Coca-Cola Femsa SAB de CV (KOF) 2010 Q2 法說會逐字稿

Good morning, everyone and welcome to Coca-Cola FEMSA's second-quarter 2010 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 will 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's 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. Despite recent global economic volatility in the second quarter of 2010, our Company delivered solid top and bottom-line results. The strong preference for brand Coca-Cola among our consumers, the growing scale of our still beverage platform and our ability to selectively increase prices across our worldwide portfolio of products were the main drivers of our performance for the quarter.

As a point of reference, in our last conference call, we explained the devaluation of the bolivar in Venezuela and its effects on our results.

For your benefit, we will briefly review the conclusions that we drew during the call. We have decided to use the exchange rate of 4.30 bolivars per US dollar compared to 2.15 bolivars per US dollar that we used last year to translate the financial statements from our Venezuelan subsidiary to our reporting currency, the Mexican peso.

In the second quarter, our consolidated revenues reached more than MXN25 billion, up 4% from the second quarter of 2009. Despite the devaluation of the Venezuelan bolivar, on a currency-neutral basis and excluding the acquisition of Brisa in Colombia, our consolidated total revenue grew 16% for the quarter, driven by selective price increases and volume growth.

In the second quarter, our consolidated sales volume rose more than 4%. Excluding Brisa, our consolidated sales volume increased more than 3%. This increase was driven mainly by the strong preference of brand Coca-Cola, which grew 6% and the double-digit growth of our still beverage categories supported by the Jugos del Valle line of products.

Our consolidated gross profit increased 2% in the second quarter of 2010. Cost of goods sold increased mainly due to higher sweetener costs across our territories. This was partially mitigated by the appreciation of [obviously] local currencies of our main operations as applied to our US dollar-denominated raw material costs. Consequently, our gross margin declined 100 basis points compared with the second quarter of 2009.

Our consolidated operating income improved more than 11%, reaching MXN 4.1 billion in the second quarter supported by the operating income growth achieved in all of our divisions. Operating leverage achieved through higher revenues in local currency compensated for gross margin pressures. As a result, our operating margin improved by 100 basis points, reaching 16.2%. On a currency-neutral basis, and excluding the acquisition of Brisa in Colombia, our consolidated operating income grew approximately 24%.

Our consolidated EBITDA increased by double digits to MXN5 billion in the second quarter. Our net controlling interest income reached MXN2.5 billion, an increase of close to 15%. This increase mainly resulted from our higher operating income.

Now let me expand on the performance of our operations. Our Mexican operations successfully built on their strong volume base from last year, delivering more than 4% volume growth. During the quarter, the sparkling beverage category significantly contributed to our incremental volumes, mainly driven by the 5% volume growth of brand Coca-Cola in both multi and single-serve presentations. This, combined with the low single digit volume growth of flavor sparkling beverages.

Our still beverage category, supported by the Jugos del Valle line of products, posted double-digit volume growth, while the volumes from our water portfolio remained almost flat year-over-year and showed an important sequential recovery from the previous quarter.

Our average price per unit case increased 5.4% in the second quarter. This increase was driven by several factors. One, higher volumes of brand Coca-Cola, which carries a higher average price per unit case; two, a positive shift in our product mix to single-serve presentations resulting from last year's low on-premise channel consumption driven by the effect of the swine flu in May of 2009, in combination with increased on-premise consumption during June of 2010 generated by the FIFA World Cup soccer events; three, selective price increases implemented in our portfolio during the quarter; and four, lower volumes in our bottled water portfolio, which, as you know, carries a lower average price per unit case. As a result of increased volumes and prices, our Mexican operation's total revenue grew 9.3% to MXN10.7 billion.

On the profitability front, higher sweetener costs were partially offset by the appreciation of the Mexican peso as applied to the US dollar-denominated raw material costs. Compared with the second quarter of 2009, our gross profit increased by almost 8% to MXN5.3 billion and our gross margin declined 60 basis points to 49.5%.

Our operating income grew 3% to MXN2 billion. The increased operating expenses were mainly driven by the resources deployed across our Mexico division to support our growing still beverage platform, enhance our execution at the point of sale, bolster our returnable base and improve our cooler coverage.

Our operating margin decreased 110 basis points to 18.4%. Our EBITDA grew 5% to MXN2.4 billion compared to the same quarter of last year.

