Coca-Cola Femsa SAB de CV (KOF) 2012 Q1 法說會逐字稿

Good morning everyone, and welcome to the Coca-Cola FEMSA first quarter 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 as good faith estimates made by the Company. These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties which can materially impact the Company's actual performance.

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

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

As you may remember, on March 29 of this year, we released our 2011 financial information under International Financial Reporting Standards, or IFRS, to provide our investors and analysts with a comparable base ahead of reporting our 2012 results, which we will present under IFRS. Our team has already spent time with most of you discussing the major impacts of the adoption of IFRS. Accordingly, I will focus this conference call on discussing our results and operational trends.

In the face of a continued challenge cost environment and tough weather conditions, especially in our Brazilian and Columbian franchise territories, our operators delivered double-digit top and bottom line growth in both of our divisions. During the first quarter of 2012, we are integrating the results of Grupo Tampico and Grupo CIMSA in our Mexican operations. Their performance contributed positively to our Mexico and Central America division, and on our consolidated results.

In addition to the integration of these territories, the main drivers of our Company's performance continued to be the execution skills of our operators; our strategy of selective price increases implemented over the past several months; and our multi-category beverage portfolio, once again led by brand Coca-Cola; our [extensive] flavors sparkling beverage portfolio; and, our growing array of still beverages.

In the first quarter, our reported consolidated revenues reached more than MXN33 billion, up 30% from the first quarter of 2011. Organically, excluding the integration of newly merged territories in Mexico, our consolidated total revenues grew 22% for the quarter. This increase was driven by average price per unit case growth in every operation and volume growth mainly in Venezuela, Mexico, and Argentina.

Our consolidated sales volume grew 16%, including our newly merged territories in Mexico. Organically, our volumes grew 5%, mainly supported by the performance of brand Coca-Cola in Mexico, Argentina, Venezuela, and Central America, combined with the performance of our strong portfolio of flavored sparkling beverage brands such as Hit in Venezuela and Fanta in Brazil.

Additionally, our still beverage category volumes grew [13%]. This growth mainly resulted from our recently-launched [Fresh] brand orangeade in Venezuela; the performance of the Hi-C orangeade and the Cepita juice brand in Argentina; and, the strong brand equity of the Jugo del Valle line of business in Mexico and Brazil.

Our bottled water portfolio registered low, single-digit volume growth.

During the quarter, higher PET cost in Brazil and Venezuela, increased cost of high fructose in Mexico and Argentina, and higher sugar cost in Venezuela and Central America, combined with the [adverse] depreciation of our main operations local currency as applied to our US dollar-denominated raw material costs accounted for the majority of the pressure on our gross profit. Consequently, our consolidated gross margin declined 30 bps, to 45.6% in the first quarter.

Our consolidated operating income grew 13%, to MXN4.3 billion in the first quarter. Organic operating income growth excluding the integration of the newly merged territories in Mexico was 8%.

During the quarter, we continued to experience higher labor costs in Venezuela and Brazil and increased labor and freight costs in Argentina. We continue to invest in marketing to reinforce our execution and foster our returnable packaging base, and we've registered additional expenses related to the development of information systems and commercial capabilities in connection with the implementation of our commercial models.

For the quarter, our consolidated net controlling interest income grew close to 20%, to MXN2.6 billion.

Now, I will expand on the performance of our operations. In the first quarter, as reported, our Mexico and Central America division recorded close to 24% volume growth, selling more than 412 million unit cases of beverages. Organically, excluding the integration of the newly merged territories in Mexico, the division's volume grew 3%. As reported, our Mexican operations volume grew more than 26%, including 70 million unit cases contributed by our newly merged territories. Organically, our volume in Mexico grew 3%. This increase mainly resulted from 5% growth in brand Coca-Cola, driven by the performance of our single-serve and returnable multi-serve presentations, as well as a 3% growth of the still beverage category, supported by the Jugos del Valle line of products, which leveraged the success of our Valle Fruit orangeade brand.

