Coca-Cola Femsa SAB de CV (KOF) 2011 Q3 法說會逐字稿

Good morning, everyone, and welcome to Coca-Cola FEMSA's Third 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'll open the conference up for questions and answers after the presentation.

During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance, and should be considered as good faith estimates made by the Company. These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties which can materially impact the Company's actual performance.

At this time, I would now like to 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 third quarter of 2011, our portfolio franchise territories across Latin America delivered double-digit [stuff] and bottom line growth despite the challenging commodity cost environment and the global market volatility which affect during the year.

The main drivers of our performance for the quarter were our revenue management initiatives implemented over the past several months across our territories, and the solid performance of our sparkling and still beverage portfolio.

In the third quarter, our consolidated revenues were more than MXN30 billion, up 18% from the third quarter of 2010. On a currency-neutral basis, our consolidated total revenues grew 16% for the quarter, driven by average price per unit case growth in most of our operations and volume growth mainly in Mexico, Colombia and Argentina.

Our consolidated sales volume increased close to 5%, mainly due to the strong performance of our sparkling beverage category supported by brand Coca-Cola in Mexico and Colombia, as well as double-digit volume growth in the still beverage category driven mainly by the Jugos del Valle line of business in Mexico and Brazil, and the Cepita juice brand in Argentina.

Our consolidated gross profit increased 16% to MXN14 billion in the third quarter of 2011. Higher PET and sweetener cost across our territories were partially offset by average appreciation of our main operations' local currencies as applied to our US dollar denominated-raw material cost. As a result, our consolidated gross margin declined 90 basis points to 46.3%, as compared with third quarter of 2010.

Our consolidated operating income grew 10% to MXN4.7 billion in the third quarter, supported by the strong operating income growth recorded in each of our divisions. Gross margin pressures combined with higher labor costs in Venezuela and increased labor and freight cost in Argentina led to a decline in our operating margin of 110 basis points to 15.4%.

On a currency-neutral basis, our consolidated operating income grew more than 8%. Our consolidated EBITDA increased 12% to MXN5.9 billion as compared with the third quarter of last year.

Our consolidated net controlling interest income grew more than 7% to MXN2.3 billion in the third quarter, reflecting increased operating income that was partially compensated by a higher tax rate, mainly generated by an increase in the tax on shareholder's equity in one of our subsidiaries in the South America division.

Now let me expand on the performance of our operations. As a point of reference, in August 2011 we announced changes in our business structure. Starting from this third quarter of 2011, our Central American operations will now be reported together with our Mexican operations in a new reporting segment that will integrate the Mexico and Central America division.

Our Colombian and Venezuelan operations will be reported together with our Brazilian and Argentinean operations in a new reporting segment that will integrate the South America division. During this conference call we will be making reference to these reporting segments.

In the third quarter, our Mexico and Central America division recorded more than 5% volume growth, selling close to 370 million unit cases of beverages. Volumes in our Mexican operations grew 5%. This growth was driven mainly by the sparkling beverage category, which grew 6%, supported by brand Coca-Cola in multi-serve presentations and by the still beverage category, which grew more than 8% due to strong performance of Jugos del Valle line of products, along with Nestea and Powerade.

During the quarter, our water portfolio volume increased 2%, driven mainly by water in single serve presentations, which grew 8%. In our Central American region, we achieved 10% volume growth during the third quarter. This increase was mainly driven by brand Coca-Cola, which grew 12%, combined with high single-digit volume growth in the still beverage category supported by our recently incorporated portfolio Estrella Azul brand, products and the performance of the Jugos del Valle line of business.

Our average price per unit case in our Mexico and Central America division grew close to 5% in the third quarter. This increase resulted from selective price increases implemented over the past 12 months, mainly in our Mexican operations. As a result, our division's total revenue grew more than 10% to almost MXN13 billion.

With regard to our profitability, the impact of increased PET and sweetener cost across the division was partially offset by the appreciation of the average exchange rate of the Mexican peso as applied to our US dollar denominated-raw material costs.

