Coca-Cola Femsa SAB de CV (KOF) 2010 Q4 法說會逐字稿

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

During the 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 would now turn the conference over to Mr. Hector Trevino, Coca-Cola FEMSA's CFO. Please, go ahead, Mr. Trevino.

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

Last year, our Company continued to extend its track record of profitable growth, despite the unusually bad weather conditions across our Mexico and Latincentro divisions during an important part of the year and the effect of the devaluation of the bolivar in Venezuela. The strength of our defensive business profile and our operators' disciplined ability to adapt our Company to a complex market environment enabled us to deliver solid profits, resulting in double-digit growth in earnings per share for the year.

In the fourth quarter, our consolidated revenues were MXN28 billion, down 3.6% from the fourth quarter of 2009, mainly due to the devaluation of the Venezuelan bolivar. On a currency-neutral basis, our consolidated total revenues grew 12% for the quarter, driven by volume growth in Mercosur and Mexico divisions and the pricing initiatives we implemented across our territories. For the full year, our consolidated revenues grew 1% year over year to MXN103 billion.

In the fourth quarter, our consolidated sales volume rose 1% year over year, despite the unusually bad weather conditions in our Latincentro division. Our increased sales volume resulted mainly from the strong performance of all of our beverage categories in the Mercosur division and volume growth in our sparkling beverage category in our Mexico division. For the full year, our consolidated sales volume grew 3%.

Our consolidated gross profit declined 3% in the fourth quarter 2010. Higher sweetener and PET costs across our territories were offset by (inaudible) revenues in local currencies in our Latincentro and Mercosur divisions, combined with the appreciation of our main operation local currencies as applied to our US dollar-denominated raw material costs. Consequently, our gross margin expanded 20 basis points as compared with the fourth quarter of 2009.

Consolidated operating income grew 5% to MXN5 billion in the fourth quarter as a result of double-digit operating income growth in our Latincentro division. Operating expenses in local currencies increased mainly as a result of higher labor and freight costs in Argentina, continued marketing investments in our Mexico division, and higher labor costs in Venezuela. On a currency-neutral basis, operating income grew 24%, and our consolidated operating margin increased 150 basis points year over year to 18.1%.

Our consolidated EBITDA grew 5% to MXN6.1 billion in the fourth quarter. For the full year, consolidated EBITDA grew close to 7%.

In the fourth quarter, our net controlling interest income rose 7% to MXN3 billion, mainly as a result of higher operating income. For the full year, net controlling interest income increased 15%, reaching close to MXN10 billion, or the equivalent of MXN5.31 [per each earned share].

Now let me expand on our operations. Our Mexico division delivered close to 3% volume growth for the quarter. Incremental volumes were driven mainly by our sparkling beverage portfolio, supported by brand Coca-Cola, combined with mid-single-digit volume growth in the still beverage category, mainly due to the positive performance of the Jugos del Valle platform.

Our average price per unit case increased 3.7% in the fourth quarter. This increase was mainly driven by higher volumes of brand Coca-Cola and the selective price increases that we implemented during the year.

Our Mexican operations total revenues increased 7%, reaching almost MXN10 billion. Higher average price per unit case accounted for 60% of the total incremental revenues, and volume growth represented the balance.

With regard to profitability, the impact of higher sweetener and PET cost was partially offset by our higher average price per unit case and the appreciation of the Mexican peso as applied to our US dollar-denominated raw material costs. Compared with the fourth quarter of 2009, gross profit increased approximately 4% to MXN4.9 billion, and our gross margin declined 130 basis points to 49.2%.

Our operating income decreased 3% to MXN1.9 billion. Operating expenses grew as a result of the investments that we made across the Mexico division to support the growing still beverage platform (inaudible) our execution at the point of sale-- also, our returnable base and improve our cooler coverage across our territories. Operating margins increased 180 basis points to 18.7%.

Our EBITDA declined 2% in the fourth quarter to MXN2.3 billion. For the full year, our Mexican operation's EBITDA reached MXN8.3 billion.

2010 looked to be a very challenging year for our Mexico dividend. We faced high volatility in international commodity markets that significantly affected local sugar prices and, consequently, our profitability. Accordingly, during an important part of the year, we experienced bad weather conditions that not only negatively affected consumption across the country but also caused substantial disruption of total distribution level.

Despite the circumstances, our operators demonstrated the ability to adapt our business to successfully meet these challenges. Underscoring our distribution execution capabilities, our Company contributed with 90% of the Coca-Cola system's incremental volume in the sparkling beverage category during the year. Additionally, the implementation of selective price increases that matched inflation levels, combined with efficiencies achieved across the value chain, enabled us to absorb most of the gross margin pressure that we expected at the beginning of 2010.

With respect to operating expenses, we made important investments in the marketplace which enhanced our execution at the point of sale, supported our growing beverage portfolio, and better positioned our business for an improved consumer environment.

For 2011, we continue to anticipate volatility in the international commodity markets. Among the important challenges that we must face is the increased price of PET resin. Nevertheless, we feel confident that a more favorable economic environment and the expected appreciation of the Mexican peso, combined with more targeted marketplace investments, should help us mitigate these pressures.