In Central America, we saw 9% volume growth during the first quarter. This increase was driven mainly by brand Coca-Cola, which grew 11%, 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 at the point of sale supported a 4% increase in our average price per unit case in the division during the first quarter. As a result, our division's reported total revenues grew 30%, reaching MXN14.5 billion. Organically, excluding the integration of the newly merged territories, the division's total revenue grew approximately 11%.

With regard to our profitability, higher sweetener costs across the division, mainly driven by fructose in Mexico, combined with the average depreciation of the Mexican peso as applied to our US dollar-denominated raw material costs put pressure on our gross margin, which was 46.9% as compared to 47.9% in the first quarter of last year.

Our operating income increased 13%, to MXN1.9 billion. During the quarter, we continued to invest in our marketplace execution, as it's critical for our Company to reinforce our cooler covers, especially during the first quarter, in order to provide our consumers with our wide portfolio of beverages throughout the year. Additionally, we registered expenses related to the development of information systems and commercial capabilities in connection with this implementation of our commercial models.

Our Mexico and Central America division continued to deliver positive results for the quarter. Our strategy of selective price increases continues to build on the brand equity of our products, especially brand Coca-Cola, where we have been able to grow single-serve consumption, contributing to a healthier price mix.

Within the sparkling beverage category, we continue to benefit from the investment we have made in returnable presentations, which once again contributed significantly to our sales volume for the quarter.

In our still beverage portfolio, our [High Fruit] orangeade volume in Mexico continued to grow, reaffirming its brand equity among our consumers. Moreover, in Panama, we continued to incorporate Estrella Azul line of products in our red trucks.

With regard to our new territories in Mexico, we are well on track to meet our previously established integration plan, and we are currently incurring the costs and investments to capture the MXN800 million of net synergies we outlined for you at the end of 2011. This investment and expenses which we identified during the first stage of the integration progress include the launch of Sidral Mundet brand in our northeast and CIMSA territories and the costs related to restructuring the distribution and manufacturing network. We expect to close the merger with Grupo Fomento Queretano shortly, and begin incorporating its results during the second quarter.

We look forward to a more stable cost environment for the remainder of 2012. Sugar prices in Mexico have been coming down sequentially, and we are starting to benefit from our stake in Grupo Piasa, one of the largest and most efficient sugar [mills] in Mexico. And, we have locked in prices for most of our fructose consumption needs. Together, these factors will provide a more stable sweetener outlook for the rest of 2012.

Moreover, with regard to PET, we have seen a more moderate pricing environment which we believe will remain in place for the rest of the year. We are confident that our operators' abilities and discipline will continue to deliver positive results for our Company.

Now, let's talk about our South America division. Our South America division's total sales volume grew more than 6% in the first quarter, reaching more than 290 million unit cases. This increase was driven by volume growth in Venezuela, Argentina, and Columbia. In Argentina, we continue to see strong volume growth momentum. Every beverage category grew, underscoring a solid consumer environment.

Sparkling beverages grew 10%, driven by 11% volume growth of brand Coca-Cola and 5% growth in flavored sparkling beverages.

Still beverages continued to perform strongly, growing more than 40%, building on our launch of Hi-C orangeade during the first quarter of 2011 and continuing to generate volumes from the Cepita juice brand.

Aquarius [flavored] water contributed significantly to the 12% volume growth of our water portfolio.

In our Columbian franchise territory, volume increased 3%, despite tough weather conditions experienced during the first part of the quarter. The sparkling beverage category supported by 3% growth of brand Coca-Cola and the performance of Quatro and Sprite in the flavored sparkling beverages grew 4%. The still beverage category grew 1%, while our water portfolio remained flat as compared with the first quarter of last year.

In Venezuela, in addition to facing a low year-over-year comparison resulting from the strike during the first quarter of 2011, we continued to see a recovery in volume growth, as exemplified by an increase of more than 27% for the quarter. In the sparkling beverage category, our volume grew 23%, driven by our flavored sparkling beverage brands and 11% growth in brand Coca-Cola. Our still beverage volume more than tripled as a result of the launch of our Fresh orangeade which has been very well received among our consumers in that country.

