Coca-Cola Femsa SAB de CV (KOF) 2010 Q1 法說會逐字稿

Good morning, everyone, and welcome to Coca-Cola FEMSA's First Quarter 2010 Earnings Results Conference Call. As a reminder, today's conference is being recorded. (Operator instructions). 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 proceed, sir.

Good morning, everyone, and thank you for joining us today.

In the first quarter of 2010, our diversified portfolio of assets across Latin America delivered solid top- and bottom-line results, continuing to prove the strength of our defensive business profile. The strong brand equity of our portfolio of products, the wide array of packaging alternatives we offer to our consumers, and our continued innovation in the still beverage category were the main drivers for our solid performance during the quarter.

As a reference, in our last conference call, we mentioned details regarding the devaluation in Venezuela of the local currency and the analyses we were going through. We have decided to use the exchange rate of VEF4.30 per U.S. dollar from VEF2.15 per U.S. dollar that we used last year to translate the financial statements from our Venezuelan subsidiary to our reporting currency, the Mexican peso.

In the first quarter, our consolidated revenues reached MSN23.6 billion, up 5% from the first quarter of 2009, despite the effect of the negative exchange rate translation derived mainly from the devaluation of the bolivar in Venezuela. On a currency-neutral basis and excluding the acquisition of Brisa in Colombia, our total revenues grew approximately 19%, driven by increased prices and volumes.

In the first quarter, our consolidated sales volume rose 6.3%. Excluding Brisa, our consolidated sales volume increased more than 4%. This increase was driven mainly by the strong performance of brand Coca-Cola growing 6% and the still beverage category growing more than 18% across our franchise verticals.

Our consolidated gross profit increased close to 3% in the first quarter of 2010.

Cost of goods sold increased mainly due to higher cost of sweeteners across our operations, which was partially compensated by the appreciation of our main operations' local currency as applied to our U.S. dollar-denominated raw material cost. Consequently, our gross margin declined 100 basis points compared with the first quarter of 2009.

Our consolidated operating income improved more than 6% to MSN3.5 billion in the first quarter, supported by double-digit operating income growth (inaudible) in our Latincentro and Mercosur divisions. Operating leverage achieved through higher revenues compensated for gross margin pressures. As a result, our operating margin improved by 20 basis points to 14.9%. On a currency-neutral basis and excluding the acquisition of Brisa in Colombia, our consolidated income grew approximately 20%.

Our consolidated EBITDA increased close to 5% to MSN4.5 billion in the first quarter.

Our net controlling interest income reached MSN2.1 billion. This mainly resulted from a more favorable, comprehensive financial results recorded during the quarter combined with higher operating income.

Now let me expand on our operations. In the first quarter of 2010, bad weather conditions in Mexico and our consumers' lower disposable income, mainly due to higher taxes and the increased cost of services, led to a slow start of the year for our Mexican operations. However, the solid recovery of our volumes in March compensated for the quarter's slow beginning. Overall, our Mexico division delivered stable volumes for the quarter - 3% volume growth of brand Coca-Cola, mainly in multi-serve and returnable presentations, combined with the growth of the still beverage category generated by the innovation in the Jugos del Valle platform, were offset by declining volume in our water portfolio.

Our average price per unit case increased 2.6% during the quarter. This increase was driven mainly by higher volumes of brand Coca-Cola and selective price increases that we have implemented in our portfolio over the past six months. As a result of these factors, our Mexican operations' total revenue increased 2%, reaching MSN8.3 billion.

On the profitability front, higher sweetener costs were partially offset by the appreciation of the Mexican peso as applied to our U.S. dollar-denominated raw material costs.

Our gross profit declined almost 2% to MSN4 billion compared with the first quarter of 2009. Our gross margin in Mexico declined 190 basis points, reaching 48.2%.

Our operating income declined 17% to MSN1.1 billion. Operating expenses, almost in line with inflation, were driven mainly by the support of our growing still beverage platform, as well as the resources deployed in the Valley of Mexico to enhance our execution at the point of sale, bolster our returnable base, and improve our cooler coverage. Our operating margin decreased 300 basis points to 13.4%, mainly as a result of gross margin pressure.

Our EBITDA declined 11% to MSN1.6 billion compared to the same quarter of last year.

During the first quarter of 2010, international sugar prices started to decline significantly. However, we expect to face short-term cost pressures from this raw material in our Mexican operations. Over the second half of the year, a more stable sugar cost environment, our ability to use high-fructose corn syrup, and a more favorable exchange rate of the Mexican peso as applied to our U.S. dollar-denominated raw material costs should help us to mitigate these cost pressures.

In summary, after a difficult start of the year, our Mexican operations showed significant improvement in March. All of the tools that we used last year to weather the difficult economic environment remain in place. The increased availability of brand Coca-Cola in returnable presentations and the innovations derived from our diverse portfolio will continue to provide our consumers with an attractive multi-category, diverse offering and help us to outperform our industry.