We will closely track the economic and consumer environment throughout the year to determine the implementation of selective price increases across our portfolio. This will help us to protect the profitability of the business and to compensate for potential commodity pressures and increased inflation. At the same time, we will take advantage of our powerful innovation pipeline to provide our consumers with a broader array of alternatives to satisfy their beverage needs.

Now let me turn to our Latincentro division. Our Latincentro division posted a close to 9% decline in volume during the fourth quarter. This decrease was mainly driven by the continued unusually bad weather conditions that we experienced across our franchise territories throughout the second half of the year.

In Colombia, total volume declined 8% during the quarter. Our water portfolio recorded a double-digit decline, while the sparkling beverage category declined 4%. However, consumer preference for our portfolio of sparkling beverage remained strong, allowing us to maintain market share year over year.

In Venezuela, we recorded a 14% volume decline for the quarter, driven mainly by a double-digit decline in the sparkling beverage portfolio resulting from the very adverse weather conditions recorded across the franchise territory.

Our Central American operations had volume decline 1% compared with the fourth quarter of 2009. Higher volumes in the still beverage category were outpaced by declining volumes from our sparkling beverage categories on the bottled water portfolio.

Our Latincentro division's total revenues decreased 26% to MXN8 billion. This decrease resulted mainly from the effect of the devaluation of the bolivar in Venezuela. On a currency-neutral basis, our Latincentro division's total revenues grew 12%, driven by higher average prices per unit case implemented across our operations.

With regard to profitability for the quarter, our Latincentro division gross profit declined 23% to MXN3.8 billion as a result, again, of the devaluation of the bolivar in Venezuela. The impact of higher sweetener costs across the division was absorbed by higher average prices per unit case in local currencies over the past 12 months, lower US dollar-denominated cost of goods sold in Venezuela resulting from a more favorable exchange rate we accessed during the quarter, and the appreciation of the Colombian pesos as applied to our US dollar-denominated raw material costs. Compared to the fourth quarter of 2009, our gross margin expanded 180 basis points to 47.3%.

Our operating income increased close to 24% to MXN1.6 billion. Operating leverage achieved through higher revenues in local currencies, combined with lower marketing expenses in Colombia and Venezuela and a more favorable exchange rate as applied to our dollar-denominated operating expenses, compensated for higher labor costs in Venezuela, resulting in an operating margin expansion of 810 basis points, reaching 20.1%.

Our EBITDA grew 16% in the fourth quarter to MXN2 billion. For the full year, our Latincentro division's EBITDA grew 11%, reaching MXN6.9 billion.

In 2010, our Latincentro division faced a very complex operating environment. Our operations were affected by several factors, from adverse weather conditions across our territories in the second half of 2010 that caused substantial disruptions to our distribution network to the effect of the devaluation of the bolivar in Venezuela. Despite these dynamics, the division continued to improve profitability and delivered solid results due to the strong brand preference for our portfolio of sparkling beverages, combined with our strategy to reinforce our non-carbonated beverage portfolio in the region.

As we mentioned in our last conference call, in October 2010, we signed a preliminary agreement to acquire Grupo Industrias Lacteas in Panama. This company enjoys an important presence in the milk, value-added dairy, and juice categories in that country.

Negotiations continue to take place in an orderly fashion. As a matter of fact, we recently received approval from the local antitrust authorities, and we expect to successfully close this transaction during the first quarter of 2011. This acquisition represents a transformational event for our Company to develop the necessary capabilities to manage a co-distribution system. Additionally, this transaction will allow us to identify prospective synergies with our existing distribution system and to leverage the full potential of this new portfolio all across the value chain through our extensive cooler coverage at the point of sale.

In 2011, our Latincentro division operators will continue to face challenges. Nevertheless, they have the extraordinary ability to successfully adapt our business to complex operating environments. As we continue to strengthen our portfolio brands to satisfy more consumers, our operators will further their efforts to protect the division's profitability.

Now let's talk about our Mercosur division. In the fourth quarter of 2010, our Mercosur division's total revenues grew 13% to MXN10 billion. Excluding beer, which accounted for close to MXN1 billion, total revenues reached MXN9.1 billion. Volume growth and higher average prices per unit case were partially offset by the effect of a negative currency translation resulting from the appreciation of the Mexican peso against the Brazilian real and the Argentine peso. On a currency-neutral basis, our Mercosur division total revenues increased 18%.

Our Mercosur division generated 8% volume growth in the fourth quarter 2010. This growth was driven by strong performance across all various categories in Brazil and by the solid performance of brand Coca-Cola and Aquarius, our flavored-water brand in the still beverage category, in Argentina. The strong performance of our sparkling beverage portfolio has allowed us to gain market share in this category in 2010.

