Coca-Cola Femsa SAB de CV (KOF) 2011 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Coca-Cola FEMSA fourth quarter 2011 earnings event 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 will 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. During the fourth quarter of 2011, our operators delivered double-digit top and bottom line growth in both of our divisions in the face of a challenging cost environment and (inaudible) water conditions in some of our territories.

During the fourth quarter of 2011, we are integrating the results of Grupo Tampico as of October and the results of Grupo CIMSA as of December in our Mexican operations. These results contribute to our Mexico and Central America division and our consolidated results.

In addition to these new enlarged territories, the main drivers of our Company's performance were our strategy of selective price increases implemented across our operations during the year and the strength of our multi-category portfolio beverages, led by brand Coca-Cola and our growing array of still beverages.

In the fourth quarter, our consolidated revenues reached more than MXN36 billion, up 29% from the fourth quarter of 2010. Excluding the integration of Grupo Tampico and Grupo CIMSA in Mexico, total revenues grew approximately 24%.

On a currency-neutral basis, and excluding the newly merged territories in Mexico, our consolidated total revenues grew 18% for the quarter, driven by average price per unit case growth in every operation and volume growth mainly in Mexico, Argentina, Colombia and Brazil.

Our consolidated sales volume grew 11%, including our newly merged territories in Mexico. Organically our volumes grew 4%, primarily supported by the performance of our sparkling beverage portfolio, in which brand Coca-Cola in Mexico, Argentina and Colombia, combined with (inaudible) in Brazil were the main drivers of the category's growth.

In addition, our still beverage category grew 11%. This grow mainly resulted from the recent launch of the Jugos del Valle line of business in Venezuela and it's continued strong performance in Mexico and Brazil, together with Hi-C orangeade and the Cepita juice brand in Argentina, our bottled water portfolio registered low single-digit volume growth.

Our consolidated gross profit grew 37%, reaching more than to MXN16 billion in the fourth quarter of 2011. Higher PET and sweetener costs across our territories, combined with the average appreciation of our main operations' local currency as applied to our US dollar denominated-raw material costs, accounted for the majority of the increase in our cost of goods sold. As a result, our consolidated gross margin declined almost 80 basis points to 45.6%, in the fourth quarter of 2011.

Our consolidated operating income grew 28% to MXN6.5 billion during the fourth quarter, supported by the double-digit operating income growth in both of our divisions, including our recently integrated territories in Mexico. Operating leverage achieved mainly through higher revenues compensated for higher labor costs in Venezuela, increased labor and freight costs in Argentina, and costs associated with integration of our new territories in Mexico, as well as increased marketing investment to reinforce our execution, widen our cooler coverage and broaden our returnable base.

Our operating margins remained almost flat at 18%, compared with 18.1% in the fourth quarter of 2010.

On a currency-neutral basis, our consolidated operating income grew 22%, demonstrating our operators' ability to deliver strong bottom line in the face of important raw material categories. Our consolidated EBITDA increased 27% to MXN7.8 billion in the fourth quarter.

During this quarter, we also reported MXN1.142 billion in other expenses. These expenses mainly reflect the write-off of certain number of key assets, including production equipment, coolers, forklifts, and returnable bottles and cases resulting from our routine inventory. And also consistent with prior quarters, the recording of employee profit sharing and the loss on sale of fixed assets.

For the quarter, our consolidated net controlling interest income grew more than 6%, reaching MXN3.2 billion.

Now I will expand on the performance of our operations. In the fourth quarter, our Mexico and Central America division recorded close to 18% volume growth, selling more than 410 million unit cases of beverages. Our Mexican operations volume grew more than 19%, including 49 million unit cases contributed by our newly merged territories.

Organically, our volumes in Mexico grew 4%. This increase mainly resulted from 5% growth in brand Coca-Cola in both single and multi-serve presentations, 14% growth of our Ciel water brand in personal presentations, and 4% growth of the Ciel various categories, supported by the Jugos del Valle line of products along with Nestea and PowerAde.

In Central America, we're registered 6% volume growth during the fourth quarter. This increase was driven mainly by brand Coca-Cola, which grew 7% combined with double-digit volume growth in the still beverage category, supported by our recently incorporated Estrella Azul portfolio.

Our multi-segmentation strategy and strong execution of the point of sale continued to a 6% increase in our average price per unit case in the division during the fourth quarter. As a result, our division's total revenue grew close to 26%, reaching MXN14.5 billion.

Excluding the integration of Grupo Tampico and Grupo CIMSA, total revenues grew approximately 13%. And on a currency neutral basis, and excluding the integration of the new territories in Mexico, total revenue grew 11% for the quarter.