In summary, our Mexican operations recovered from a slow start of the year to deliver solid results this quarter. Our main challenge for the year remains the higher cost of sugar. As you may know, international sugar prices started to decline significantly at the beginning of the year. What we have not seen yet is decline in local sugar prices. Accordingly, we will continue to leverage our ability to use high fructose corn syrup to mitigate this cost pressure.

Now let's turn our attention to our Latin Central division. Our Latin Central division recorded 1% volume growth in the second quarter. This increase was driven by the integration of the Brisa bottled water business in Colombia. Excluding Brisa, the division's volume declined 4%.

In Colombia, volume grew 10% during the quarter, mainly driven by the integration of the Brisa water business and the performance of brand Coca-Cola. Bad weather conditions in the month of May and June affected the volume growth of our sparkling and still beverage portfolio. Including our water segment, our Colombian operations volume grew 1%. In Venezuela, our volume decreased 7%, driven by lower disposable income of our consumer base, especially during the month of June.

Our Central American operation's sales volume declined slightly, mainly due to bad weather conditions experienced at the beginning of the quarter. High single digit volume growth in the still beverage category was offset by a 2% decline in the sparkling beverage volume.

Our Latin Central division's total revenues declined 15% to MXN7.4 billion. This decline resulted mainly from the devaluation of the bolivar in Venezuela. On a currency-neutral basis and excluding the acquisition of Brisa, our Latin Central division's total revenues grew 23%, driven by higher average prices per unit case across our territories.

On the profitability front, our Latin Central division's gross profit declined 16% to MXN3.4 billion as a result of the devaluation of the bolivar in Venezuela. Higher sweetener costs across the division were partially offset by the effect of the appreciation of the Colombian peso as applied to our US dollar-denominated raw material costs. Compared with the second quarter of 2009, our gross margin declined 70 basis points to 46.5%.

Our operating income grew 19% to MXN1.2 billion. Operating leverage achieved through higher revenues in local currencies. And high operating expense as recorded in the second quarter of last year resulted in an operating margin expansion of 470 basis points to 16.7%. Our EBITDA grew 16% to MXN1.6 billion compared with the second quarter of last year.

Our Latin Central division delivered stable results when compared to the first quarter of 2010 despite the devaluation of the bolivar in Venezuela and the unusually bad weather conditions experienced in Colombia and Central America.

In local currency terms, our operations continued to post solid top-line growth, mainly driven by selective price increases implemented over the past months designed to compensate for local inflation and higher sweetener costs.

Now let me talk about Mercosur. In the second quarter of 2010, our Mercosur division's total revenues grew 24% to MXN7.2 billion. Excluding beer, which accounted for MXN745 million, our total revenues reached MXN6.4 billion. Organic growth, driven by higher average prices per unit case and increased volumes, represented approximately 75% of our incremental revenues. The effect of the positive currency translation resulting from the depreciation of the Mexican peso against the Brazilian real provided the balance.

Volume growth in our Mercosur division was up close to 9% in the second quarter of 2010. Our Brazilian operations recorded more than 13% volume growth, mainly driven by brand Coca-Cola, combined with the continued strong performance of the Jugos del Valle line of beverages.

In Argentina, our volume declined 2%. The solid performance of our still beverage categories driven by Aquarius, our flavored water brand, was offset by a low single digit decline in the sparkling beverages.

On the profitability front, our Mercosur division's gross profit increased 21% to MXN3 billion. The increased sweetener costs across the division, combined with higher PET costs in Argentina, were partially mitigated by the appreciation of the Brazilian real as applied to our US dollar-denominated raw material costs. Our gross margin decreased 100 basis points to 41.4% for the second quarter of 2010.

Our operating income grew 21% to MXN895 million. Operating leverage achieved to higher revenues in Brazil was partially affected by higher label costs and freight costs in Argentina. As a result, operating margins declined 30 basis points to 12.5% in the second quarter. Our EBITDA grew more than 15% to MXN1.1 billion.

In summary, our Mercosur division delivered positive results in the second quarter of 2010. In Brazil our portfolio of products continues to perform strongly, especially brand Coca-Cola. The preference among our consumers for this brand is driving higher demand across our portfolio. Our strategy of building a wide array of products and presentations to satisfy our consumers' needs is proving successful. Eventually, the still beverage category continues to build momentum, growing at superior rates, supported by the integration of the Jugos del Valle line of beverages in Brazil.

Over the past few years, our Brazilian franchise has become an important driver of our Company's growth. Going forward, we have ample opportunities to continue developing our portfolio, enlarging our beverage offerings to satisfy the dynamic markets and capitalize on the opportunities to increase per capita consumption.