Now let's turn to our Latincentro division. Our Latincentro division posts more than 15% volume growth in the first quarter. This increase was driven by the integration of Brisa bottled water business in Colombia, double-digit volume growth in brand Coca-Cola in Colombia and Central America, and the strong performance of the still beverage portfolio in Colombia and Central America. Excluding Brisa, the division volume grew more than 6%.

In Colombia, we recorded strong volume growth of more than 32% in the first quarter. This increase was driven by the integration of Brisa and double-digit volume growth in our sparkling and still beverage categories. Excluding Brisa, our Colombian operations' volume grew close to 7%.

In Venezuela, our volume increased 2%, driven by increased volumes of sparkling beverage and our water portfolio.

And, in our Central American operations, we recorded sales volume growth of 12% compared with the first quarter of 2009. This increase was driven by double-digit growth across all of our beverage categories.

Our Latincentro division's total revenues declined 8% to MSN7.4 billion. This decline resulted from a negative currency translation effect, due mainly to the devaluation of the bolivar in Venezuela. On a currency-neutral basis and excluding the acquisition of Brisa, our Latincentro division's total revenue grew 36%, driven by higher volumes and higher average prices per unit case across all of our operations.

On the profitability front, our Latincentro division's gross profit declined 8% to MSN3.4 billion; again, as a result of the negative currency translation because of the devaluation of the bolivar in Venezuela. Consistent with the industry, we faced higher sweetener costs across the division. This cost was partially offset by the effect of the appreciation of the Colombian peso as applied to our U.S. dollar-denominated raw material cost.

Our gross margin reached 45.8%, an expansion of 20 basis points compared with the first quarter of 2009.

Our operating income grew almost 18% to MSN1.2 billion. In local currency, higher operating expenses were driven mainly by continued marketing investments to support our growing still beverage category in Colombia and Central America, the integration of Brisa water brand in Colombia, and higher labor cost in Venezuela. Operating margin expanded 370 basis points to 16.7% compared with the first quarter of 2009.

Our EBITDA grew 14% to MSN1.6 billion compared with the first quarter of 2009.

In the first quarter of this year, our Latincentro division delivered strong results, despite the devaluation of the bolivar in Venezuela. In local currency, all of our operations recorded solid top-line growth. Importantly, our performance continued to demonstrate the brand equity and the (inaudible) strength of our sparkling beverage portfolio, which achieved double-digit growth in Colombia and Central America, despite the increased pricing initiatives to compensate for local inflation and higher sweetener costs.

Over the past year, we have reinforced our returnable base of sparkling beverages and, at the same time, developed a broader portfolio of products through innovations we have made in the still beverage categories, offering our consumers more alternatives at different price points. Additionally, through the acquisition of Brisa, we have reinforced our position in the water segment.

Now let's talk about our Mercosur division. In the first quarter of 2010, our Mercosur division total revenues grew 25% to MSN7.9 billion. Excluding beer, which accounted for MSN763 million, our total revenues reached MSN7.1 billion. Organic growth, driven by higher average price per unit case and increased volumes, represented approximately 70% of our incremental revenues. The effect of a positive currency translation resulting from the appreciation-- from the depreciation of the Mexican peso against the Brazilian real provided the balance.

Volume growth in our Mercosur division was up 10.5% in the first quarter. Our Brazilian operations recorded more than 14% volume growth, driven mainly by brand Coca-Cola in multi-serve presentations and the continued strong performance of Jugos del Valle line of beverages. In Argentina, our volumes grew 2%, mainly due to the strong performance of our still beverage category, which compensated for a low, single-digit decline in the sparkling beverages. This performance represents a significant improvement as compared to last quarter.

On the profitability front, our Mercosur division's gross profit increased 24% to MSN3.3 billion. The increased cost of sweeteners across the division was partially compensated by the important appreciation of the Brazilian real as applied to our U.S. dollar-denominated raw material costs.

Our gross margin decreased 40 basis points to 42.1% for the first quarter.

Our operating income grew 27% to MSN1.2 billion. Operating leverage achieved through higher revenues resulted in a 30-basis-point operating margin expansion to 14.9% in the first quarter. On a currency-neutral basis, our Mercosur division operating income grew 17%, and EBITDA grew more than 19% to MSN1.4 billion.

During this first quarter, our Mercosur division delivered positive results in Brazil. Our portfolio of products grew importantly in every category, supported by the wide array of alternatives that we offer to our consumers.

It is important to highlight that brand Coca-Cola also grew significantly, driven mainly by our two-liter, returnable presentations and reinforced by our introduction of new packages, such as the 250-milliliter cans and [BD] presentations. These alternatives represent a compelling market offering for our consumer. Going forward, we anticipate an important opportunity to leverage our returnable base in Brazil while we continue to capitalize on our innovation capabilities. Additionally, as we noted in our last conference call, the still beverage category is gaining traction, supported by the integration of Jugos del Valle line of beverages in Brazil.

Now let me talk briefly about our financial performance for the quarter. This quarter, our operations outside of Mexico produced strong results, driven mainly by our Brazilian and Colombian franchise (inaudible). These engines of growth help us to compensate for our Mexico division's slow start of the year. This underscores the value of our Company's diversified sources of cash, as well as the strong operating and financial position.