With regard to our profitability, higher PET and sweetener costs across the division were further impacted by the average appreciation of the Mexican peso as applied to our US dollars denominated raw materials costs. Compared with the fourth quarter of 2010, our gross profit increased 17% to MXN6.6 billion and our gross margin reached 45.4%.

Our operating income increased 16% to MXN2.5 billion. Operating leverage achieved through higher revenues partially compensated for gross margin pressures across the division. As a result, our operating margin was 17.2%. On a currency neutral basis, our operating income grew approximately 15%.

Our EBITDA grew more than 20% to MXN3.1 billion compared with the fourth quarter of last year.

In sum, our Mexico and Central America division delivered positive results for the quarter. Our strategy of selective price increases, targeted to mitigate the increased cost of raw materials, continues to build on the brand equity of our products, especially brand Coca-Cola. We continue to benefit from the investments we have made over the years in support of our base of returnable presentations, which continue to contribute significantly to our Company's growth.

In addition, we seek to foster the availability of single-serve packaging alternatives, such as the 200 milliliter one-way presentation for brand Coca-Cola in Mexico and the affordable 12 ounce presentation for brand Coca-Cola in Central America, contributing to a healthier price mix.

Within the still beverage category, we continue to incorporate the Estrella Azul portfolio in Panama, distributing shelf stable milk and juice products in our (inaudible). This new venture with our partner, the Coca-Cola Company, continues to provide us with a deeper knowledge and understanding of this exciting category.

We have successfully integrated the beverage division of Grupo Tampico, now our new Northeast region in Mexico, as well as the beverage division of Grupo CIMSA. And we are working to capture the announced synergies according to the timeframe we previously shared with you. Additionally, as you may know, in December 2011 we announced our agreement to merge with Grupo Fomento Queretano [beverage] division, another key step for the Mexican Coca-Cola system.

We are honored to have reached our third merger agreement with one of Mexico's deeply restricted family owned bottlers with whom we share an aligned vision of economics and social value creation. These transactions, combined with our (inaudible) in the daily segment in Panama, together with our partner, the Coca-Cola Company, amounted to more than MXN28 billion, our most significant investment since the acquisition of Panamaco in 2003.

(Inaudible) expected synergies from our mergers in Mexico are more than MXN800 million. We remain confident that our operators' abilities and discipline will continue to deliver positive results despite raw material cost pressures.

Now, let's talk about our South America division. Our South America division's total sales volume grew more than 3% in the fourth quarter, reaching more 320 million unit cases. This increase was driven by volume growth in every operation.

In Argentina, we continued to expand the strong performance experienced in 2011. Every category grew, leveraging on solid consumer and (inaudible). Sparkling beverage grew 9%, driven by 13% volume growth of brand Coca-Cola. Still beverage expanded their solid performance, growing more than 45%. Leveraging the successful launch of Hi-C orangeade earlier in the year, as well as the strength of the Cepita juice line. The Aquarius label water line drove the 5% growth of our water portfolio.

In our Colombian franchise, volume increased 3% despite tough weather conditions experienced during the quarter. The sparkling beverage category, supported by 6% growth of brand Coca-Cola and the performance of Quatro and Sprite in flavored sparkling beverages grew 5%. The still beverage category grew 3%. These increases compensated for a volume decline in our water portfolio.

In Brazil, despite unfavorable weather during the later part of the quarter, our volumes grew more than 1%, building on strong fourth quarter of 2010 in which we post 8% volume growth. Sparkling beverages grew 1%, supported by the Fanta and Schweppes brands, still beverages driven by the Jugos del Valle line of business and PowerAde grew 5%. These increases compensated for a volume decline in our water portfolios.

With regard to Venezuela, our volumes grew almost 2%. Our operators' continuous efforts to evaluate different portfolio alternatives for our consumers, such as introducing new still beverage offerings in the marketplace, combined with increased consumer spending yield positive results. Our still beverage portfolio volumes doubled, mainly as a result of the successful introduction of the [ValleFrut] orangeade. This increase, in combination with 1% growth in the sparkling beverages offset volume declines in the water category. We will continue to evaluate different portfolio strategies for our consumers, such as affordable one-way PET presentations and expanding of the ability of our single serve returnable package.

In the fourth quarter of 2011, our South America division's total revenues grew 32% to MXN21.7 billion as a result of double-digit revenue growth in every territory. Excluding beer, which accounted for MXN1.2 billion of revenues, our total revenues reached MXN20.5 billion. Selected price increases implemented over the past several months across the division accounted for close to 90% of our incremental revenues and volume growth in every country accounted for the remaining. On a currency neutral basis, total revenues in the division grew approximately 24%.

