we have some instability, we have the opportunity to negotiate with the sugar price - producers and the-- the corn-- the high-fructose, corn-syrup producers with some months in advance and have compromises of supply and demand and certain pricing formula with a number of months in advance.

Where the volatility is similar to what we have, we see a lot of reluctance from the suppliers to get into long-term agreements. So we'll have to play it by ear and see how the market is evolving. But our feeling is that, for the next six months, we'll have similar cost pressure on sugar to what we had during the third quarter that we are presenting.

Now, with respect to beer and this test pilot, again, I don't want to play it down. We firmly believe that the-- that Coca-Cola FEMSA should be ready with all the production, distribution, and sales to work in an industry that is more diversified and we have a great number of SKUs. And that's regardless of beer. If we have-- When we look-- You know that I've been here at this Company for 16 years. And the number of SKUs that we had in '93 was less than 15. And it was basically Coca-Cola, returnable-glass, medium, small, and large size, and that was basically all of-- the majority of the SKUs.

The SKU proliferation has brought a lot of complexity to this industry with the introduction, because of the cleaning process and the retooling processes that you have. And, as I mentioned in the beginning, I think that we have been very, very successful in working in all the production and manufacturing.

And distribution is also a very complex animal because you have to have unions' negotiations to introduce new SKUs or to introduce a different way of compensating for different SKUs that might have either lower or a substantially higher margin than soft drinks. And then negotiations with unions are very complex. You need to have the systems and the platform to-- and decide how to go to market. And that's what we have been focusing on the last year and a half, and we will continue to focus in the next years in how to work with our clients-- different clients and the complexity of this distribution with this tremendous number of SKUs.

Beer is another product. If it's successful, it's going to be in our trucks. If it's not successful, it will not be. We have to finalize this pilot test that we are doing in Michoacan. So far, it looks fine, but it's not conclusive yet. And, obviously, it's-- As we have-- As we are different companies-- It's similar to what we have in Brazil. For Coca-Cola FEMSA to sell a beer from Kaiser and the rights of the Coca-Cola bottlers in Brazil, you have a margin for the distribution, and you have to judge if it's a good business for you to use your capacity to sell that beer product in Brazil vis-a-vis the cost that you have for distribution and the conditions that you have to sell and vis-a-vis the space that it's taking in your truck versus maybe a product that is-- that you're (canning) and producing directly. It's a simple equation. We need to test and see if it's worthwhile for us to sell beer in the future or not. And that's where we are. At the end of the day, we are testing that. As you have different shareholders, it's important that you understand the economics for both parties. For FEMSA Cerveza or for Kaiser in Brazil, it has to make business sense to use a distribution vehicle that is cheaper than what it costs for FEMSA Cerveza for Kaiser in Brazil. For us, it's important that the margin we get doing that pays for the cost of doing that and the space that it's taking from our other products. Okay?

(Operator Instructions). Sean Glickenhaus, Citi.

We were wondering what opportunities you could share with us regarding the Valle and still beverage expansion in Brazil. Should we be thinking about it similarly to the success you had in Mexico in further rolling products out to additional points of sale-- that perhaps there's a percentage that has been covered-- and also what the timeframe associated with that would be. Thanks.

Brazil is-- It has been a difficult story, and it shouldn't be. We have a situation similar to Mexico, where we have different-- a number of bottlers there are different, and the country's not like Central America or Colombia, where we basically operate it per country, and we have been very (inaudible) in some of the markets. So you have to get into agreement with a larger number of stakeholders into Jugos de Valle.

It's also important to remember that, in Brazil, we have had Sucos Mais for a few years. And that has, in a certain way, taken up part of the volume on the still beverages or juices and nectars in Brazil. So, in a way, we then start with Jugos de Valle from the scratch in Brazil, as we were doing in Mexico. So that's why the incremental volume that you see in Brazil is not as important as what we have in some of the other territories.