As of March 31 of this year, we have a cash balance of MSN14.7 billion, an increase of MSN4.7 billion compared with yearend 2009. This increase was driven mainly by additional funds we obtained through the issuance of a new debt and cash generated during the quarter. Our total debt increased MSN3.2 billion compared with yearend 2009. This increase was driven mainly by the issuance of a Yankee Bond in the amount of $500 million and the repayment of Certificado Bursatil, a Mexican peso bond, in the amount of MSN2 billion, both during February of 2010.

As a result of the above-mentioned factors, our net debt decreased by MSN1.5 billion at the end of the first quarter. As of March 31, our net debt to EBITDA coverage ratio was 0.2 times. And our EBITDA to net interest coverage ratio was close to 15 times, highlighting our financial flexibility and balance sheet strength.

Using part of the proceeds of our Yankee Bond issuance on April 16, 2010, we fully paid the maturity of our Certificado Bursatil in the amount of MSN1 billion, reducing our debt position. This will be reflected in our balance sheet in the second quarter of 2010.

As you might already know, on April 14, Coca-Cola FEMSA held its annual ordinary shareholders meeting, in which our shareholders approved a cash dividend in the amount of approximately MSN2.6 billion to be paid as of April 26. This dividend is almost double the amount that we paid to our shareholders last year.

Additionally, on the same day, following the annual ordinary shareholders meeting, our shareholders also held an extraordinary shareholders meeting, in which they approved amendments to Coca-Cola FEMSA's bylaws to reflect changes to the shareholders' agreement between subsidiaries of the Coca-Cola Company and subsidiaries of FEMSA. The main purpose of the amendment is to establish that only a simple majority vote of the board of directors is required for the appointment and compensation of the Chief Executive Officer and all of the officers reporting to the Chief Executive Officer and, also, the adoption of decisions related to the ordinary operations of Coca-Cola FEMSA. Decisions related to extraordinary matters such as business acquisitions or combinations, among others, shall continue to require the positive vote of the majority of the board of directors, along with the vote of two of the members appointed by the Coca-Cola Company.

2010 represents another opportunity for our Company to demonstrate its operating and financial capabilities and to outperform our industry, despite the challenges that we might face. We have learned to capitalize on past experiences to achieve our goals. For everyone at our Company the value of learning is the foundation on which we will continue growing and focus to deliver solid results for our stakeholders.

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

Thank you. (Operator instructions). Lauren Torres, HSBC.

My question is about the market environment in Mexico. You know, you talked about some poor weather starting off the year and then some improvements. But you also spoke about tougher consumer, getting hit with higher taxes and higher costs of services. I was curious to hear about how those are impacting the consumer-- if there's more pressure as a result of that this year than what we've seen over the last several quarters-- you know, something more of a concern.

Yes, Mexico, as we explained and you summarized in this question, is going through difficult times. January and February were pretty much affected by unseasonably cold weather. We have checked with other consumer industries, and it was pretty much the case where January and February were very slow. For us, March was a positive month compared to last year, both in terms of volume and in terms of profitability. However, we believe that the Mexican consumer is still experiencing a lot of pressure.

My concern in Mexico is with respect to the pricing availability-- or pricing potential that we have. We had plans since the end of last year to increase prices at a slow pace, little by little, to compensate for this increase in taxes. Remember that they ad valorem tax in Mexico was increased from 15% to 16%. So such a small price increase is not necessarily in all presentations. If you have a product that has been sold at MSN10, you are not going to sell that to MSN10.10. You have to run both the figures either to MSN50 or MSN11, for example.

So we had planned to increase prices in a progressive manner during the year. We have done some of these price increases, especially in the large package presentations - the 2.5-liter and the 3 liters. But, at the same time, our competitors have reduced prices. And, just to give you an example, Pepsi-Cola announced a reduction of the 3-liter package that they have, from MSN16 to MSN14. Just as a reference, we just increased the price of the 3-liter from MSN21 to MSN22. So, at the end of the day, we have more than a 50% premium over the same package as Pepsi-Cola.

So, when you look at our numbers in Mexico and say, basically, the effect of maintaining some of our operating expenses pretty much in line with inflation but not being able to increase revenues at the same rate, both because of the effective of volumes that we had during January and February and because this pricing power as we were, in a way, absorbing part of the tax increases during the first quarter.

So I think that, in general and in summary, the environment continues to be tough. I think that we are very well positioned, as we have expressed in the past, with all the different packages that we have to address the consumer needs at different price points. I think that the fact that we have a very strong returnable base also helps us in this against (inaudible) on this pricing environment that I was mentioning. Our 2.5 returnable BD product on brand Coca-Cola is priced at MSN14, so it's similar to the Pepsi price and the Big Cola price but with a returnable package. But, again, we continue to move our prices on one-way packages and, as I explained, with a very large price gap.

So I think that the consumer in Mexico is hurt by all these services and price increases. I tell you it's a tough environment to continue to increase prices, but we should be looking for these increases so that we compensate for some of the cost.