Our operators will continue to evalue different portfolio alternatives for our consumers and reinforce our execution in the marketplace anticipating the long-term growth prospects of the Venezuelan market.

Our volumes in our Brazilian franchise territories remained flat as compared to 2011. We faced tough weather conditions in the first half of the quarter, but experienced a nice recovery in volumes in the second half, resulting from more favorable weather and our operators' execution at the point of sale. In the still beverage category, our volume grew 9%, driven by the Sucos del Valle line of business and Powerade. Our water portfolio volumes grew 6%, and our flavored sparkling beverage volume grew 6% as well, supported mainly by the Fanta brand.

In the first quarter of 2012, our South America division's reported total revenues grew more than 29%, to MXN19 billion, as a result of double-digit revenue growth in Venezuela and Argentina and Columbia and high-single digit revenue growth in Brazil. Excluding beer, which accounted for MXN981 million, our reported total revenues reached MXN18 billion.

Our strategy of selective price increases implemented over the past several months accounted for close to 80% of our incremental revenues.

Lower sweetener costs in Brazil and Columbia offset PET cost pressures in Brazil and Venezuela as well as the average devaluation of our main operations local currencies as applied to our US dollar-denominated raw material costs.

As a result, our gross margin expanded 30 bps, to 44.1% for the first quarter of 2012.

Our South America division's operating income grew 13%, to MXN2.4 billion. Operating expenses were affected by higher labor costs in Venezuela and Brazil, higher labor and freight costs in Argentina, and increased marketing investment across the divisions to continue reinforcing our point of sale execution.

Our South America division delivered solid top line results in the first quarter of 2012 despite bad weather conditions in Brazil and Columbia. Brand Coca-Cola remains an important driver of our incremental volume growth, complemented by our portfolio's strong local flavored sparkling beverage brands.

In our water category, we have advanced our commitment to sustainability by replicating our Mexican operation's eco-flex packaging alternative in Columbia and Brazil, engaging the environmentally friendly consumer with very good results.

In still beverage, continuous innovation is a hallmark of our Company, as we capture volume and value opportunities with our del Valle Fresh and Hi-C Orangeade in Venezuela and Argentina, respectively.

Furthermore, we continue improving our execution capabilities and reinforcing our availability of returnable packaging to complement our already wide portfolio of beverages.

As we face the rest of the year, we see international sugar prices coming down sequentially, benefitting our Brazilian and Columbian operations, among others. With regards to PET prices for our operations, we maintain a stable outlook for the remaining of the year.

Now, allow me to briefly walk you through our financial performance for the quarter. This quarter, our Company continued to deliver solid cash flow from a geographically balanced portfolio of territories, providing us with the continued financial flexibility to meet our debt maturities as exemplified by the Certificado Bursatile that we paid down in the amount of MXN3 billion during the quarter.

As of March 31, 2012, we had a cash balance of MXN11.4 billion, and our total debt was MXN18.3 billion. The strength of our balance sheet and our financial flexibility is evidenced by our net debt-to-EBITDA ratio of 0.3 times, and our EBITDA-to-net interest ratio of 19.2 times.

We continue to build on our financial flexibility. With this in mind, we continue to invest in the future of our Company, while increasing the cash we return to our shareholders in the form of dividends. Specifically, our shareholders have the payment of a dividend in the amount of MXN2.77 per share, to be paid as of May 30, 2012.

Consistent with the information we shared with you in February, our financial and operational relation teams have started to take a closer look at the Coca-Cola Company's Philippines franchise territory. We remain confident that the skills we have developed through the years in Latin America, the depth of our beverage offering, and our commitment to continuous innovation not only in packaging and point of sale execution, but also in commercial models and new lines of business, will allow us to pursue relevant growth opportunities for our Company and to continue delivering increased value for you, our shareholders.

