Coca-Cola Femsa SAB de CV (KOF) 2011 Q2 法說會逐字稿

Good morning everyone and welcome to the Coca-Cola FEMSA second-quarter 2011 earnings results conference call. As a reminder, today's conference is being recorded and all participants are in listen only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

During this conference call management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance, and should be considered as good-faith estimates made by the Company.

These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the Company's actual performance

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

Good morning everyone, and thank you for joining us today. During the second quarter of 2011 our portfolio of franchise territories across Latin America delivered strong results, achieving double-digit top and bottom line growth.

The main drivers of our performance for the quarter was the volume growth generated by our operations in Mexico, Colombia and Argentina, and our pricing initiatives implemented in our (inaudible) over the past several months across all of our territories.

In the second quarter our consolidated revenues reached more than MXN28 billion, up 13% from the second quarter of 2010. On a currency neutral basis our consolidated topline revenue grew 14% for the quarter.

In the second quarter our consolidated sales volume grew 5%, mainly driven by the popularity of brand Coca-Cola, which grew 4%, supported by strong volumes recorded in Mexico, Colombia, Central America and Argentina and the double-digit volume growth of our still beverage portfolio. This volume growth primarily resulted from the Jugos del Valle line of products in Mexico and Brazil, coupled with the strong performance of Nestea and Powerade in Mexico and Cepita in Argentina.

Our consolidated gross profit increased 12%. Cost of goods sold grew mainly as a result of higher integrating and sweetener costs across our territories. This increase was partially offset by the appreciation of our main operations' local currency, as applied to our US dollar denominated raw material costs. Consequently, our consolidated gross margin declined 30 basis points compared with the second quarter of 2010.

Our consolidated operating income improved 12% reaching MXN4.6 billion in the second quarter, supported by double-digit operating income growth achieved in our Mexico and Mercosur divisions.

Operating leverage achieved through higher revenues allowed us to compensate for gross margin pressures and higher labor costs recorded in Venezuela and Mercosur, as well as higher freight costs in Argentina. As a result, our consolidated operating margins remained flat at 16.2%.

On a currency neutral basis, our consolidated operating income grew approximately 13%. Our consolidated EBITDA increased by 14% to MXN5.7 billion in the second quarter. And our net consolidated interest income reached MXN2.6 billion, an increase of 6%.

Now let me expand on the performance of our operation. Our Mexican operations delivered double-digit topline growth in the second quarter of 2011, successfully building on the solid results imposed in the second quarter of last year.

During the quarter the sparkling beverage category significantly contribute to your incremental volumes, mainly driven by the 7% volume growth of brand Coca-Cola in most of our presentations, combined with 5% volume growth in flavored sparkling beverages.

Our still beverage category posted mid single-digit volume growth, supported by the Jugos del Valle line of products as well as the performance of Nestea and Powerade.

Additionally, the volumes from our water portfolio, including bottled water, grew 7%, supported by double-digit volume growth in our personal package offerings.

Thanks to our operator focus on designing tailored portfolio alternatives that target a differentiated base of consumers, we saw volume growth among all of our 12 channels during the quarter.

Our average price per unit case increased 3.9% in the second quarter. This increase was mainly driven by the selective price increases we have implemented over the past several months, specifically from our sparkling and still beverage portfolio during the quarter, and also by higher volumes of brand Coca-Cola, which carries a higher average price per unit case. As a result of our increased volumes and prices our Mexican operations' total revenues grew 11%, reaching MXN11.8 billion.

With regard to our profitability, higher PET rating costs were offset by the appreciation of the Mexican peso as applied to our US dollar denominated raw material costs, coupled with a more favorable sweetener cost environment.

Compared with the second quarter of 2010, our gross profit increased by 11% to MXN5.9 billion, and our gross margin improved 20 basis points, reaching 49.7%. Our operating income grew 19% to MXN2.3 billion. Operating revenues achieved through higher revenues, combined with tightly controlled operating expenses and more increasing marketing investment initiatives, allowed us to expand our operating margin by 130 basis points to 19.7%.

The profitability we obtained at the operating level translated into EBITDA growth of 16% to MXN2.8 billion compared with the same quarter of last year.