I think that the positive news out of all of this is that, finally, we are starting to see some movements on sugar prices. At least on the international markets, that, at some point in time, in Mexico will be-- we'll start to see some of these pressures to (inaudible).

So, just as a quick follow-up, you don't believe that you need to pull back on any pricing-- that there's just other ways of managing that with packages and what not? It's not that you-- you may have to pull back on pricing.

That's correct. We don't believe that it is necessary to pull back on prices. And, as I mentioned, we are actually increasing some of the pricing on the large-- on the family presentations. I think that, with the cost pressures that we have because of sugar, at some point in time, the competitors will continue to increase prices.

And to follow up, it's important also to highlight that we do believe that because of all the marketing activity that we have around the World Cup, that we will benefit also from that as the consumer also is exposed to a larger budget on marketing. And that will also help on our volume.

Robert Ford, Bank of America/Merrill Lynch.

Hector, I was hoping you could comment a little bit more extensively on Venezuela in terms of the operating environment that you see there - your ability to access the preferred FX rate for some of your input costs.

And then, if you could, just remind us how much this year and last year did Venezuela represent of the sales and the operating profitability, please.

The Venezuela environment continues to be tough. As you might imagine, a lot of pressure on salaries and wages-- this is obviously going to have, as we explained-- As we were anticipating during the fourth quarter conference call, when you have devaluation of currency, usually you start having a lot of pressure from some raw material costs but also from wages and salaries.

In terms of the access to the controlled exchange rate, we have been receiving some foreign exchange at the VEF2.16 exchange rate. But it's very small amounts, and it was basically amounts that were approved prior to the announcement of the devaluation of the bolivar. And those dollars, if I remember correctly, was around $10 million for raw materials that we have. We have continued to work with this agency-- the [Cardivi] agency to continue to have access at this exchange rate. And some of these applications have been approved, but we have not received the money yet. So there is pressure on that.

Part of the preoccupations or the worry that we have in Venezuela also has to do with the availability to some of the raw materials because it's not only we have the currency to pay for that but also the suppliers were able to import some of these materials into the country. Sugar is important. We don't foresee any problem in the short term, but we are worried more for the second part of the year because, obviously, as you may know, Venezuela produces a lot of sugar but not for the consumption of the country.

And this issue with the electricity shortages is also a thing that we need to be very-- on top of that, being very careful. We need to-- Because of regulation, we need to consume 20% less electricity than what we were consuming last year. We are installing some diesel generators in some of the plants. With that has a little bit the advantage that diesel is quite inexpensive in Venezuela. So I can foresee, necessarily, expenses related to that, but we have to do some investments in our (inaudible)..

So, in general, the environment is tough, Bob, and I'd like to see a little bit more flow of funds to really get a better picture of how the future is going to shape up for us in terms of access to dollars (inaudible).

And, then, Hector, just sales and EBIT in both periods.

And then I would expect that it's got to be even tougher for some of your competitors. I'm hearing that you basically are selling everything you can get on the shelf right now. Is that correct?

Revenues - Venezuela represents around 12% of this quarter's revenues on a consolidated basis.

I didn't understand the second part of the question, Bob.

I was hoping to get revenues and EBIT in both periods, Hector.

And then I was-- I was under the impression that the environment is even more severe for your competitors. And I'm hearing that you basically are selling everything you can get to the shelf.

Well, the EBIT is very (inaudible). It's around 11% or 12% of the consolidated EBIT.

And you're right that, in Venezuela, the issue that we have is we sell everything we produce. We are looking at alternatives in how to improve productivity in some of the plants. We have some plants that have very low productivity because of the agreement that we have with unions. We are investing in new production lines. We are investing in that so that, by the third quarter of this year, we have (inaudible) because we see our volume-- We're selling everything we're producing in Venezuela now.

In terms of our competitors, we know that they have been going through some difficult times in terms of the relationship with unions and closing of some of the facilities-- some of the stuff that's happened to us in the past when some of our plants were stopped by a few days. And I think that's basically what I have to say in that respect.

Great. Thank you very much.

Lore Serra; Morgan Stanley.

I wanted to ask a follow-up and then a separate question. If I understood the answer, you just said that Venezuela was 11% to 12% of your EBIT this quarter?

Yes. That's correct.

And I guess that's what we thought it was in '09. So can you help us understand how your Venezuela contribution could be steady if you've gotten sort of 100% devaluation of the currency? What was Venezuela as a percentage of the EBIT in '09?

It was very close to that number. And then I'll give you the exact number in a second.

Well, I don't need the exact number.

Let me explain what is happening in Venezuela. In Venezuela, we have volume growth that is not only important, but, especially, we have been able to increase prices importantly. And, even with 100% devaluation of the bolivar, our EBIT was very close to being flat. It was slightly below what we had last year on the first quarter.

So the implication is that the margins grew materially-- I mean, big, big margin increase.

Yes. Yes, Lore, because we were able to increase prices and move our mix to a richer mix of products. But that's basically what is happening in Venezuela.