With regard to our profitability for the quarter, our Mercosur division gross profit increased more than 14% to MXN4.3 billion. Higher sweetener costs across the division, combined with increased PET costs in Argentina, were offset by our higher revenues in local currencies resulting from the selective price increases implemented over the past several months, along with the appreciation of the Brazilian real as applied to our US dollar-denominated raw material costs. Our gross margin expanded 30 basis points to 42.7% for the fourth quarter of 2010.

Our operating income remained flat at MXN1.6 billion, despite increased labor and freight costs in Argentina. Our operating margin declined 210 basis points to 16% in the fourth quarter.

Our EBITDA grew 4% in the fourth quarter to MXN1.9 billion. For the full year, our Mercosur division EBITDA grew more than 15% to MXN5.8 billion.

In 2010, our Mercosur division represented an important driver for our Company's growth. Our Brazilian franchise recorded strong volumes, leveraging a strong consumer and economic environment, as well as selective price increases that allow us to compensate for higher levels of inflation and increased raw material costs.

In Argentina, we saw an important sequential recovery in our volumes, driven by a more favorable consumer environment and better weather conditions.

Across our Mercosur franchise territories, we advanced significantly on several fronts. With the incorporation of Matte Leao branded products in the non-carbonated beverage platform we share with our partner, the Coca-Cola Company, we increased our footprint in this high-growth potential category. It enabled us to (inaudible) our product offering in Brazil.

During the fourth quarter, the ready-to-drink tea category grew close to 40% when compared to the fourth quarter of 2009. In the sparkling beverage category, we significantly grew our returnable base. And, through our (inaudible) offering, we satisfy the thirst of more consumers. To reinforce our execution at the point of sale, we substantially expanded our cooler coverage. Through the (inaudible) operation in only one day, we sold more than 5,000 coolers, establishing a benchmark for the Coca-Cola bottling system.

For 2011, our Mercosur division will extend its hard record of growth, supporting by our operators' discipline and defined capability to serve one of the world's most dynamic beverage markets.

Now let me walk you through our financial performance for the year. Despite the challenges we confronted in 2010, we continued to improve our financial position based on the strength of our defensive business profile and our balanced, diversified sources of free cash flow generation.

As of December 31, 2010, we have a cash balance of MXN12.5 billion, and our total debt was MXN17.4 billion. Our net debt to EBITDA coverage ratio was 0.2 times, and our EBITDA to net interest coverage ratio was about 14 times.

On February 18, it was proposed to our board of directors a dividend payment of approximately MXN4.4 billion, subject to approval of the annual shareholders meeting to be held during March of this year. The proposed dividend is approximately 60% higher compared to the dividend paid in 2010. This dividend proposal does not change our strategic vision to continue growing through acquisitions.

At Coca-Cola FEMSA, we have developed a strategic framework that builds on several key (inaudible), which clearly lay the foundation for our future business growth. With this strategic framework environment, we continue exploring the best alternatives to grow our business in the beverage industry, both organically and through acquisitions, reinforcing this growth with our strong in-house pipeline of innovation. This has enabled us to significantly enhance the Company's financial position, providing us with the flexibility to participate in the consolidation of our industry with the discipline necessary to ensure value creation for our shareholders.

In conclusion, our operations delivered positive results for 2010, despite weather-related events that affected our volumes and the increased sweetener cost that affected our industry profitability. We delivered improved results thanks to the strong consumer preference for our products and our balanced portfolio process. Our operators have ability to capitalize on the experience they have gained over the past several years. It's an important competitive advantage which will build our Company well into the future.

2011 represents challenges and opportunities for us all. The position we have achieved in the beverage industry is the result of our daily efforts to transform complex challenges into opportunities to deliver increased value for our shareholders.

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

(Operator instructions). Lauren Torres, HSBC.

Hector, you mentioned, obviously, that commodity costs and the impact of higher costs this year will affect you. But you also mentioned that you feel somewhat comfortable offsetting these costs. Just, first, if you could, give us a sense of where you are as far as exposure to costs, whether it be sweetener costs and/or packaging costs this year and then, secondly, that your confidence in offsetting these-- you talked about selective price increases. Just curious if you feel that's the main offset here at this point. And I guess I'd ask that question with consumers still being somewhat weak-- if you feel comfortable that taking pricing at this point makes sense. Thank you.

Certainly, 2010 was a very tough year in terms of cost pressure from some of our raw materials. Some preliminary numbers that we have made internally is we have stayed with the same mix of sweeteners that we have in 2009. The very large increase in refined sugar prices-- on cane sugar prices basically implies an impact of around $120 million on our P&L. We offset it, around $40 million of those $120 million, by using different mixes of sweeteners in our formulations. And the rest, the other $80 million, the impact on our costs on a full year is through your pricing initiatives and (inaudible) value-- or efficiencies in our value chain.

And, therefore, when you look at the results of Coca-Cola FEMSA in this past year and having an operating income that, on a consolidated basis, increased a little bit more than 7%, I think that [simulates] a tremendous effort from our operations and in our strategies. And that impact alone of $120 million in refined sugar costs implies that, without that, our operating income would have run probably closer to 14% or 15% as opposed to the 7% that we grew.