With regard to our profitability, our South America division's gross profit increased 35% to MXN9.9 billion. Higher PET and sweetener costs across the division were further impacted by the average devaluation of our main operations local currency as applied to our US dollar denominated raw material costs. Nevertheless, our gross margin expanded 100 basis points to 45.7% for the fourth quarter of 2011.

Our operating income grew 36% to MXN4 billion. Operating expenses were affected by higher labor costs in Venezuela, higher labor and freight costs in Argentina and increased marketing investments in the division to reinforce our execution. Consequently our operating margin expanded 60 basis points to 18.4% during the fourth quarter. Our South American division's EBITDA increased 32% to MXN4.6 billion within the fourth quarter.

In summary, our South America division delivered solid results in the fourth quarter of 2011. Our broad array of beverage alternatives on top of consumer's preference for brand Coca-Cola and our ability to offer these consumers value in packaging alternatives, such as the two level and the four level single serve presentations, have proven successful. Today, we are able to provide our consumer with a wider array of choices to quench their thirst. We continue to foster the introduction of new products that capture volume and value opportunities in the beverage space, such as the ValleFrut, Hi-C orangeades, in Venezuela and Argentina respectively.

Indeed, one of our main competitive advantages continues to be the multi-category portfolio of high quality beverages we have developed through the years.

Now allow me to walk you through our financial performance for the quarter. This quarter once again, our geographically-balanced portfolio franchise territories delivered increased cash flows. As of December 31st of last year, we had a cash balance of MXN12.6 billion and our total debt was MXN32.6 billion.

Our net debt-to-EBITDA leveraged ratio was 0.4 times, and our debt EBITDA to net interest coverage ratio was 22 times, highlighting the strength of our balance sheet and financial flexibility.

Our financial flexibility is underscored by the solid balance sheet and the strong cash flow generation that our Company has built over the years. In addition to the investments we have made to grow our business and (inaudible) via innovations in categories, business models and packaging alternatives. And to value creating mergers and acquisitions.

We have been increasing the dividends we pay to our shareholders. With this in mind, our board of directors has agreed to propose a dividend of approximately MXN5.625 billion to our shareholders. This proposed amount represents a dividend of approximately MXN2.77 per share, computed on the basis of 230.5 million shares, which include the 45.1 million shares to be issued in connection with the merger of Grupo Fomento Queretano. As compared with a dividend of MXN2.36 per share paid as of April of last year, these represent an increase of approximately 17%.

We are confident that the strong brand equity of our multi-category portfolio beverages, our operators relentless (inaudible) of optimal execution at the point of sale, the innovation capabilities of our talented team of professionals, the incorporation of new businesses into our Company and the financial flexibility that we have achieved over the past several years will enable us to continue growing our business and delivering increased value for our shareholders now and into the future.

As many of you may know, on February 20 of this year we announced that we have signed a 12-month (inaudible) agreement with the Coca-Cola Company to evaluate the potential acquisition of our controlling stakes in the Philippines bottling operation. Both parties are confident that our Company's expertise, as demonstrated by our successful track record of operation in fragmented markets and emerging economies can be effectively deployed in this territory and completed significantly to expanding the penetration of and consumer preference for the Coca-Cola Company's brand in this market.

This agreement does not require either party to enter into a transaction and there can be no assurances that our definite agreement will be executed.

Thank you as always for your continued confidence in us and now I would like to open up the call for any questions that you may have.

(Operator instructions) Lauren Torres, HSBC.

Hector, despite some significant cost pressures last year, you were able to maintain or we saw maybe a slight compression for the full year with your gross and operating margins. Just curious how you're thinking about this year. I assume some of your cost pressures are still weighing on your result or will weigh on your results this year. So if you could talk about the offsets, I mean is pricing still your main option here or do you think we'll see some further compression on the margin side if these pressures do exist?

Yes, as you correctly explained, this year during 2011 the pressure we saw on raw materials, especially PET and sugar, was very, very strong. When you look back and just as a reference and obviously Mexico being a very important market, and to look back at sugar prices two years ago, we basically have more than doubled the prices of sugar.

And in the case of PET and that's basically across all of our territories, we have suffered increases of around 65%. So those are very tremendous increases for these very important raw materials, no? As you know, PET and sugar, together with a syrup that we pay to the Coca-Cola Company are basically 90% of our raw materials that we use.