In summary, our Mexico division successfully continued on its path of growth, delivering solid results. During the quarter we experienced growth in our single serve portfolio, which may imply a more tangible economic recovery for our consumers.

We believe we have undertaken the right initiatives in the marketplace over the past year to provide our wide multicategory portfolio approach and presentations to a broader base of consumers.

To this end, we invested significant resources across our Mexico division to enhance our execution at the point-of-sale. Also on a (inaudible) level base we grew our Cola coverage and enhanced our growing still beverage platform and support our flavored sparkling beverage categories.

Thanks to our implementation of these initiatives and our operators' focus on addressing our consumers' needs through our refined segmentation strategies, our portfolio continues to gain marketshare across most of our beverage categories.

Despite important brand recognition we have enjoyed over the years, we constantly challenge ourselves to stay ahead of the curve to reinforce our position at the forefront of those categories in which we lead, and to improve our position in those categories in which we do not.

Clear examples of these efforts are Nestea and Powerade, brands we jointly developed and supported over the years, together with our Coca-Cola contracts. In the case of Nestea it now enjoys a leadership position across our Mexican territories.

With respect to Powerade, our isotonic brand, we work to better understand the drivers of the category, to further develop it and achieve a higher market position. As a result, during the year we continued to gain marketshare.

Now let's turn our attention to our Latincentro division. Our Latincentro division recorded 3% volume growth in the second quarter. This increase was driven by the strong performance of our Colombian and Central American franchise territories which recorded 10% and 8% volume growth, respectively, and compensated for a 9% volume decline in Venezuela.

In Colombia our volume grew 10% during the quarter, mainly driven by the strong performance of brand Coca-Cola in multi-serve presentations. After the severe weather conditions that prevailed over the past 12 months, we have seen a broader recovery of our volumes in this franchise territory.

In Venezuela our volume decreased 9%, primarily resulting from lower sparkling beverage volumes. During the year we have observed a more cautious consumer spending environment, mainly driven by increased consumer groups and services prices.

Additionally, over the past three months we have experienced adverse weather conditions that further affected consumption. However, our operators continue to evaluate strategies to address our consumers' needs, providing more affordable packaging alternatives, and implementing innovative options in the still beverage category to foster consumption.

Our Central American operations saw volume grew significantly. This growth was mainly driven by brand Coca-Cola in both single and multi-serve presentations across our franchise territories. And our still beverage [performed in] Nicaragua, which was fueled by the Jugos del Valle line of products.

Our Latincentro division total revenues grew 11% to MXN8.2 billion. This increase primarily resulted from the volume growth in our Colombian and Central American franchises, and the implementation of selected price increases in Venezuela over the past 12 months. On a currency neutral basis, our Latincentro division total revenues grew 15%.

With regard to our profitability, our Latincentro division gross profit grew 10% to MXN3.8 billion. Higher PET and sweetener cost across the division were partially offset by the effect of the appreciation of the Colombian peso as applied to our US dollar denominated raw material costs. Compared with the second quarter of 2010 our gross margin declined 60 basis points to 49.9%.

Our operating profit declined 1% to MXN1.2 billion. Operating leverage achieved through higher revenues was offset by higher labor costs in Venezuela. These resulted in an operating margin decline of 180 basis points to 14.9%.

Our (inaudible) in Latincentro grew 4% to MXN1.6 billion compared with the second quarter of 2010. Depreciation and amortization expenses in the region grew mainly as a result of our continuing investment in the marketplace to increase our cooler products and reinforce our [return] (inaudible).

In summary, our Latincentro division delivered profitable results for the quarter. The strong performance of our portfolio benefits across our Colombian and Central American franchise territories compensated for high single-digit volume decline in Venezuela, underscoring the benefit of our geographically balanced portfolio.

However, we continue to face several challenges in the region, from an increased competitive environment in Colombia to the continued higher labor cost in Venezuela. As previously noted, our operators remain focused on adapting our business to these conditions and to minimizing their impact on our profitability.

For example, in Colombia we are analyzing different strategies from reinforcing our [general base] to increasing the availability of more affordable products to developing alternatives that will attract consumers who are normally accustomed to drink tap water and homemade fruit beverages.