Compared with the third quarter of 2010, our gross profit increased close to 8% to MXN6 billion and our gross margin declined 120 basis points to 47.7%. Our operating income increased close to 8% to MXN2 billion, operating leverage achieved through higher revenues, combined with controlled operating expenses in Mexico partially compensated for gross margin pressures across the division. As a result, our operating margin decreased 30 basis points to 16.3%.

Our EBITDA grew more than 7% to MXN2.6 billion compared with the third quarter of last year.

In summary, our Mexico and Central America division delivered positive results for the quarter, advancing on many fronts. The brand equity of Coca-Cola and its wide preference across our territories allow us to continue with the implementation of our strategy of selective price increases, started to mitigate the increased cost of raw materials.

Our initiatives to foster the availability of sparkling beverages, in returnable presentations, combined with our continued efforts to provide our consumers with new packaging alternatives, such as the 400 and 200 milliliter single-serve non-returnable presentations for brand Coca-Cola in Mexico. And our affordable 20-ounce presentation for brand Coca-Cola in Central America, are truly successful. These presentations are significantly increasing our number of single-serve transactions, contributing to our price mix.

With regard to our still beverage portfolio, we continue to incorporate new beverage alternatives for our consumers. As exemplified by our recent integration of Estrella Azul brand portfolio in our Panamanian operations through the joint venture that we have with (inaudible) the Coca Cola company.

Together, we recently relaunched this important brand and presented the consumer with a new image. Beginning last August, our operators started to distribute Shelf-Stable Meals and juice products in our red trucks, leveraging our distribution fleet and reaching more consumers to these high-quality products.

As you may know, this month we announced a successful completion of our merger with Grupo Tampico's beverage division. We are pleased to have closed the transaction in such a short period of time, and we integrate this franchise results into our Mexican operations (inaudible) of this year.

Regarding our merger with Grupo CIMSA, we continue to advance in this process. And when we receive all the necessary corporate and government approvals, we will successfully close this transaction as of the first quarter of 2012. With regard to our profitability, we have seen additional increases in both sugar and resin costs. These increases affected the profitability and Mexico and Central America divisions and produced gross margin pressures, particularly in the month of September.

However, we have continued our efforts to control our operating expenses, allowing us to partially compensate for these pressures. As we enter the final quarter of the year, we see increased global economic volatility from abroad. Nevertheless we are confident that are operators refined revenue management strategies and cost difficulties will continue to mitigate raw material cost pressures.

Now let's turn our attention to our new South America division. Our South America division total sales volume grew close to 4% in the third quarter, reaching almost 280 million unit cases. This increase was driven mainly by the drive volume growth we achieved in Argentina and Colombia.

In Colombia, our volume increased 9% due mainly to the solid performance of our sparkling beverage category, supported by the 17% growth of brand Coca-Cola. This growth more than compensated for volume declines in our water and still beverage portfolios.

Moving to Venezuela, our volume declined 3%, high single-digit volume growth in our flavored sparkling beverage portfolio, and the still beverage category was outpaced by declines in the rest of the beverage categories. On a sequential basis, we have gradually improved our volumes in Venezuela recovering from a difficult start of the year.

Our operators continue to evaluate implementation of different portfolio strategies for our consumers such as introducing affordable one-way PET packages, expanding our single-serve returnable presentation availability and introducing new still beverage offerings in the marketplace.

In Brazil, our volume grew more than 1%, successfully building on a very strong third quarter of last year in which we posted 13% volume growth. Our sparkling beverage categories grew 1%, mainly driven by our Schweppes and Fanta brands. Our still beverage category supported by the Jugos del Valle line of the business and the Matte Leao product line grew close to 20%. These increased compensated for a volume decline in our water portfolio.

In our Argentina franchise territory, we recorded strong volume growth across every category, leveraging solid consumer momentum. The sparkling beverage category grew 10%, driven by the 8% volume growth of brand Coca-Cola and 16% volume growth in our flavored sparkling beverage category, mainly supported by the Crush and Schweppes brands.