So with that pressure, that puts cost pressure that we have experienced in the past are definitely having some flexibility and the pricing is very important. And I think that basically we have, as you see from the numbers, been able to pass along most of those price increases -- most of those cost increases to our consumer.

In total, the impact that we have (inaudible) sugar and PET, the whole Company for the full 2011 was basically around MXN1.9 billion, which is a very large fee.

We have flexibility in some countries, others -- some more than others. And but I think that the good news is that those are costs that are impacting the full industry, so we are seeing some more pricing flexibility from our competitors and as you might expect, and I'm sure that you visit some of the markets and to look at our prices, we still are maintaining very significant price gaps that -- versus our competitors. And say that the main yellow light, if you want to use that expression, is in Mexico where we have a new operator after -- with Pepsi Cola, after the formation of the new bottling operation in Mexico to (inaudible) the Venezuelans. They have been a bit aggressive on the pricing.

As an example, on cans we are basically selling at double the price of -- for what they are selling. They are selling in some instances (inaudible) overpriced on some of the (inaudible). But we think that those are probably temporary -- in our opinion, those are temporary price points that they will -- that they are using just to, I guess, (inaudible) deliver their presence in Mexico, no?

Other than that, Lauren, I think that in general we are expecting for the full year more or less stable prices in PET. And worried a little bit because of the old prices at the beginning of the year have been increasing. So January has been a little bit higher than what we are anticipating in PET prices.

And sugar prices will (inaudible) in some volatility and some potentially increase. But we feel that the main lever, which is fixing the price of our products or fixing (inaudible) -- taking care of the prices of our products, I think that we have this flexibility to start moving going forward because everyone in the industry is suffering from this same cost pressure.

The other part of the equation is what can you do with operating expenses? And I think that -- and you have heard me in the part that we are stressing a lot on that line. I think that the Mexico, Central America, we have been very successful in improving the OpEx line. We still have some room to move in in South America, but I think that we are moving in the right direction.

But try to compensate exclusively where at a more efficient operating expenses line. So these increases that we have been suffering in raw materials it's (inaudible). So we do need this flexibility on the pricing front of -- in our products to fully compensate for that. And as I said, most of our -- we are seeing most of our competitors moving the prices. As I said, the only section is right now and I think it's more as an effort for the new management of PepsiCo in Mexico. It's the only way we're working some -- the (inaudible) tends to move prices, but again we believe it's more as a temporary price activity.

And as a follow-up, can I ask that the visibility that you have now with respect to pricing and managing the operating expense line, do you think you can maintain margins this year?

Yes, Lauren, I think that it's -- given the expectation we have with prices, operating expenses and cost of raw materials, I think that we can certainly maintain markings on a consolidated basis. You might see some differences country-by-country, but on a consolidated basis I think that the idea is that we maintain the margins that we have.

Alan Alanis, JPMorgan.

A couple of questions, one technical and one more strategic, Hector. The technical question is, is it true what we're seeing on the (inaudible) in Mexico related at all with the write-downs that you're doing in the fourth quarter? And I guess -- I mean you already answered that you expected flat to -- I mean you don't expect margin contraction for -- based on Lauren's question.

But I just want to understand what would be the right level of selling and -- as (inaudible) that we should see going forward? And is this right balancing anywhere from a related to that improvement that we saw in 2011?

For the first question, I think in general we can see from additional efficiencies in Mexico on the operating expenses line, and I certainly hope that it's not in South America we can also improve. I'm seeing, as I mentioned, some improvement in Mexico already, but I think that because of the integration on the (inaudible) and the scale that we are gaining, that we would continue to see some improvement in the operating expenses line.

In South America, we are still working -- we are behind what was done in Mexico probably by 12 months, but we will little-by-little improve it on the operating expense line.

And as I mentioned, in general I see on a consolidated basis flat margins at the operating income line and again, we might see some difference in -- on the temporary basis on a country-by-country basis, depending on how raw material costs are affecting each of the different countries and maybe some of the movements on (inaudible). Remember that most of these raw materials are dollar denominated, no? So -- but I think that that's basically how I'm seeing 2012, no?

Got it. But you're not -- I mean these improvements have nothing to do with declines on marketing spending, correct?

No, I think that general market expenses have been very flat. We do have some adjustments at the end of the fourth quarter because sometimes you do some provisions during the year and you end up spending a little bit less than what you were anticipating, no? But at the end of the day, basically we target a certain level of marketing expenses to work with the Coca-Cola Company. Sometimes by the fourth quarter you need to take an extra charge because your provisions were a little bit smaller than anticipated. Sometimes your marketing expenses goes a little bit below. But at the end of the day, the full amount for the year is what you spent for the year, no? Is that clear, Alan?