Now let's talk about our Mercosur division. In the second quarter of 2011 our Mercosur division total revenues grew 18% to MXN8.4 billion. Excluding beer, which accounted for MXN850 million, our total revenues reached MXN7.6 billion. On a currency neutral basis, our Mercosur division revenues grew 16%.

Volume growth in our Mercosur division was up 4% in the second quarter of 2011. Our Brazilian operations volumes rose 2%, successfully building on the significant volume growth we recorded in the second quarter of 2010. This growth was mainly driven by the strong performance of our still beverage platform, which grew close to 30% supported by the Jugos del Valle line of beverages, the Matte Leao tea portfolio and Powerade, our isotonic drink.

In Argentina our volume grew 9% in the second quarter of 2011. The solid performance of our sparkling beverage portfolio was mainly driven by brand Coca-Cola in multi-serve presentations, and Crush, our flavored sparkling beverage brand.

The still beverage category recorded considerable growth mainly due to the strong performance of Cepita, our juice brand, and the innovative product we introduced over the past several months, including Hi-C, the juice brand, and Hugo, our new juice-flavored product.

With regard to our profitability, our Mercosur division gross profit increased 17% to MXN3.5 billion. Increased cost of high fructose corn syrup in Argentina and PET (inaudible) were partially offset by the appreciation of the Brazilian real, as applied to our US dollar denominated raw material cost. Our gross margin decreased 40 basis points to 31% for the second quarter of 2011.

Our operating income grew 18% to MXN1.1 billion. Operating leverage achieved through higher revenues across the division and more target marketing investment compensated for gross margin pressures and higher labor costs through our franchise territories. As a result, operating margin remained flat, up 12.5% in the second quarter.

Our EBITDA grew 25% to MXN1.3 billion. Depreciation and amortization expenses in the region grew mainly as a result of the increased production capacity we have incurred in Brazil over the past several months and our continuing investment in the marketplace to increase our cooler coverage and reinforce our (inaudible) across the region. In summary, our Mercosur division delivered positive results in the second quarter of 2011.

In Brazil, our (inaudible) still beverage platform continued to perform strongly, especially the Jugos del Valle line of products. Consumer preference for this brand of beverage is driving higher demand.

Moreover, our strategy of increasing the availability of return on presentations for brand Coca-Cola for our consumers has proven successful. During the quarter we extended (inaudible) offerings to the Coca-Cola, Ciel and Fanta brands. Furthermore, the Schweppes sparkling beverage line has gained marked popularity among adult consumers, providing important incremental volume growth in the flavored sparkling beverage category.

Our prospects for future growth in revenue remain positive, despite the recent slowdown in consumption we have seen due to higher interest rates implemented by the government to moderate inflation growth.

In Argentina we continue to reinforce our efforts to broaden our product portfolio, focusing on developing the products and categories and leveraging prevailing consumer momentum in the country.

To target different consumption locations during the quarter, we launched an Orange beverage under the Hi-C brand with outstanding results. And over the past several months we have started to participate in the juice beverage segment in Argentina to fuel innovative growth.

Going forward in our Mercosur division, we see ample opportunities to continue developing our portfolio to appropriate consumer presence and future needs.

Now let me walk you through our financial performance for the quarter. In the second quarter our operations produced strong results, delivering double-digit top and bottom line growth. Despite increased volatility we have experienced in some of our key raw materials, particularly PET (inaudible) our operators have adapted our business to tough conditions and sustained our Company's profitability.

As of June 30, 2011, we had a cash balance of MXN16.7 billion, an increase of MXN4.2 billion compared with year-end 2010. This increase was mainly the result of the debt we issued and the cash we generated in the first half of 2011, net of the dividend payment we made in April in the amount of MXN4.4 billion. As of June 30, 2011, our net debt to EBITDA coverage ratio was 0.2 times, and our EBITDA to net interest coverage ratio was more than 16 times.

As you know, at the end of last month we announced a merger agreement with the major controlling shareholders of Grupo Tampico to integrate their beverage division into Coca-Cola FEMSA.

Grupo Tampico beverage division is the fifth-largest Coca-Cola bottler in Mexico with operations in the northeast part of the country. This franchise, the oldest in the Mexican Coca-Cola bottling system, is expected to serve 154 million unit cases of beverages during this year.