The still beverage category continued its strong momentum, posting considerable growth due mainly to the performance of the Cepita juice brand, the successful introduction of our Hi-C orangeade, and Hugo, our new juice dairy product. Our water portfolio also grew significantly driven by the Aquarius flavored water product line.

In the third quarter of 2011, our South America division total revenues grew 25% to MXN18 billion as a result of double-digit very good growth in every territory. Excluding beer, which accounted for MXN942 million, our total revenues reached MXN17 billion. Selective price increases implemented over the past several months, across the division, and volume growth from Argentina and Colombia accounted for the majority of incremental revenues.

With regard to profitability, our South America division gross profit raised 23% to MXN8 billion. Higher sweetener and PET cost across the division were partially offset by the appreciation of the average exchange rate of our main operations local currencies as applied to our US dollar denominated raw material cost. As a result, gross margin declined 70 basis points to 45.2% for the third quarter of 2011.

Our operating income grew 12% to MXN2.6 billion. Operating leverage achieved through higher revenues was affected by higher labor costs in Venezuela, and higher labor and freight costs in Argentina. Consequently, our operating margin declined 170 basis points to 14.8% in the third quarter.

Our South America division's EBITDA increased 17% to MXN3.3 billion in the third quarter. In summary, our South America division delivered strong results in the third quarter of 2011, leveraging the continued presence for brand Coca-Cola throughout our growing returnable base and decreased the scale of our still beverage category. We were able to provide our consumers with more alternatives to satisfy different consumption occasions.

Our strategy of introducing new beverages in the marketplace over the past several months in our still beverage category of even juices, teas, coffees and dairy [milk] products has proven successful. We are confident that the (inaudible) category portfolio's high-quality products we have developed is not only a competitive advantage, but also an attractive proposition for our customers and consumers.

Now let me walk you through our financial performance for the quarter. This quarter, our geographically-balanced portfolio franchise territories delivered increased cash flow generation. The revenue management (inaudible) [juice] implemented across our territories, and the strong volume performances all Mexico, Central America divisions as well as our Colombian and Argentine operations were the main drivers of our cash flow generation.

As of September 30, 2011, we have a cash balance of MXN18.7 billion and our total debt was MXN22.3 billion. Our net debt-to-EBITDA leveraged ratio was below 0.2 points, and our EBITDA to net interest coverage ratio was close to 20 times, highlighting our financial flexibility and the strength of our balance sheet.

The cash position and the strong cash flow generation our company has delivered the past several years provide us with the necessary flexibility to continue growing our business, both organically and through mergers and acquisitions in the various industry. We will continue to invest in the production, capacity required to meet the growth we ambition through our territories, and to foster innovation across our various categories.

In conclusion, our operation delivered strong results for the quarter. Our operators execution of the strategies designed to foster our portfolio volume growth, coupled with the implementation of refined [revenue] management strategies across our territories, enabled us to gain the important operating leverage to compensate for the increase cost of raw materials and protect our day-to-day profitability.

As we enter the final quarter of the year, we'll continue to adapt our business to the changing economic conditions and implement the necessary initiatives to sustain our profitability. We are confident that resilience of our industry, through stronger and equity of our (inaudible) category portfolio beverages, the innovation capabilities of our talented team of professionals, and the relentless pursuit by our operators of the right execution of the point of sales are key factors to continue growing our business and delivering increased value for our shareholders now and into the future. 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). The first question comes from the line of Lauren Torres. Please proceed.

Good morning, Hector. My question relates to the cost pressures obviously that we saw in the third quarter and your expectations for costs, whether it be commodity costs or expenses as it relates to your operating expense line looking into next year. We saw some notable margin contraction in the quarter.

Just curious how you think that's going to play out over the next several quarters. Similar pressures as what we saw this quarter? And if so, what are the offsets? Is there more pricing ability on your part or is it more of this OpEx control that you mentioned?