It is clear. My last question was (inaudible). I know you and I discussed this in the past many times. But it will be good to get an update. Regarding your views on the Philippines, I mean the context of the question is Amatil operated that territory for some years. Unfortunately they had to sell it back at a lower price than they had acquired it, so it was painful for them.

I guess the question that I'm framing here is why the Philippines and what can Coca-Cola FEMSA do differently than Amatil and other Coke bottlers in order to create value in that country? And what's the likelihood of closing if you're controlling a percentage? I mean do you see more than 50%, less than 50% chance of posting it? I know you were very clear in saying that there's no guarantee, but if you're controlling their percentage it'll be highly appreciated.

I think that -- I mean I guess that you have -- you heard me say for many quarters that we will continue looking for opportunities to grow. We do look at what is left, then we use that expression in Latin America. You have a very large bottler like (inaudible), you have an (inaudible) that did a recent merger announcement. Those two mean that these other bottlers continue independent. There is not much opportunities to continue growing. I mean there are a few territories in Mexico, there are some in Brazil, and then -- not much left.

So a little bit of our thinking is we have to -- setting aside, Alan, everything related to new (inaudible) when we did the acquisition of Jugos del Valle or we did with the (inaudible) business in Panama (inaudible) that our strategic thinking is these [countries] are growing, we need to be present there if we are participants in another (inaudible) ready to bring business there.

Looking at -- on the startling opportunities, we have to look at our geographies. Because again, in Latin America there are not that many opportunities left. And even if you do all of those that are available, it's not that large in terms of (inaudible). It's not another Panamaco or another opportunity like that.

Or usually Asia always catches the attention of everyone when we do an analysis because of the potential for growth that you see and the stage of development that you see in the things. As we announced on February 20th, both the Coca-Cola Company and Coca-Cola FEMSA, we were very concerned that a lot of rumors would trigger -- we would start basically Philippines and we concluded it was better to do this announcement basically saying that for this 12-month period, we have an exclusivity from the Coca-Cola Company to analyze this opportunity.

We are not reaching any conclusions, Alan, so therefore this -- because we are just starting to analyze that. We have very few information. We will start traveling to Philippines in the following weeks. And actually if the right trends -- the 12-month exclusivity period have also to do with the fact that this is -- we are starting at the very important high season -- or they are starting at the very important high season on sales and on volume in the Philippines, so they prefer to delay our revenue (inaudible) landing in Philippines to start analyzing and do all the analysis that we have to do after Easter.

So we basically have very few information right now. And from a very (inaudible) analysis of just what we have visited in the past and analyzed, we think that is a market that is in certain aspects similar to what we have in Latin America in the fragmentation of the (inaudible) system and the consumption pattern of some of the consumers set there. So we feel that we can take advantage of some of our expertise that we have developed in (inaudible) these markets.

I would not venture to give you a percentage or possibility of the (inaudible) because as I said, we are just starting to our own analysis. But what I will ask you is give us the benefit of the doubt that we will do a very profound analysis, negotiate the structure and the price and the conditions as we have done in the past I think [profitably] and we have demonstrated that in the past.

So give us some time and we'll keep you informed on how we are (inaudible). But so far, we are so far -- so early in the beginning of the process that it is very difficult for us to venture to give possibilities of closing a transaction or even venture to give some original information on values or whatever, because we are just starting to do that too.

Lore Serra, Morgan Stanley.

I wanted to just follow-up a bit on the cost pressures you've faced, particularly in Mexico in the quarter. And I wonder if you could just go back and sort of -- just give us a better -- well, I'd like to understand how much of the fourth quarter pressure kind of was related to currency and the currency strengthened a bit here. You also mentioned that you're expecting PET to be stable this year, but I guess -- I think PET rose during the course of last year, so I'm not sure if you're talking about stable with fourth quarter level or stable with the average of last year.

And then -- and sugar's also down from its high, although not for maybe the average level. So could you give us a sense of how much of the sort of intense cost pressures you felt in the fourth quarter was going to be sustained as you start the beginning of 2012 or how much of it was unique to some of those factors or more associated with those factors in terms of the fourth quarter? Thanks.

Let me give you some figures and maybe I'll refer to Jose to just -- to confirm a little bit the breakdown of how much is FX and how much is price later on.