It's also fair to say that, during the first half of the year, we benefit from the appreciation of some of the currencies versus some of the dollar-denominated raw material costs. And, therefore, some of the packaging materials will benefit. And that was also helping us to offset that impact.

During the fourth quarter, we started to receive pressures from, especially, PET. So the fourth quarter was affected by both high sugar price and high PET price.

And, going forward, the signal that we have with our operators is we have to be very careful where the raw material pressures that we certainly will have during 2011 and certainly have during the first quarter of 2011. If you look at some of the future prices of some of these commodities, in theory, sugar prices should come down as we advance in the year. But nobody has a crystal ball here.

So it's very important that our operators work in carrying a slimmer fixed-cost structure. We have a addressed this issue in several conference calls, especially in the last year, as a way of focusing a lot our attention in terms of the SG&A and how we work with our daily business in a more efficient manner. I think that both Mexico and Latincentro divisions have made some important inroads in that respect. I think that, because of the growth that we have in Brazil and the very strong salary pressure in Argentina, we haven't been as successful in that front in Mercosur. So we still have homework to do in that area.

And, addressing your question more specifically, we have worked a little bit in trying to fix some of the high-fructose corn syrup prices. We basically have committed with some of the suppliers to amounts and prices that will basically mean that we have enough high-fructose corn syrup for 2011 for our needs and at prices that are around 5% above what we had during 2010. Given the prices of corn that we have seen, I think that these levels are good. But you never know until times-- until the days go by and the industry has-- the spot prices are behaving. But we feel that we have a good, solid supply of (inaudible) and additional price.

(technical difficulties).

The big question is if we are going to be able to pass along some pricing as we advance during the year. We believe the answer is yes, although we have to recognize that we have a very large gap versus our competitor in comparable presentations. You know that we are very [knowlative] and very creative in how to compete in this marketplace with different SKUs. The scale that we have and the knowledge that we have in the market allow us to change different sizes of packages or different SKUs in different consumer applications in the different geographic areas that allow us to better compete.

But, just to give you an idea, if we look at today's prices in Mexico and we compare 2-liter Pepsi-Cola products at around MXN10 versus our 2.5-liter, returnable package in some areas at MXN13 and some areas at MXN14, we are speaking around 30% to 40% price gap with, in theory, less convenient packages because of the returnable presentations. If you compare Pepsi products in 3 liters versus our Coca-Cola products in 3 liters, the gap is close to 45% or 47%.

So our anticipation is that some of our competitors will also feel the pressures in the market in terms of these raw materials and that they will start increasing some of these prices. And, regardless of what our competitors will do, we'll continue, as ever, looking for opportunities to find price points at which we can improve our prices and still maintain our market share.

It's a very tough environment, but I think that we have-- In some areas, I think that we have somewhat additional pressure on sugar prices and, in theory, in energy prices toward the end of the year. We have locked in some of the prices in high-fructose corn syrup. We think that we will have pressure in PET because we didn't see pressure in the first half of last year, and we are starting to see pressures in fourth quarter 2010 and first quarter 2011 in PET prices. But I think that we will, as always, try to find formulas to compensate that in savings throughout the value chain in our cost structure and some pricing activity.

Okay. That's helpful. I was just trying to get a sense if pricing was one of your main offsets. It seems like, in addition to everything else you've been doing to offset those cost increases, you feel you still have the ability to do that in addition to pricing, where there's opportunities. I guess that's a correct statement?

I think that we'll just-- pricing is a very important element in our strategy (inaudible). But we continue to look to innovation in terms of having lighter packages, having different mixes of sweeteners. And we look at the opportunity to have the packaging again, too, to try to compensate for those pressures.

Okay. Great. Thank you.

Alan Alanis, J.P. Morgan.

First, a clarifying question regarding the operating expenses in Mercosur, Hector. If all the increases only come from labor and transportation-- I'm doing some very back-of-the-envelope numbers here. Around one-fourth to one-third of your Mercosur revenues are coming from Argentina. So, if all of this spike is coming only from Argentina, that means that you almost doubled the total SG&A, or close to 70%-plus the growth in SG&A, in that region. So, I guess, the first question is-- could you quantify a bit this a bit more? What else is there besides the labor and transportation costs in Argentina?

Certainly, when you look at Mercosur, you have two different environments. One is Brazil. It, as you probably know, is very important growth in volumes and in consumer sentiment, et cetera, and very favorable for the benefit of our growth in that area. And Argentina, where we are having these very strong concerns with some of the major costs and some derivatives from labor costs that have to do, especially with freight. Remember that, in Argentina-- I don't know if you're familiar. I think that everyone should know that most of the distributions don't (inaudible) as opposed to what we have in other territories. And that has to do a lot with the solid reasons we've given you surrounding that in Argentina (inaudible).

But the impact that we have had in freight costs in Argentina and salary increases is tremendous. It's probably not (inaudible), as you said, in your back-of-the-envelope example, but freight costs, for example, have increased close to 70% as to what we had last year. Salaries have increased around 32% or 35%, depending on the fixed production of some warehouse operators. So that really put a lot of pressure on the SG&A numbers in Argentina.