Good morning, Lauren. In terms of the commodity pressure, we continue to see pressure on the sweetener side. We see both corn and sugar prices in the local marketplace. Remember that some of the areas that we do not necessarily follow international prices because of different types of -- different situations in the marketplace. But in general, sweeteners we continue to see pressure. And we see for next year prices a little bit higher than what we have up to this moment.

Just to give you an idea, on a consolidated basis for the [full] Coca-Cola Femsa, the strength that we have from sweeteners and PET for this quarter was close to MXN700 million just -- additional costs that we have compared to the previous year. Part of that, Lauren, had to do with very good prices that we had in Brazil last year because the year before we were successful in implementing some hedges that worked out a very good price before the prices continued to -- before the prices started to go up.

But in general, that number is around $50 million of less profitability than we have this quarter -- just in this quarter. So our anticipation for next year is that we will continue to see some pressure in sweeteners. In PET, we are starting to see some reductions basically in the last two weeks. So PET we have a little more optimistic scenario going forward. But again, the volatility in these markets have been very high.

In terms of saying that, obviously, as you see from this report, we have seen -- you can see that we have been able to increase prices importantly basically in every market in every one of the countries to compensate for that. And we are seeing that our competitors are also increasing prices because they are feeling the same pressures that we've have. So that's the positive side on that front.

In the OpEx line, we continue to work and say that we have been a little bit more successful in Mexico and Central America. We still need to work a little further on our operators in South America have as one of the priorities to really try to structure those operating expenses in a different way and start subtracting some efficiency.

In South America, what has happened, which is difficult to control by our operators, is that salary increases in Argentina and Venezuela have been very large, in excess of inflation. And because of the very high level of employment that we have in Brazil, we are suffering also some pressure there as not only having to pay for our workers and employees in terms of salary, but also retraining them because they leave for other industries or other companies in Brazil. The market is very [hard] for workers.

So in those three countries, Argentina, Venezuela mainly, as a way of general increases on salaries and in Brazil because of the low unemployment and the economic activity that we see there, we are suffering a little from that effect. So I think that with those comments I'll give you a very good picture of what we're seeing in terms of raw materials, a little on the OpEx and my belief is that we will be able to continue to increase prices to compensate for part of those effects.

And just as a follow-up, I'm not sure if you're prepared to comment on margins. Because with the pressures that we've seen over the next couple of quarters, do you think you could basically stabilize them or should we see improvements or similar declines to what we saw this quarter over the near term?

Again I would say that in Mexico, Central America I feel more confidence that we will have stable margins. I'm a bit concerned on South America because of the reasons that I mentioned the salary pressures in those countries.

Okay. Thank you.

The next question comes from the line Alan Alanis from JPMorgan. Please proceed.

Thank you so much. Hi, Hector. I want to follow up a little bit on this -- on the comment of the previous question. This idea of the operating expenses. I appreciate that you mention now Brazil. Besides labor, anything else that it's explaining this 28%, 29% in operating expenses above the 24% growth of revenues of the region, Hector? That would be the first question.

Besides salaries, we have seen a little more activity in the marketing expenses, especially in Colombia, Brazil and Venezuela. And in Mexico we are doing an original campaign in terms of marketing expenses. As you know that in that line we include cooler placement in anticipation of a unified Peps] bottler in Mexico.

So there's a whole campaign in Mexico of trying to capture additional points of sales, getting good positions in the stores [of everything]. So you will see some increases in the marketing expenses line in this quarter and the next two or three quarters. And other than that, I'd say that the other expense that is a little bit out of line is [straight] in Argentina.

Okay. It sounds like most of them are recurrent. They're just new levels that you will be having. And as you said, you will have to offset your pricing, correct?

Yes. I think that -- my expectation -- some of them are more recurrent, like the marketing expenses around -- that I'm commenting is a more discretionary expense. We don't see the pricing, we can count on that. We don't see the profit or the result that we anticipate from that, we can start reducing those expenses.