The figures that I have right now and as I presented to the board of directors last week, the effect that we have during the fourth quarter, (inaudible) in the fourth quarter for both the effect of foreign exchange and the prices of sweeteners and PET, it's MXN920 million. More or less, it's half and half between Mexico and Central America and half South America.

I don't have a specific breakdown right now, Lorre, of how much of that is related just to pure pricing and how much is related to the FX effect. So as you correctly are pointing out, part of that has to do with a very important evaluation of some of the currencies forward, the end of the fourth quarter. And that's the certain -- to try to break that down between prices of raw materials and FX.

For total year impact in Mexican pesos, which combines both FX, it's MXN920 million. For the full year, as I mentioned a little bit earlier, was MXN1.9 billion, so in the fourth quarter, the effect was basically half of the total effect that we have during the year. So it was very important.

During January we have seen some increases in PET compared to December, compared to the prices we have in November and December. And that's ahead of what we had last January also. But in general -- as a general trend, Lorre, I would say that PET should be -- on average for the full-year should be flat or slightly up. And again, I'm a little bit concerned with the rise in oil prices that we are seeing right now, and that might change a little bit the -- how we look at prices going forward.

And in the case of sweeteners, we are seeing flattish average prices for the full year compared to last year. Again, so all the currencies have been recuperating, some of it are the lost space that they had at the end of last year. So that will benefit a little bit during January and February, but that will depend on how the currencies behave and I'll ask Jose and Orlando to try to break down between prices and peak and FX for the fourth quarter so you have picture.

But that's more or less our -- the environment of (inaudible) notes. PET, flattish to slightly up, and sugar prices more or less flat compared to a full average for last year.

And then in terms of Tampico and also CIMSA, can you just give us a sense of -- or just an overview of where you are in the integration process? You mentioned that you've -- that OpEx includes some costs to integrate the acquisitions, kind of when do you expect to see the positive effect of those acquisitions?

And then just lastly, if you could give us your CapEx budget for 2012, that would be helpful. Thank you.

In the case of Tampico, which is the one that we started -- with the process earlier, strangely enough, it's the one that is going to take a little bit more to fully integrate, not because of the distance, but because of some of the integration on systems that were very different from what we have.

In there, we are still (inaudible) from -- I don't know how the technicians call that, but we are (inaudible) separate processors in terms of systems and the administrative expenses related to the minus in some other accounting. And that will probably take us two more months to finalize. And then we'll especially start saving on that front.

So, the commercial process is fully integrated, the logistic process is fully integrated, the -- all the production capacity has been decided how we're going to do it and allocate it to the different plans. So I think that in that (inaudible) we are advancing very fast. And again, the OpEx line in Tampico is the one that we are having a little bit more problem because of with difference in systems that we have.

But I say that two more months that will take probably five full months since we started integration will help -- will imply for us to really cut those expenses down.

In the case of CIMSA, we started in December. But CIMSA was a company that was (inaudible) raising it to what we have and in the case of CIMSA we are advancing a little bit faster in the OpEx front.

We are pretty much advancing in the integration of logistics and production, but we are still probably a month away from that full integration of CIMSA, no? So I'll say that during the full year 2012, I'll expect somewhere around 65%, 70%, 75% of the synergies that we announced for our full year to be achieved during 2012, no? And just to give you the latest number, we are more or less expecting around MXN300 million in each of the operations around synergies. Once we integrate (inaudible), that we will expect to have -- to conclude the transaction at the end of the first quarter. We will start looking at (inaudible) another MXN200 million pesos for our top down, MXN800 million net synergies.

And then just the CapEx budget for this year, please.

The CapEx, it's -- we are expecting somewhere around $600 million of CapEx, Lorre. But bear in mind that we are starting plans and waiting for authorization for two additional production plans, one in Colombia and one in Brazil. Depending on the speed of the authorizations for all the work permits that you need from the different government agencies in two countries, that might increase by our -- I'd probably say around $100 million more if we start building those two plants during this year.

So if the speed of the permits going fast, we might end up closer to $700 million this year.

Karla Miranda, GBM.

Congratulations on your results. I had a question regarding the debt in the quarter. When you announced the acquisition of Tampico and CIMSA, you announced that both companies had a net debt of around MXN4.7 billion. I was wondering if the outflow of cash that we saw during the quarter was related with the payment of these debts?

It's totally related to that. They had that level of financing that was part of the, let's say acquisition price at the end of the day and we ended up immediately paying those financings as soon as we took control of the operations.

And just a follow-up. Previously you mentioned that the (inaudible) Pepsi system in Mexico was being reluctant to move prices. Besides that, have you seen any other changes out there regarding competition? Are they more aggressive in the market maybe?

