Coca-Cola Femsa SAB de CV (KOF) 2011 Q1 法說會逐字稿

Good morning, everyone, and welcome to Coca-Cola FEMSA's first quarter 2011 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 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. In the first quarter of 2011, our Company delivered strong top and bottom line results supported by our successful strategy to selectively increase prices on our worldwide portfolio beverage alternatives over the past several months combined with our operations discipline to adapt our business to particular market conditions.

Our Mexico and Mercosur divisions were the main drivers of our positive performance for the quarter demonstrating again the benefits of our geographically diversified portfolio of franchise territories, which enabled us to compensate for a slow start of the year in our Latincentro division.

In the first quarter, our consolidated revenues reached MXN25.8 billion, up close to 10% from the first quarter of 2010 despite the effect of the strike we faced in our Venezuelan subsidiary at the beginning of the year. On a currency neutral basis, our consolidated total revenues grew approximately 11%.

In the first quarter, our consolidated sales volume rose 2.6%. This increase was driven mainly by the strong performance of every various category in our Mexico division and the solid performance of our sparkling and still beverage portfolio across our Mercosur division.

Our consolidated gross profit increased close to 10% in the first quarter of 2010. Cost of goods sold increased as a result of higher PET and sweetener costs across our operations, which were partially offset by the appreciation of our main operations' local currencies, as applied to our US dollar denominated raw material costs. Consequently, our gross margin expanded 20 basis points compared with the first quarter of 2010.

Our consolidated operating income improved more than 10%, reaching MXN3.9 million in the first quarter, supported by double-digit operating income growth generated by our Mexico and Mercosur divisions. Operating leverage achieved through higher consolidated revenues, combined with stable year-over-year operating expenses in our Latincentro division, compensated for higher labor costs in Venezuela and higher labor and freight costs in Argentina. As a result, our operating margin expanded 10 basis points, reaching 15% for the quarter.

On a currency neutral basis, our consolidated operating income grew approximately 11%. Our consolidated EBITDA increased 11%, reaching MXN5 billion during the first quarter of this year.

Our net controlling interest income increased 6% to MXN2.2 billion. This increase mainly resulted from higher operating income recorded during the quarter.

Now let me expand on our operations. In the first quarter of 2011 our Mexican operations delivered strong top and bottom line results driven by operating leverage we achieved by strong volume growth and pricing ahead of year-over-year inflation.

10% volume growth of brand Coca-Cola in multi and single serve presentations combined with an 8% volume growth in flavored sparkling beverages enabled our sparkling beverage portfolio to achieve high single-digit volume growth for the quarter. Our bottled water portfolio grew 10%, supported by both our bottled water business and our single serve water presentations.

Moreover, our still beverage category grew 14%, driven mainly by fruit, our orangeade under the Jugos del Valle line of business. Powerade, our isotonic beverage grew more than 30% and Nestea grew more than 50% as compared with the first quarter of last year.

Our average price per unit case increased more than 4% as compared with the first quarter of 2010. This increase was driven mainly by the selected price increases that we have implemented across our portfolio over the past several months, coupled with higher volumes of brand Coca-Cola. As a result of these factors, our Mexican operations total revenues increased more than 14% to MXN1.5 billion.

With regard to our profitability, the impact of higher PET cost was partially offset by the appreciation of the Mexican peso as applied to our US dollar denominated raw material costs. Compared with the first quarter of 2010, our gross profit increased more than 13% to MXN4.5 billion, and our gross margin declined 30 basis points to 47.9%.

Our operating income increased more than 23% to MXN1.4 billion. Operating leverage achieved through higher revenues produced an operating margin expansion of 100 basis points, reaching 14.4%. Our EBITDA grew more than 15% to MXN1.8 billion compared with the first quarter of last year.

During this first quarter of 2011 our Mexican operations delivered strong results, achieving the highest volumes ever recorded for a first quarter. All of our beverage categories grew at a healthy pace. Brand Coca-Cola continued its growth thanks to its strong brand preference and our operators' relentless effort to design segmented broad portfolio that allows to capture regional industry value.

Our strategy to selectively increase our prices has proven successful as we outpaced increased year-over-year levels of inflation. This strategy has enabled us to partially compensate for raw material cost pressure such as the higher prices of PET resin in our Mexican operations. On the sugar front, we have seen a more stable cost environment, which combined with the appreciation of the Mexican peso as applied to our US dollar denominated raw material costs, it's also helping us to mitigate PET resin cost pressures.

The investments we have made over the past 18 months in the marketplace to enhance our execution of the point of sale foster the availability of our internal presentations, increase our cola covers and support our still beverage categories are enabled us to increase our market share year over year. We are confident that our clear focus on satisfying our consumers with our wide multi-category portfolio beverage combined with the precise execution of our marketplace initiatives will continue to drive our performance for the year and help our Mexican operations to outperform our industry.

Now let's turn to our Latincentro division. Our Latincentro division posted a 14% volume decline in the first quarter. This decline mainly resulted from the strike we faced in our Valencia production and distribution facilities in Venezuela at the beginning of the quarter, which resulted in a 29% volume decline in this franchise territory. And a slow start to the year in our Columbian operations.

In Columbia, we recorded an 8% volume decline in the first quarter, mainly due to continued bad weather conditions that affected the whole of our industry. However, we have maintained our market share in this market.

It is important to note that in the first quarter of last year our Columbian franchise territory recorded double-digit volume growth, presenting a soft year-over-year comparison.

Our Central American operations recorded a 2% decline in sales volume compared with the first quarter of 2010, cycling a 12% volume growth. Volume growth in our water portfolio and our still beverage category was outpaced by a mid single-digit decline in our sparkling beverage volume.

Our Latincentro division total revenues declined 5% reaching MXN7 billion. Higher average price per unit case across the division was offset by lower volumes. On a currency neutral basis, our Latincentro division total revenues declined 2%.