Now let me walk you through our financial performance for the quarter. This quarter, our operations produced strong results with all of our divisions contributing to profitability. Our geographically balanced portfolio of franchise territories is helping us to deliver sustainable cash flow generation and to compensate for seasonality or weather-related events.

As of June 30, 2010, we had a cash balance of MXN9.4 billion, a decrease of MXN572 million compared with year-end 2009 mainly as a result of debt and dividend payments we made in the first half of 2010 and net of the cash generated by our operations during the year. Our total debt decreased MXN103 million compared with year-end 2009. By using part of the profits from our $500 million Yankee bond issued during February, on April 16, 2010, we fully paid the majority of a Mexican peso bond in the amount of MXN1 billion and also during the year, we prepaid $202 million of bilateral loans.

Our net debt increased by MXN469 million, mainly as a result of the MXN2.6 billion dividend we paid during April 2010 and obviously net of the cash generated during the year. As of March 31, 2010, our net debt to EBITDA coverage ratio was 0.3 times and our EBITDA to net interest coverage ratio was more than 15 times, highlighting our financial flexibility and the strength of our balance sheet.

In conclusion, our operations delivered positive results for the quarter with performance of our Mexico division improved significantly compared to the first quarter of the year and the rest of our operations across Latin America continue to deliver profitable growth. We are pleased to serve a growing base of consumers with our broad portfolio of high-quality products and presentations in one of the best markets in the world to sell beverages.

As we enter the second half of the year, we perceive increased global economic volatility. Nonetheless, we are confident that the prime equity of our products, the operating capabilities that we have developed and the financial strength that we have achieved will help us to continue outperforming our industry.

Despite the prevailing challenging economic conditions, we remain focused on our goal of delivering solid results for all of our stakeholders. Thank you for your continued trust and support and now I would like to open up the call for any questions that you may have.

(Operator Instructions). Lauren Torres, HSBC.

In the first half of the year, you had these higher costs, but you were able to get operating margin based on better operating expense leverage. So curious if you feel that, directionally, that is what we should still see in the second half? I guess I am just looking for some comments on some of your COGS outlook for the second half. And then also the offsets that you see in the operating expense line, if some of those initiatives are sustainable?

Good morning. Yes, I think that, as I mentioned during my speech, in general terms, we see very stable cost of our raw materials. The challenge remains sweetener costs in most of our area and then we go to some of the geographies.

In Mexico, as we mentioned during the Mexico part, we saw an increase -- we saw a faster pace of increase than what we saw last year in the international markets. And now that the international prices have come down, Mexico prices have come down slightly, but not at the pace of the decline in the international prices. So in other words, the gap of the Mexican sugar price compared to international prices have widened substantially as international prices have declined.

What we anticipate -- but nonetheless, we see little by little results from the sugar price. Our expectation is that we will continue to see some small declines in sugar prices in Mexico. We are a little bit concerned on high fructose corn syrup. We are expecting some increases in corn syrup. So when you factor in those two elements, we are expecting stable sweetener prices at this current level of the second-quarter current level for the rest of the year, which will put some pressure on our margins.

If we go to other markets like Brazil, prices went up last year, importantly and then came down, importantly, because they follow very closely the international price. So I don't see an issue there. In Brazil, we have some hedges there. We have had a strain in the past because of that. Proximity of the local prices to international prices, we are able to take some of the costs. We basically have a cost around MXN0.155 to MXN0.16 per pound on our hedges and that is a good number given where the prices are right now. So Brazil, I don't see a problem.

We have seen some pressure in Argentina with high fructose corn syrup prices and the same in Colombia with sugar prices, we have seen pressures. In Central America, it is similar to in a way between Mexico and some of the other markets. It is not as closely related to the international prices, but it is not as high as in Mexico on that front.

And lastly, Venezuela, it is more an issue of availability because of the scarcity of some of the prices. We have very large volatility on the prices because of the scarcity of sugar in Venezuela.

Other than that, we see PET prices very stable and we are not expecting any surprises there. Although obviously that depends a lot on oil prices. And the other big component is obviously to concentrate prices where we see a stable environment as we have discussed in the past. We don't see any surprises there. So that is in general what I can basically share with you, Lauren, on our cost of goods sold.

So with that said, when you think about managing the operating expense line, do you think there is advantages there or we should see some of that spend maybe ramp up in the second half?