Yes, Karla, as I say during the -- some of the comments, I think that -- again, I think that PepsiCo is -- they had a more aggressive, more as a temporary process for the startup of the new entity or the new company operating here in Mexico, I'll say especially in single serve presentations if I was to start in this huge price differential that we have in cans. Karla, basically we are selling at double the price than Pepsi.

But it was (inaudible) that show the other competitors that for years we're locked onto move prices. They started to move prices last year, especially (inaudible). There was for many years, as you remember, and it -- (inaudible) in this Company -- with these conference calls, saying that they have a 2 liter at MXN10, then last year they move the prices to MXN11 and we understand and we are seeing some price movements from Jarritos and Big Cola. Or Jarritos, for example, is targeting some areas starting to move to MXN12.

So it's an important increase from our competitors and because of that we -- I should (inaudible) of the comments I made earlier that this raw material pressure is affecting all the competitors and that's why we see that the pricing lever has been an important element in the past to compensate for that. And those prices are sticking because those competitors are also moving the prices, no?

Jose Yordan, Deutsche Bank.

One quick question and then (inaudible) Brazil. When you first started the Jugos del Valle business, you had said you were going to be reinvesting all the profits for a few years until the marketing spend was up to par, et cetera. And that at some point we were going to see some equity income. If you could update us as to when we could expect to see the first trickling of equity income from that unit.

And then the second question is just after the big minimum wage increase in Brazil, have you seen a marked impact in consumer behavior in Brazil in January? And how should we look at Brazil volume growth for 2012 in the context of this?

Let me tackle first the Jugos del Valle question. In general we share two different models in what it respects to Jugos del Valle in Mexico versus Brazil. Remember that Jugos del Valle had a -- when we acquired had a very important operation in Brazil.

The agreement that we have with the Mexican bottlers is that Jugos del Valle is basically (inaudible) -- the (inaudible) world basically a total (inaudible). So, the -- Jugos del Valle (inaudible) has a very small margin and basically the 50% of the profits that we share with the Coca-Cola Company, the Coca-Cola Company receives that through selling some of the formulas and key ingredients to the formulas that they sell to their [stock] position entity. And we get a price from Jugos del Valle and the margin that we get when we sell that to our clients is basically our 50%.

So there's not that much money left in Jugos del Valle and the only assessment is that to better serve the modern trade, Jugos del Valle is the one that sells to the modern trade for the whole country. And then because with the modern trade you have information of the numbers stored that you have by region and everything so it's very efficient in terms of serving that client -- those clients and also being able to allocate the 50% to profits for the bottlers -- to each of the bottlers according to the directions of those stores in between regions.

In Brazil the formula is totally different because there are important tax incentives in the area where the production happens. So, most of the profits in Brazil remain the joint venture and then the joint venture -- the phase -- dividends to the different participants. More as a -- (inaudible) the words of (inaudible) were without a reasonable profit there in the operation.

In both instances, it was a -- right now we continue to be at a level where we continue to invest heavily behind those (inaudible) and because that is in some cases is growing faster than others. Mexico has not grown very importantly, but we have continued to invest behind the branch. And I think that the important element for next year is that under the mew international accounting groups, it will help to register and will help to explain with much more detail this in the common, which we have to register the participation on these [accessory] companies as part of the operating income is not going to be anymore as on other revenue line below the operating line.

So in general, to try to answer your questions, both businesses, both Brazil and Mexico are profitable, but we continue to reinvest some of the money. In the case of Mexico, that margin is staying directly in Coca-Cola FEMSA because we have a margin with the stream. In the case of Brazil, we just saw participation on the equity of that joint venture.

In case of -- your second question with respect to Brazil. I think that -- I mean without the salary increase, important salary increase in Brazil, I think that is going to be positive for the consumer. So far in January we haven't seen that because the weather continues to be unusually wet. And especially January.

So I think that one thing has compensated the other, but I'm optimistic that as the consumer has a little more disposable income, we will see some volume growth that we haven't seen lately in Brazil. We'll start to see some volume growth in that operation.

But I guess in the case of January, not in the summer, but in the case of January this wetness was already in the base because last year had already been a wet January. So I guess I'm not sure how much of a case you can make about the weather playing a part in January given that it's in the base. But I hear you on the answer. No impact yet.

Well, I see what you're saying. I mean I look at some of the presentations from the operators, they are complaining about that. They show me pictures of some of [disasters] that have been caused in tidal waves and all of that. It is important -- honestly I don't remember how it was last year, but you know that in this industry sometimes the favorite excuse from the operators is the weather and I (inaudible) and take a look at what has been happening last year.