With regard to our profitability, our Latincentro division's gross profit declined 2% to MXN3.3 billion. Higher PET and sweetener costs were offset by one, a benefit recorded in Venezuela resulting from having PET inventory from 2010, which were registered at a lower exchange rate as compared to the same quarter of last year. And second, the effect of the appreciation of the Columbia peso as applied to our US dollar denominated raw materials costs.

Operating leverage achieved through higher average prices per unit case in local currencies produced a gross margin expansion of 150 basis points to 47.3% compared with the first quarter of 2010.

Our operating income decreased close to 9% to MXN1.1 billion. Higher operating expenses were driven mainly by higher labor costs in Venezuela, which were partially offset by lower operating expenses in Columbia and Central America. As a result, our operating margin declined 60 basis points to 16.1% compared with the first quarter of 2010. Our EBITDA declined close to 5% to MXN1.5 billion compared with the first quarter of last year.

During this first quarter, our Latincentro operations faced several challenges. From a 26-day strike at our most important facility in Venezuela to continued bad weather conditions in Columbia. In the face of these challenges, our operators demonstrated the flexibility to adapt our business to the prevailing conditions and minimize the impact on our profitability. Despite a 14% volume decline across the division, our profitability decreased by less than 5%, mainly due to our operations ability to implement selected price increases, innovate with different packaging alternatives, and effectively adjust our business to this adverse imbalance.

Importantly our wide portfolio approach continues to enjoy the strong preference among our consumers, as demonstrated by our gains in market share across the divisions.

Furthermore, consistent with our commitment to stimulate and satisfy our consumers' taste with additional high quality products, we reinforced our non-carbonated beverage platform through the joint acquisition of Grupo Industrias Lacteas in Panama with our partner, the Coca-Cola Company, we ventured together in a promising beverage segment.

Among other benefits, this transaction will give us the opportunity to learn about the beverage category and develop new capabilities to manage a cold distribution system, leveraging our skills to segment the market and refine the pricing architecture of this important portfolio while we incorporate a talented team of professionals into our Company, who will leverage our mutual strengths. As of April 2011 we will start reflecting the profitability of our share of this business in our financial results through the equity matter.

Now let's talk about Mercosur division. In the first quarter of 2011, our Mercosur division's total revenues grew more than 18% to MXN9.3 billion. Excluding beer, which accounted for MXN837 million, our total revenues reached MXN8.5 billion. An increase in the average price per unit case accounted for approximately 65% of incremental total revenues and volume growth represented the balance.

Volume growth in our Mercosur division was up almost 7% in the first quarter of 2011. Our Brazilian operations reported close to 4% volume growth, successfully building on more than 14% volume growth in the same period of last year and despite bad weather conditions presented during the quarter. This increase was driven mainly by brand Coca-Cola in single and multi serve presentations, and the continued strong performance of our non-carbonated beverage platform, which grew more than 40%, supported by the Jugos del Valle line approach and the incorporation of different line extensions of the Matte Leao portfolio.

In Argentina, our volumes grew 14% mainly due to the strong performance of brand Coca-Cola, which grew 18% and the solid performance of our still beverage category, which grew 17%, mainly driven by our flavored water brand, Aquarius, and our Cepita juice brand.

With regard to our profitability, our Mercosur division's gross profit increased 18% to MXN3.9 billion. Increased sweetener and resin costs across the division were partially offset by the appreciation of the Brazilian real as applied to the US dollar denominated raw material cost. Consequently our gross margin decreased 20 basis points to 41.9%.

Our operating income grew 18% to MXN1.4 billion. Operating margin was 14.9% in the first quarter, remaining flat as compared with last year. Our EBITDA grew more than 23% reaching MXN1.7 billion.

During the first quarter of 2011, our Mercosur division delivered positive results. Our portfolio of products demonstrated its preference among consumers, building on significant volume growth in the first quarter of 2010. Our operators successfully increased the ability of packaging alternatives in the sparkling beverage category, especially brand Coca-Cola in returnable presentations.

Moreover, the still beverage category continued its momentum, supported by the Jugos del Valle line of beverage and our wide portfolio of material approach in Brazil. As well as our Cepita juice brand and acquired flavored water in Argentina.

Our operators' execution capabilities combined with the innovation we have developed across all of our beverage categories have enabled us to grow at a faster pace and lead our bottling system. The selective price strategy we have implemented over the past several months allows to compensate for increased raw material costs.

Now let me walk you through our financial performance for the quarter. This quarter the balance profile of our franchise territories underscore the value of our Company diversified source of profitability. Despite a slow start to the year in our Latincentro division, the strong performance of our Mexico and Mercosur divisions enable us to increase our profitability. This performance highlights our robust defensive profile, which protects our consolidated cash flow from particular economic, geographic, or weather related events we may face in our business.

As of March 31, 2011, we have a cash balance of MXN13.5 billion and our total debt was MXN70 million. Our last 12 months' net debt to EBITDA ratio and our EBITDA to net interest ratio were 0.2 and 15 times respective.

As you may already know, in March 2011 Coca-Cola FEMSA held its annual ordinary shareholder meeting in which our shareholders approved a cash dividend in the amount of approximately MXN4.4 billion to be paid actually today, April 27, 2011. This dividend is approximately 70% higher than the amount we distributed to our shareholders last year and it's more than 3 times the dividend we paid during 2009.

On April 18, we successfully issued MXN2.5 billion in five years Certificados Bursatiles, or peso bonds, at a yield of 28-day TIIE plus 13 basis points and MXN2.5 billion in a 10-year at a fixed coupon rate of 8.27%. We will mainly use the proceeds from this issuance to pay down the maturity of our MXN3 billion peso bond that matures at beginning of next year. This issuance will not only extend our maturity profile, but also replace of our cash balances after the dividends we have distributed to our shareholders.

Our operations posted a positive start to the year. The strong brand equity of our portfolio bearers, our fine execution capabilities, and the innovative mix of product and packaging alternatives we have developed to suit our consumers' particular needs, enable us to reinforce our business position in the beverage industry. We remain confident in our ability to generate increased value for our shareholders and position our Company ahead of the curve.

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.