This transaction resulted to the completion of a confirmatory, legal, financial and operating due diligence process, in which we are advancing as planned. We expect to successfully close this merger agreement during September, and start consolidating Grupo Tampico's beverage division results into Coca-Cola FEMSA as of the fourth quarter of 2011.

As we have emphasized in the past, we remain committed to pursuing opportunities in the beverage industry that will maximize our shareholder value. This transaction exemplifies that commitment.

In conclusion, our operations delivered positive results for the quarter. We believe that our geographically diversified sources of cash flow generation represent a competitive advantage that will allow us to continue investing in our industry's future growth and enhance our leadership position within our markets.

We are proud to manage a wide and wonderful portfolio of brands in one of the best markets in the beverage industry. As we enter the second half of the year, together with our partner, the Coca-Cola Company, we will celebrate the 125th anniversary of brand Coca-Cola.

As we commemorate this event, we feel even stronger and more enthusiastic about our merger with Grupo Tampico's beverage division, and are confident that our combined operating capabilities to manage our business under challenging conditions will enable us to continue outperforming our industry and delivering increased value for our shareholders.

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). Due to the large volume of participants, we ask that questioners limit themselves to one question. You may reenter the queue after your initial question has been taken. (Operator Instructions). Lauren Torres, HSBC.

My question is on commodity costs. We are, obviously, hearing from a number of beverage companies already this earnings season that certain costs are trending a bit higher than initially expected. In your second quarter we did see some gross margin contraction. But you were able to actually keep operating margins flat.

So, just curious, somewhat a short-term question or a shortsighted question, but as we think about the second half of the year, do you expect continued pressure on the gross margin line? But with that said, do you think there still are offsets, meaning that maybe you could take more pricing or there are other savings flowing through that will help you to keep your operating margin flatter, or maybe even grow for the year? Just how do you generally think about that?

I think that in order to appropriately answer that question, we have -- even though commodity prices are kind of following international prices, we have different environments within the different countries, sometimes because tariffs, regulations, et cetera.

Let me start with Mexico and then I will give you a general sense of the trends that we are seeing for the second [half]. In Mexico I see more stable sweetener cost. And it is not necessarily the same in some countries like Venezuela, where we have a lot of scarcity and restrictions in importing some of these products.

So Venezuela would feel some pressure on consumer prices. And (inaudible), as you know, which is a very nice market for us, it is totally following what international prices are in that country.

Mexico with higher prices, but Brazil, with [relatively] stable prices and, therefore, not much pressure in general.

In [models] between countries, this is really the big question, because we have received a lot of pressure in increases in prices of that [increasing] in dollar terms. But then here's the pretty part of your question, it is depending on how the foreign exchange behaves in each country going forward, but the extent of the [suffering] (inaudible).

Let me give you an example, if we use for this quarter, just for this quarter, an unconsolidated rate, PET prices have grown in general in dollar terms. If we hadn't paid with normalized exchange rates, PET prices would have impacted our numbers somewhere around $40 million to $50 million. But approximately half of that effect was offset because the Mexican peso per share was larger than the Brazilian real per share when we compare that with last year, and the same with the Colombian peso.

So it is a long answer, but my perspective for the second quarter is that we continue to have some pressure on dollar terms on PET, and the exchange rate would play an important role there. Second, sugar prices, I don't see -- I see stability in that market on those prices in the second half.

And I think that is very important that we continue to focus on improving the operating expenses line. And we have commented with you for many quarters now that has been the focus of a lot of attention on Coca-Cola FEMSA in the last two or three quarters.

If I can just follow up on that, then as far as offsets are concerned is your pricing plans -- or are your pricing plans more or less in place or there is further opportunities, do you think, in the second half?

In general, you're right that is an important element here. Also, in general we continue with the idea that at least we should have increases with inflation in most of our territories.

There has been some examples where we advance further than inflation in some locations. There has been some examples where, for example, in Mexico this quarter with the growth of brand Coca-Cola and with the growth of single serves it had a positive effect on the mix. That happened also in Argentina, where we saw an important price increase mainly related to mix. But, in general, I will see that what most of our pricing plans are in place.

The only question mark we have here is Venezuela. I don't know if everyone is aware, but yesterday (inaudible) new regulations passed that in theory we will focus in trying to, I guess, exercise some price controls in the industry, in general in the country and commerce.