Okay. And, I guess-- You know, can you help us sort of stretch it out and give us some perspective on 2010? It's not intuitive that you'd have a big devaluation and you would grow margins. So is this sort of a temporary factor because you got a lot of pricing ahead of-- I don't know-- renegotiating with unions? Or do you expect to see this kind of trend persist?

I think that-- It's a little bit counterintuitive probably because of the cost of raw materials that we import. But, in local currency, the implication is that, in bolivares, you have volume-- You are selling everything you can, but still you have capacity constraints, or volume doesn't even grow significantly. You have a lot of pricing because of, obviously, the effect of this devaluation and increases in sugar and increases in PET and things like that. And the expenses are pretty much flat. I mean salaries and all of that is flat. And we are receiving some pressure, but we have not analyzed the negotiations.

So maybe first quarter is a little bit awkward because we haven't received a lot of the pressure on wages. But, when you look at the numbers for the first quarter in Venezuela in local currency, it's very close to-- almost double the size in local currency to what it was last year. But, once you translate that into pesos, EBIT is very close to being flat. It's slightly negative.

Okay. And just--

It's not something that we can-- I don't anticipate that this is something that we can sustain once we start receiving a lot of the cost pressures related to that, especially (inaudible).

Okay. But, in terms of access to raw materials at the VEF2.6 rate, you mentioned that-- I think it was $10 million worth. Are you optimistic that you can renew raw materials at that rate, or will you face more pressure in coming quarters there?

No. I think that-- I'm not very optimistic because the $10 million that we received were invoices that were prior to the devaluation of the bolivar. We have received approval to receive the VEF2.6 rate, but we have not received the dollars. So it's a little bit-- It's a cumbersome process. But we have not received it. So, until we get a little bit more light on that, I'm a little bit pessimistic that-- I'm not sure exactly at which exchange rate we're going to receive the currency for raw materials.

Okay. And then the question I wanted to ask was just to understand a little bit about the perspective for how the change in the sugar cost dynamics is going to affect your results in coming quarters. And I know it's going to depend by market. But, if you comment-- I don't know-- Mexico, Brazil, Chile-- how quickly you expect to see the lower world sugar prices be reflected in your cost structure, that would be helpful.

Yes. As you saw, Lore, international prices went up very importantly at the end of last year and a little bit at the beginning of this first quarter. And the good news is that these prices are back to more reasonable levels. The bad news is that, in some of the markets where we operate, it takes some time to adjust to those prices.

If we go to Mexico, prices are very high still. And we are close to prices around $900 per ton, which is pretty much affected by the U.S. price. In the U.S., the price is also very high for sugar. It's higher than Mexico. It's close to $1,000 per ton. So, in Mexico, even though international prices are probably around $500 or $600 per ton presently, I don't see Mexico prices coming down as fast because, again, we need the U.S. prices to come down for Mexico to come down because of the small trade that is happening between the U.S. and Mexico.

In other markets, like Brazil, the prices adjust, basically, immediately because they do follow very closely the international prices, even despite that Brazil is a big exporter of sugar on a worldwide basis. So, in Brazil, we are already with prices closer to the international prices. And remember that we have some [pages] there around the $0.16 or $0.165 per pound that are still working for us. They are basically back to the level where we have the prices-- the sales price. And, for that, we have basically-- We have covered half of our consumption for the next few months. So, in Brazil, I'm seeing (technical difficulties) in the second quarter numbers and going forward.

And then you have [someone] between these two extremes which are the Colombian market and the Central American market, where you have different regions that it would be adjusted little by little - somewhere between Mexico and Brazil that are the two extremes. I'm leaving outside Venezuela because of the situation in Venezuela. It's very complex. It's the highest price per ton of sugar that we have in our system. It's close to $1,100 per ton. But that has to do with scarcity issues and all these currency discussions-- discussions of foreign exchange that we see in Venezuela.

Thank you.

Alan Alanis, J.P. Morgan.

My question has to do with the trends that we're seeing in the different categories in Mexico. I know it's only a quarter, but (technical difficulties)--

And one of the trends that we see there is that, as we continue to innovate and to launch new products like cranberry juices that were not present before and this ValleFrut, which has low juice content but it's also within this category growing very importantly, you see some cannibalization of the traditional line of business or what we call the red line because remember the packaging material for the traditional Jugos del Valle juices and nectar were red. So the juices-- 100% juice and nectars are growing very slow. And what is providing the growth in this category is all the innovation that we are bringing into the marketplace.

Okay. That's very useful. Thank you. If I may just ask very quickly regarding your cash a totally different question. You have almost MSN15 billion there. It would be like $1.2 billion. How much of your debt you can actually repay, Hector, of your long-term debt? And how should we think about the accumulation of cash that you will have going forward, if you could provide some comments, please, on that?

Yes. Well, you are correct. We have this MSN15 billion. As I mentioned during the introductory comments, we paid on April 16 MSN1 billion. And, next Monday, we are paying a big chunk of that as dividend (inaudible).