Or we'll be back to environment that we have to have with the Coca Cola company and that environment is sometimes is difficult, but you have seen because of the performance that we have in the past that that's a level -- an environment that we can adjust. So the marketing expenses, I feel very comfortable. We are convinced that it's important that we increase a little bit those expenses, especially for the beginning of the next year. But it's a totally discretionary (inaudible).

Got it.

Salaries sometimes, [freight] escapes this, raw materials, but what will be for the [story].

Now, below the operating line you have MXN287 million gain from derivatives instrument. Is this a COGS hedge, is sugar, or -- and how do you see this hedges in this -- the derivative instruments going forward, Hector?

I don't know quite what you are referring to. Let me just (inaudible). I think that the MXN287 million that you mentioned is a loss that we have. That is related to -- in the past we changed some of the -- we were able to issue pesos denominated debt and we swapped that into dollars because it was cheaper. It was a cheaper way of financing. We wanted to have dollar debt, but it was cheaper to issue the bonds in pesos because of the ForEx on the market that we have here.

So at the end of the day we got a lower dollar rate that we would have had if we had issued [Gaikey] bond in the US.

Okay.

And because of -- in the balance sheet you do have the end of the period exchange rate. And this quarter is a little picky because during the quarter the currencies, as we you know, were depreciating importantly. But that is because we're in September. So this quarter we have the benefit of some raw materials that we were paying with a lower exchange rate than last year. But at the end of the year, the exchange rate is -- most of the currencies deprecated substantially.

That's and now that we have in converting those peso bonds into dollar in [debts], which is totally -- it's -- as you know, it's [explained] (inaudible) hedges. Nothing exotic. It's just moving from dollars -- from pesos into dollars. We also have some dollar denominated cash balances that we'll use a better and that's why you have a foreign exchange [to gain], which is almost the same size of (inaudible) because we had dollar cash balances that compensate part of that exposure.

Got it. That's very useful. Thanks so much, Hector.

Thank you.

The next question comes from the line of Lore Serra from Morgan Stanley. Please proceed.

Good morning. I just wanted to ask a couple of follow-ups to what's been asked. On the COGS side, I'm just wondering a bit more if you could talk about where you see the pressure. Because it seems like sugar's leveling out and maybe could fall, and you say PET's going to fall. So could you just give us a sense of what your guys are seeing to see the continued pressure?

And then in terms of the OpEx, I understand the markets are very different, but it took you a long time to get sort of the Mexico operating expenses under control, and it looks like you've now done it for this year, which is great.

If you kind of compare and contrast the markets, and obviously there's some differences in terms of the labor markets, but on a structural basis are there things that you've done well in Mexico that you can do more rapidly in other markets to control the inflation that you're seeing in the different markets? Thanks, Hector.

Good morning, Lore. I think that in general -- let me start with the first question. The first part of the question in raw materials. Sweeteners, we basically have gone to -- for example, for Mexico agree with our suppliers on basically some of the prices for next year. And those prices are in average a little bit higher than what we have this year. It's not much. I'd say about 5%, 6% on average of what we have this year.

And that's why we are basically saying -- and the first question from Lauren that was saying that in sweeteners we were anticipating a little bit higher prices in general. We are seeing, as I mentioned, some reductions in -

I'm sorry. What about -- what about HFCS? Because you use a lot of HFCS in Mexico. Will that be under pressure?

That basically is what I was referring there. The agreement with some of the suppliers has to got to do with HFCS. In cane sugar, we don't have any agreement with because that's a more complex environment and it's impossible to do hedges with that. And the suppliers -- so far we haven't really found a supplier that is willing to agree on a price for two or three quarters in advance (inaudible) more as a spot market.

So in HFCS, I'd say there are around 50% to 70% -- it's closer to 70% of our need for next year (inaudible) we have a price that is [checked]. And it's, as I mentioned, slightly above what we have next year that was going to be larger. Now, with respect to the OpEx, I think that --

I'm sorry. And PET, what's your view on how much PET will go down this year, or next year rather?