Good morning, everyone. Hector, you mentioned this in your prepared remarks, but I was curious if you could elaborate a bit on your commodity cost outlook for the remainder of the year. And you obviously talked about pressures, PET and sweetener costs trending up and we've heard this from other bottlers for the year.

Curious about your offsets. I know you've taken pricing. Is there more room for pricing or are you comfortable with your current pricing offsetting these cost increases? And also any details with respect to hedging, how do we think about you managing these costs potentially if they're still going up for the remainder of the year?

Good morning, Lauren. I guess that the environment with raw materials is not only an issue with our industry. I've seen many different companies also commenting on this issue of pressure on raw materials. In general, I'll say that the environment that we are seeing and as you perfectly know this, the two prices -- the two raw materials that we have an exposure and that are important is sweeteners and PET or packaging materials would mainly be.

Last year we suffered a lot on the sweetener front. We believe that for 2011 sweetener costs will not present a big issue, although we are seeing prices stable, we are seeing some market prices slightly above last year or slightly below last year, but not a big issue with sweeteners.

As we have expressed, we have basically agreed with our suppliers on certain amounts of sweeteners at certain price ranges that basically set the price for -- especially for high fructose in Mexico around I said as we mentioned last quarter, around 3% to 5% above the costs we had last year.

Since high fructose is dollar denominated, the effect of the foreign exchange is helping us to compensate a little with that, let's say 5% increase in the cost of high fructose.

In the other markets and (inaudible), in Columbia and Venezuela we are seeing prices slightly above what we had last year. In Brazil we are seeing prices in the marketplace similar to what we found last year, but last year we have the benefit of a very successful hedging strategy on the sweetener costs. So therefore when you look at our numbers, we will suffer a little bit on Brazil slightly. I mean but it's not at something to worry. I'll say that sweeteners will increase a little bit higher than Mexico, than the 5% that I mentioned in Mexico, no? Because obviously of the volatility and the moment that we did the hedging in 2009, it helped us a lot during 2010.

We have continued to hedge some of the sweetener costs in Brazil, but as the prices have been more stable we don't see the benefit that we have larger of having this important element in our P&L.

The issue to worry this year is PET. PET is increasing important in dollar terms in most of our markets. If my memory's often fail to me, it's we are probably 30% to 35% above what we have by the third quarter of last year. So it's a very important increase in PET costs.

That has obviously put a lot of pressure to the industry in terms of trying to pass those price increases to the consumers. And we have seen some mixed reactions from our competitors. We have, as I mentioned during the prepared remarks, we have selectively increased prices in some of our portfolio, some of our presentations.

And for example, in Mexico very importantly after I'll say probably six to eight years that Jarritos was with flat prices and MXN10 for two liters, for the first time in I believe it's close to eight years, they increased prices to MXN11. I think that that has to do to two factors. One, that we increase prices also of our products because of the pressure on the materials, but also that they have also been -- that they are also facing this pressure from especially PET.

So I think that that's positive news in Mexico that one of the competitors, especially in the Valley of Mexico areas is moving their prices when they have been very reluctant to increase prices for, as I mentioned, for so many years.

One element that is important for you to consider, Lauren, is that in the PET front remember that we have a very important mix of our approach in returnable presentations. That's not very common for our competitors. There are some like AmBev in Brazil that have some return ability in their portfolio, but it's not very common. Most of our competitors are 100% one-way products. And I think that that also gives us a certain advantage in this environment where we're seeing at lot of pressure on the packaging materials.

Our technicians continue to do a lot of analysis and improvements in light weighting our packages, which is another strategy that we're facing, but at the end of the day, Lauren, you are put in the common -- where -- and the important element is were relative to increased prices to compensate for all of these materials. We believe that we have some flexibility as in the case of Mexico where we're seeing this improvement in the pricing and the competitors following with those price increases.

At (inaudible) we believe that on a temporary basis some reductions on some of the pricing, indeed the presentation, which is strengthening the pressure on resins, but we believe that in general the environment in Mexico and I'd say the same for Venezuela, Central America, and Argentina is positive on the pricing front.

In Brazil, we are seeing some pricing activity of (inaudible) with some introductory packages that we believe are temporary and are more related to the introduction of new presentations. And in Columbia, as we have expressed, we have a very tough competitor on flavor markets, on the flavor segment that it appears that they are very concerned with a pricing structure here of Big Cola. And they have been reluctant to increase prices, so.

And we have some question marks on Columbia in terms of our ability to increase prices. Although clearly one of the signals that the operators there have is to have -- for us, as leaders of the industry we should be leading the way in the pricing architecture in the industry. So we are focusing a lot on Columbia and how to improve the performance there.

And if I could just quickly follow up on Mexico with respect to pricing, be it that you and your competitors are being rational here. Are you seeing general consumer acceptance? I know you've had some good hot weather in the quarter, so curious though with respect to the health of the consumer, if you think these price increases are being basically well taken.

Yes, Lauren, I think that in general we have seen a very positive environment on the consumer in Mexico. I think that in general these price increases are sticking in very well. My concern is that from (inaudible), again with Columbia where we believe it has to do a lot with the weather related issues and as we mentioned, even though we reduce our volumes 8% for the quarter, our market share is stable or gaining a few basis points. So it's an industry trend that we need to understand and to follow. Very important, no?

Venezuela, given the fact that we have increased the price importantly, because of the devaluation of the bolivares and the increases in salaries and raw materials that we have faced there because of the macro economic environment, we are seeing the consumer a little bit less reluctant to accept the price increases as in Venezuela. And Argentina and Brazil, we seem like to Mexico, we -- I mean in general the industry is moving.

As I mentioned we based little (inaudible) of (inaudible) of this introductory price with (inaudible) in a glass returnable, family size glass returnable presentation. But other than that active -- pricing activity we are seeing a positive environment and the consumer accepting price increases in Venezuela -- excuse me -- in Brazil and Argentina.

Gustavo Oliveira, UBS.