The idea that we have, Alan, is that we'll continue to repay some of the bank loans that we have. We have been very selective on the timing and the institutions that we are using. And some institutions don't want the credit to be repaid because (inaudible) important business for them also. But the mandate that we have from the finance committee when we issued this Yankee Bond was basically to extend the life of our maturities and use, basically, the full $500 million to repay other credit lines that we have. So we are in that process, and the idea is obviously not to have such a large cash balance and start reducing our debt.

The big question is what's going to happen as we continue to generate cash going forward. We discussed briefly that last quarter over that. And, obviously, our idea is that we see opportunities to continue growing by acquisitions, maybe not in the short term, but, obviously, we need to have our cash balances in order for that. But we also have the flexibility to reduce our debt and then borrow money if we are confronted with an acquisition and then, obviously, if no acquisitions are in the radar screen in the short term, to review our dividend policy again and maybe increase that dividend again for next year. But, as of this moment, I'd prefer not to speculate right now if we are going to increase dividends or not.

But what I can say is we have it very clear that we are basically getting to a zero-debt situation, which is not effective for the Company. So it is important that we have a structure where we have debt in our balance sheet and, obviously, use that either for acquisitions or larger dividends if no acquisitions are present.

Good. That's very useful. Thank you so much.

[Antonio Gonzales], Credit Suisse.

My question is also on Mexico; in particular, on the profitability front. Clearly, part of the impact of profitability this quarter is related to sweetener costs. But just excluding that for a moment, could you help us understand how could SG&A evolve in line with inflation for the remainder of the year? I wanted to understand - first, what's your current coverage of coolers at the point of sale and if you're planning to expand that aggressively; secondly, if there's any incremental expense you foresee in terms of a higher share of returnable bottles; and, lastly, to what extent can the potential increase in marketing related to the World Cup can impact this SG&A.

I think that-- When you look at operating expenses and SG&A, what you have here is that, for example, this year this already happened-- and speaking about Mexico. Most of the salary compensation was increased by 4.5%, which is basically what you see around the industry in Mexico, which is very close to inflation of last year, which you remember was close to 5%. So it was 4.9% or something like that. So, between-- You see in different areas increases between 4.5% and sometimes 5% increases in the salaries.

So, in general terms, you see the salaries flat with inflation. The problem we are facing this quarter is that, in addition-- There are several situations. But, in addition to all these salary increases, we have increases in the cost of gasoline and diesel for our trucks and electricity for our plants and our offices. All these services that are provided by the government in Mexico saw big increases at the beginning of the year. That's one issue.

The other issue is that we were not able to pass along or to increase prices at the same rate that we are suffering these increasing costs and salaries. And a portion of that was that during the first quarter we were absorbing, basically, one extra point of ad valorem tax because we couldn't adjust, as I mentioned, the prices on a timely manner. But we have a plan to recuperate little by little these prices during the rest of the year.

So when you have volume, basically, being close to flat and prices increasing in nominal terms, around 2%, with mix and everything changing in our favor but just 2% and you have most of your salaries and cost increases 5%, that's what happens. You have this (inaudible) on the profitability.

With respect to coolers, we have a lot of initiatives, but it doesn't necessarily have to do with coverage. Coverage-- We have very good coverage. We're probably close to 80% coverage in that respect. The initiatives have to do more with how do we improve the execution or the performance of that cooler in the point of sale. It has to do with larger coolers maybe, but it will not change the coverage. It will change the investment because we have to change to a different cooler and to rotate from this plan to start investing in a larger cooler and the cooler that a B client has you translate that-- you send it to a smaller retailer. Remember that, as we move into a more-- a larger number of SKUs, the space in the cooler gets complicated. So there are a lot of initiatives on how to deal with multi-categories and how to improve the performance of the cooler in the marketplace.

At the same token, we can say that the cooler that we have right now consumes less than 80% of the electricity - 80% less electricity than what they used to consume five or six years ago. But we are also very cautiously moving to a lot of (inaudible) issues. So that's the issue with coolers.

Returnable bottles. We continue to invest behind that. The mix-- I told you (inaudible) exactly what the mix is, but it's increasing versus what we have last year; basically, by one percentage point. But we do have some investment behind returnable bottles.

And, with respect to the World Cup, we do have some investment behind that. It's something that we see every two years because of the Olympic games and because of the World Cup but the World Cup being a little bit more serious in terms of the amount of resources that is invested behind that. Obviously, the negotiation process with the Coca-Cola Company is always tough in that respect. And we like to invest in marketing as we see resource performing during the year, and we might adjust a little bit towards the end of the year if the results are not there. But the World Cup always brings some extra investment behind this. What we hope to see is that, because of this investment in marketing with the World Cup that you will see a pickup in single-serve presentations as people start going more towards on-premise consumption. And that might help a little bit our margins.

Okay. Thanks. And, finally, with respect to Jugos del Valle, this year are we seeing something significant in your P&L already contributing already to EBIT for Mexico?