Yes, in the operating expenses, we have, as we have mentioned in the last few quarters, a big effort following all of our fixed cost structure. We will continue to push in that respect and we have seen some improvement in some of the territories, especially in Mexico. We still have to do some of our homework in Brazil and Argentina.

In Colombia, the numbers are good in that respect and as we mentioned, where we see a lot of volatility in salaries is in Argentina and Venezuela because the negotiations with unions are complicated in those, especially complex in those two countries.

We do have also some market traditional activity on the marketing front. In Mexico, I mentioned during my brief speech, we have been spending additional resources in marketing not only because of the World Cup, but more I guess across the globe during this season. Every country is spending a little bit more because of all the promotional activity and the Coca-Cola Company being the biggest sponsor on that big event. So you always see, every four years, that increase because of the World Cup. But in Mexico especially because of the campaign that we have for returnability and introduction of coolers that is now owed to our marketing expense.

So when you look at the marketing expense in Mexico that we normally say is around 3.5% to 4%, last year, it was around 3.8%. This year, the second quarter was around half a percentage point higher than what we thought. So you see that -- we have seen that drop -- that increase in marketing expense.

In Brazil, we have also taken a very strong campaign, I think a very successful campaign of going to returnable presentations. Returnables are still a very low percentage of our (inaudible). (inaudible) is around 15%, but a lot of this volume -- this tremendous volume growth that you see in that country has to do with the introduction of bottles and cases that are also reflected in our marketing expenses.

So I think that in general and in summary, I will say you will see these campaigns for returnability increasing in our territories. But to compensate for that, you will see as a big trend a push from corporate to lower fixed cost structure of our operations. So I see stable operating expenses going forward.

Thanks. That helps. Thanks.

Robert Ford, Bank of America-Merrill Lynch.

Thank you and good day, Hector. I had a question with respect to Venezuela, but also a follow-up on Mexico too. In Venezuela, what percentage of EBITDA or from the Central American region or Latin Central came from Venezuela and what access did you have to dollar FX for inputs and remittances? My understanding is that all corporates now are capped at $350,000 a month when it comes to remittances, but you may have better access at preferential rates for some of your inputs.

And then with respect to Mexico and returnability, you are doing a lot to drive single serves and I was wondering if you could give us a little bit of an update in terms of your efforts to promote those single-serve presentations and simultaneously drive more returnability and if there are any specific learnings that you can perhaps transfer to other markets like Brazil or Argentina?

Good morning. Let me give you some general figures on these questions. In Venezuela, even though we have registered a very strong devaluation of the Venezuelan bolivar as we translate that into Mexican pesos, Venezuela represents around, I'd say around 10% of the total EBITDA of the Company. You remember last year we were saying that it was around 12% of that and we were expecting for those numbers to reduce, starting basically to have even the strong devaluation of the Mexican peso.

But given the performance of the entire operation that has to roll off, on the volume decline, we have important adjustments in some of the prices and also mix change and a strong reduction in some of the operating expenses because we basically are not spending marketing dollars in there, even on the capacity constraints that we have with energy shortages, a lot of that. At the end of the day, the EBITDA continues to grow in local currency.

So right now, Venezuela represents I'd say around 10%, 11% of our EBITDA, consolidated EBITDA and it represents around 9% of our volume. So it is pretty much in line. I don't think that that number is really sustainable given the fact that we are translating that into pesos at a higher exchange rate, but it will depend on our ability to control costs and pass along prices as we have a high inflation environment in that territory.

In Mexico, we continue -- there are two effects on the single-serve push that we have. Obviously, we are happy to see that increase. The mix of single serve increased around 60 basis points in our mix. As I mentioned, it has to do with the fact that last year a lot of the on-premise consumption was reduced substantially because of the swine flu and this year, we have the -- the other effect of having many people in restaurants during some of the matches, that helped a little bit on that front.

But we continue to launch new and innovative packages and as a matter of fact, we also wanted to share that we have in the market for the first time a 200 milliliter PET bottle, one-way bottle that, to my understanding, is the lightest PET bottle for that size in the world. It is only 10 grams. It is incredible what our technical guys have developed here in our operations. They are obviously working very close hand-in-hand with the Coca-Cola Company because of all the -- to be sure that the priorities -- that the quality of the product is very good. We are anticipating a good success because with that very light bottle with very low PET content at the end of the day, we can afford to have a very low price for the consumer as an empty package.

And that -- we are just waiting to see the results of this introduction in Mexico because we think that that is the presentation that will be very much successful in other geographies and we are starting to do some planning for launching of that package to other markets.