The charts that they have been showing to me in terms of rain and inches of rain and how that has been damaging some of the roads, it's important. I mean I was in Brazil in January and it was a mess. We were trying to look at some of the area where we would be building this plant. It was impossible to reach it because it was totally flooded, no? But honestly I don't remember exactly how that was last year.

But that's -- I think that my message, Jose, is I think that salary increases, although it's not affecting everyone, will help in the disposable income. And I'm positive that at some point in time that will start to trickle down in some of our (inaudible). So far, January has been very flattish, February is a little bit better, but it's still flattish compared to last year.

Robert Ford, Bank of America Merrill Lynch.

Hector, I had a question with respect to hedges you may have on -- in terms of high fructose corn syrup as well as any sugar positions for the coming year.

In general, I would say that in Mexico we have advanced importantly with high fructose and we basically have agreed that the estimate that we have to use for the full year we are basically 90% covered in the price at what I believe are good prices compared to last year.

We don't have, as you know, any hedges on sugar in Mexico. We do have some in Brazil, as -- but I'll say around 30% to 35% of the needs in Brazil, which have been entered into some hedges. And we have done some hedges with respect to the currency on some of the dollar denominated raw materials. In other words, we are not hedging this early the price of the raw materials because maybe there's not a market for that. But for simple for PET in Colombia, oil PET in Brazil, we have advanced in scheduling some of the exposure to the dollar in those markets.

And I'll say it probably -- (inaudible) -- it's probably around 20% to 25% of the needs from Brazil for -- from here to probably over September. So it's not the full year, but around 20% to 25% of the needs from here to August we have covered some of the exposure to foreign exchange for some of the raw materials.

And then I had a second question and that is with your experience in Panama with Estrella Azul, can you talk a little bit about maybe some of the synergies you're seeing with better distribution? And perhaps the products that you think lend themselves to more -- to better distribution opportunities, right? And things that may be higher margin in nature, but at the same time, show stable or can -- you can -- with this -- a minor modification to you distribution you can add them to the pipe.

Estrella Azul is a very important learning experience for us in this category. And I'm glad that we (inaudible) in a country like Panama with a leading brand of Estrella Azul. Again because it's more market and we are following exactly what we said in the past is we are learning from that. This is more market, it's not -- I will not call it an experiment, but it's a learning process for us, an important learning process.

In Estrella Azul, we have been running that operation to whether we (inaudible) as a Company and say that pretty much according to the model that we used for the acquisition, we are a little bit behind our budget, but the budget was a little bit more aggressive than the valuation model.

And the two areas where we are a little bit behind, one related to your question, we have been getting shelf stable products in the (inaudible), mainly uses on some of the (inaudible). Remember that Estrella Azul was -- Estrella Azul had in the past very few SKUs, with shelf stable meals. Most of their competitive base was with a meal that is unavailable, that are not shelf stable. And they also have non-shelf stable juices and nectars, which is an important element there.

So, as we develop some of the new formulas and new products, and moving to over shelf stable products, we have been getting those products in the right truck. And I'll say that we are having our own share of pains and problems, all the way from finding the right incentive to the pre-seller and the guy who does the distribution in convincing the storeowner of buying from the same guy Coca-Cola and these products. So we are having our learning curve there. I think that we're improving little by little, but again it has served us very well as a learning experience.

The other area where we have some delays in our plan had to do with all the supply chain. Getting the product from the farmers all the way to our production plant and carrying the efficiencies as we are used to seeing our CSV plans, it's been -- has been (inaudible) of a challenge. I think that again we are advancing little-by-little with very solid stakes, but those are the two areas where we find challenges or --

And I think that when ever you have a chance to visit Panama, it's a very nice experience, because you see how this business is being transformed from in the previous stage to what's 100% daily company with a lot of -- a note of their own problems and how we are trying to integrate with a very fast moving company as Coke FEMSA in terms of value chain and distribution efforts, no?

But I think that the example -- that the exercise is going in the right direction. Again, we are a little bit behind our budget, but ahead of our valuation plan. And the two areas which originally have to do with supply of the area and how we go through the growth and plan, and all the problems that you find in production. And then in the distribution front, how do you better serve your clients with the rep job taking these products and -- with our pre-sells.

This concludes the question and answer portion for today. I turn the call back to management for closing remarks.

Thank you for your interest in our Company. And obviously Jose and Orlando are available to answer any remaining questions that you may have. Thank you.

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