Coca-Cola Femsa SAB de CV (KOF) 2009 Q4 法說會逐字稿

Good morning, everyone, and welcome to Coca-Cola FEMSA's Fourth Quarter 2009 Earnings Results Conference Call. As a reminder, today's conference is being recorded and all participants are in a listen-only mode. At the request of the company, we'll open the conference up for questions and answers after the presentation.

During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance.

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

Good morning, everyone, and thank you for joining us today. Last year, we experienced increased challenges and one of the most difficult global economic environments witnessed in recent history. Under these circumstances, our company managed to prove its defensive profile and deliver solid top and bottom line results, extending its strong track record of growth.

Our broad portfolio of products, a wide array of value alternatives that we offer our consumers and the innovation we developed in new categories will remain pillars for our solid performance during the year, driving double-digit top and bottom-line organic growth.

In the fourth quarter, our consolidated revenues reached MXN29 billion, up 28% from the fourth quarter of 2008. Organic revenue growth was driven by increased prices and volumes, which accounted for more than 70% of incremental revenues. Our positive exchange rate translation effect represented less than 25% of incremental revenues and the consolidation of Brisa, the water brand in Colombia provided the balance. For the full year, our consolidated revenues reached MXN103 billion, growing 24%.

In the fourth quarter, our consolidated sales volume rose 8.7% year-over-year. Excluding Brisa, our consolidated sales volume increased more than 6%, driven mainly by double-digit growth of brand Coca-Cola in our Mexico and Latincentro divisions and more than 30% growth of the still bearish category across our territories. For the full year, our consolidated organic sales volume grew 5%.

Our consolidated gross profit increased more than 28% in the fourth quarter, high revenues compensated for higher cost of goods sold, producing a gross margin expansion of 20 basis points as compared with the fourth quarter of 2008. Consolidated operating income improved 19% to MXN4.8 billion in the fourth quarter.

Revenue growth partially offset the higher operating expenses, which resulted from higher labor costs in Venezuela and increased marketing investments in our Mexico and Latincentro divisions, the effect of a positive currency translation resulting from the depreciation of the Mexican peso against our operation's local currency provided more than 40% of our incremental operating income and the consolidation of Brisa in Colombia, accounting for more than 5% of our incremental income for the quarter.

Excluding the acquisition of Brisa, and on a currency neutral basis, our consolidated operating income would have grown 10%. Our consolidated net operating margin declined 120 basis points year-over-year to 16.6% for the quarter. Our consolidated EBITDA grew close to 17% to MXN5.8 billion in the quarter. For the full year, EBITDA grew 15% to MXN20 billion.

In the fourth quarter, our net controlling interest income reached MXN2.8 billion, mainly as a result of higher operating income, combined with a more favorable comprehensive financial result recorded during the fourth quarter of 2009.

Now, let me expand on our operations. Our Mexico division delivered 7.6% volume growth for the quarter. The incremental volumes were driven mainly by double-digit volume growth of brand Coca-Cola, combined with growth in the various categories due to the innovation generated by the Jugos del Valle platform.

In the fourth quarter of 2009, our still bearish category grew more than 25%, driven mainly by increased volumes of our oranges, Valle fruit. During the quarter, the sales volumes of these innovative products, which we introduced in the market less than two years ago, reached more than 8 million unit cases, becoming one of our top five selling brands in Mexico.

Our water business, excluding bulk water, recorded double-digit volume growth. This growth was driven by the new image of our Ciel water brand, which we launched during the second half of last year. Our average price per unit case increased 2.7% during the quarter. This increase was driven mainly by the higher volumes of brand Coca-Cola and the selective price increases that we implemented during the quarter.

Our Mexican operation's total revenues, more than 10% to MXN9.3 billion. Increased volumes accounted for 75% of our total incremental revenues and a higher average price per unit case represented the balance. On the profitability front, higher revenues combined with the lower cost of resins year-over-year helped to mitigate for increased sweetener costs and the third and final stage of the scaled Coca-Cola Company concentric price increase announced back in 2006.

Our gross profit grew more than 10% to MXN4.7 billion as compared with the fourth quarter of 2008. Our gross margin in Mexico remained almost flat at 50.6% as compared with the fourth quarter of 2008. Operating income grew 4% to MXN1.9 billion; higher operating expenses were driven mainly by normalized marketing investments during 2009. As you may remember during the fourth quarter of 2008, we rationalized marketing expenses to adapt our business to the global economic environment.

Investments made during 2009 were intended to support our growing, still bearish platform as well as to deploy resources in the value of Mexico to enhance our execution at the point of sale, bolster our returnable base and improve our fuller coverage. In addition, during the second half of 2009, we supported the launch of Coca-Cola Zero and the new image of our water brand, Ciel.

As a result, our operating margin decreased 130 basis points to 20.5%. Our EBITDA remained flat compared with the same quarter of last year, reaching MXN2.3 billion. For the full year, our Mexican operation's EBITDA reached MXN8.5 billion.

In 2009, the severe global economic crisis produced an important devaluation of the Mexican peso versus the US dollar that affected our dollar-denominated raw material costs. This effect was the main factor that drove the gross margin pressures that occurred last year in our Mexican operations. Despite the Mexican GDP contraction in 2009, our Mexican operations delivered volume growth of almost 7% during this difficult year.

For 2010, we foresee an important challenge that we must confront. Global sugar prices will remain volatile, however, our ability to use fructose in Mexico combined with an expected more favorable exchange rate of the Mexican peso versus the US dollar applied to our US dollar denominated raw materials should be helpful to mitigate higher sugar prices.