So in returnables -- so in a way, we have these two big pushes. One is to try to get these new packages -- (inaudible) packages, small cans, it's lean cans and to have entry price points for the consumers that are attractive in single-serve presentations and we have worked with both returnables and one-way, but mainly one way because of the size of the presentations. Although we have done some experiments with small return on our glass bottles.

But on the other hand, we also want to have, especially in some areas of the cities with lower income areas, we want to have the affordability of returnable products and we are working also on that second hand on large packages and the liter, 1.25 liter, 2 liter, both in plastic and glass liter (inaudible).

In Brazil, as I mentioned, it has been a tremendous success basically from nonexistent returnables. Returnables are now 15% and that has to do a lot with the growth that we are seeing in that market.

On the last part of your question with respect to the Venezuelan availability of dollars, the way it works is that for raw materials that are in certain [leased], we have access to -- let me qualify that. You have low access to those dollars, but we have been receiving dollars. I was reviewing the figures for our Board meeting and basically we have purchased around $50 million for raw materials that are in those leased the 2.6 exchange rate. And we have accessed this small basket, which, as you correctly pointed out, $300,000 per month, but that is only for products or goods that are not on those lists. So that is basically for some services and things like that and that is around the 5.3 bolivars per dollar rate approximately.

In general, we are still getting some dollars at the control exchange rate. Although we are seeing a reduction of the flow and that is part of the complications of doing business in Venezuela. You have to negotiate with suppliers for them to be patient so that we are able to get the dollars out of the system and those are tough negotiations because sometimes the periods to get those dollars are long.

Gustavo Oliveira, UBS.

Good morning, everyone. As a follow-up question on your returnables strategy in Brazil, the country has not been on the returnable market in soft drinks for a long time or the presence has been very small. Can you expand on that? What is the target? You can move this 15% penetration that you have in your territory up to what number? That is the first question.

The second question is is this a Coca-Cola Company initiative or is the Coca-Cola FEMSA initiative only in your territories and it is something that can be expanded to the other territories, even the ones that you don't have in the country?

The third question is on whether your focus is on premise and off-premise consumption for the returnable packages and how could that mix evolve over the long run? Thank you.

Good morning, Gustavo. Yes, as you correctly pointed out, Brazil was not used to (inaudible) presentations. Although the beer industry uses that a lot, but it is a little bit different. In our case, it is an initiative that we wanted to test. Obviously, we had to have very long conversations with the Coca-Cola Company. To be honest, I am not sure it has been applied to other territories outside of our operations, but I assume that if it is successful, some other bottlers will follow. The investments behind the bottles and cases are high, but it is an important element to grow volumes.

Our main target is to focus to the low and let's say medium/low classes of the population. It is a two-liter presentation. It is basically for off-premise for home consumption and one of the main areas that we want to attract is that, and I might have mentioned this in the past, but it is an important element for you to have in mind. Once you have the consumer used to carry an empty bottle to the mom-and-pop or to the supermarket to buy a returnable package, once he is used to that, it is like a virtuous circle because the consumer takes a decision what product he is going to buy when he is leaving his house.

Before he goes to the mom-and-pop, he takes the bottle and he already knows or he or she already knows that they will buy a Coca-Cola product. So they will go to the store and they will not start comparing our product with some other competitor product or whatever because they already took the decision of where are they going to buy. Then they use the expression at the pantry in their house.

They might look at some of our competitor products, but the price point of that presentation is attractive and then that is how we can maintain the price gaps that we see across all of our territories where we have a substantial premium in comparable presentations. And when I say comparable, it is comparing one-way presentations versus one-way presentations.

But for the consumer that purchases our products, but wants to be a little bit more -- to spend a little bit less money, they just have to carry this empty container, which is not a large inconvenience at the end of the day and that has proven to be successful in other markets and we have seen that in Brazil. It is also going to be the case.

And since it is an off-premise initiative -- I think the two follow-up questions is first what do you think could be a target you have in terms of the percentage of contribution and volumes? And the second is, since it is an off-premise initiative, are you already having the buying from the large retailers or for now, you are targeting mostly the smaller mom-and-pops?

Let me start with the second part. It is basically a target for mom-and-pops because some of the big retailers do not necessarily like the hassle of having the space to have the empty containers and to issue a receipt when the consumer enters the supermarket. But so far, it is more a mom-and-pop as a target.