It is now clear still the extent of that or which (inaudible) we will enter or with which degree of control. But Venezuela is always a question mark on that [front]. But in general, the rest of the other eight countries were very well in our plans with respect to price.

Alan Alanis, JPMorgan.

Congratulations. Good quarter. My question has to do with Mercosur. The volume had been kind of weak in Brazil in the first half, I think, 2.5 growth. And we are seeing, as you mentioned, pricing -- pretty strong pricing across the board. A couple of questions there. What is the outlook that you see in terms of volumes, particularly in Brazil as you get tougher comps in the second half?

If you could comment on the marketshares, not only in Brazil, but across the region. The Coca-Cola Company mentioned that the Coke system has been gaining marketshare, particularly Mexico and Brazil. Any color that you can give us on marketshare would be appreciated.

Finally, just any comment that you can give on the announcement of Pepsi and consolidating its bottler in Mexico into a single operation with the JV of Polar (inaudible). So those would be the three questions. Thanks.

Let me start with (inaudible). I think that in general -- I think that you're right in pointing out that the comps versus last year are very tough. If I remember correctly, last year the second quarter we grew around 13%. Then we have a third quarter that also grew double-digit, and a fourth quarter that was in single-digit range, (inaudible) growth. So the comparison is tough.

But still my feeling is that it is a little bit the following in this environment. I think that we have during (inaudible) of the movie, The Good, the Bad and the Ugly, no?

The good part of (inaudible) is that the macro economic environment and all the implications you see there are very, very positive. We had a tremendous chunk of the population moving from lower socioeconomic levels to the middle or low middle class segment, and that obvioulsy brings a lot of consumers with more disposable income in their pockets. I think that is very good news.

I think the amount of some estimates that we have is that in the last 10 years we have had around 60 million people moving from very low socioeconomic levels to more interesting levels closer to middle class. And (inaudible) is a country. At the end it is a very large number. So I think that is the good part of the story.

The bad part in Brazil is that that also has create a lot of, I guess, activity in the country that [helps] inflation importantly. The government is trying to control inflation. Things have increased quite importantly. There is (inaudible) of overheating in the economy in a sense. You have a consumer that has more -- a lot of resources for buying a car or buying a TV or buying electronic equipment or whatever.

Part of the restrictions that the government is putting in that region to high interest rates, it is a tougher restrictions on limits on what they have to pay on credit cards and a lot of that, that we believe that it is causing our consumer to dedicate back to those resources to repay these loans and not so much to our products.

My guess, and I don't have information here, and I would love to have it, but I think this is more of a general trend for consumer good companies in Mexico. I would like to see some other reports later on.

The ugly part of the picture is that when we start speaking about the government continue with the social programs and then looking for taxes. And that we fear the first part of the quarter we would suffer a tax increase in our industry, that basically we have to increase prices to the consumer around 4% or 5% basically to stay neutral to us now in terms of the taxes that were increased.

So in general, that is the comment that I wanted to make. We feel positive in the future in Brazil. There might be some weather-related problems that we face in the past. But we feel positive about the growth prospects and a bit cautious with this consumer sentiment about how they are to [initiating] their indebtedness. And, obviously, (inaudible) with the tax situation in the country.

In Mexico, turning to the announcement of Pepsi-Cola, Polar and (inaudible) I think that it is going to be a very interesting and clever move. We compete with Polar in Venezuela. It is a very tough competitor. Also, it is very tough in the territories. We fight with them in the streets.

I think that it is an interesting move for Pepsi. I think that we will have a combination of two very cool operators in the Pepsi system now combined here in Mexico for the whole country.

I think -- I don't know if I missed one question from you or if I answered everything now.

(Operator Instructions). Bob Ford, Merrill Lynch.

Congratulations on the quarter. My question had to do with package mix. I was wondering if you could remind us a little bit of your returnable/nonreturnable mix in the major markets. And if you could give us a sense of how much of the incremental volumes came from returnable packaging?

And when you look at maybe some of the mitigation strategies when it comes to PET, in addition to maybe returnables, what can you do in terms of greater use of recycled PET or further light-weighting of packages and caps?

(inaudible) question. Obviously, innovation on light-weighting and all the way from the PET bottles and caps and labels and other products are always top of mind in our think and people.