Thank you as always for your continued trust and support. And, now I would like to open up the call for any questions that you may have.

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

Our first question comes from the line of Karla Miranda of GBM. Please proceed.

Hi. Good morning everyone, and thank you for the call. Hector, I was wondering if you could give us more color regarding the operating expenses in South America? It's been a while now since you've been pressured by higher labor costs in Venezuela and Brazil, and I wanted to have a little more sense of how long is this negative impact going to be present.

Good morning, Karla. In general, I would say that the pressure, the main pressure we have has to do with Venezuela and Argentina. In Brazil, I think that we have basically commented over the last few quarters that we are in the process of adjusting our SG&A to more, let me call it, reasonable levels and starting to benefit from top line growth. And, I think that in that front, in Brazil, I'm happy to say that we have been reducing our workforce in an appropriate manner, and we will, I hope that we'll start to see some of these savings in the coming quarters.

In the case of Argentina and Venezuela, we do have, and every year it's a little bit the same story, important pressures on salaries, because basically the political and macroeconomical environment on those countries. Let me refer to each of those.

In Argentina, even though we have inflations at the level of around, official inflation of around 8%, 9%, every year over the last two or three years, we have increased salaries in excess of 20%. That certainly has been putting pressure on some of the margins that we have in that country.

Having said that, we have been very successful in adapting the Argentine operation to improve efficiency. Basically, we have increased the number of cases that we are selling by each person in the territories by adapting and innovating on new technologies. We have a warehouse in Argentina which is the largest we have in the entire operation, that is basically or very close to 100% automatization. So, that has helped a lot on that front.

And, when you look at the results for Argentina, with some prices that we have been able to pass to the consumer and these efficiencies that I just described, the results are very good for Argentina, even though obviously a part of that price and efficiencies is taken or consumed by these salary increases. No?

The same is true for some freight expenses in Argentina. Argentina, after a year that was kind of soft in terms of growth last year, we were achieving very important growth levels this quarter. My concern, personal concern, is a little bit with the macroeconomic and political environment going forward, even though the announcements that have been made in the country. And, my concern is what indications that will have on our industry.

In the case of Venezuela, it's important to remind everyone that we had a strike during January of last year, when our operations were closed basically for a month, 26 days. And, as a result of that strike and to solve that strike, the industry went through a very important salary increases. So, when you analyze labor costs in Venezuela, you have the increases in excess of 35%, close to 40%, which are important numbers.

So, even though we have good numbers again, because last year we had a month that we were out of business, in one of the main warehouses. Volume wise, we have good numbers, and we have good numbers in terms of pricing. Part of that is again absorbed by these salary increases and, therefore, we have not been truly taking advantage of the important top line growth in Venezuela.

So, in summary, my area of concern in South America is Venezuela and Argentina because of what I just explained. I think that we have positive movements in Brazil, because of the efforts that we have been describing over the last two or three quarters that are taking place there. And, Columbia, I think that we have a positive environment.

Great. Thank you very much. That was really helpful.

And, our next question comes from the line of Alan Alanis of J.P. Morgan. Please proceed.

Thank you. Hi, Hector. Hi, everyone. My question has to do with earnings per share during the quarter. I mean, if I'm doing the numbers here right, basically, your earnings per share are growing around 10% to 11%, but this is largely driven by an FX, by a currency gain, Hector, that you're getting on your debt of around MXN200 million. If we isolate that FX gain, it seems that your earnings per share were pretty flat, maybe slightly, slightly down. But, my question would be, does this mean that the acquisitions that you've made in Mexico so far have not been accretive so far? And, if that is the case, then the next question obviously, and I think that you will get this question a lot, is regarding the SG&A in Mexico. This surge in SG&A in Mexico, how should --? What explains it, more specifically regarding marketing? And, how do you expect it, seeing going forward, Hector?