I don't have any -- that I don't have any idea of. We just started to see some reductions in that. Our budget calls for flattish PET prices for next year. We might have some positive news because of the reductions that we have seen in that -- in these two weeks, but our indication is flat PET prices for next year.

Great.

With respect to OpEx, I think that other than this structural payments in Venezuela and Argentina have to do with salaries, I think that there are very good opportunities in Brazil (inaudible), as you know, is now in charge of that area. It's always good to have a new pair of eyes to start looking at some of the process.

We are working a lot in the basics -- the basis of the business, for example some of them. As I said, product that goes [raw, bad], I don't remember the word. (inaudible) in the Spanish.

Bosses?

Light-weight. It's a little bit outlined. If someone [teaches us] in the plan we believe that we can improve. So it's always good to have a new set of eyes to look at this area. How fast can we change that? That is difficult to predict, but as I mentioned, the attention and the policies of the executives are being to improving this OpEx line. And the right incentives are there to start improving. We feel confident that what we have done in Mexico we can duplicate in some of our other areas. This period's is a little bit tricky, but (inaudible) incentives are there to start moving.

Thank you.

Thank you.

(Operator instructions). We ask questioners to limit their self to one question. You may reenter the queue after your initial question has been taken. (Operator Instructions). And your next question comes from the line of Celso Sanchez from Citi. Please proceed.

Yes. Hi. Good morning, Hector. A very simple question actually. The concentrate terms that you have, as I recall, have a fairly lengthy standstill in what -- until the next increase would happen. I'm thinking something between five and 10 years from when it was -- from when it was enacted.

So my question would be you obviously have made a couple of acquisitions. It seems like there could be more in Mexico specifically. Do the terms that you had in terms of a standstill, do those apply to all other bottlers as well? Or if they don't, as you potentially merge with or require other bottlers, what's the mechanism through which the terms that you have can be applied to those territories?

Is that -- is that another negotiation, or is that kind of accounted for in your standstill that you had with the Cola-Cola company?

That's a good question. This standstill that you refer is -- covers all of Mexico. The rest of the countries, there is no specific agreement on concentrate. We always try to work -- to work with the Coca Cola company and the idea of growing the size of our pie rather than trying to split that pie differently. But the only guarantee that we have is that in Mexico we still have a few more years of this standstill.

So the two acquisitions that we have done in Mexico are covered by that -- we the same in terms with respect to the standstill. So in that respect, it's easier to do the evaluation of this operation because we have -- we can anticipate the cost of concentrate also. It is easy to (inaudible) with that respect -- with respect to the concentrate.

Okay. And just a follow-up to that. In the countries where you operate and more than one bottler operates, or another bottler at least besides you operates, is it fair to assume that in every country the concentrate formulas apply to the whole country?

In other words, the concentrate pricing formula is the same for all bottlers in a given country, or can that -- can that different in a given -- in some countries amongst different bottlers?

To our best of our knowledge is the same in every country, for example in Brazil. The 16 bottlers we have the same formula. And in Mexico every bottler has the same formula to the best of our understanding. We don't know if the Coca Cola company has any specific special agreement with someone. We believe it's the same treatment for every bottler within a country.

Okay. Great. Thank you.

The next question comes from the line Antonio Gonzalez from Credit Suisse. Please proceed.

Good morning. Thanks for taking my question. Hello, Hector. I wanted to ask, first in Brazil, could you give us an update on the competitive environment, particularly within [CSVs]? Are you seeing -- what we're hearing from your main competitor, some aggressive promotions particularly at the modern trade. And I was hoping you could comment maybe on how you feel your portfolio has evolved over the last 24 months or so.

Of course you've talked a lot about SKU diversification and introduction of returnables lately. And I was hoping to hear your comments on how you feel you're prepared potentially for a longer period of more aggressive price competition in Brazil and whether you can comment on if your market share in CSVs and particularly in colas is stable up until now with this price aggressiveness.