All of our strategies remain focused on our primary goal, to provide our consumers with the most valuable alternatives to satisfy their beverage needs, from our brand Coca-Cola products in returnable packages to products such as Valle fruit, our oranges.

This successful launch exemplifies that we have learned to develop innovative products in a short period of time and to manage the wide offering of packages in almost every category, making our portfolio an attractive vehicle to offer value for our consumers. We will continue to evaluate the current environment throughout the year, to implement selective price increases in our portfolio to compensate for higher sugar prices and increased inflation.

Now, let's turn to our Latincentro division. Our Latincentro division posted 19% volume growth in the fourth quarter. This increase was driven by one, double-digit growth in the sparkling beverage across the division, two, the integration of the Brisa bottled water business in Colombia and three, the strong performance of our still beverage portfolio in Colombia and Central America. Excluding Brisa, the division volume grew close to 10%. For the full year, the division's organic volume grew more than 5%.

In Colombia, volumes increased more than 25% in the fourth quarter, driven mainly by the integration of Brisa and growth in the still bearish categories. Over the past 12 months, sparkling beverages sales volumes grew, despite important price increases implemented in this territory. Venezuela, we recorded a 20% volume growth, driven by the strong performance of our sparkling beverage category and our low year-over-year comparison, resulting from operating disruptions that we faced during the fourth quarter of 2008.

Our Central America operations recorded sales volume growth of close to 7% as compared to the fourth quarter of 2008. This increase was driven mainly by a mid-single digit volume growth in our sparkling beverage category and more than 25% growth in our still bearish portfolio.

Our Latincentro division's total revenues grew 43% to MXN10.8 billion. Organic revenue growth, driven by higher volumes and higher average prices per unit case accounted for more than 90% of our incremental revenues. The integration of Brisa in Colombia represented approximately 5% of our incremental revenues, while the positive currency translation resulting from the depreciation of the Mexican peso against some of our operational local currencies accounting for the balance. On a currency neutral basis, and excluding the acquisition of Brisa, our Latincentro division's revenue would have been approximately 40%.

On the profitability front, our Latincentro division gross profit increased 58% to MXN4.9 billion. Higher revenues combined with the lower cost of resins and the appreciation of the Colombian peso as applied to our US dollar denominated raw material costs compensated for the higher cost of sweeteners across the division. Our gross margins reached 45.5%, an expansion of 420 basis points compared with the fourth quarter of 2008.

Our operating income grew 32% to MXN1.3 billion. Higher operating expenses were driven mainly by higher labor costs in Venezuela, increased marketing investments to support our growing still beverage platform in Colombia and Central America and the integration of the Brisa water brand in Colombia. As a result, operating margins decreased 100 basis points, reaching 12%, as compared with the fourth quarter of 2008.

The effect of a positive currency translation, resulting from the depreciation of the Mexican peso against some of our operations' local currencies accounted for close to 20% of our incremental operating income and the acquisition of Brisa represented approximately 15% of our incremental operating income for the quarter. Excluding Brisa and on a currency neutral basis, our operating income grew more than 20%. Our EBITDA grew 33% to MXN1.7 billion, as compared with the fourth quarter of 2008. For the full year, our Latincentro division's EBITDA reached MXN6.2 billion.

In 2009, our Latincentro delivered strong results and the past 12 months we have advanced our strategy to build a comprehensive portfolio, amplifying the beverage categories in which we participate. At the same time, we reinforce our position in the water segment to the acquisition of Brisa. The sparkling beverage portfolio demonstrated its defensive strength by growing mid-single digits year-over-year across the division, despite increased pricing designed to compensate for local inflation and higher feeding costs.

Now, let me talk about our Mercosur division. In the fourth quarter of 2009, our Mercosur division total revenues grew to 32%, reaching almost MXN9 billion. Excluding beer, which accounted for MXN990 million, our total revenues reached MXN8 billion. Organic growth, driven mainly by higher average prices per unit case, represented more than 35% of our incremental revenues. The effect of a positive currency translation resulting from the depreciation of the Mexican peso against the Brazilian reais provide the balance.

Volume growth in our Mercosur division was up 2.3% in the fourth quarter of 2009. Our Brazilian operations recorded mid-single digit volume growth, driven mainly by brand Coca-Cola, through multi-serve presentations and the continued strong performance of the Jugos del Valle line of beverages. In Argentina, however, volumes declined mid-single digits, mainly due to the prevailing tough economic environment and the bad weather we experienced in the [figure] Buenos Aires.

On the profitability front, our Mercosur division gross profit increased more than 23% to MXN3.8 billion. Higher revenues combined with the lower cost of resins across the division and the appreciation of the Brazilian reais partially compensated for the increased cost of sweetener across the division and the year-over-year devaluation of the Argentine peso as applies to our US dollar denominated raw material costs.

Our gross profit margin decreased 290 basis points, 42.4%, for the fourth quarter of 2009. During the fourth quarter of 2008, we reported a one-time operational tax benefit in Brazil equivalent to approximately MXN180 million. Excluding this effect, our Mercosur gross margin during the fourth quarter of 2009 would have remained flat.

Our operating income grew 31% to MXN1.6 billion. Operating leverage achieved through our higher revenues and controlled operating expenses compensated for gross margin pressures. Our operating margin remained almost flat at 18.1% in the fourth quarter.

The effect of a positive currency translation resulting from the depreciation of the Mexican peso against the Brazilian real accounted for approximately 70% of our incremental operating income. On a currency neutral basis, our Mercosur division operating income grew close to 10% in the fourth quarter of 2009. Our EBITDA grew more than 31% to MXN1.8 billion. For the full year, our Mercosur division's EBITDA grew more than 27%, reaching MXN5 billion.