Good morning, Alan. In general, I would say that, we basically integrated Tampico in October of last year, and CIMSA started in December. So, as you can imagine, and we explained that in both of those cases, we are expecting net synergies of around MXN300 million each, for a total of MXN600 million. Queretaro will bring another MXN200 million of net synergies. But, as we explained during the announcement of the acquisition, we expect those synergies to be basically accomplished during an 18- to 24-month period.

So, right now, Alan, this first quarter is a tough quarter for the results of the Company, because basically we have most of the costs of the integration reflected during this quarter. Under the new international accounting rules that we are applying, we have to take all these expenses as they happen. And, that's basically what we have being reflected in our numbers.

So, with this, the message that I want to transmit is we are well in line, even I'll venture to say, to exceed the sum of the synergies that we announced. We are working very well with that. We have already reduced the workforce in Mexico, with not a single complaint, because in Coca-Cola FEMSA, we believe in treating all people with a lot of respect. So, you have not heard a single complaint from a union, and we have already reduced close to [500 million] people in the integration process, which is extremely fast for any integration process that you see around, and if you start digging around with other companies in the industry.

So, we are moving very fast on that, but we are [prospecting] all these expenses in our P&L.

So, in a way, Alan, although I'm not a big fan of hockey sticks, perhaps in this case, you do have that situation where you carry the burden of all the expenses for the integration and cutting people and closing facilities, et cetera, and then, you start reaping all the benefits of that integration, which I --. Well, the message that I want to transmit is that we are very well ahead of the curve in that, and we will start benefitting from those savings in the later part of the year.

With respect to the net income per share numbers, basically, that is a reflection of that. We increased the number of shares because of CIMSA and Tampico, and we do have an additional net income and revenue and everything that Tampico and CIMSA brought. But, again, all these expenses take us to basically to having a result that we are expecting to see improvements in the second quarter of the year.

Precisely because of that, we decided to open up the information, and I hope you noticed that, that we have now maybe used, kind of, organic growth excluding all of the M&A transactions, which we thought was going to be helpful for everyone to start on, to understand what are the trends of the original business.

So, if we exclude the acquisition, Alan, and you look at Mexico and Central America, you basically will find that we have three something (inaudible) growth. We have good pricing. We have a little bit better revenues. We do have an impact on, as we said, especially in Mexico, with high fructose and some of the sweetener costs. That impacted our numbers during the quarter basically for between MXN100 million and MXN120 million, just because of additional cost compared to last year on sweeteners and some other raw materials that were denominated in dollars.

And, we do have a little bit more of marketing that we have discussed also in the past with the integration of the Pepsi system into a single bottler in Mexico, and the new management that is in place. We're seeing a little bit more activity in the marketplace, and we together with the Coca-Cola Company decided to protect [to do with] a bit our market and market share by investing in coolers and returnable bottles and cases, which are again a little bit of the activation in the marketplace that is improving.

My big thing is not, the excess marketing is not that large of an amount. I'd say that is probably something around MXN30 million, but it is, when you normally use it, our marketing expenses, it's a little bit ahead of the 4%. Last year, we were probably around 3.7%, 3.8% for the full year.

So, we do have, I would say that when you look at Mexico and Central America, excluding the effect of the M&A activities, you have a top line that is growing. You have additional pressure on raw materials. You have some additional expenses related to marketing. I think that in Mexico and Central America, we have important SG&A control on those expenses.

We have a bit of expenses related to systems, to all the software that we have with regard with SAP. You have some licensing fees, and because of the migration to [MySAP] from the old R3 system that we had, there are some expenses that we are amortizing. So, those expenses happened probably 12 to 18 months ago.

But, in general, that's the general picture. No? I think that the important element here is that, as we have been moving towards new categories and new geographies, we have diluted a little bit our profitability when it's measured as a margins, operating margins or EBITDA margins, because these new categories and new geographies normally that those carry a little bit lower profitability than our Mexican operations.