And in terms of how far it can go, it is a complicated question, so I think that you have -- I think that if we get to know -- if we get a chance to be successful, but we are not targeting that right now, if we would get to be successful to introduce this to some of the small foot places as you see here where the consumer shares for launch a liter presentation or a 600 milliliter presentation of beer, a returnable, we might have a chance to introduce that into some of these cafeterias or (inaudible). 3

We haven't (inaudible). As a reference, I will tell you, as in Mexico, returnables are as high as 30%. It is too early to say that -- for me to give a guidance that will get that level. I think it is not going to be 30% in the short term, but I think it is going to grow from the present level. But I would not like to give a target figure because I honestly don't have a specific (inaudible) that we think we have to put (inaudible) and if it grows, welcome and if it stays at a lower level, we don't mind. It is already (inaudible) that makes a profitable package for us.

Thank you.

Antonio Gonzalez, Credit Suisse.

Hi, good morning. I also wanted to talk about Brazil and I wanted to see if you could expand on the operating leverage that you are getting in the country. I mean year-to-date already volumes have been quite strong and it is somewhat difficult to understand where are you in terms of profitability. For instance, maybe if you can talk vis-a-vis Mexico and what upside do you think is still left to be realized?

Good morning, Antonio. Brazil is a market that we see is growing fast and as I mentioned a little bit earlier, it is a country where we need to work a bit better on all the fixed cost control and that is one of the areas of focus for us in this year and going forward. We have this tremendous important growth. We have an expansion of operating income and EBITDA, but it is a little affected by -- especially when you look at the first (inaudible) by some of the -- although the prices fall to international prices, they were high compared to the previous year. So we have a little bit the effect of sugar prices there.

We have a little bit PET prices and when you look at the Mercosur numbers, it certainly -- the Brazil numbers are contaminated a little bit by the performance of Argentina. That obviously will, as I mentioned, will -- volumes that were not as successful, as a matter of fact negative versus last year in Argentina, with pressure on labor costs and pressure on some of the costs because of the higher inflation rate that we are seeing in this country and pressures on high fructose because of the increasing prices in high fructose in Argentina, that let me use the word contaminated a little bit the performance of Brazil.

So Brazil is a profitable market. It is improving the profitability behind Mexico in terms of margins, but improving. And my feeling is that once we control a little bit better the SG&A figures, especially in the fixed cost part of that, we will have a better number.

Also it is important to remember that in the case of Brazil, the joint venture that we have for the Jugos del Valle products, it is an arrangement where all the bottlers our partners. It is basically the same that are in Mexico, but different than Mexico, we have a structure of a JV that stays with all the profitability because there are important tax advantages because of the location of the production plans and all of that.

And then in our case, we report that more as -- it is not shown in our operating income. It is below the operating income line. Although we register the volumes because we are selling those products. In other words, our Brazilian operations [send] the Jugos del Valle product basically with fewer profit. The profit stays in the JV and then we share dividends from that JV.

So that issue also distorts a little bit the profitability of Brazil, but economically, either if it is below the operating profit line or below that economically from a financial point of view, we are receiving the benefit of the Jugos del Valle investment, although it is below the operating line as a dividend or some other income.

Thanks. This is very helpful. And if I may, just quickly on Venezuela, do you think you will be able to maintain current prices given the low volumes. I understand there has been a broad-based deceleration in consumer dynamics in the country. So I just wanted to understand if you feel comfortable with the current prices or you have to adjust a bit downwards maybe?

We will have to play by ear in (inaudible). At the end of the day, you are correct. It is a big deceleration on the feeling of the consumer in Venezuela, what we are feeling there. Especially during June, we saw a big deceleration and most of the companies, we have to comply with 20% less use of energy as compared to last year are struggling to keep up with that regulation.

We are giving preference to brand Coca-Cola obviously in some of our production runs, so we are suffering a little bit in flavor. We do not necessarily have all the flavors available as we give preference to brand Coca-Cola. So it is a challenge I think to work in that country. You have to work with prices. Our preference is not to move prices down because obviously we have high pressure from inflation and salaries. So our first choice would be not to move prices and we haven't been moving prices up to the moment.

You have to -- you have the challenge of increasing labor costs, increasing raw materials, availability of dollars to pay your supplier. So it is a challenge to work in the country, but I think that so far I would think they have done a tremendous job of -- even though the circumstances continue to increase very importantly the profitability of the business in terms of absolute numbers in local currency. So when you translate that into pesos, even though it is half of what it was last year, still an important number in our numbers.

Great. Thank you very much.