I have a question with respect to your operating leverage, both in Mercosur and also in Mexico. When you compared the first quarter numbers of 2011 to the first quarter of 2010, obviously I think the comparison was relatively easy because the volumes were weak in first quarter 2010. Could you please comment what you think you could see going forward in terms of operating leverage in Mexico since you've been investing a lot in your commercial model? And I think perhaps this is mostly done and I don't know if perhaps you could clarify that.

And also I think in the last call you highlighted that the focus in the Mercosur division for this year would be in trying to achieve some operating leverage from the model. Obviously saw that in the first quarter, but I think that the comparison base is relatively useful. What we could expect going forward from here?

As I mentioned and you correctly pointed out, a lot of the focus of the Company for 2011, a lot of the strategies and the initiative that we are following had to do with running a more efficient Company with respect to the LGMA. We have, as you know, moved our strategies in terms how we go to the market. Importantly with all the strategies that we have implemented in the go to market strategies, we are rolling out a lot of these initiatives. And I think that in general in Mexico, I mean you are pointing out correctly that maybe larger first quarter was an easy comp for Mexico and Brazil.

But nevertheless, we are seeing improvements especially in Mexico with respect to the way we measure fixed cost structure. And we are seeing that because of that you are starting to see a little bit more operating leverage going through to our work beyond that. We are following every month, line by line, the fixed cost structure of our operators. And they know that they are being measured importantly this year on that front.

As I mentioned last quarter, we need to focus involving Mercosur in that area. In Brazil we are facing, and I guess this is -- my guess is that it has to do with the whole country. We have facing us, I mean a slightly higher inflationary environment that we have in the rest of the countries. That is being reflected also in salaries in Brazil. That is pushing a little bit some of the costs and related issues in Brazil, including freight and salaries.

And in Brazil we have one particular element, which is (inaudible) and that's why we -- because that's the reason why we are focusing a lot in Brazil. Brazil we are growing, we have been growing the -- our volumes and our Company importantly over the last months and the last years. And we are getting to a level where we are facing capacity constraints.

We just finished the -- a few months ago, this collection of two new production lines. As we have expressed, we are thinking of building a new production plant in Brazil next year. We will start working on that this year and finish that for 2011. And all of that activity, when you are running close to 100% capacity, it's difficult to -- for you to get -- to trickle down all the revenue growth all the way to the bottom of P&L because you have to increase capacity. We are building the warehouses, as I mentioned. We have two new production lines. And we are starting to work and obviously carry the expenses related to our other planning and engineering of a new production planning in the state of (inaudible).

It's true, we will have some tax benefits on that production facility. That is also one of the reasons we are building that. But the main reason is that the plan -- the existing plan that we have in (inaudible) is no longer good for our needs there and we paying much higher freight costs because we are producing 100% of -- we are extending more than 100% of over capacity in that production plant.

So clearly Brazil we have that issue that we need to cover. As I mentioned, we are following month-by-month. We know that we are -- that they are doing the effort. We state that the second half of the year we will start seeing a reflection of that as we lower our head count and reduce some of the freight costs, expenses, et cetera, as we better -- as we do our logistic map work. And that's an effort that we need to follow.

The good news is that the Company continues to grow, top line importantly. And although we are not improving the profitability of the way we should be improving, in other words we should be improving profitability at a higher rate than the growth of the top line. In other words, margins are staying flat compared to last year, even though we are growing volumes and revenues importantly. I think that the (inaudible) is that we have the top line and we are working and fixing these issues that I have described so that by second half of this year we should be improving the profitability in Brazil.

I think that in general also Brazil was slightly below 4% volume growth. Clearly was a tough comparison versus last year, but slightly less than 4% growth was a little bit behind of what were anticipating. So I think that we have some room to cut back a little bit on head count, et cetera, because the volume was not as we were anticipating, because obviously we were going through several months where volumes were growing important.

So I think that there's a lot of work to do in Brazil, but I think that the main issue, which is top line growth is there and we will benefit of that in the second part of the year.

Just to follow up on that, do you see additionally that even the production lines and production facilities were already then contemplated in your initial CapEx for the year? And if you could remind us of your CapEx. And if they were not contemplated, what would be the increment of CapEx that we're talking about?

Let me give you a picture of the CapEx here, no? If we take a look at what we spent last year, it was around -- I'd say around $500 million, $520 million last year. As we mentioned during the last quarter conference call, the number that we were anticipating for this year was a little bit higher, probably closer to $550 million to $580 million.

Now the last Board meeting that we had a few weeks ago, two, three weeks ago, we presented this new production plant in -- the plant we presented to our Board of Directors the plan for this new production plant in Brazil and also for one [column]. So that will probably increase our CapEx number by around $50 million to $60 million over this year, over what we have in our plans, Gustavo. So in general, let's say that somewhere around $600 million, $620 million will be a good number for 2011, which is higher -- a good $100 million above what we had last year.

That's part of the reasons why we decided, given the interest rate environment that we have, to issue these bonds, which have this very important dividend payment being done today. We have the maturity of these bonds at the beginning of 2012, but also we have an important CapEx problem that we need to finance. And given the -- what we think is a very good interest rate environment, we decided to do this financing, which maybe was a little bit surprising, given our cash balances that we have, no?

Robert Ford, Bank of America.

Thank you and good afternoon, everybody. Hector, I know it's always difficult, but in Mexico is just a great performance. And I know weather helped. But when you look at the macro economic aggregates, right, employment is going very well, particularly for lower income consumers. And salary mass growth is there and nominal wages are up 5%, 6%, right? So salary mass is growing low double-digits right now in Mexico. And one would think that in addition to the weather benefit you're seeing some trade up, particularly as the B brands raise prices you mentioned, right? The first time that Jarritos has in many, many years. And 10 is kind of a magic number, right, when it comes to the relevance of that price point.

And I was curious if you could, how would you allocate your volume gains, right? And you also have the impact of a shift in eastern, and I know it affects your different territories differently. But there's a lot of moving parts. And this quarter suggests that you do have considerable pricing power. And I was wondering if you could address your expectations in terms of maybe a consumer trade up, the strength in pricing, and the ability to fully offset the additional increases you're likely to have in terms of PET please.