But, certainly, in Brazil, we believe that it's substantially underdeveloped. If volumes-- The per capita that you see in juices and nectars and low-juice-content beverages-- It's very, very small compared to Mexico or Colombia. And we feel that there will be opportunities there that we need to capture. It's important also that we have in mind that, again, it's 16 different bottlers, plus the Coca-Cola Company is a shareholder in this joint venture. And it's a little bit more effort to get everyone with the same idea to [track] the market. But you're right. There are opportunities there, and our work is to go on and capture them.

Okay. Thanks. And, regarding the bottlers, who I assume most of the bottlers and Coke recognizing the importance of the incremental growth that you get from these products and that we've seen you do elsewhere, it's less a directional issue and more of a how-to. Correct?

Yes. It's more-- As you say-- You are correct. We have been debating how to deal with the two brands, and we finally got to this agreement that is going to be under the umbrella of a product called [Sucos del Valle Mais] so that we have two brands. And some cannibalization when you introduce Jugos de Valle because the same products were also with Sucos Mais. And that kind of effort for everyone is in the same page, I believe, on the opportunities that we have going forward. And, obviously, after doing investment, everyone wants to get the highest return on their investment.

(Operator Instructions). Jose Yordan, Deutsche Bank Securities.

I had just one question. Your cash obviously continues to grow at a pretty good clip ahead of schedule. And so the question of acquisitions and what you're going to do with that cash comes again. And, I guess, my question would be - What are the chances in terms of your pipeline that we'll see a substantial acquisition of another Coke franchise, let's say, within the next 12 months? And, if there is one or more, is one of those likely to be outside of Latin America, as you have been, let's say, advertising for a while that you're sort of authorized to step outside of LatAm? Would that next opportunity over the next 12 months include something outside of LatAm, or would it stay inside of Latin America?

Certainly, the level of cash flow generation and, therefore, the amount of-- Let me put it this way. The capital structure that we have-- it's getting to be very inefficient. And, obviously, (inaudible) question in mind is what we'll do with the excess cash, and how do we get into again a financial structure that is efficient and appropriate for a company this size. We continue to look at opportunities. We have been looking to (inaudible) opportunities within Latin America and outside of Latin America.

I think that, with respect to the timing, it's a little bit complex. I would not like to venture to saying that we will have something during the next 12 months because, at the end of the day it's not only your financial structure and your willingness to do a transaction to find a good opportunity and do something that is rational also in terms of the prices that you are paying and everything.

So I will not describe that we do something in the medium term. It could be outside of Latin America or within Latin America. I think that's what I can say right now. But, certainly, the financial structure is in the top of mind of our Board of Directors; no doubt-- that we need to address.

(Operator Instructions). Alan Alanis, JPMorgan.

Most of my questions have been answered. But, let me expand a specific question regarding this beer and soft drinks issue. Hector, Modelo has been distributing the number-one bottled water in Mexico now for, I think, over two years, if I remember correctly. They have claimed that their volume growth has been consistently double-digit. You're reporting this quarter single-serve volume of water growing at around 8%. Could you comment if you're losing market share in single-serve water versus Nestle, versus Modelo, in the quarter and how you see this bottled water market evolving because, I guess, a sub-question to that would be we're also seeing Big Cola being more aggressive with their water product at an aggressive discount. And how--? Those would be the two questions. Thank you.

Alan, I think that-- I think that there are some, I guess, misconceptions on this. We have been tracking, obviously, what Modelo has been doing with the Nestle brand, Santa Maria. I think that you probably can argue that, in single-serve presentations, they have had some traction in some of their on-premise clients. But, at the end of the day, Santa Maria continues to be very far away from all the water brands in terms of (inaudible). I don't know if it's the fourth brand or fifth brand. This is not the number-one brand. I don't know how they are measuring that. Maybe they look at restaurants in Mexico City or whatever. Maybe they get to an interesting number. But I haven't seen those numbers (inaudible).