In 2009, the Mercosur division delivered positive results and that benefited significantly from expansion of our beverage categories. Our still beverage product base is growing faster due to the integration of Jugos del Valle line of beverages in Brazil, helping us to amplify the current array of juice-based beverage offerings and to accelerate our innovative capabilities in the market.

Now, let me walk you through our financial performance for the quarter and the full year. At the beginning of 2009, adverse global economic conditions presented many challenges for both companies and consumers. Under these conditions, our balanced and diversified portfolio of assets delivered strong results, reaching our free cash flow generation. To date, more than ever, our company's in a strong operating and financial position to continue growing, investing in our business and ultimately delivering an attractive return to our investors.

As of December 31, 2009, we had a cash balance of -- MXN9.7 billion, an increase of MXN3.5 billion compared with year-end 2008. Our total debt decreased MXN2.6 billion compared with year-end 2009. This decrease was driven mainly by the maturity of a Yankee Bond in the amount of $265 million and the maturity of a peso bond in the amount of MXN500 million for -- by of 2009.

As a result of the above mentioned factors, our net debt balance decreased by MXN6.2 billion at year-end 2009. So, December 31st, 2009, our net debt to EBITDA covered ratio was 0.3 times and our EBITDA to net interest covered ratio was about 12 times, highlighting the strength of our balance sheet.

On February 5th, 2010, we successfully issued a 10-year Yankee Bond in the amount of $500 million at a yield of 4.689%, with a coupon of 4.625%. This transaction marked our third return to the US capital market since 2000 -- since 1996, underscoring our company's fundamental investment grade credit rating and the ability to access international markets at very attractive rates. We intend to use net proceeds from this issuance to refinance short-term maturities and for general corporate purposes. We are very pleased with this successful transaction.

As you may already know, on January 11th of this year, 2010, the Venezuelan government authorities announced a devaluation of their currency, the bolivar, and the establishment of a multiple exchange rate system. According to accounting practices, this event will not have an effect on our 2009 financial results and balance sheet.

For 2010, we expect this devaluation will increase our operating costs as a result of the exchange rate movement applied to our US dollar denominated raw material costs and reduce our Venezuelan operation's financial statements when translated into our reporting currency, the Mexican peso. According to accounting practices, the exchange rate that will be used as of January 10th -- January 2010, for translation purposes in our financial statements, will be the one at which we can remit dividends. We are still awaiting a resolution on this matter.

2009 was a difficult year for all of us. Our company's strong results came from our firm conviction to maximize the value potential of our multinational portfolio of assets, the defensive characteristics of our industry, the strong brand equity of our products and our new line of businesses and the innovation we always pressure -- excuse me, the innovation we always pursue across all of our processes were key factors to achieve these strong results.

Once again, this year represents opportunities and challenges for us. Our operating and financial flexibility positions our business to continue growing in one of the most dynamic and attractive regions in the world to sell beverages, in Latin America.

We never stop learning. These lessons we have acquired over the past years will strengthen our ability to continue outperforming in our industry. Our team of talented professionals is our most valuable asset. They are continuously developing their operational experience and innovation capabilities to expand our company's track record of solid results for our stakeholders and investors. Thank you for your continued trust.

Now, before I open up the call to questions, I would also like to announce an important change in my team. Alfredo Fernandez, who has been working with me as Head of Investor Relations for Coca-Cola FEMSA since 2001 has been invited by our Mexican operations to continue his career path with our company. Alfredo has worked well -- relentlessly to position our story as a benchmark in the global beverage industry. Alfredo, thank you very much for all your support. We wish you the best with your new assignments.

As new Head of Investor Relations, we have appointed Jose Castro. Jose has been part of the corporate finance team of Coca-Cola FEMSA since 2003. I'm sure that Jose will extend Alfredo's successful track record and to his experience, he will help our analysts and investors in the coming years. Welcome, Jose.

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

Thank you. (Operator Instructions).

Your first question comes from the line of Lauren Torres with HSBC.

Good morning. Actually, first, I want to congratulate Alfredo. And secondly, if I could ask about expansion opportunities this year. It seems like you, along with FEMSA, have been somewhat vocal about investment opportunities this year and I was just curious to get a sense of where you see these opportunities?

You've spoken about building out your business in and outside of Latin America, so any more comments on that would be helpful. And also with respect to brands, as you've been acquiring brands, if you feel that there's more opportunities in that front?

Good morning, Lauren. Let me just address some of these issues here. Growing in this industry has proven to be difficult by acquisitions. I mean, we have been successful with some of these acquisitions in the past, but if you look at our track record, we did the Buenos Aires transaction then with a small piece of Mexico in the Tapachula region.

Then, the big acquisition of Panamco that took us some time to digest and integrate and then we have had several transactions that helped us to diversify our portfolio growth, like the Jugos del Valle transaction or Brisa or the acquisition of Agua De Los Angeles in Mexico, another water brand. As you know, we are totally committed to work together with the Coca-Cola Company in this front with respect to the brands that you mentioned in your question. Any transaction that we might do in the future would, if it's a different category of a different brand, will be always together with the Coca-Cola Company.

And with respect to geographic expansions, we continue to look at some alternatives and to have our eyes open. As I said, as an information, because I think there were some rumors in the past, the owners of the franchise in Ecuador were in a process to entertain proposals. We were there, present, and the process has stopped. We need to wait for a clarification of the -- of what are the intentions of the owners of that brand, but that was probably the closest thing that we have in our radar scope.