No, I think that in general your comments are correct. I mean we are -- in Mexico we are seeing a consumer that is showing us a new [denomination], like (inaudible). Salaries are increasing, the employment is increasing. I think that the perspective for -- I mean every economist in Mexico is increasing their expectation of GDP growth for the year from what we had before.

So I think that in general the consumer sentiment in Mexico is good. I think that we have the positive news of the difference also increasing prices because of the pressures they are receiving. As I mentioned Pepsi was a little bit surprising with the results in their two-liter Pepsi-Cola pricing range. Right now they are pricing below Jarritos and with brand Pepsi-Cola, which is strange for us, but that's the case right now in the value of Mexico. And we hope that is a temporary thing.

So we think that in general -- or I'll say that we feel very confident with the pricing flexibility we have with brand Coca-Cola, with some of our juices and nectars, and value fruit that we -- value fruit we have increased importantly our prices over the last (inaudible) interruption. And we introduced that package at MXN4 and we are selling that now at MXN6. It's a very special price increase percentage wise. There are some important elements. We think we have flexibility in some of the areas.

Flavors I'm a little bit worried, but given the price that Jarritos followed with some of the price increases that we did, I think that we're okay also in that front. And as you know, just might have noticed in the past, in the sparkling category we always have healthy growth in brand Coca-Cola. We were struggling a little bit with flavors. The last six months we have had growth in flavors. And so we need to protect and foster -- continue fostering the growth of flavors so that we don't use momentum there. And I think that in general we will be a little bit more cautious in increasing prices in flavor.

But in general, I'll say that we have a positive environment in Mexico with the consumer sentiment and the possibility of them trading up to better alternatives. For example, very successful, I'm speaking about market prices. 400 milliliters brand Coca-Cola, MXN5 has very importantly helped in our growth in brand Coca-Cola. And that's very good for our Company as we continue to increase volumes in single servers in pesos.

So in general I think that the explanation we presented is correct that that's how we are seeing the environment, the consumer environment in Mexico, Robert.

And when it comes to that opening price point strategy that you have, Hector, whether it's the 400 milliliter or returnable glass, do you see other opportunities to kind of drive the core business in Mexico and other marketplaces with additions on the low end?

Yes, Bob, I think that -- I mean if I understand correctly your question, we are seeing opportunities in the single serve presentations. I mean Columbia and [Amber Field] we are doing important -- I would not say introduction because these are products that have been there for a few months. But important in-roads that is our -- important growth through, for example, in Brazil with 250-milliliter presentation at a very important price point, which is BRL1, which is like a magic price again, no?

So in Columbia we are pleased to (inaudible) the same strategy. So we do think that although we are not seeing in the numbers of the first quarter because multi servers continue to outpace single servers in growth, both categories are growing. But we do see that there is this possibility of us improving the pricing mix of our Company by moving a little bit more volume for our single server presentation as the consumer sentiment and the consumer focus improve.

Lore Serra, Morgan Stanley.

Just a couple of quick things. First in Mexico, the performance on the revenue line was really great, but following up on the earlier question, I mean it looks to me like the operating expenses weren't maybe as tight as they could have been, especially since it looks like the depreciation came down. So is the first quarter just an anomaly? I take your point about putting more focus on the SG&A line, but how should we think about the way in which SG&A and Mexico would grow this year? What's the kind of right metrics to think about it?

And then in Latincentro you have 150 basis point gross margin increase. I suppose a lot of that's what you referred to about taking pricing in Venezuela and cutting older raw material costs. So can you help us understand in the coming quarters what is the sort of downside risk in Latincentro? Because it sounds like the pricing is getting maybe a little more tough in Venezuela. And maybe the raw materials will be a bit more difficult. So if you could help us understand what to expect there, that would be really helpful. Thanks.

Let me address first the question with Mexico. I think that -- I mean we've seen some improvements in Mexico as we've mentioned on the operating expenses. I think that there's still room to improve there. When you look at, for example, marketing is increasing in -- when you compared the absolute number, which is last year, but in terms of as a percentage of revenues it's more or less the same number.

So in a way marketing is (inaudible) a little bit like a viable expense on these quarters. We do know that sometimes when we see a lot of pressure on the results we start reducing a little bit our marketing, but this has not been the case in this quarter because we have seen positive numbers and we are investing on some of these programs as we have done in the last 18 months too. And what we call the plan -- body of Mexico and the plans (inaudible), whatever we have to allow introduction of returnable bottles, and (inaudible).

So there's room for improvement there. When you look at the specific lines of expenses our top (inaudible), we are seeing those staying (inaudible) and not moving as we improve the volume. So that's positive when we look at what has happened in other quarters in the past when we're growing our volumes and because of the capacity constraints again we were increasing some of our workforce and all of that. So the positive signal is that we are seeing that benefit. I think that there is still room to improve in Mexico in that front.

In Venezuela and Latincentro in general, I think that it's important that we comment on this (inaudible). This was probably on a typical quarter in the sense that, as you correctly point out, we increased 150 basis points our gross margin. And that has to a lot with the fact that in Venezuela we have PET that was bought at a controlled exchange rate when at the beginning of last year we were buying in the parallel market a substantially higher rate.

That's not going to stay going forward, because obviously those historic -- we are going to get starting this coming second quarter to a more comparable (inaudible) exchange rate in -- as we applied to raw materials in the second quarter versus the second quarter of last year. So clearly that's going to put some pressure on the markets in Latincentro.

The other area of worry to me is that, as I mentioned during one of the comments and you also correctly pointed out this during the question, we are seeing some -- let me use the word softness in the response to of the consumer to price increases in Venezuela. I'm not sure if still if it's fully there, but we are starting to see that the prices -- that the consumers is not as early buying at the same pace that they were buying before. Because we have increased prices important.