And, the challenge for our management is to bring all these profitability on the new categories and new geographies to the level that we have in Mexico. And, if we can accomplish that, Alan, with the kind of top line growth that we have, I think it will be important growth for our bottom line in the future.

Yes. I agree. That's a very clear explanation and very comprehensive. Thank you so much, Hector.

Thank you.

And, our question comes from the line of Lore Serra of Morgan Stanley. Please proceed.

Good morning, and thanks for the call. And, thanks also for breaking out the data. That was very helpful. I wanted to ask a little bit about pricing in Mexico and in Brazil. If I look at Mexico and I look at excluding the M&A effects, well, Mexico and Central America, the revenue per case is up 7%, which is the highest I think I can remember it being. So, I wondered if you could just comment on that kind of price, in light of what you're talking about with Pepsi? And, in light of, you know, kind of the margin pressure you're seeing? It's kind of odd to see that much pricing when you're seeing that much margin pressure.

And, then, in the case of Brazil, I wonder if you could comment on how you see the affordability of your brands. You know, I was in Brazil recently and just, you know, top line is just, like, sticker shock in terms of how expensive a two-liter bottle of Coke is. And, I just wonder how you feel about pricing power in Brazil and whether you can roll out returnables quick enough to continue to have the kind of pricing flexibility in that market you want? Thanks.

Good morning, Lore. Yes, I think that, let me start with Mexico and Central America. We basically have increased the prices of most of our products, especially in these territories, in Mexico. It's again, we have discussed a little bit of this in some of the other conference calls. When you have such a large pressure for the whole industry on raw materials, then, I mean, that's the bad news. The good news is that most of your competitors are also receiving the same pressure, and some of them are moving.

We have commented that, for example, Jarritos moved from the MXN0.10 magic price two months ago, and if they stay, I don't remember, but it was probably five or six years with that price. And, not that we have a low inflation environment in Mexico, but it was very tough to compete when the prices were not [being moved], and especially when at some point in times, some periods of time, Pepsi Cola was pricing their products closer to Jarritos and to (inaudible).

So, we have increased prices as you said. In November, if I remember correctly, in November of last year, we increased most of the prices for all of our products in Mexico.

In Central America, we have had some pricing activity, except Guatemala. Jarritos have recently announced to the world of course that they are increasing prices and, at the end of the day, Lore, this is caused by all the pressure we have been receiving as an industry on PET and sugar.

So, it doesn't worry me a lot, because when you look at the pricing of each of the nine countries that we have, now Mexico, even though you might not believe this, Mexico is the lowest price per case that we have in the whole nine countries, because of the different macroeconomic environment and everything. It was not the case a few years ago, and I think that Mexico has some potential to continue to pricing activity.

In the case of Brazil, everything is so expensive that, on relative terms, I'm not concerned with the numbers. I'm sure that if you were there, the hotels are expensive. Salaries for our guys are expensive. And, it's a very expensive economy. So far, I think that from a competition point of view, I'm not concerned with the pricing structure that we have in Brazil. We have been successful with the returnable presentations that bring some affordability for our consumer, and those presentations have been growing importantly.

So, in general, I feel confident that, because of the cost pressure that we have in sugar and PET, that we have been able to pass along some of this pricing to the consumer. And, we are OK from a relative pricing to our competitors, as always, with prices that are in excess of what our competitors, but with price gaps that we can maintain because of the strength of our price.

OK. Thank you.

Thank you, Lore.

And, our next question comes from the line of Antonio Gonzalez of Credit Suisse. Please proceed.

Hello, everyone. Hello, Hector. Thanks for taking my question. I wanted to ask first a question on the difference that you are showing between EBITDA growth and EBIT growth. I think you're showing a very big difference both in Mexico and Central America, as well as in the South America division. And, I understand that last year you had some important investments in coolers that increased your depreciation and amortization expense and made operating income to grow less than EBITDA. But, I think that difference is widening significantly in South America. It's also showing up in Mexico. So, I wanted to know if you can give us some sense as to why are the depreciation and amortization expenses coming up so much in both markets? Is there anything else in addition to these cooler investments that you did over the last 12 months or so, that explains this?