I will be working very closely and sometimes, [I would say], from a commercial point of view from a financial point of view the Company is painstakingly slow, because it has to work through a lot of approvals in terms of the quality control. But, obviously, it is very important that we support those initiatives to be sure that we don't have any quality issues with respect to the carbonation of the products and nothing like that.

The other element which have been very important, and we have stressed that for many quarters also is to work on accountability issue. We have, and no less in general if I remember correctly where (inaudible) be around 17% of the nation's returnables. Mexico, it is more than that, it is closer to 30%, 31%, and in both cases increasing.

Remember, (inaudible) a big portion of the volume that was -- the growth in volume that we saw the last 12 months was coming from the push for returnability. (inaudible) also, as we maintain higher prices of our products compares to our competitors, having an affordable returnable product ot only works from the point of view of isolating the effects of PET increases, but also from the point of view of competing without having to adjust our pricing of (inaudible). In other words, putting a returnable (inaudible) close to the prices (inaudible) of our competitors.

In fact, the strategy in Brazil has been so successful that we are now doing return on Coca-Cola (inaudible) and Fanta, which obviously, sometimes in the flavored categories, where you don't have this extra strong brand (inaudible) brand Coca-Cola it is a little bit tougher and riskier to move into returnable flavored drinks, because obviously (inaudible) some cases as the large.

So we feel confident of that because of the success that we have seen in the field with return (inaudible) that we can increase that selling into (inaudible) in returnable. If the sales are mitigating the effects of PET, and also on the competitive front and on the pricing front.

Just with respect to recycling, several years ago I think it was you and The Coca-Cola Company established a fairly important recycling facility in Mexico. And I was curious if that is a dimension that can help ease some of the pressures as well or not?

Yes, you're right. For (inaudible) part of the question. We have a very important recycling center near Mexico City. It is a partnership between the Coca-Cola Company and (inaudible), which is one of the suppliers, the main suppliers that we have for a PET bottles in our operations, and (inaudible).

That facility is everyday a little bit more efficient. It started for two or three years with a learning curve where we were basically having recycled PET that was not very competitive with the new PET. But now it is very good for us, because we are using recycling correctly. Thankfully, I believe we are allowed to use around 25% to 30% of every bottle we can use recycled PET, which that index has increased from 5%, 10% of reusable.

So it is an important source for us of savings in the PET front. That plant has been -- it is an important benchmark for the world in terms of efficiency. As a matter of fact, The Coca-Cola Company is looking at replicating some of that, some (inaudible) with other bottlers around the world.

Then just we are backing out that about one-third of the incremental volumes is coming from returnable packaging. I wasn't sure if we are in the ballpark or not.

Then if you could just touch on the relative cost of recycled PET versus virgin resin, please?

Let me give you -- this figures I have in the top of my mind right now. Around half of the additional volume in Mexico is coming from returnable products -- operational volume, and the rest is coming from obviously (inaudible), but it is an important element here in our strategy.

I don't know exactly that number is four directly reporting to (inaudible). But I will certainly ask (inaudible) with that question.

Then, just lastly, on the cost savings, with the use of recycled PET, is it significant?

Right now it is very little, but it is important as a source of having an original supplier, and not relying on the few types of (inaudible) produce.

It is very little, but it is improving. And we start to, as I said, at the beginning with the higher cost and (inaudible) PET at the very beginning, but we have improved that efficiency and the knowledge of that and said that we are slightly below the cost of PET.

But one issue that we should not lose sight here in beverage, because very importantly, in addition to the diversification of our sourcing of PET, is the [sustainability] issue. I think that if we hadn't had that plan in Mexico for many years now, we probably would have had some either taxes were some extra cost embedded in our cost structure because of issues of production and (inaudible).

That is very helpful. Thank you very much.

Antonio Gonzalez, Credit Suisse.

Thanks for taking my question. I wanted to ask first on Mexico, year-to-date you have seen very strong growth both in terms of topline as well as in terms of operating profit. I think you have emphasized that the adjustments in your commercial strategy have been quite important in driving these topline and EBIT growth.

But I wanted to ask if you think that looking more into 2012, more with probably a multiyear horizon, do you think some of this growth will carry over into the next years? And are you now more bullish with respect to the longer-term maybe topline and EBIT equation -- for Mexico do you think this is an impact that will be mostly concentrated in this particular year?