Also salaries have increased importantly because of devaluation of the bolivares and out of that. And you probably (inaudible) also there's a new saying that minimum wages will increase around 26% this year, no? So salaries have increased, but prices have also increased and the consumer is a little bit more hesitant to continue buying our product, so we need to be very careful with price increases in Venezuela going forward.

Columbia, I think that the name of the game is how do we regain growth for the industry and for the country? Again that's -- I like to point out this issue. We are maintaining and in some categories even increasing slightly our market share numbers, but volumes are down 8% versus last year taking that last year we had a double-digit growth and all of that.

But I'm concerned that the volume is not there and we need to focus a lot of our attention on the basic indicators and the basic strategies in Columbia that has to do with per capita. That as we have mentioned in many quarters it's very low compared to other markets. It's half of what we have in Venezuela, which is a neighboring country. And we haven't been able to increase consumption per capita, no.

So as I mentioned that the focus in Mercosur and in Mexico is to continue controlling SG&A. The same is true for Latincentro. In Columbia we have the additional task of how do we take leadership in an industry where our competitors is strong flavors? And we need to take pricing leadership and start growing volumes in Columbia.

So when you take into consideration all these issues the whole environment for Latincentro for the rest of the year it's a little bit tough. We will have a profit comparison with raw materials in Venezuela, which have the effect of salary increases, the effect of the devaluation of the bolivares. In Columbia a very soft volume that we need to continue growing so that we start seeing this operating leverage to function.

Central America we're okay. It's small, but we are okay. No, we are improving there little by little.

And just very quickly in Brazil, obviously the year got off to a slower start volume wise because of the weather issues. Can you give us an outlook for what you're expecting for volumes for the full year please?

In general let's say that even the competitive environment and all of that, Lore, we should be seeing growth in these volumes similar to GDP. I mean if you look at the (inaudible) economies, they are looking at 5% to 6% GDP growth. We should be growing around that rate.

This year, especially during carnivals, we see some important season in our industry in Brazil to where (inaudible) help a lot and it took us a little bit by surprise with some, let me use the word, overcapacity in our system to tackle a larger volume that was not there because of the weather and in our geographic area, no?

But in general I continue to see Brazil for the full year growing around 5%, 6% volume wise.

(Operator instructions) Margaret Kalvar, Harding Loevner.

I had a question about the cost issue in terms of the translation rate in Venezuelan currency that you were allowed to use. We had spoken before and you had said that that was going to impact your margins in Venezuela, as you had to buy at a less advantageous Venezuelan exchange rate. Was there evidence of this this quarter? And if so how much? Or is this something that we will see in the second quarter?

Yes, in raw materials I think that we went through several phases in Venezuela. Now one at the beginning probably, the first half of last year when we were in -- we didn't count full access to the so-called controlled exchange rate that last year was around 2.6. That was the control rate. But since we didn't have full access to that, some of the raw materials we would find in the parallel market. That's close to VEF6 or VEF7 per dollar.

Then we had the valuation of the bolivares and the control rate moved from 2.6 to 4.3. And we were buying, but we have plenty of availability of dollars to buy it at that exchange rate, the 4.3. So this first quarter we are basically comparing raw materials that we have bought at around 4.3 bolivares per dollar versus raw materials we were buying at around VEF6 or VEF7 per dollar in the parallel market.

So that's why I was saying second quarter will see a little bit more pressure on the cost of raw materials because the comparison will not be as favorable.

So the reality was that last year first quarter, despite the officially better rate, since you couldn't get it all at the good rate, you ended up buying at a much less advantageous rate than you were able to this year. But from now on we should see a -- more of an impact.

Yes, that's correct, Margaret. That's the correct -- what you're saying is correct. We were buying, even though the official (inaudible) was lower, we didn't have access for 100% of our raw materials at that rate and we were buying in the -- it was -- it's not a black market, it's what's called the parallel market, which is official, but it was a very high exchange rate. But in order to continue running our operations, we were forced to buy at that otherwise we'd have to stop production, no? Because we will not have raw materials.

Antonio Gonzales with Credit Suisse.

I just wanted to make a follow-up on Brazil. And I wanted to see if you can help us understand this 5%, 6% growth in volumes that you're expecting for the rest of the year does incorporate a scenario of higher taxes. And if you can just give us an update on whether you would try to pass through any higher taxes to the final customer or you would try to eventually absorb some of that?

It's a good question. I mean we have -- probably we should have mentioned that also in the remarks. We have during this first quarter an official increase on the, let's say value added taxes that we pay in Brazil, (inaudible) taxes on consumption. That basically had an impact in our business so that in order to fully compensate that tax increase so that it's neutral for us, we have to increase prices around 3% to 4%. 3.5%. And that will take the profitability of our business to the same level that we have.

We have already done that increase and the industry has done that increase. So in general, that also will have a slight impact on -- in addition to the weather, to the soft volumes that we saw during the first quarter because the industry was in general was passing this price increase -- this tax increase was passed to the consumer as a price increase, no?

So that everyone has this number in mind, basically in order to fully compensate for that, this tax increase that we have, it's equivalent to around 3.5% increases on prices. And we have already done that in our products as well our competitors.

So going forward we still believe that we can reach the 5%, 6% volume growth for the year. Obviously that assumes that there are no more surprises on the taxing front, no, which is always a question in Brazil to certain extent.

Jose Yordan, Deutsche Bank.

Just a quick question, more about the long-term about the M&A, et cetera. I mean I guess you could argue that some of the cost pressures in the last year or two have been the catalyst for M&A. Maybe (inaudible) is what brought them together finally. I mean how do you think about this? Is this something that's continuing to bring sellers to the negotiating table with you?

And the strong dollar is not going to last forever and maybe these pressures will continue over the next couple of years. So I mean so how is this making it more or less likely that we'll have significant M&A in the next year or two? And does the spike in CapEx in 2011 have any bearing on whatever you're doing on the M&A side? And for that matter, on the dividend policy for next year? Should we expect flat dividends next year as a result of the spike in CapEx this year? But more interested in the trade-off between this and the M&A plans.