Good morning, Antonio. Yes, certainly, the [cold air] equipment that we have been placing in the marketplace is one of the strategies, especially in Mexico, that I described in anticipation of the entrance of a single Pepsi Cola bottler in Mexico. And, that has obviously created some pressure on that, as part of the depreciation and amortization.

Obviously, adding Tampico and CIMSA also add, when you look at the absolute number that is being impacted, but if you look at the column where we are maintaining just the organic growth, that's basically the, I mean, that's isolating the M&A activity.

Another area for, that is impacting some of this depreciation and amortization is the investment we have been doing in bottles and cases. No? We are firm believers as you have seen in the past in the important role that the returnables play in the Latin American markets or in markets where you have to compete with, or to maintain important price gaps with the competitors. So, we have been investing in that presentation also.

There are some more issues that are more related to, for example, South America. For example, in Columbia, we are launching a 1.25-liter returnable presentation. So, you have to do all the investments in bottles and cases for that. That basically brings like, you know, a peak in capital that then you start amortizing.

The same is true for the new territories with Sidral Mundet, which is a presentation that sells very well in a very flashy profitary brand package that --. So, there are some [laser] trucks in the new territories in CIMSA and Tampico, because of Sidral Mundet.

But, I would say that in general it has to do with bottles and cases, with coolers. And, remember that also one year and one-half ago, we did a very important investment in production lines, that we finalized basically [restoring] all these lines, around between one year and one and one-half years ago. We bought those lines during the crisis at very attractive prices. But, we installed two production lines in Mexico, two new lines in Brazil. So, in every country, where we were close to running to capacity constraints, we did important investments in production lines.

But, that will explain basically what is the depreciation and amortization effect, Antonio.

Oh, I see. Thanks. And, if I may, just a quick follow-up on Argentina. Are you facing any problems in terms of import restrictions, and so forth? And, secondly, can you talk a little bit about the pricing environment, especially have you seen any difference between your pricing ability between the supermarkets and the traditional channel? And, do you think there's any important distortions taking place there?

Yes. As I said a few minutes ago, Argentina is going through in my opinion to a tough political and macroeconomic environment. We have been receiving some, if you would, quote and unquote, unofficial pressure on the use of foreign exchange. So, we think that --. And, so far, we have not had a problem of acquiring raw materials, et cetera, that are important. But, my concern is if the country continues to suffer from the availability of dollars, we might in the future face some restrictions on products, imported products.

So, if you look at some of the macroeconomic numbers that have been published, if I remember correctly, they have between $40 billion or $50 billion in reserves. But, last year, around $25 billion of reserves were reduced. So, basically, they have, like, two years at that rate of using dollars. I think that part of that had to do with investments leaving the country. And, that might well be the case in the future, Antonio, that we might face some restrictions on availability of FX to buy some other raw materials.

From the point of view of our business, the quarter, this first quarter, and the last quarter of 2011, they were very, very good in terms of profitability, because volumes were growing importantly, and we have had some price flexibility especially as you said in the traditional trade. In general, there is some non-official price control, if you will. It says that some of the most important and, let me use the word, popular presentations, or presentations that are like family size presentations, et cetera, we basically -- well, and when it's sold through the supermarkets, it is difficult to move the prices there, because of the different relations between the modern trade and pressures from the unions and the authorities. No?

So, there are some pricing opportunities in the single-serve presentations in the traditional trade, not so much on the family sizes in supermarkets.

Thank you so much, Hector.

And, our next question comes from the line of Gustavo Oliveira of UBS. Please proceed.

Good morning everyone, and I think good evening, Hector. We heard you were in the Philippines, hosting this call from there today. So, my question is essentially that if you could share with us some of your thoughts on the profit and what you're seeing on the ground from the Philippines?