And just to continue answering your questions, you will see opportunities outside of Latin America. As we mentioned, in the last few months, we believe that we have a Coca-Cola Company's doors open to -- for us to look at some other alternatives. Right now, we don't have anything in our radar screen in that sense and that's basically where we're standing, Lauren.

And if I could also ask one other question with respect to your initial thoughts on the deal with Heineken and how you see that working for you, benefits and how you're going to go about working with them now in a closer capacity?

For sure, it doesn't have any specific implications. I know that they are working very closely with the guys from FEMSA Cerveza to -- just to close the transaction and start taking over the operations. We continue selling Kaiser beers, beer, in our shops in Brazil because we have that contract. We have continued with this very, very small pile.

It's more of a learning process for Coca-Cola FEMSA to -- just to be ready in case there are changes in the marketplace in Mexico that we are not foreseeing presently. But also as we mentioned during the last quarter conference call, I think that the most important element of this is continuing to learn from managing multi-categories. So far, I don't think that there is any specific implication for us, Lauren, with respect to this Heineken and FEMSA Cerveza transaction.

Okay, great. Thank you.

Your next question comes from the line of Robert Ford with Bank of America-Merrill Lynch.

Good day, everybody, and congratulations on the quarter, Hector. I had a question with respect to Venezuela and of the MXN10.8 billion that you have in revenue from Latincentro, how much is coming from Venezuela in revenue as well as the MXN1.7 billion in EBITDA? And I know you're, going forward, you're going to use the FX rate to translate the same FX rate at which you remit and I was curious, when was the last time you actually were able to access the remittance rate for dividends in Venezuela?

And I do understand that some industries are able to access that preferred lower FX rate of [2.60] for critical inputs and I understand that you may be one of those companies, which could suggest that at least in a bad environment, you're still doing fairly well, and I was curious how much difficulty you're having accessing that preferred FX rate of 2.60 right now?

Good morning, Bob. I think that you -- this is a very important question for us in this time of the year and we just had our Board meeting and obviously, all -- a very important part of the Board meeting was dedicated to the issues of Venezuela.

Let me give you some flavor of what we are seeing. First of all, if we look at the 2009 figures, we had a very long conversation with auditors and we analyzed several options and we concluded, together with the auditors, and that was, in our understanding, what all the companies are doing, is that since this devaluation of the bolivar happened in January 2010, we should not affect 2009 figures. That's the first point. 2009 stays as it's being reported.

However, let me give you some flavor of the -- of where the numbers can go, going forward. There are two main effects. One is the impact of these new exchange rates on raw materials. In there, we think that we feel very comfortable with -- that we will have access in a big portion of our raw materials to the [2.6] exchange rate, which is basically a 20% devaluation from [2.15] to 2.6.

The rules are that in order for you to access this preferred exchange rate, you have to have what is called a certificate of non-local production, it's called CNP for the acronym. And we have that CNP for this full year for PET, for resin and for sugar in case we need to import sugar, because remember that we buy locally, but sometimes it -- there have been some deficits in the sugar industry in Venezuela and we need to import that.

And we had that CNP because we needed that to have access to the 2.15 exchange rate during 2009. So on PET and sugar, we feel very comfortable that we will have the smaller impact of all the impacts available in Venezuela, which is this 20% devaluation.

Cans, we haven't had the CNP for 2009 and we don't have it for 2010. This -- we buy locally, but the supplier has not been able to buy aluminum at the lower exchange rate, so cans during all 2009 were acquired at the parallel market and we were suffering that cost during 2009 and I believe that's going to be the impact that it will have on cans during 2010. So, that's basically one leg of the equation, which is the effect that we have on dollar-denominated costs in the operations.

Now, the second leg of the question is how do we translate those numbers into Mexican pesos, which is our reporting currency? And as we mentioned, we need to define -- the accounting rule says that, at the exchange rate, that we can remit dividends, we should give that.

We have declared a dividend in Venezuela as recently as last week and we are in the process of requesting the dollar access to -- just to pace that position. However, in the past, we have asked for dividends and we have been denied the authorization, so I don't state that in the short term, we'll have an answer to this dividend requests.

We will look at the 2009 figures, well, as an example and if we were to use the [4.30] exchange rate, so that you have an idea of the size of the impact that we might have. Venezuela, during 2009, represented around 20% of revenues and around 12% of EBITDA. If we use the 4.30 exchange rate, those numbers will go down to around 10% of revenues and around 6% of EBITDA.

I do believe that that 6% number represents [EBITDA]. It's a more reasonable number when you compare that to the importance that Venezuela has in our portfolio since the acquisition of Panamco in 2003, which started around 4% of EBITDA, and where we have improved a lot the operation and the profitability of the Venezuelan operations. So, it has grown in importance, but certainly 12% of EBITDA was a large number and it was affected, basically, by this exchange rate translation effect.

So in summary, Bob, I'll say that we have an impact on some of the raw materials, but the majority of the raw materials that we have, which is PET, sugar or we have this certificate for -- of non-local production that will give us access to the VEB60 per $1.00, we have to buy cans at the 4.30 and then the translation will -- we are thinking and discussing with the auditors.

But we don't have an answer in the short term, we should be using the 4.30 exchange rate that is basically 100% devaluation of -- in that translation effect and that will basically divide by half the numbers that I just mentioned. So Venezuela, during 2010, should be representing around 6% of EBITDA on a consolidated basis.