I think that in general we feel very confident that the commercial model that we have implemented has helped us to take Coca-Cola FEMSA Mexico operations to ahead of the curve on what we call to the next line which is where we are now. I think the big changes are here to stay.

But one issue that is very important, with the number of SKUs that we are selling, the number of categories we are now selling, it is impossible to serve the market if we didn't have these commercial models in place.

The big investment that we have done in technology and information systems and training our people and then changing compensation by our salesforce, it is just an adjustment that is necessarily going to handle such a large portfolio of products.

First of all, that is a very important element. Second, going into the future, I think that because of that -- those changes that we have implemented in our commercial practices, I think that that will carry over to [other things]. Yes, I am a little bit more bullish on the future and the topline growth.

With respect to bottom line of the P&L, I think that obviously that additional volume and the growth that we are experiencing will trickle down to the bottom of the P&L [or] will be subject to effects of cost of raw materials, sweeteners, PET, (inaudible).

I feel actually more confident now, as I have expressed from the last three or four quarters, that a lot of our operating expenses are much more under control, and on a more stable basis that will [effect us] also to continue with this trend of increasing the bottom line of our P&L.

Thank you. That is very helpful. Secondly, if I may, in your prepared remarks you mentioned the marketshare gains that you are seeing in Powerade. I think that even anecdotally we are seeing a lot more advertising and marketing for the brand across the region.

So I just wanted to see if you can give us more color on what have you changed in the brand that you think was necessary to see these better results? And maybe if you can share with us a little bit what is the outlook that you expect for the evolution of this brand in the next two or three quarters?

I think that -- let me first say that Powerade is an important alternative to (inaudible). We are still behind -- very far behind our main competitor, which is Gatorade. I see we have gained important marketshare from basically not being present. We have marketshare closer to 30% in Mexico, which is very, very important. And, again, as I have said in the past, especially when you think that our competitors derives a lot of their profitability from that product.

The hard work that we have in Powerade -- and it is related to your question, we have invested heavily in innovation in the formulation. And we have in the advertising will give items that are included in the formula that clearly can't be readily induced as a sport drink.

And very importantly, the investment behind (inaudible), which is -- we didn't have before. So to be very honest, I will (inaudible), but not talk much a few years ago.

(inaudible) after leveraging (inaudible) facilities, we have continued to invest in appropriate lines within our facilities. We continue to invest in those lines, because obviously it is also useful for the juice products. And I think that has been a key element in carrying a formula that is -- that is slightly comparative versus (inaudible).

At the (inaudible) going forward is that also have fostered this volume growth there is a lot of marketing activity behind you. And you see a lot of sponsoring of sports and especially World Cup and things like that. So to help empower a case with our team are very important topline growth and a good pricing, because we have stopped discounting as a competitor and we have a better formula.

But we are still spending big bucks on marketing. And the bottom line in Powerade, when you look at that alone, it is good, but it is not as good as we would like to see it. I think that we still have to benefit going forward and in the future of a better margin on those products. As we start having a little bit better pricing and less marketing expenditures of promotional activity.

Alan Alanis, JPMorgan.

Thank you for taking my follow-up. Just a quick question. Regarding the departure of Miguel Angel Peirano, what are your views and who is going to replace him as the CEO of Mercosur?

(inaudible) was here in our Company working for 14 years. We are very thankful for (inaudible) certainly a key element in all the development of our Company and (inaudible).

He was offered a very good opportunity to become CEO of Andina. So it is a case where someone in the organization is offered a very good position it is almost impossible to stop that.

That is part of the thing that happens when you are successful and you have a good talented team of professionals. We feel that we have a very strong bench inside. We actually have -- we have been discussing very recently (inaudible) as we announced Wednesday or Thursday of last week. We having internal meetings tomorrow. We had a Board meeting a couple of days ago, where the reorganization was basically approved. And the idea is that after the internal meeting that we have tomorrow we will announce how the organization will look like.

So you need to wait for that, because obviously we haven't given it internally anything yet.

Celso Sanchez, Citi.