I think that it's very difficult to know what really triggered the Arca Contal consolidation. But one thing is for certain, I think that my position is that in Mexico and generally in Latin America everyone is looking at their transaction and doing an internal analysis. And reviewing the buyer was as you have mentioned, the cost pressures that you have, the strong currencies that we have in some of these markets that in theory would help compare the larger dollar amount in that transaction value. So in general I'll say that because of the Arca Contal transaction, I think that we will see a new wave of at least some curiosity from some of the owners to look at potential transactions that will be positive for the M&A environment.

Second, I don't think that even our financial position, the behavior capital expenditure program we have this year would have any impact on the M&A front. I think that we have plenty of financing capacity to do large transactions. And it's important to point out also that if the Arca Contal transaction serves as an indicator, it's probably that some of these transactions will also be done more as mergers, more than an outright purchase of the owner. And maybe they will require some cash element there, but that's also an alternative.

And I think that obviously it's for the shareholders to approve next year, but after improving our dividend payout ratio importantly as we mentioned in my remarks, we're basically having created dividend compared to a couple of years ago by 3.2 times. So it's a very large increase. We feel that now we are paying a dividend deal of around 2.5%, which is pretty much comparable to a lot of the peers.

But on the other hand, we have our capital structure that is inefficient because as we also reflected in the remarks and in the press releases, we are getting very close to a zero debt situation in our Company. So the recommendation of management to our Board of Directors will continue to be that if we don't have a -- indicate we don't have as a specific M&A transaction in the short or medium term that we should continue to increase the dividends so that we take the capital structure of the Company so we're some more effective -- more efficient capital structure where we put in some leverage there, no?

And having that the (inaudible) that would be my recommendation like in that the -- our CEO is more or less in the same page. And at the end of the day would be the Board of Directors to approve and obviously the shareholders for final approval, no?

But in general my message is, Jose, if we have M&A transactions, we'd probably stay with dividends as they are. If we don't have M&A transactions in the medium term or the short term, we should be looking at our increases in the dividend payout rate. Probably not at the pace that we have seen of (inaudible) now increasing 70%, but continue to increase little by little on the (inaudible) that we are paying on.

That's clear, but it sounds a bit like a few months ago maybe six months ago when you were looking at Ecuador that seemed like you had a couple of things in the sort of short term analysis under analysis. And that for a while then the sort of plate became empty. It sounds like it's more active in that area at this point. It sounds like there's more people accepting to meet with you guys, et cetera, in Mexico hopefully and perhaps elsewhere. Am I reading you correctly or?

Yes, it seems to say that -- I mean we don't have a strategic thing right now in the rails when the -- this is my interpretation of the situation in Latin America, no? As you say, this is a -- the (inaudible) favorable cost pressures in some of the -- for these producers.

One thing that I'd like to point out is that we have been very active in the M&A front constantly. I mean obviously Panamco happened many years ago, but then three years ago we did Jugos del Valle. We did Remil, we acquired Brisa water business in Columbia, we increased (spoken in foreign language) from our neighbor Toluca a couple of years ago.

We finished the acquisition of (spoken in foreign language) together with the (spoken in foreign language) Company two years ago. We just closed last month the acquisition of Industrias Lacteas in Panama. So we have been very active. Other than Panamco and Jugos del Valle the other transactions are not very large. I take that and we don't need a specific financing or leverage in the Company because of that.

But my perception is that we'll continue to be active and I think that there is a positive environment in the minds of the owners that my perception, if I were there I would be looking at these alternatives. The example of the Arca Contal transaction and that's creating in my opinion everyone should be now looking at their own internal numbers and see if that -- is this the right moment to merge or to sell or do something?

Alan Alanis, JPMorgan.

It's regarding Mercosur. I don't know if you commented in the prepared remarks or if I missed it, but did you comment anything regarding the search in the DNA, the increase in DNA Mercosur? Because if we isolate that increase the margins of Mercosur were -- the EBITDA margins would have been stable. So I was wondering number one, what is it? What's causing this? And how shall we think about modeling the depreciation and amortization for the remaining of the year?

Are you there, Hector?

Ladies and gentlemen, please stand by. Your conference call will resume shortly.

(technical difficulty)

Mr. Trevino, you may proceed.

Yes, hello. Sorry for the inconvenience. We got cut off. I don't know what technical difficulty we had. Alan, are you still there?

Yes, I am here. I don't know if you (multiple speakers).

Sorry about that. No, I was going to say and I don't know where we lost you, but then we noticed that the line was cut off. In Brazil, in Mercosur in general, we have, but especially in Brazil, we have two production lines that I mentioned that we introduced because of the capacity constraints, because of the growth that we have experienced in the past, which is a good product to have but it also generates CapEx and therefore depreciation and amortization.

It's this program that we call the (spoken in foreign language) or (spoken in foreign language). It's a very important cooler program that we introduced at a very fast pace with heavy investments in tens of millions of dollars in coolers. That is also producing some increase in depreciation and amortization.

And also the other element, as you know, that has been very successful for us is introduction of (inaudible). As you know, the presentations that we introduced into internal packages help us a lot to grow brand Coca-Cola and to gain important free market share, but obviously we are suffering a little bit from that, from the effect of the amortization of this packaging method.

But I'll save those sort of premium elements that are there. In general say that the two-person lines would have the normal amortization scale for that. I mentioned that we are going to invest a new production facility in Brazil that will create some (inaudible) and depreciation and amortization there for next year. The coolers, I think that we are now more in that more normalized investment in cooler program out of this spike that we had last year for this strategy.

And the (inaudible) in general we are seeing a more stable replenishing the bottles that we have so we are not seeing important increases in introduction and (inaudible) presentation now that we go to an appropriate level there.

So those are the three main elements there, Alan, that is causing this.

Yes, that's very clear. So basically this is -- we should think about a new level of DNA for Mercosur. Thank you.

One last question. Regarding market share in Brazil going forward and the -- I know that the objective is always to maintain or increase market share while you're increasing profitability, but as you rollout new returnable presentations, your main competitor in Brazil is doing the same. We're also seeing the interest of new B brands. What should be the thinking?