It's -- there will be some uncertainty because, obviously, if we start using the 4.30 and then we have access to dividends, we might need to change the currency, but we will fully disclose that to you guys, so that you fully understand what we are doing.

Great. Thank you very much.

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

Yes, thank you. I actually wanted to just go back to Venezuela for a second. When you mentioned, Hector, that you were buying at the parallel rate in cans this year, does that mean you were buying at the effective, whatever it was, VEB5.00 or VEB6.00 rate instead of the official rate?

And -- that's one question. And then, I want to understand, do you have pricing flexibility in Venezuela? So, I understand the translation effect is what it is. I'm just trying to understand -- do you expect to be EBITDA margin positive in Venezuela in '010? Or do you expect to lose money on an EBITDA basis in Venezuela this year?

Yes, Lore, good morning. The first question, yes, parallel market is around VEB6.00 and during last year we were buying cans and sometimes other raw materials like caps and labels at that parallel market, around VEB6.00 per $1.00. With respect to the profitability and pricing flexibility for this year, those are certainly risks that we need to confront as we have experienced in other countries in the past.

Every time that a country goes through a difficult situation, like the one that Venezuela is going right now, we do have less pricing flexibility because there are concerns about inflation and pressures to try to manage inflation. That's one risk that we have. I mean, this is very recently and we have not had any pressures of -- so far, but it's certainly a risk.

One other element of the risk that -- which is important to mention, that is -- to mention and even though it's probably something that you have on the radar screen, it's pressures on salaries. Venezuela, and we have mentioned several times in different conference calls that Venezuela has a very high labor cost and very difficult process for the negotiation of those contracts. We don't know at this moment if this devaluation of the bolivar would put extra pressure on some of these salaries.

And so far, if we look at the -- at our volume for Venezuela, I think that we basically believe that we can be EBITDA positive. I don't think that we will get to a negative number in the EBITDA, but with the caveat that obviously we have a lot of volatility in the country.

And as I mentioned, those are some of the main risks that we have, if we have pricing flexibility or not, to pass along to some of the cost increases in raw materials, pressure from labor in terms of extraordinary increases because of the devaluation and obviously the environment in Venezuela that has been difficult for several years in terms of the operations, disruptions and things like that. But with our preliminary assumptions, we believe that Venezuela will be positive during this year.

Okay, thanks. Thanks very much. Can you just remind me what percentage of costs are resin, sugar and aluminum in Venezuela?

Yes, if you split sugar and PET, are between 20% to 25% each. Then, you have a more important percentage, which is the concentrate; since we are in an incident-based level, we don't have a foreign exchange problem there and with those three, we basically get very close to 80% of the -- of our cost of goods sold. And aluminum cans is very small because we -- it's not as important, but it should be around 5% aluminum.

Thank you.

Your next question comes from the line of [Sohail Ackman] with Lucitech.

Good morning. Just had a few questions on sweetener costs in general, not just the costs, but in terms of the availability. So, I just wanted to confirm if you have availability in each of your markets, what sweetener you need and also in -- I mean, 2009 was a tough year, so there was -- it was harder to push through any cost increments in the last year. I was wondering if you're going to make up for that in this year and perhaps is there likelihood of seeing higher margins quarter-on-quarter on a seasonally adjusted basis?

Yes, good morning. As far as availability, we don't see any problems. The only place where we have some problems with availability in the past and we might see that in the future is Venezuela because of all the very complex processes to import goods whenever you have that need. Venezuela produces a lot of sugar, but it's [deficientary] in that and the import process in the past, it has been very complex by the suppliers and during 2009, we have some scary moments where we were very close to not having sugar in our production facilities.

So, I think that Venezuela -- I mean, that's the only case that will worry me in 2010. The rest, it's more an issue of the price rather than of availability of sugar. And as we mentioned during the -- this conference call, we do some flexibility to use some alternative sweeteners like the high-fructose corn syrup and some other corns.

With respect to margins, I think that in general, given the very strong decline in growth in the economies where we operate, we basically have approximately 7% reduction in GDP in Mexico and Brazil obviously behaved better with a flat GDP growth versus 2008. But in general, most of our -- the countries where we operate had a very negative macroeconomic environment. So, it was very difficult to increase prices.

We were successful in some, we increased some of the pricing on the large formats in Mexico. We were able to increase prices, importantly, in Colombia because the competitors were also moving and in some cases we were following, sometimes we increased prices beforehand and some of the competitors then were following us in Colombia, but we did have some price -- a lot of pricing flexibility in Colombia.

So market by market, I feel comfortable that we were very close to having either flat pricing -- prices in real terms or slightly negative. But given the fact that we were, with this deceleration the economics, I feel very comfortable. I think that going forward, one of the elements that will play in our favor is the effect of the FX translation and some of the raw material costs, with the exception of Venezuela, as I explained in the previous question, for Mexico was -- the Mexican peso was probably the worst performing currency last year.

We don't expect that to continue this year, given the fact that we think that it's now a little bit undervalued. So, given that we see a little bit more stability on the currencies, we feel that some of the cost pressures will not necessarily be there. But for the -- going forward, 2010, obviously we'll, again, try to keep prices with inflation and to maintain or slightly improve our margins, even with the variables, no higher sugar price, a better FX environment and that's basically what we are seeing for 2010.

[Register]. Do you have a consolidate figure for the percentage of your costs that are denominated in US dollars?

Yes. On a consolidated basis, it's around 30% of cost of goods sold.

Great. Thank you very much.

(inaudible), yes. Thanks.