It's important also to know that Argentina, compared to last year-- last year, in the middle of the crisis-- and it was triple most of our operations in the end of 2009. We did have very strong growth in marketing expenses in most of our operations. In general, marketing expenses each year are increasing versus what we had in 2009. Especially when you compare fourth quarter versus fourth quarter, the numbers are a little bit more dramatic. And this is the case in Argentina also. During the fourth quarter of last year, we'd been able to move to very close to zero marketing expenses in the fourth quarter because we were going through a very difficult environment, as you remember, last year in a very difficult year.

The good news in Argentina is that I think that we feel that consumer sentiment is improving during the fourth quarter. We grew volumes in Argentina around 7%, if I remember correctly. But, if we look at the month of December, December grew around 16% in volumes. And January and February are running at double-digit growth rates in Argentina.

So I believe that, with this flexibility that we have in terms of how we apply or stop a little bit of our marketing expenses and depending on how we see the environment and the consumer sentiment-- it's very much. And now, fourth quarter, in addition to the very strong freight costs and very strong salary increases, we do have substantially [increasing] marketing expenses that we believe is paying off with this growth in volumes that we are seeing in Argentina. Again, this marketing expense, even if you spend a little bit compared to Brazil that we had in the fourth quarter, it's an important increase.

So I think when you isolate Argentina that has all these external (inaudible), if you will, because of, especially, salary increases and freight costs-- when you look at Brazil longer term are a little bit more stable. You have a nice growth in volume, a nice growth in prices, and you have revenues and profits that are growing at double-digit growth.

I very clearly understand your concerns because the numbers look a little bit strange when you look at the fourth quarter numbers combined for Argentina and Brazil.

I hope I clarified a little bit your question.

So there's nothing else? Those are the key issues.

Now, if I may quickly ask a more strategic question regarding the use of cash and regarding M&A, you've seen the transaction and obviously have analyzed the transaction-- what's happened with Contal and Arca. My question goes more in the sense of-- We're entering an environment of inflation. We're already in full inflation. That's trickling down into other categories. And what this means is that the interest rates are going up. I don't think that anyone would wish to say that they will stay this low for a long period of time. The specific question for you, Hector is-- what's the sense of urgency? Knowing that the cost of capital is going to go up and that it's likely any acquisition that you might do in the future is becoming likely more expensive from the financing standpoint as time passes by, how does the Contal transaction change your view regarding senses of urgency regarding how you should approach M&A in the future? And what's the optimal use of cash for the Company after all these events?

I think that you raise a good point, and I think it's important to clarify on that. When you look at our past as Coca-Cola FEMSA, you know that we have been active in conversations with every single bottler in Latin America and, you can argue, around the world. We have been active.

We acquired Panamco in 2003. We entered into a phase of deleveraging our balance sheet because the [announced date] was taken into our balance sheet at that moment in time in 2003.

But, if you look what we have done-- what we have accomplished after that, it's basically, in the last three or four years, every single year we have an important transaction. We acquired REMIL. We acquired Jugos del Valle. And you know that we did that transaction through the whole system in Mexico and Brazil. It was Coke FEMSA doing that, and we have been active.

And then, getting back to all the other bottlers, we acquired Brisa, the jug water business (inaudible) in [de Luca]. We acquired Agua de los Angeles, which is the water down in de Luca. We acquired Brisa in Colombia. Together with the Coca-Cola Company, we entered the transaction of Matte Leao. We are doing this laboratory in Panama, which I think has tremendous useful (inaudible) of this area in terms of (inaudible) on the transaction amounts.

I think that the Arca/Contal transaction is a very positive one for the system because it signals something that we have been expecting for a long time, and we have disclosed openly with every investor and every analyst. I think that everyone in Mexico that is independent, independent meaning that it's not either with Arca/Contal or us-- some of the small bottlers, are thinking-- I'm sure that they are thinking now-- should I stay independent, or should I do something similar to what they do? I think that the fact that the owners of Contal decided on doing this transaction also signals, I guess, a new environment that we are seeing in Mexico in terms of generation changes and differing needs of different shareholders. You can add your security things-- your security issues in Mexico to (inaudible).

I think that the fact that Coke FEMSA represented 90% and a little bit-- 90% of the additional (inaudible) in the year (inaudible) in Mexico, I think that signals very clearly the importance that Coke FEMSA has in the growth to position the system. And I think that it would be also an important element for whoever wants to join forces with a different bottler to consider in terms of who should they be approaching.

I'm of the idea that that, if you take the position to no longer control a (inaudible) business but to approach someone, you should approach (inaudible) that has a better (inaudible) in terms of diversification, growing to Brazil and Argentina and Colombia and have been good (inaudible) and the product that we have.

But, right now, with the consumers being-- even the bad situation that we have in Venezuela and the difficult situation we have in various regions in Argentina, (inaudible) at the end of the day. And I think that that's very difficult to replicate by other alternatives.