What we have in terms of information is that we have lost a few share points. And, when I say this, fractions of 1% in water, it probably would compare to last year, where we are close to 1% market share erosion. But the one that continues to create a lot of problems for us is Bonafont. It doesn't have anything to do with the Modelo distribution. Bonafont continues to grow. And it's the leader, and it's the one that is a little more active, is the more aggressive in pricing, is the more aggressive in marketing and TV and media and all of that. And that continues to be the leader in--

We have started, and that's part of the additional marketing expenses that we had during the quarter-- It's not only Coca-Cola Zero. We're launching Ciel with (inaudible). We have big hope-- big hopes for the brand to see if we get some traction from that. I think that what we have done with Ciel from nonexistent a few years ago to where we are is remarkable in terms of the volumes that we're getting.

I think that, in jug water, we're doing good improvements. As a matter of fact, the price of jug water, even though it's the lower of all the products that we have when you look at price per unit case, is improving importantly because we are doing a little bit more in the Valley of Mexico, where we have a better pricing formula than in the rest of the country.

And so I think that water is a story that we haven't end yet. And, again, the leader is Bonafont, and we-- That's the (inaudible)-- Your question is really more related to this-- to the effect that you have when you integrate with beer these products. And, again, that they are getting some traction on the volume-- As I mentioned, some of the on-premise accounts-- but we haven't seen anything significant with the brand Santa Maria, which is owned by Nestle. And our feeling and rumor in the market is that nor Modelo nor Nestle-- neither Modelo or Nestle are happy necessarily with the arrangement.

Thank you very much.

Lore Serra, Morgan Stanley.

I know this is a sensitive issue. And maybe it's appropriate or not to ask. But Coke said very clearly on their conference call last week that they believe in the backend integration of beer and soft drinks and not the front end. And, clearly, what you're doing is-- This pilot test involves both the front end and the back end. So, when you think about this sort of situation, how do we reconcile those two different points of view?

I think, Lore, that, if I read correctly the conversations that I have had with the Coca-Cola Company in the past, I think that you have a situation where the Coca-Cola Company has a larger scale in the operations than we have in Latin American and probably on a worldwide basis. And, although they recognize that-- If I focus on Latin America, which is the area that I know better, you have competitors, especially Pepsi, that have been doing work together with a beer company or doing the distribution and everything to where even the ownership is in the hands of a beer company. But, when you look at some of the numbers, you can argue that, yes, Brazil-- you have some profitability that is good for some of the products. But when you are-- you were in the shoes of PepsiCo, are you really getting the benefit or the volume traction because of having your product being sold and distributed together with a beer truck or because your truck is distributing a beer product. And I think that the argument that the Coca-Cola Company is trying to present is that Coca-Cola has a much [lower] scale in this market. And, therefore, they brought in the benefit of getting additional scale by getting together with other products. And their argument is that, in the case of the Coca-Cola Company they haven't seen the benefit for PepsiCo on that relationship.

From our perspective, again-- when I say our, meaning Coca-Cola FEMSA, is we have a distribution force and a sales force that is very important; probably one of the largest in Latin America. I don't know if it's statistically the largest or not, but it's very, very large and very complex, very efficient. And, as probably-- Maybe do the comparison with a retailer. I mean, a retailer has the space, and the question is - What else can I do to this space (inaudible) to start getting additional revenue? From our perspective, we have the distribution for it. We have the sales force. Can we do (inaudible) that will bring some scale or efficiency or margins, just because of getting distribution margin on that? And that's where we need to analyze. And it's probably difficult to [reconiciliate], but that's where we are right now, Lore. I don't know if I've answered your question.

And this concludes our question and answer session. Ladies and gentlemen, I will now like to turn the call back over to Mr. Hector Trevino for closing remarks.

Thank you for your interest in our company. And Alfredo and his team, as well, will be available to answer any remaining questions that you may have or clarifying questions. Thank you.

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