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

Hi, good morning, Hector and everyone. My question on Venezuela was asked already -- answered already, but just a question on the dividend. I saw that you doubled the dividend, but given that you're saying that there's no potential acquisitions of any size and even if you are able to turnaround Ecuador, you probably can finance that with a couple of weeks' cash flow.

Why still hoarding cash? I mean, you should be able to quadruple at least the dividend without really any impact on your financial position, it would still be conservative. So, why are you still hoarding cash to a certain extent, even though letting go a little bit is a good start? I would have expected something more aggressive at this point.

Yes, good morning, Jose. Well, I mean, you're right. That's -- if I should give some priorities to the two issues that were discussed the most during the Board meeting that we had a couple of days ago, I mean, the finance committee, one was Venezuela and the reporting things as I mentioned, and the other one was the capital structure of Coke FEMSA and given the fact that we are basically reaching a level where we might -- we make our -- on that net debt position, which basically reached zero very fast.

The message that we received from the -- and it's probably a little bit conservative, is that rather than giving a very large number then in dividends and then maybe confronted with an opportunity to grow by acquisitions and then reduce that dividend that they felt that it was better to increase the dividend double the size right now. We are still below some of our peers in terms of our yield and if you look at the yield of -- of dividend yield, and just to continue to increase little by little as opposed to having reductions in the dividends going forward.

The one element that is still there, which I think is important that it's ending measures is that even though we don't have any specific transaction on our radar screen, it doesn't mean that we are not looking for opportunities. So, we will continue to look for opportunities strongly, always with a very, let me use the word, it was a very wise approach of doing some transactions that make sense for our investors and shareholders, in terms of value and vis-a-vis opportunities to grow and all of that.

And -- but we still believe that we can continue to grow. So, it's important that we don't go to a situation where we totally pay all the excess cash and start just having like a -- like very small cash balances or very high debt levels in the structure. So, the debt structure of the companies is an issue. We think -- because it's not efficient. But we feel that we still have opportunities. If we don't see those opportunities, the answer for our directors is we don't see those opportunities, we will continue to increase the dividends. But we think, right now, that we will have some opportunities.

Is it -- I know you guys always do a dividend once a year. Is it possible that if, come October let's say, you have not turned anything up with any adequate acquisition opportunities, et cetera, that you would pay a second dividend or an extraordinary dividend, such as what Arca does, for example, and several other companies in Mexico? Is that even possible or likely under Coke FEMSA's bylaws or no?

Yes, it's under the bylaws, is it possible? To be very honest, I think that from here to October, it's going to be a short period of time to change our mind in terms of the opportunities to grow. But I mean, what is certain is that we will continue to review, every Board meeting, what is present to us in terms of opportunities, probabilities of those to happen.

And if we are at a stage where we feel that we don't have the need to start accumulating those cash balances, I -- you're right, we might decide to pay some extra dividends. I don't think that October -- I mean, I think that October is too close to change our minds in terms of the acquisition opportunities, Jose.

Okay, great. Thanks a lot.

Your next question comes from the line of Alan Alanis with JP Morgan.

Hi, Hector. Congratulations, Alfredo, and best of luck with Jose, welcome. Actually, the question is going to sound a little bit bizarre, knowing that Jose is not -- is now coming to take over IR, but in the line of Jose Yordan's question, could you remind us, Hector, the merit of keeping Coca-Cola FEMSA listed?

I mean, as you decided -- I mean the Board decided to increase the dividend to X-amount, but it's not -- I mean, you could -- like it was said previously, it could have been much higher than that. And through a levered buy-out, you could easily take out the float and still be easily under two times if not much less than two times net debt to EBITDA. So, I think it's a good opportunity to remind us, all of us, what are the merits of having the Coca-Cola FEMSA listed, please.

Yes. Yes, I presented your comments, Alan, and obviously we have a very -- I will discuss this with Jose also, if he's joining. That's a possibility, I know this. I mean, you read it, every other person is -- or every other research report that that possibility -- let me give you what is our philosophy here.

We do believe, still, that having Coca-Cola FEMSA listed helps us in several instances. One is the visibility that we have with some of our peers. Clearly, they follow our reports, they see the track record that we have and we can argue that they can follow that, if they do get the FEMSA report or whatever, but it's important from a perspective of the dialogue that we have with our peers, our -- very often.

But the most important element is that we still have not concluded on the issue of is the Coca-Cola FEMSA shares a currency that is attractive for acquisition or not? At some point in time, we were thinking that we, in theory, FEMSA could do an acquisition and use FEMSA shares as a currency, which is a more liquid share and all of that and that's still a viable alternative.

I'm not sure what the impact of this Heineken FEMSA Cerveza transaction will have in terms of the implications for FEMSA shares as a currency. We still believe, Alan, and -- that this is the dialogue that we have had with some of the reporters that some of them don't want -- do not want to exit the business, in the words of some of these bottlers, especially in Mexico that I have heard, is that the best business they know in the world is a well-run Coca-Cola bottling operation and the second best business that they know is a bad-run Coca-Cola operation in Mexico.

So, we are still facing with this question that we don't have an answer yet of -- if Coca-Cola shares is an attractive currency for acquisitions because some of these bottlers might not be interested in exiting the business. But we believe that if we have Coke FEMSA as a public company, we might attract some of these investors that are interested in a Coca-Cola operation alone, not beer, not [oxo], not cash to do -- invest in software companies or whatever.

If we get to the conclusion that this is not the case and I have to recognize that it has not been the case in the last 16, 17 years that I've been CFO of this company, then certainly taking Coca-Cola FEMSA privately is a possibility and as you say, we -- it's very well within the reach of Coke FEMSA to do that. So far, in -- we have analyzed that. We haven't, basically, concluded.