Alan Alanis, JPMorgan.

Thank you. Hi, Hector. My question has to do with Brazil also. Remind me, when was the last time the Coca-Cola Company did a concentrate increase? And now that the country's profitability for Coke is increasing so fast, what is the likelihood of getting another concentrate increase from Coke there?

Alan, good morning. I hope nobody in the Coca-Cola Company is listening to your question. Don't give them bad ideas area. So let me tell you, we received a concentrate increase in 2005, 2005 or 2006. I don't remember, at the same time that we announced the Mexico price increase. It was a price increase in two steps in Mexico and there was this increase in Brazil.

The difference was that because Brazil was going through a very difficult time during the early 2000s, and you remember when we were buying Panamco, that they were -- it was an operation that was not profitable at all and we were negative on EBITDA figures. The Coca-Cola Company did a concentrated reduction to all the bottlers in that -- prior to Coke FEMSA being there.

So either -- I don't know if it was 2005 or 2006, now that the profitability was bad to the industry, they decided to take it back to the level it was before the reduction. So that is why it was an accepted movement by all the bottlers because, in a way, everyone recognized that the Coca-Cola Company to share the pain of the situation in Brazil sacrificed a little bit the concentrate price for a few years. So everyone was in agreement to take back that price increase. And that is what we -- that is the only movement we have seen in this decade.

As far as what is the likelihood of them increasing, I don't know. I mean they can do it. You know that contractually they can do it in every market and obviously, you know that, as we do with other raw materials, we would have some volatility in some raw materials and we would start to compensate either with marketing or prices or whatever. We always look at ways to try to maintain our profitability, as you know.

But so far, I think that the main focus, and I think that two companies are in sync in that respect, is how do we continue growing the size of the pie rather than splitting the pie in a different way. And I think that is pretty much the dialogue that we have together with the Coca-Cola Company in our conversations.

That is very useful. Thanks. Now if I may ask just quickly two more questions. One has to do with the competitive environment in Mexico. Have you seen -- what are the kind of changes that you have seen now that the PVE has been run by Pepsi for a while there in the market? And my last question will have to do with cash deployment going forward. Any news regarding your previously mentioned potential expansion plans for -- both in the Americas and outside of the Americas of course?

Alan, with respect to the competition environment in Mexico, we have seen some positive trends. When I say positive that we are seeing less aggressiveness on the regard of Pepsi in terms of some of the products. For example, they have placed the three-liter presentation at MXN14, which is basically at parity where our returnable 2.5 liter, which is before it was at MXN13. So the fact that they are increasing their price point of sold approach, I think that is a positive trend for the industry. And for them also to separate a little bit from the D brands that you remember that, at some point in time, they were pricing the products very, very close to re-brands.

With respect to cash deployment, we are basically on the same page. As we mentioned a few quarters ago, we will be looking for opportunities to grow in this industry that we feel that we can manage very well. Obviously with a lot of caution and a lot of product (inaudible) in our analysis. And as we mentioned, if we don't see opportunities in the short term, we will probably increase a little bit our dividend next year as we did last year. Remember that we basically doubled the amount in peso terms of the dividend payment this year and thus, we are mentioning some of the price relief (inaudible) basically this is our seventh straight year that we have been increasing the dividend.

So if we see that there are opportunities, but they are not very close from a timeline perspective or we don't see any opportunities, we certainly need to look back at the [current medium term] ratio.

Okay, thank you so much.

Celso Sanchez, Citi.

Hi, good morning. I have been pretty impressed by this continued strength of brand Coca-Cola, not just in Mexico, given their already high per capita consumption, but also relative to flavors in that market and more recently more obviously this quarter at least in the Mercosur division. Can you speak a little bit to -- it does seem like this is a bit of a structural thing. Certainly brand Coca-Cola for yourselves and other bottlers has been growing quite strong in several regions in Latin America for awhile. Is it something we should think about that maybe there is a structural reallocation of marketing resources that is pushing more towards the cola rather than the flavors given competitive environments in different markets?

And also or is there also an element of flavor support that used to be there for the sparkling side is now being slightly moved to the Jugos del Valle still business. How should we think about this because it does seem like there is a trend here?

I think that there are several elements as normal in this -- for instance, it's very difficult to explain with a single fact here. But let me share with you some trends. Brand Coca-Cola, as you said, continues to grow strongly and especially when you compare it to some other flavors.