Yes. Right now during this year, we have-- As we explained-- Remember that, at the beginning of the year, we were saying that most of the visibility we were-- was going to remain in Jugos del Valle to continue investing behind the production facilities in Jugos del Valle, but this year, basically, we are operating the joint venture among all the bottlers in the Coca-Cola Company, basically, with a [very small profit order] so that most of the margins start-- reflect in the bottler. Still, the profitability of juices and some of these drinks that we have been designing are at the low end of the margins that we like to see. We'd like to improve those margins. Remember that juices have a very different cost structure because of the juice content and all the volatility that is embedded in orange juice and some of these fruits. And we don't have the same margins that you have on a CSD or water. But we are improving that profitability little by little, and at some point in time I'm sure that it will be a good contributor to the profitability of our Company.

So, in terms of pesos, we are adding pesos to the operating profit line. In terms of margin, as you include the revenue on a lower-margin product, it's reducing a little bit our total margin for the Mexico operation.

Okay. This is great. Thanks a lot.

Jose Yordan, Deutsche Bank.

My question is a follow-up to what Alan was asking, about the hoarding of cash and what you're going to do with it. I understand that you're still looking at acquisitions. I guess, specifically, if you come to the next three or four months and all the current acquisitions you're currently evaluating were to stop or to become cold again, would Coke FEMSA consider an October/November dividend like some of the other bottlers do or other companies in Mexico do, or would we have to wait until next year?

And then just a second question on-- If you can just review our CapEx forecast with us, that would be great.

First of all, on the acquisition and the dividend issue, I think that three or four months is a short period of time for us to refine acquisitions. We have mentioned the fact that we know that the (inaudible) operation was for sale, and then they stopped the process. So we-- I don't think that we will define an acquisition in the next three or four months, and, because of that, I don't think that we don't have it in the radar screen to increase dividends at the end of this year. My perception is that it will be more next year during these dates; again, during a normal shareholders meeting to take a decision on that.

With respect to the CapEx, last year, we invested-- cash flow for CapEx was around $450 million. 2010, I think that we'll increase that to $500 million or $530 million as we are investing in some of these production lines. We have increased some of the capacity already for some of our operations. But part of the program to upgrade production capacity in all of our facilities, including what I mentioned-- installing a new production line in Venezuela, and we have plans for Brazil and Colombia and Mexico also. So it takes us-- Basically, the CapEx budget to-- I'll say around $530 million for 2010.

$530 million?

Yes.

And then, for 2011, we can just assume it goes back to the sort of near-depreciation level?

Yes. Like 2009 and 2010, we have this step-up in the CapEx because of all the production lines that were installed at the end of last year. Some of them started production as late as March. And we have a lot of projects still under development. But we basically installed capacity for-- In these two years, we will install capacity for an additional 200 million unit cases in our system. We took advantage, I think, of the opportunity that, given larger-- some of the producers-- manufacturers of these lines were in very hard conditions. So we negotiated very good prices and very good terms. And we place a big order with the suppliers of equipment to help us improve our production capacity in this 2009/2010 time period.

So my expectation is that 2011 will go back to $400 million or maybe $450 million. $400 million would be a good number for 2011.

Okay. Thanks a lot.

[Gustavo Avilla], UBS.

The question is again back to Mexico. You comment a little bit on the cooler coverage and the execution at the point of sales. My understanding is that those are only some of the issues that you're dealing with in your new revenue-driven model that you're trying to implement in Mexico. The question, then, is to what extent you think that the new model you're implementing is already supporting your volumes and profitability. And, if it is, do you think that it's been a big contributor already to your volumes? And, if it's not, what do you think that this means going forward? Does it mean that you essentially could-- essentially have to maintain a very high or even increase your operating expenses during the year to support your new implementations? And that's the first part of the questions.

And the second question would be in terms of the overall market conditions-- if that is really one of the drivers of your weak volumes in Mexico. What are the signs that you are expecting to see to essentially try to become-- to position your portfolio a little bit more to the returnables, away from the-- to one-way presentations away from the returnables. And what are the signs that you could see that could make you a little bit more aggressive in the marketplace?

The new model that we have has already been implemented in some areas. We are deploying that little by little in geographic areas because it takes training of the workforce and everything. And the idea is that we are trying to maximize the revenue potential from each of the clients. It hasn't yet been deployed to the majority of the area. So I'll say that we haven't seen the effect of that yet in the volumes during this quarter. It's something that we will respect more towards-- I'm speaking about Mexico (inaudible) toward the end of the year.

That model has to do also with-- The expenses that are related to that model-- There are some additional salaries because you have new positions in terms of supervisors and workers that have that kind of position that is-- a slightly richer salary than what we had. So it brings some additional cost. But our expectation is that the volume that we will get and the cost to serve when you start to deliver products in a more efficient manner will more than compensate for those additional expenses. There will be some expenses related to all the software that we need to develop for that. And this is also coinciding also with a big renovation of the SAP platform that will also bring some additional expenses. We are more [tight] with this new version of SAP in all of our operations. But, again, we are expecting that this additional volume and the lower cost to serve to the specific lines will help us more than mitigate this additional expense.