We are in the process of reviewing that again and again and I had the opportunity to listen to some of the comments that FEMSA made during the road show where they were explaining the Heineken transaction and they said that they were open to analyzing either doing a larger float for Coke FEMSA or taking Coca-Cola FEMSA private. So, it's in the top of mind of the management, but we -- as of February of 2010, we haven't concluded that we don't need FEMSA shares to attract some potential targets.

Okay. I hear you. Now -- thank you, Hector, that was useful. Now, in terms of taking -- going into the operations, the trend of the operating expenses, particularly in Latincentro and Mexico are quite concerning in the fourth quarter. Could you comment, going forward, how this should look in your view in 2010? And a similar question regarding CapEx. You could isolate there that much of the CapEx in the fourth quarter was regarding any acquisition and what CapEx guidance are you -- could you provide for 2010?

Yes, Alan, let me go first to the operating expenses line. I think that this quarter we have like a very -- a lot of variations on those lines. The main impact that we have is in Mexico. Last year, we were very much concerned with the well-being of the business and we stopped, during the fourth quarter, a lot of the marketing projects that we have.

If you look at the marketing expenses as percentage of revenues in Mexico during the fourth quarter, it was basically around 1.3% of revenues and you know that we basically are around 3%, 4%, sometimes 4.5% of revenues on -- depending on some of the marketing activities. So, if you look at the fourth quarter versus -- 2009 versus 2008, marketing expenses were basically double as a percentage of revenues and we ended up with a 2.6%, 2.7% marketing expense as part of revenues during the fourth quarter.

If you look at the full year 2008 versus 2009, you still see some differences in the marketing expenses. It's -- that 2008 we were -- we ended up with around 3.2%, 3.3% of revenues while 2009 we ended up around 3.8% marketing expenses to revenue. So, that --

And that marketing is matched like Coca-Cola, correct? So, this is also --?

Yes.

Okay. Sorry. Thank you.

That's matched by Coca-Cola, yes. It's -- yes, it's 50/50 and that is the way it has been always, no?

Yes. Correct. Sorry.

In Latincentro, we have all these additional expenses with respect to marketing with a new campaign for Brisa in Colombia, with dealer spend a little bit more resources in marketing because we are increasing prices in Colombia importantly. So, it was again a little bit on the -- more on the marketing expenses.

There are many initiatives now within the company to try to control better all the fixed cost structure, no? We have in Latincentro the effect of labor that will be reflected in net G&A in Venezuela, as we have spent some time in the previous question on that and the question that we received. So, this is an initiative, what we are trying to isolate, Alan, is that there are many expenses that traditionally you would think that are fixed, that has to do a lot with the distribution and the sales force.

But when you start dissecting and drilling down on those expenses, some of them -- I will not say that are fixed are [quasi] fixed, but they are quasi our (inaudible) no? You have buyer compensation to some of the sales personnel, you have the depreciation expense on trucks and forklifts and warehouses, based on all of that.

That, as you continue to grow volumes or as you continue to increase the number of SKUs, you immediately see an impact on those expenses or costs that you though were -- that traditionally you would think are fixed, no? So, there is a big effort on the companies to try to better understand that situation and to better manage these expenses. But -- okay?

Yes. That was useful. Thanks. In terms of CapEx, just quickly, CapEx going forward, please.

Yes. CapEx for next year will be -- would be a bit higher than 2009. The budget that was presented to us, we are calling for around $500 million. My personal gut feeling is that if every year we have a request for a substantial amount of CapEx and then projects get a little bit delayed and even if you start on time, you end -- you do not expand all the resources because of the velocity of the investments and the transportation of equipment or building warehouses and all of that. So, my gut feeling is that it's going to be somewhere around $420 million to $450 million for 2010.

Thank you so much.

Thank you.

Your next question comes from the line of Celso Sanchez with Citi.

Hi. Good morning. I just wondered if you could update us a little bit on the Brazil still beverage opportunities and if you could just remind us how the Jugos Del Valle in [Matalejo] integrations going in terms of fitting it into the existing business, how the coverage is going and if it's where you want it to be? Sort of where we are in that process? I know it took a little bit longer there, obviously, than it did in Mexico, but clearly it's a compelling opportunity, so if you could update us on that please. Thank you.

Yes, Celso, good morning. Let me give you some flavor there in Brazil. I mean, you are totally right, it took a little bit longer; there was already an existing operation with [Tucosmice] and we have thought that integrating Jugos del Valle into the same platform was going to be easier.

We have some issues with integration. I think that the most important change that we have made is -- or the two important changes. One is that actually the mails, which was three years ago, the marketing guy for Coca-Cola FEMSA in the operations in Mexico, he was appointed as the CEO of Jugos Del Valle Mexico. He was there for two years and now, as of January, he has started as the CEO of the integrated -- the JV in Brazil. I think that that's going to be a positive change for the operation in Brazil.

The previous CEO that we had was the same that Jugos Del Valle had, that has had a very successful experience of starting Jugos Del Valle from zero to the number one juice company in Brazil, was under the helm of the previous owners. But at the end of the day, the -- dealing with 16 different bottlers and the CEO, et cetera, it was not working out, so we decided to do this change and I think it's an important change.

Even though I'm saying that, the volumes are growing very fast. I mean, [Matel], Jugos [mice] was selling around 1 million unit cases last year and now we are selling around 3 million unit cases. So, it's basically tripling the volumes of the operations. Now, that -- those are for -- numbers for the fourth quarter.