Flavors, the good news is for example that in Mexico, we saw for the first time an increase, around a 3% increase in flavors versus last year, which was a switch in the trend that we were seeing in flavors. But flavors, you are right, they have been affected by the introduction of different products of the Jugos del Valle line of business.

As you introduce flavored waters like Aquarius in Argentina or you introduce (inaudible), which is a low juice product with no carbonation in Mexico or Colombia or Brazil with some (inaudible) content with no carbonation. Those products basically eat away a little bit of the flavor of the core flavor market. And for me, that is a very important trend, but the consumer is moving in that direction and if we don't have those products, someone else will do it and we will suffer in our core flavor products anyhow

When you offer a consumer a product that has a little bit of juice, that has vitamins and that has a good flavor and maybe no carbonation, I think that it is an attractive combination for the consumer, vis-a-vis a Sprite or a Fanta or a [Leaf], for example, in Mexico. But again, I think I am very happy to see that the trend for flavors that we were seeing at the kind in Mexico especially, it is starting apparently to change for the first time with a 3% increase.

On the other hand, on colas, you have all these initiatives for example marketing dollars because of the World Cup, the names that you saw in a lot of the shirts and a lot of the stadiums is Coca-Cola or Powerade that were also a lot of marketing dollars behind Powerade. But you don't see a Sprite or Fanta or Aquarius. You see brand Coca-Cola and you see Powerade, a sports drink.

So we saw more marketing dollars behind that and especially I say also that because of the size and the scale that brand Coca-Cola has, that is where you can afford the returnable bottles and cases. In the product of not a high volume, for example, let's say that you want to do Fanta or [Ciel] in Brazil [returnables], it is very hard to do it because flavors, you have different proprietary shapes for every flavor and different labels and all that. So brand Coca-Cola is one bottle, one product with a massive scale and then you can afford -- the economics of the returnability are easier to achieve when you have that scale or that massive volume we have like behind brand Coca-Cola.

So I think that the combination of all these factors and it is very difficult to give a specific weight to each of them, but a combination of those factors is what is happening behind brand Coca-Cola.

Great, thank you. And I know it is a long call, but if I could just ask one follow-up; I joined a little bit late. And so I heard the end of the PET returnable discussion. I think it was PET, but returnable discussion for Brazil. You mentioned [paladias] there as one potential avenue for growth for that, but one of the other examples I know you have talked about in the past was Argentina where the mom-and-pops initially had the returnables, which they were glass in that case I suppose, and then the supermarkets actually asked for it.

Now I know it was in time of crisis and it was a bit different, but is that not something that you think could develop in Brazil or is it really specific to that situation, the economic hardships in Argentina and that is why you would be looking at paladias potentially to be a follow-on rather than supermarkets?

And the second part of that is if you do push larger size returnables, how does that square with your single-serve initiatives in Brazil? Does it potentially cannibalize some of those opportunities for single serves in places like paladias?

Yes, let me just go over that returnables in Brazil, we started with the two-liter returnable plastic bottle. It has been successful with the mom-and-pops. We have been doing some activation in the paladias, mainly because, as you heard, we continue to sell beer in our trucks and we seek out the returnable beer bottles, the consumer works with that very well at launch and what they share with friends in one of these places, the paladias or cafes or whatever.

So we are doing some activation and that is why we want to follow that direction because we see that in Brazil there is this -- the consumer is used to sharing a glass from the same bottle when they are with friends and that is the main driver behind pushing the paladias. You are correct, in Argentina during the time of crisis, the supermarkets were asking for the returnable products because, again, it was very important for the consumer.

At that time, I think that we did a good job in trying to segment the market. We had a different package in the supermarket than to the mom-and-pops so that we avoid any cannibalization of one channel to the other and things like that. If the supermarkets in Brazil starts -- if they start to ask for this product, we will certainly have to look at that maybe with a different package. So not necessarily with the same two-liter presentation as we have done in some other markets.

Then you get into a very complicated structure where -- it is important that the mom-and-pop has a different package than the supermarket because then you don't have this contamination where the mom-and-pop goes and buys from a supermarket because it is cheaper because of some promotional activity as compared to our product. But we are open to those trends and I think that we have been the knowledge to manage those different (inaudible).

Thank you very much.

Ladies and gentlemen, this concludes our question-and-answer session for today's conference. I would like to hand the call over to Mr. Hector Trevino for closing remarks.

Thank you, everyone, for your interest in our Company and obviously Jose and his team are available to answer any remaining questions and if you visit Mexico, please give us a call and we will be there to help you understand better our business. Thank you.

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