Regarding cost of capital, I think that you're right. We are reviewing that interest rates are going to continue to increase in our region. The board meeting that we had last Friday, the finance committee approved this, I guess, additional (inaudible) dividend payment because it's a dialogue that we have had with you guys and with investors. We are approaching an inefficient capital structure, where you have close to zero debt in our balance sheet.

Together with that decision, it was approved by our finance committee to see if we can (inaudible) or try to look for alternatives for financing and take advantage of the low interest rates in anticipation of we have maturities in 2012 (inaudible) that we can prepay. That's the worst-case scenario. But we (inaudible) last year. But we can also use that as part of our controlling the capital structure to a more reasonable capital structure for our Company. And, if we have an acquisition in front of our (inaudible), then we have some of this cash available.

I think that Arca/Contal has also signaled an important element (inaudible) in terms of prices. If some shareholders are willing to join forces, I think that signals also-- It confirms our belief that we have been discussing with investors for many years that the Mexican bottlers are not necessarily here to sell and to go out with a big pile of cash to look for alternatives. It confirms that investors in Mexico in the Coca-Cola system want to continue to be part of the system. And, in that respect, your concern (inaudible) would not necessarily be a competition because it would be more merger of entities as opposed to trying to finance through the capital markets (inaudible).

Okay. Understood. That's useful. Thank you so much, Hector. Thanks.

(Operator instructions). Lore Serra, Morgan Stanley.

I just wanted to go back and look at sort of maybe the year as a whole and, first, look back and, then, look forward. I think a year ago, if you had told me that cost margin would go up 110 basis points with declines in Mexico and Mercosur and a big increase in Latincentro, I'm not sure I would have believed it. So can you walk us through why you had so much margin increase in Central America?

And then, as we look forward to this year, there were lots of moving parts. I think the certainty here is Venezuela is going to be under pressure, given what's happened with the bolivar, with, probably, the strike, and the fact that I think your input costs are going to be more difficult. So I assume the margins are going to be under pressure in Latincentro. And you talked about pricing and costs, but there's lots of moving parts. Can you just kind of give us a sense of--? Is this a year where you're going to be hoping for margin stability because of all these factors, and you're going to really have to be tight on operating expenses to get there? Or is this a year where you think there's some-- I don't know-- potential for margins to recover in Mexico and Brazil and sort of pull out some of the problem areas? If I look at a consolidated basis, is the margin going up or down this year? I guess some direction would be helpful. Thanks.

I think that you make a very important point. When you look on a consolidated basis at our margins, you see clearly the effect of Latincentro, eight points of basis expansion in the operating margin in Latincentro, it has a lot of noise there because of Venezuela and because of the foreign exchange translation.

What's very positive in Venezuela this year that significantly affected our margins were basically factors that, we have access to some other important raw materials at a controlled exchange rate of around VEF2.6 per dollar versus what we have in 2009, where we were buying some of the raw materials in the open market at close to VEF6 per dollar and, in some cases, a little bit more than that, that created a lot of additional margin in Venezuela that I don't see for next year because of modifying the VEF2.6 market is extinct in December. I'm told it's unified on the controlled-- the two-tiered controlled exchange rate that they passed-- on at VEF2.6 and one at VEF4.3 is unified now at VEF4.3.

We have (inaudible) dollar-denominated expenses that were also affected by that conversion. But, again, in 2009, we paid with very high exchange rates because we didn't have access to the controlled market. And, in 2010, we have that benefit.

So, when you look at-- I think that very positive in Venezuela is the pricing leverage. When you have a country that has strong inflation, you have more flexibility in moving prices. And we're increasing prices in real terms in an important manner in Venezuela. And I think the pricing lever we've seen solid.

I see that similar to what we have in Colombia-- both in Colombia and Venezuela (inaudible) playing a very important role in Latincentro. We have very strong bad weather conditions that disrupted a lot of our visibility approach in the marketplace. And, with that, we basically stopped a lot of our marketing efforts, not necessarily advertising on TV. This is marketing activity-- the day-to-day marketing activity in the streets. You have (inaudible) because you don't-- (inaudible) facilities or in the warehouses because of the disruption of the logistics. You simply stop-- balance that marketing activity. And, therefore, Colombia and Venezuela-- the two of them have a lower marketing level of expenses than what I would anticipate in a normal (inaudible).

When you look at, especially, Venezuela on a sequential basis and the effect that that has in Latincentro, Latincentro on a sequential basis has operating income to sales ratio of around 16%, more or less, each of the first three quarters. And then we jumped during the fourth quarter to 20% because of these reasons that I'm explaining. I think that, because of the pressure on the bolivar, that we will have a higher exchange rate for some of the raw materials. That's all of these things that I have mentioned. I think that on more normalized (inaudible) of around 15% to 16%. So we certainly will have pressure next year, in 2011, on the margins in Venezuela.

On top of that, you have some pressure on raw materials. Raw materials will play a role. My anticipation is that we'll have pressure from PET. We will probably have a better environment in sugar at the end of the year. But there is a lot of uncertainty there.