In terms of the aggressiveness in our mix and pricing in Mexico, I think that, for us, the returnability-- The returnable platform that we have has helped us a lot with the pricing formula that we have in the one-way packages. For us, it would be impossible just to have 3-liter presentations at MSN22 when Pepsi is at MSN14 with 3-liter. If we don't have in certain geographic areas the 2.5-liter returnable presentation at the same price at the same price as Pepsi, then we would have a lot of pressure in how to manage our one-way packages.

The signal that you're probably referring to-- it's when we see the consumer moving more towards one-way packages to see increasing consumption in the (inaudible) liter, for example. That would be a signal that the consumer is again starting to spend a little bit more on this. And, obviously, seeing our competitors to move the prices also-- it's very difficult when you have a price that-- or a premium that is more than 50% versus a brand like Pepsi on equal presentations. It's very difficult to continue moving prices. But, again, we have-- I think that we have been-- demonstrated in the past that we always find alternatives to either improve the mix of products or start selling a new package that will bring us a little bit richer margin or, at some point in time, sustain these price gaps and live with that and continue growing our volumes because of the strength of our brand.

I see. If you sustain your price gaps knowing that-- you mentioned that your competitors lowered it substantially. Are you concerned with losing a little bit market share? Although you might be growing your volumes in absolute terms, you might be losing market share? Are you concerned, or you can live very comfortably with that as long as the profitability is okay?

Our drive is obviously the profitability that we have, and we will sacrifice market share because of profitability. But we also need to bear in mind that market share is important for the long-term sustainability of the product. So we like to find that balance. In the numbers that we have reviewed recently, we continue to maintain or slightly improve our market share in colas. So, even though our competitors have-- Even though we have this price gap with our competitors, we are not concerned with the market share right now because it's sustained or improving-- even improving a little bit in some areas.

Okay. Thank you very much.

Celso Sanchez, Citibank.

I wondered if you could just give us an update on two initiatives, please. You talked about coolers before. But if we could talk about, specifically, the multi-category coolers-- what the status is in terms of your rolling them out in any of your territories and what kind of initial indications you're getting in terms of benefits versus the cost of putting them into new locations.

And then the second one would simply by - Can you give us an update and some color on the evolution of the Jugos del Valle portfolio in Brazil? Where does it stand now versus, in your estimation, the complexity or the sophistication of the Mexican portfolio? Is it halfway there? Is it 10% of the way there, just so we can get an idea of what opportunity there might be in the months ahead in Brazil specifically? Thanks.

These multi-category coolers-- It's pretty much related to this new model that we are calling (inaudible) or working with values for our consumers. And this model of how we approach the market and try to capture the revenue from our consumers. We have started, basically, as I mentioned minutes ago-- We have started to roll out that model in certain territories. We basically did that in each individual (inaudible) area and in one of the warehouses in the Valley of Mexico in the (inaudible) area. So in those two areas, we are advancing in this approach to the market that also takes together with that this new cooler that I was-- It's too early still to understand what the impact of that-- if we are more than compensating or not the additional expenses that are brought by this new model and the cooler that is in place in some of these clients. So we need a little bit more time to really understand that. But it's being rolled out as we speak.

And, in terms of the Jugos del Valle category, the two main areas for development of initiatives-- of innovation is Mexico and Brazil. And we continue to see a lot of ideas. Obviously, not all of them will be successful, and maybe not all of them will even get to the starting point and will be canceled before deployment of this product. But I do see that innovation is a big force and one of the big initiatives that Coca-Cola FEMSA is focused in on during this year. It would be very difficult for me to give you a percentage if we were halfway there or 10% there. But we see a lot of activity with innovation.

And, as an example, this ValleFrut, or this orangeade that we launched a year and a half ago or two years ago, it has been a tremendous success in terms of volume. The number of unit cases that we're selling is huge. It's more than 30 million unit cases-- close to 40 million unit cases from a product that we didn't have in our radar screens before and was not present in our portfolio. So I hope that some of these new initiatives and innovation will bring about a lot of cases in the future and profitable cases.

We are-- Obviously, we are looking at every category - coffee drinks and milk-based drinks and soya-based drinks and things like that. And, again, not all of them will be necessarily developed totally. But it creates a lot of ways to see us once you see the amount of innovation that has been developed in this Company. And that's true for Mexico and Brazil.

What we are doing in some of the other countries and with a lot of success is in Colombia and Central America we are also deploying some of the products that have been successful in Brazil and Mexico and with a lot of success. We have a product that is a bit more concentrated than this orangeade and with different flavors. For the people that have visited Mexico before, it's very similar to a [Boing] product which is a non-carbonated soft drink that has a lot of pulp. And that has been very, very successful in Colombia and Costa Rica.

So I think, Celso, that the area of innovation, and you see on our annual report, is one of the pillars of our business going forward, and we continue to work a lot behind that.

Okay. Thank you.

This concludes the question and answer session for today's program. I would now like to hand the presentation over to management for any closing remarks.

Thank you for your interest in our Company. And Jose and his team, as always, are available to answer any remaining questions you may have. Thank you.

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