And what you mentioned regarding the 5% to 6% volume growth for Brazil in 2011, what's the thinking internally regarding the balance, if needed, going forward regarding giving a little bit of market share in search of maintaining or expanding the profitability of the margins in Brazil specifically, but in all of Mercosur versus saying you know what, we are expanding capacity, we brought these new two lines into service, we must use them and we're going to defend that market share, and we might see some weakness in pricing in Mercosur going forward.

I mean it's a tough question, no, because it's something that we need to be judging basically day-by-day. Now it's a tough balance. Obviously as you correctly pointed out, is as a general objective is to maintain or slightly increase our market share. We don't want to be -- to create a very adverse reaction from our competitors who wished our increasing market share importantly. So as a general strategy, maintaining market share is important.

It does start to create a conflict with profitability. Our general [admission] again is as a general statement is we will sacrifice a little bit of market share in order to increase our profitability. But that also had validity because then you start to erode -- if you lose a lot of market share you start to erode your stake power in the future, no. So it's important that you stay with a (inaudible) preference and the market share that you have.

So it's a very tough question that I hope that I have answered with those two general comments. As a general principle, maintaining market share or increase it slightly is desirable, but if that starts to be a conflict with profitability, we would sacrifice a little bit of that in order to get profitability. But also to assert an element, no? To a certain level.

Celso Sanchez, Citigroup.

Just with some of the news that we're hearing again about the potential movement in ownership of Schincariol in Brazil, can you remind us what your view is on the role of beer in your business? And whether you think -- obviously one of the names being thrown around potentially still is Heineken being interested.

If -- would you rather have more access to beer and if this market share became available through your partner? And would that help your business or would this get a chance to reconsider that -- all the progress you've made on return ability in the portfolio evolution, and the magic price points, and so forth, would it be a chance to maybe consider focusing more on soft drinks? I guess the question is net net, is more beer better or is that a chance to actually focus more on soft drinks if your partner goes that route?

It's again a tough question as the previous one. It's very difficult to judge the -- from without having all the elements of the certain moment and without looking at the environment at that precise moment, if beer will help or not in your strategy going forward. So far, I would say -- I'll tell you that since FEMSA Cerveza was the owner of Kaiser and now with Heineken being the owner of Kaiser, in general the comments of all the bottlers, the Coca-Cola bottlers in Brazil, including for FEMSA is that the margins for distributing those products is not very good.

There are a lot of conversations since FEMSA Cerveza was the owner with respect to generally the commercial relationship between the beer company and the soft drink companies for -- as to changing the margin of these two (inaudible), and these conversations continue with Heineken, no?

It's an important element because our competitor has a very important position, market position with our competitor, meaning our (inaudible) competitor. It's a very important view player in Brazil. So it's also -- and that's what creates a lot of difficulty in having a very precise answer.

Beer strategy in Brazil is important to where it would (inaudible) because the competitor is very important in beer. But so far and for the last two or three years, in general the complaint from the bottlers is that the margin that we get for distributing beer, it's very little and we need to improve that relationship.

How that is going to turn out in the future, if Schincariol will play a role here or not, it's really complex for me to try to answer at this moment because I don't have the answer. It's not that I don't want to share it with you, but we look at those strategies and from our perspective, Coke FEMA perspective, it's what does beer bring to the table for us in terms of market strength, in terms of serving better our clients, which are the retailers? And what does beer bring to the table vis-a-vis our competitor that is very strong in beer. And if we have or not have a weakness because our presence -- larger presence or lower presence in beer, no?

So those are the (inaudible) that we need to look every day basically if that's so and then not when we will our (inaudible) in Mercosur. It's a very important competitive element. We cannot just discard the side that deals in (inaudible). And we need to look at ways of improving our profits from selling beer, no?

Yes, I think we all have always been under the assumption that beer is very important, but your results in soft drinks relative to your competitors' results in soft drinks seem to suggest that even with a portfolio that's not as strong perhaps as theirs in the beer side you seem to be doing well. So I was just wondering if perhaps you had an opportunity to reevaluate that. Does your contract allow you -- is there any stipulation in the contract that allows you to reconsider before a certain point in time, if you can remind us how long the contract with Heineken is for and how often or usually it is to renew or alter?

That's an important point also because I don't remember exactly, but we have here like 16 or -- 15 or 16 years more of a contract that we have to sell beer. And in the other time, the Heineken would have to sell through the Coca-Cola system for the next 15 years, or 17. I don't remember exactly the years. Unless both parties agree otherwise.

You're correct. We are doing a great job in soft drinks. I think that the -- so at this moment that our competitor is doing it just (spoken in foreign language) precisely because we are being very successful in soft drinks, even though we had a -- not a strong portfolio of beers compared to our competitors. So you can argue that we don't need the beer, but so far we are tied up with this agreement for at least for the next 15 years.

And there's no --

Unless both parties agree otherwise, no? But --

There's no specific event clause that if the ownership of beer broadens or something and there's a transaction there's no change of -- I guess it wouldn't be change of control here, but there's no -- nothing obvious that would relate to the potential acquisition of another brewer as would be the case of Schincariol that would allow you to reevaluate the contract, correct?

I will have to review. I don't remember if there is any change of controls specific (inaudible), but I'll review on that (inaudible) and then if there is any specific opportunity there we will certainly share it with you. But I don't think that there is any -- there's no easy way out of doing this. And don't get me wrong, it's not that we want to get out.

It's we'd like to improve the profitability of selling beer and that's an important element, it's an important number in our revenues, no? Not in our profit, but we think that even the effort we have and vis-a-v what we make in terms of profits in soft drinks, I think that we should improve the profitability in beer in our operation. And that's a negotiation that we need to continue carrying on with Heineken, no?

At this time we have no further questions. I would like to turn the call back over to Mr. Hector Trevino for any closing remarks.

Well, thank you all of you for your interest in the Company. We'll now stay a little bit longer and obviously Jose and his team will be available to answer any questions that you might have in the coming weeks and days. Thank you.

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