In general, I would say that we have -- we have seen -- in most of our markets we have seen brand Coca-Cola behaving very, very well. We have a very, very slight erosion in Brazil, but it's less than 0.1%. It's very, very small. But in general, [these are all] the numbers brand Coca-Cola grew very important during this quarter.

My general sense of -- what I can share with you in terms of the competition is that we have very good segmentation of our portfolio. I think that we excel at doing that. We have (inaudible) a very gracious competitor, we have returnable presentations that are closer to those prices will normally be that an entry price for accretive for our consumer.

We have these very small presentations like 200 milliliters that we are selling in Mexico at MXN3, which is a very good price for a product like that. So we are seeing [cheers] amount now, some adults doing -- using that presentation as an indulgence, only 200 milliliter and they no longer care about the calorie intake and they take that.

So in general, I'll say that we have very good market prints. Where we see a bit more competition is in the Colombia market with [Postovol] that sometimes that they behave a little more aggressively on prices. But as you saw, as we reported, brand Coca-Cola in Colombia grew very well. Obviously it's an easy comp because last year we were suffering a bit, but we were getting share importantly in Colombia. In flavors in Colombia we were losing a little bit of share, remember that Postovol is the leader there in flavor.

So in general, I'll say that with cost pressure in raw materials that have, most of our competitors are following -- are -- is also increasing prices. So I don't see a lot of pressure on that front. Let's see what [Pepsi] would do in Mexico now that they're integrating all these bottler now in the whole country (inaudible).

So far we think our region (inaudible) would be (inaudible). They have paid for some accounts in package that would protect for those that know Mexico. It was an account that Coca-Cola had for many years. Now it's a Pepsi operation. They -- high amount of money for that. And you can argue that or maybe they would gain some accounts with that. That we're going to change the markets (inaudible).

Thank you very much, Hector.

The next question comes from the line of Lore Serra from Morgan Stanley. Please proceed.

Thanks for taking the follow up, Hector. I just wondered, there's a lot of noise in the market about M&A. And I just want to make sure that -- or just to confirm your views.

Obviously you talked in the beginning about the fact that you still have a lot of room on the balance sheet side even with the two acquisitions you're making in Mexico, and you remain committed to more sort of bolt-on acquisitions like that and that the -- some of these properties, moving is creating more interest in others.

But obviously there's a lot of competition for those properties, so I'm wondering if you could just put in perspective kind of the priority and maybe the possibility of deals on the smaller side, like what you've done with Cimsa and Tampico, versus the sort of larger deals that might be more global in nature. Thanks.

Yes, Lore. Well, that's a tough question because obviously it's difficult to predict what will be next in terms of M&A activity. I think that in general we have commented that areas of potential interest in the future it's the North America market. I truly believe that's going to take two or three years before the Coca Cola Company post something there and at some point in time we need to value if that's interesting or not for us.

If we have in the meantime more of these medium size or smaller bottler in Mexico, Brazil that are -- that we would like to do something similar to what we have done as to what Arca and [Contal] did at the beginning of the year, we certainly -- very much interested in doing something like that.

So if you ask me in terms of probability if I think that is (inaudible) transaction was announced I expressed that that will create the environment for everyone to review their own situation. I think that that's for bottler in Mexico to review their priorities on where they're standing and everything. I think that that's still true. So I think that there will be -- I see possibilities in that front sooner rather than a larger transaction on a global basis like something like North America, more something like that.

Or other global transactions.

Or other global transactions.

Okay. Thank you.

But it is very difficult to know, you obviously to have the other part also willing to do the transaction.

Perfect. Thank you.

I will now turn the call over to Mr. Hector Trevino, FEMSA CFO, for closing remarks.

Thank you for your interest in our company. And as always, [Hosea] and his team will be available to answer any remaining questions. And we'll be in touch. Thank you.

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