Good morning, Gustavo. I basically thought that because of the strange hour that we are doing the conference that most of you will understand that I was traveling. And, as I mentioned the previous conference call, the process basically is that we had this 12-month exclusivity agreement with the Coca-Cola Company. And, I expressed last conference call that that had to do with the fact that this being the peak season in the Philippines, we were going to start our analysis and due diligence process in the month of May.

So, I basically arrived for the first time yesterday to the Philippines, and will stay here for a few more days. We have an important team of experts from Coca-Cola FEMSA in different fields, ranging from people doing financial analysis for the valuation process, to people doing a little bit more of the operational analysis to understand and really do a very thorough analysis of our, doing the right valuation process in here.

So, we are basically just starting, Gustavo. I visited the market today. I see a lot of opportunities. I think that the Philippine market is a market very similar to what we have seen in Latin America in what it has to do with the fragmentation of the retail market, the so-called sari-sari's, which are similar to the abarrotes in Mexico, the small mom-and-pop's. It's a very important area of business here. So, that fragmentation of the retail system, I think that we know very well how to handle.

There are issues with the portfolio of products. There are issues with the SKUs. And, most importantly, there are issues with respect to the route to market and how the bottler is handling all the sales effort and the delivery efforts to these sari-sari's.

So, I think that what I can say is that, so far, even though we have been here for, this is our second day, I'm enthusiastic about the fact that we see opportunities and, obviously, there will be many challenges, because it's a different culture, a different region, a very different time zone, as you can imagine. But, I think that we do have, in my opinion, we do have the skills to do a good job here.

The idea is that if everything works as I'm anticipating with this team, we'll probably need three or four weeks of analysis on this. And, it probably will take another, I don't know, six to eight weeks of negotiation with the Coca-Cola Company and, therefore, if everything works very well, I'll see something, a potential announcement for the third quarter in terms of agreeing or not to a transaction here in the Philippines. No?

OK. Thank you very much.

And, our next question comes from the line of Margaret Kalvar of Harding Loevner. Please proceed.

Yes. Good morning, and thanks for the call. I was just wondering, you know, you talk often about the strength of brand Coke amidst the other segments of volumes in your mix. Overall, and if you could break down between the Mexico, Central America, and South America, it would be even better, how much of your sparkling sales are brand Coke? And, what is your current breakdown overall on still and sparkling?

Yes. Good morning. I think that in general, let me give you some rough numbers and, obviously, as I'm not in my office, I don't have maybe the precise numbers, but we can just follow up with some of this more precise information. But, in general, around 80% of our volumes are carbonated drinks. And, I'll say around 20%, it's water and the juices and nectars. And, out of those 80% of carbonated drinks, in general, I'd say that, at it varies market by market, but a good approximation for Latin America is that around 80% is cola's. So, cola's plays a very, very important role in our operations in Latin America.

It's not the same market by market, and I was surprised here in the Philippines, for example, that cola's, it's I think that there is a lot of room for improvement of brand Coca-Cola in the Philippines, because there are other brands that are --. It's not as important as we have seen this in Latin America.

There are some markets, for example, in Columbia where we have [Top 10] domination on the cola market, with 90-plus market share, but where we have a lot of opportunities with flavors, because our competitor is very strong on flavors. And, they have a dominant position on that.

In other areas, like in Mexico, we have a strong position in all of those.

But, in general, I'd say Margaret that 80% of our volume is carbonated drinks, and around 80% of that is cola's. More or less, be cola's.

OK. And, that's, all the cola's is brand Coke?

It's all the cola's. But, brand Coke is the most important one. I mean, Coca-Cola Light and Coke Zero and Coke are important in our market. (multiple speakers) diet drinks.

OK. Thanks very much.

Thank you, Margaret.

There are no further questions. I would now like to turn the call back over to Mr. Hector Trevino for closing remarks.

Well, thank you for your interest in our Company. And, obviously, as always, Jose and his team will be available to answer any more questions with more detail and improving a little bit on some of this data that I just shared with you.

Thank you for your attention.

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