So, all of this I'm mentioning-- it's clearly to send a signal. Fourth quarter 2010 is a very strange non-common profitability in the Latincentro division because, basically, of the effect of foreign exchange, the effect of the Venezuelan bolivar. And it's kind of counterintuitive because we think that, with the devaluation, you will have a very bad situation. But it's at play because of the access that we have in the controlled market. A lot of that has played in our favor in the end of last year. I think that we'll have a more normalized level of profit in Venezuela on 2011.

I think that Mexico and Brazil, on the other side-- I'm positive on those two countries. I think that Mexico has shown very strong growth during the first two months of the year in terms of volume. And I'm expecting this to trickle down to very profitability during the year in terms of Mexico. And I think that, in Brazil, we had a lot of big crops for Brazil also. Although it was growing very strong volume-wise during 2010, I will expect a more moderate growth in 2011 in terms of volume.

But I'm expecting them to deliver on-- our operators to deliver on some cost control, as I mentioned during this conference call. I think (inaudible) in Mexico and Latincentro in some of the cost containment. I think that Brazil (inaudible) on that front. And we think that, because of those efforts, we are expecting to see some improvement in profitability for Brazil.

So, in summary, Lore, I see Mexico and Brazil with potential to increase margins (inaudible). I see a very complicated Venezuela because of the exchange rate now moving from the controlled exchange rate to unified at VEF4.3. That would make it very difficult for us in terms of comparison because we can't access at VEF2.6 for a big part of the year. I see Argentina with a lot of pressure in salaries and freight, as I expressed during the question that Alan posed. And, obviously, those increases are going to stay for 2011. And I think that Colombia is also an area where we should see improvement in margins. Central America is small, but we also see stable or increasing margins for Central America.

I hope that this answers a little bit the question.

Yes. I'm sorry. Just to clarify, you're saying that, overall, that you would expect margins to come up this year as those franchises compensate.

And then, just secondly, can you just give us an idea what the CapEx budget for this year is? I think it was about $500 million last year, if I remember correctly. What is it for this year, please?

I'm sorry. Lore. I didn't hear very well. You are thinking about CapEx for this year?

Yes. What is the CapEx budget for this year?

We have a similar CapEx budget to what we have. The big question-- to what we had in 2010, around a little bit more than $500 million. The big question that we have is we start the new plant in Colombia. We are looking at that project, and we are analyzing the possibility of replacing the production facility that we have in (inaudible). We will move in that direction, and I think that we have good chances of moving in that direction. We might see a slight increase (inaudible) around $50 million as opposed to $500 million that we have this year.

Thank you.

Jose Yordan, Deutsche Bank.

My question is about the working capital. Working capital investment for the year of MXN6 billion is pretty-- it's a lot higher than what you've had in the past. A two-part question. Is there any specific one-time reason for this? Or is this the way we should think about working capital investments in the future?

I think that when we look at the cash flow statement that we have in the press release, and we've had discussions generally with our auditing committee, which we keep presenting, that cash flow statement specifically and the press release-- it's a little bit convoluted in the sense that it has some effects of inflation because of-- and translation effects of some of the countries that we participate-- not only the countries that have inflationary accounting, but it's certainly convoluted.

The translation I would like to give you-- I think that, to clarify that specific number (inaudible) to growth and look at the numbers. Working capital-- this industry is not very complex necessarily, and it shouldn't be reflected as a very large negative number as we have in this statement. We have very few accounts that have (inaudible). In every country, it's very minimum. And we have some freight from our suppliers. At the end of the day, it's never been a problem for our Company to be worrying our treasurer to finance deficits in working capital.

And, after this call, Jose Castro and his team to review statistically the computations that are involved in that cash flow statement. But I would like to give you-- (inaudible) that from a working capital point of view, we don't have any strategic needs that should be fairly worried to any investors at this moment.

Okay. Great. I'll take it offline with them.

And just a clarification to Lore's question. Was it your answer in the end that, on a consolidated basis, you expect flat margins for the year, notwithstanding a 6-point decline or so in Latincentro?

What I was trying-- I tried to go-- When I was answering Lore, I was trying to refer to (inaudible) increasing margins in the different regions. I think that, when you look at it on a consolidated basis, it's a little bit (inaudible) that I explained. I see Brazil and Mexico and Colombia with good profitability with increasing margins. I see Argentina and Venezuela with very good possibility of diminishing margins because of the pressure that I have. And I feel more neutral Central America.

Okay. We'll work it out from that. Thanks a lot.

Celso Sanchez, Citigroup.

I just wanted to ask, really, about innovation in Mexico on two different levels-- or two related levels, I suppose-- one on the process side. And, by that, I'm speaking specifically about the commercial model (inaudible), just to see what update you can give us an color on that process. Especially, I think you mentioned some of the execution initiatives you were working on in the quarter as affecting operating expenses. So it would be helpful to know kind of where things stand there, how you see that having evolved. And is it in line with your target to this point? Is it ahead of schedule or behind schedule?