Now, with respect to [Material], that company was acquired by the Coca-Cola company. It went through a long process with the -- with CADE which is the antitrust commission in Brazil. It finally got approval somewhere last year. They requested that Nestea be dropped or suspended from the -- from our trucks and starting this week or the following week, we are starting to tell Material, on a ready-to-bring presentation and we are in the process of selling Nestea and this is happening as we speak. I believe it's next week when we start and that -- with Carnival and all of that in Brazil.

That's the way the operation for the ready-to-bring these won awards and we have finalized, together with the Coca-Cola Company and the 16 bottlers, how -- the process to integrate that into Jugos Del Valle, the price that we have to pay to the Coca-Cola Company for that acquisition, which is basically the costs that they have plus some current costs and some other expenses that they have during the time they manage these operations, so I think it was a very fair value.

We split the -- half of the price because this is under the 50/50 joint venture umbrella. We split between the 16 bottlers what has to be paid by who among ourselves. So, all that process is behind us and now we are ready to go forward and use Material as the new platform.

On the dry part, and by dry I mean the feedbacks that is also part of the business, we continue to be managed by the Material personnel because it's a different -- it's a different product that not necessarily is as appropriate to growing our process as the case of already to bring deep. But everyone is owner in their own participation according to how that was split, so the Coca-Cola Company owns 50% of the dry deep of its feedbacks and the bottlers, we own the other half and we will benefit from profits on that.

But in the meantime, during this year, the decision was that this should continue to be handled by the people that were doing this process in Material. A year from now, we'll review and see if there is a different alternative to handle the feedbacks in Brazil.

Thank you. Should we think about the profitability of the business in terms of what trickles down to the bottlers, sort of like it's been in Mexico, where it gets reinvested in the brands? Or do we -- should we see some profit enhancement on the bottler and as you roll these -- or as you consolidate these operations?

Yes. I think that at the beginning, with respect to Material, it was we are going to continue to invest behind the brand because we are just taking over that and it's important that we invest that. And from our perspective, we will have a price at which this product is sold to us by the manufacturing facilities and we have our distribution margins the same that we are having, basically, in Jugos Del Valle in Mexico, no?

It's not the full margin that we have when we compared to the carbonated soft drink market, but this arrangement that we have is explained to you guys before, no? Which is we are the owners of this, we have a distribution margin and whatever profits remains in the operation, which we split half-and-half.

Okay. Thank you.

Your next question is a follow-up from line of Lore Serra with Morgan Stanley/

Yes, thanks for taking the follow-up. I just wanted to go back to Mexico real quickly. You've had really strong volume growth the last couple of quarters in Mexico, yet the pricing seems to be lagging. And I know you took some price increases recently, but it didn't look like as much of them stuck into the fourth quarter as I would have guessed, and I know there's probably a lot of mixed issues.

So, can you just talk a little bit about the pricing outlook in Mexico for '010? Why can't you get pricing more in line with inflation? Why is pricing up only 1.5% year-on-year? I suppose there's a lot of mix effects, but I would like your perspective on that, please.

Yes, Lore, good morning. Yes, you're right, I mean, the main impact of this is a mix change. We have, in the numbers that you see, we have an important growth as we mentioned in brand Coca-Cola that helped us a little bit vis-a-vis water products or even some of the juice products, like the Orangeade that have a lower price per unit case.

Orangeade has continued to grow very fast and that pushes the equation a little to the other side. So, that you have an idea, in Mexico, from a product that was not existent a year and a half ago, two years ago, Mexico as a country sold around 50 -- a little bit more than 50 million unit cases of the Del Valle fruit product. In our case, in Coca-Cola FEMSA territories, it was in excess of 30 million unit cases. And that, obviously, pulls a little bit the price down because of the pricing equation on that.

The other big trend is, as we entered a very difficult macroeconomic environment, consumers, no question, moved to larger packages and larger packages, obviously, as you are well aware, carry a lower price per unit case. We've had several initiatives to try to bolster or to foster the consumption of single serves and we think we see very promising things in terms of the relatively new package, it's something like that, in the single serve category that we expect will help us with the pricing equation.

But the main impact of not -- of having this -- of not passing -- not fully passing inflation in our prices has to do with mix change. In every category, we try to increase it to the level that is appropriate, always taking in consideration the rounding figures and when you have a low price product going from MXN5.00 to MXN6.00, it's a very large increment and you need to minus that and -- but it's -- the -- again, in summary, the main impact is mix change. I believe that -- sorry.

No, I'm sorry.

Let me just finalize this. I think that 2010, I'm hopeful that if we see a little bit more of economic growth in our economy, we will have a little bit more traction and flexibility.

Yes, I'm sorry. Thanks for that. And just as a follow-up, if you strip out R&J and you strip out water and you just look at sparkling and specifically brand Coke, are you seeing any evidence it's down trading to the larger sized bottles is starting to slow down? Or are you still seeing that trend as strong in the fourth quarter as it was, I don't know, two or three quarters ago?

Yes. If we strip the orangeades and the water, certainly have a richer price, but even if we just look at, let's say, TSDs or even just brand Coca-Cola for 2009, we saw a result on these prices, in sales terms, almost flat, but basically it has to do with the six stores, the large packages that I was mentioning.

Okay. Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to hand the call over to management for closing remarks.

Well, thank you everyone for your attention and -- to this conference call and your interest in the company and I know that Jose will take over Alfredo's job with a lot of strength and Gonzalo and Roland will continue to work with Jose and we are here to answer any questions that you might have. Thank you.

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