I just wanted to follow up a little bit on the packaging question from before and then ask a separate one. But the returnability in Brazil, we understand from one of the major competitors is starting with a little bit [depositos] and some of the supermarkets to help drive the concept of returnability even in supermarkets.

Can you update us on where you are in that process? Are you part of that development or are you thinking of doing that as well? And I'm thinking, of course, of the success that you had in Argentina with that. So if you could address that please.

I know that most of our efforts is in the traditional channel. I am not aware there is any specific push for supermarkets. Let me check on that specific question and get back to you. But most of our efforts has been in the so-called (spoken in Spanish). The traditional channel were usually we push a lot with the return.

It also serves a lot of differentiator between supermarkets and the traditional channel, as we have presentation that is very well dedicated for traditional channel. But let me check with our operators over there and I will answer to you, if there is a specific push for supermarket.

Great, thank you. If I could just ask with respect to Mexico, I think we are all fairly impressed by the success of the results here. And touching on some of the questions from before, the commercial model that has been rolled out seems to have played a big part of that. Can you update us and remind us of the status of the (inaudible) model in the different countries? Where is it now fully rolled out versus just beginning, or if it hasn't started yet when it might start country-by-country please?

In general, it might sound strange, but we did a big push in Brazil. And we did basically like a big sign and moved to 100% of our (inaudible) in Brazil. So Brazil is 100%.

Mexico, it is -- I would say around three-quarters. So we still need to roll out part of the Mexican (inaudible), even though a lot of the initial (inaudible) and development of this model was done in Mexico. So there are still some areas to cover in Mexico. Markets like Colombia we are around 25%, so we still need (inaudible). We have some work (inaudible) to do that.

We have to do also the (inaudible) of that process, even though some of these have been successful in the market where we have implemented. It has to do with a lot of the training that is needed, adapting and changing the compensation scheme for the sellers, which is obviously a process that is tough because you have to negotiate with unions.

And, also, (inaudible) with the implementation of systems. And as you probably recall, we have explained that to you. A model -- the platform is that we have with SAP a few years ago, we think a couple of years ago we received a (inaudible) from SAP that system was not going to be maintained in the future, and we needed to change to the new version of SAP.

So this set a pace (inaudible) where the profits of running over the new SAP system and in our operations. That is why it is something that you -- that is difficult to just do big banners within Brazil. But that is more or less the status of where we are.

With respect to timing of SAP and therefore the (inaudible) rollout is this a 2012 event what you think about for Argentina and Central America or beyond that?

Yes, we should finish that by late 2012.

The SAP or the (inaudible) as well?

The two of them are going [together]. We decided the new platform for SAP, we are incorporating on this, as I said (inaudible), so it is going at the same time.

Carlos Laboy, Credit Suisse.

Can you please expand on the Powerade comments you made to my colleague, Antonio Gonzalez. You said that you see room for improvement in marketing of Powerade. What do you think can be better for Powerade to take more share or there is price gaps that you think need to be closed there?

Obviously, Gatorade is very important for the profitability of the Pepsi system here in Mexico, you mentioned. But what does Powerade's profitability look like for you? Is it higher? Is it equal? Is it lower than brand Coke? How do you see that improving?

Right now if we look at the profitability of brand Powerade it is much lower than brand Coca-Cola, especially as I mentioned because of the high marketing expenses that we have been investing.

We believe that it is important that we continue to invest those marketing (inaudible) on the brand until we get a better market position. But just to give you an idea, during some quarters last year when we had the World Cup, marketing expense, including all the expenses related to the World Cup and the share that we have (inaudible) in Mexico from that, were closer to around 55% to 60% of revenues, when usually we go to 3%, 4%. So, this is just to give you a sense of the high marketing investment that has been behind the brand.

There is an important (inaudible) with all the different bottlers in Mexico and The Coca-Cola Company (inaudible) this is one product that is in under this 50/50 model umbrella to where it will [go for] a Company.

But I think that little by little as we grow margin, that number looks very impressive because of the top line was -- we needed to grow the top line at the end of the day. This is not (inaudible) denominator, but also the numerator. My objective, like (inaudible) is similarly to brand Coca-Cola, but we are not there yet.

I would now like to turn the call over to Hector.

Thank you for the interest in our Company. And other people (inaudible) to answer remaining questions that you may have. Thank you.

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