And then, secondly, on the portfolio side, the still beverage growth in Mexico was, I think, throughout the year a bit lower than I would have thought at this stage of the game and not very much higher than the sparkling side. I just wonder. Is that a lull in growth, or is it really a category that, for competitive reasons or overall pricing reasons, should not be expected to grow that much above sparkling, which, to me, there should be a material difference in those growth rates to the benefit of still? Thanks.

I think that you raise two important elements here, which is competitive innovation. Innovation is one of the very important levers that we have in our planning process in Coca-Cola FEMSA. It has been there for a couple of years. And I think that some of these elements that (inaudible) innovation and have helped us really importantly in terms of volume growth in the past. (Inaudible) was an example of that. Out of nothing, (inaudible) that includes, very importantly, volume-wise last year. And, if you remember, it was very important with Mexico especially. And you remember, in Mexico-- we mentioned in some of the conferences last year that we have record-level volume growth in 11 out of 12 months of last year. When the economy in Mexico was suffering and activity was coming down around 6%, we were increasing our volumes around 6% versus what the economy was doing. And a lot of that has to do with innovation and (inaudible) Jugos del Valle Fruit. (inaudible) have made 2010 a very difficult year to grow.

I think that you are very correct in pointing out that the growth of non-carbonated drinks is about that of the sparkling beverages, so it's not that much. That has to do, again, with the success of 2009 and very difficult comps. Part of that is that we have not been able to grow importantly the base of the business that we acquired, which is juices and nectars.

We have been able to grow on some (inaudible) around juices and nectars, but we still have a lot of homework to do in juices and nectars vis-a-vis some of our competitors. I think that we're gaining. I'm sure that-- I've seen the data. We are gaining market share. Plus, we think that we have a lot of opportunities, and we should capture those opportunities going forward.

I think that products like Nestea in Mexico or Matte Leao in Brazil are growing at a fantastic pace, with net sales of 40% (inaudible) both in Mexico and Brazil from a very small base. So I think that, as those products continue to grow, we will start to see more traction in volumes of non-carbonated growth.

Plus, like Valle in Mexico, reaching, every day, new milestones. As a matter of fact, in our territories-- in Coke FEMSA territories, Valle has reached market share in beverage of around 26% or 27% from basically nothing that we had a few years ago. It's a very strong signal of the work that we are doing in the streets in Mexico. When you think about this trend (inaudible) in these territories-- If you asked me a few years ago where we dream of having (inaudible) of that amount of market share points, it was very difficult to believe.

I think that we have to work a lot on the profitability on Valle because, obviously, it has been tough in terms of the pricing environment vis-a-vis our competitor there. And we have to (inaudible) in the profitability we have-- as we get traction, some of the marketing expenses that are [tight] compared to the volume base that we have so far -- we'll start to distribute that marketing expenses on a higher volume base.

So, so far, pricing and marketing expenses is an initiative we have to look at on a very specific product. But just thinking that we have taken away so many market share points from our competitor, especially when our competitor is deriving most of the profitability from that product, I think that is a very important success story for our Company.

But you are right. It's been the focus of top management and the board of directors of Jugos del Valle that we should have a better growth story in non-carbonated products.

We have worked with other new products. Some of you are probably familiar with the coffee initiative in Mexico or the Coca-Cola brand named Black. We have placed 5,000 equipments at the end of 2010 in the Valley of Mexico. We are targeting to increase that to 8,000-- three addition of 1,000 equipments during this year.

And it's a very specific consumption occasion targeting not necessarily the office or the at-work point of consumption. It's targeting the small mom and pop providing a new category that the mom and pop owner have to offer to her clients. And it's proving to be an important element.

Once we establish a better base here and start getting a little more information, we'll share those numbers with you. But I think it's an important initiative.

We have worked in a product called (Inaudible) Ciel, which is a product that was developed by (inaudible), developed with the Coca-Cola Company. It's a drink that provides 50% of the protein that is needed by a kid. It's something that we'll provide this year in Mexico and some of the other countries, especially countries like Latin America, where nutrition is an important element in the development of the kids. It's an area that we'd like to help with that.

And, lastly, what you mentioned about (inaudible)-- how we define the route to market, it's also an important element in terms of how we target our clients and-- how we segment our clients will be impossible for us. It will be impossible for us to bring up the same thing to our clients so many different SKUs if we don't have the tools that are around what we call (inaudible) internally. We target the clients (inaudible). And then we define specifically the portfolio that will be targeted to each of these different clients. It will be impossible to have a success story in so many different SKUs if you just launch every SKU to every single client in your universe of clients. So that's where (inaudible) brings a lot of important knowledge to focus and to target specifically these clients.

I think that all those efforts that are around innovation are very important for the future of Coke FEMSA, and that's why innovation is one of the important pillars in our (inaudible).

I hope that I answered the question.

Yes. That's great. Thank you.

And, at this time, we have no more questions. I would now like to turn the conference back to management for closing remarks.

Thank you so much for your attention to this conference call. I will be in touch, as always, to solve any additional questions you might have.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.