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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Good day, ladies and gentlemen and welcome to the Coca-Cola FEMSA Q3 earnings event conference call. My name is David and I'll be your coordinator for today.
This conference call 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 manage expectations that are based upon currently available data. Actual results are subject to future events and uncertainties, which could materially impact the company's actual performance.
The financial information for the nine months ended September 30,2003, both on a consolidated basis and by country includes nine months results of the original Coca- Cola FEMSA territories, Valley of Mexico, South East of Mexico and Buenos Aires. And only five months of our new territories acquired from Panamco. Our consolidated results for the third quarter of 2002 do not include new territories.
Coca-Cola FEMSA's financial information will not be comparable with previous quarters until the third quarter of 2004 and on a yearly basis until the end of 2005. I would like to now turn the presentation over to your host for today's call Mr. Hector Trevino, Chief Financial Officer, Coca-Cola FEMSA. Please proceed sir.
HECTOR TREVINO, CFO, COCA-COLA FEMSA: Good morning and welcome to Coca-Cola FEMSA's conference call to discuss our third quarter 2003 results. We continue making significant progress with the integration of our operations by streamlining manufacturing and distribution facilities. We are starting to achieve higher productivity levels for employee (inaudible) operations. This effort is helping us reach higher quantum's of scale, data utilization and will improve six cost absorption over time.
Currently we are operating with 34 plants all over Latin America compared to the 52 that we had in early May of this year. Strengthening our manufacturing network will provide us with flexibility to invest in the market place to develop the capability to compete more effectively in our territories.
These market initiatives include introducing returnable presentations to strengthen the brand equity of the Coca-Cola company brands, rationalizing in some markets and increasing in orders the portfolio brands, improving and increasing our cooler presence and reconfiguring our distribution network in order to become more efficient, by adapting our pre sales system practices to our new territories. We believe that the integration process is progressing better than planned.
In Mexico, excluding volumes generated for marginal activity with further (inaudible) last year. Total volumes grew 3.2 % during the third quarter of 2003, including a 4% CSB volume increase. This performance was mainly driven by 1 approximately a 1.5 volume growth of brand Coca-Cola. This strong performance of our carbonated soft drink label brands mainly driven by the recent introductions of Fresca Rosado and (inaudible) and the off scaling to a 2.5 liter, non-returnable BT packaging presentation of our core flavor brands.
Carbonated soft drink flavor volumes increased around 13% in our Mexican territories during the quarter. Volume growth was also driven by the strong performance of Stillwater CN in the Valley of Mexico, growing volumes by more than 60% during the quarter, which partially offset the volume decline of the jug water business in our new Mexican territories. We continue to implement (inaudible) management initiatives to increase the profitability of the jug water business.
Excluding volumes generated from promotional activity with (inaudible) last year, carbonated soft drink flavors generated more than 70% of incremental volumes during the quarter. Brand Coca- Cola represented more than 25% and the balance was reduced mainly by Stillwater brands here. The Valley of Mexico will present us slightly more than 70% of the incremental volumes generated by our Mexican Territories during the quarter.
The Carbonated soft drink industry in Mexico is certainly facing a more competitive landscape and the Mexican economy is facing a weak economic environment. However we believe that our 2.5 liter return over BT packaging presentation for brand Coca- Cola is proving to be a compelling value proposition for our clients and consumers.
This presentation has helped us strengthen our market presence in our regional Mexican territories and its (inaudible) market presence trends in all of our new Mexican territories. We are ready to introduce 2-1/2 liter returnable BT packaging presentation for brand Coca-Cola in the main series of our regional and new Mexican territories.
Recently our main competitor in Mexico initiated a price cutting strategy and family site presentation for Cola and individual site presentation for Cola's and flavors. We believe that our family side return over packaging presentation for brand Coca-Cola and non-returnable package for core flavors will continue providing a better value proposition to our clients and customers at current prices.
In the case of individual size, package and presentation, revenue management and packaging (inaudible) station by channel has proven to be the viable or sustainable strategy for Coca-Cola FEMSA. Throughout the years, Coca-Cola FEMSA developed a marketing model with the strong brand supported by state-of-the-art information system and high cooler progress, executed by a proven management team that developed a close relationship with their clients.
The second week of October, we adjusted the pricing architectural for our (inaudible) presentations for flavors from 4 pesos to 3 pesos and the eight-ounce, non-returnable glass presentation of brand Coca-Cola also from 4 pesos to 3 pesos. These two packaging presentations combined represent less that 3% of total volumes in Mexico. We already implemented a similar strategy in the fourth quarter of last year with successful results. When our main competitor in Mexico implemented a price discounting strategy for its twelve ounce non -returnable TT packing presentation.
During September, we also introduced Coca-Cola Vanilla on a 450 milliliter PT packaging presentation and an 8-ounce aluminum (inaudible) package to test new alternatives in the Cola (inaudible) recycling (ph). We believe that Coca-Cola FEMSA has the portfolio brands and packaging presentations that provides enough liquidity to compete wisely in the current environment. We will continue analyzing new packaging alternatives approach (ph) to complement our portfolio fronts.
In Mexico, in the execution front, several strategies have been implemented in our new territories during the quarter to stream line our process structure, including sub contracting our production delivery from our plant to our distribution facilities to FEMSA logistica (ph). Sub contracting cooler maintenance to Bando (ph) associate of FEMSA and taking over fleet truck maintenance in-house. These initiatives will help us manage more efficiently our process structure over time.
Now let me talk about our Latin central division. In terms of America, our focus on returnable packages in the family size and in the view of presentations is to strengthen the market prices of our core carbonated soft drink brands and we believe it will increase the profitability of our territories. As a consequence of these strategies, TSDS in Central America posted more than 10% volume growth during the quarter. Approximately 75% of this volume growth was generated by the brand Coca-Cola and the remainder by our TSDS flavor brands, Fanta, Fresca and (inaudible).
The introduction of family size returnable (inaudible) presentations in Guatemala and Paraguay are helping us to capture incremental volumes from all of our risk segments such as juices and (inaudible). In Guatemala specifically, brand Coca-Cola reached a leading position in the Cola segment for the first time. Our regional Stillwater brands in Central America increased volumes approximately 15%, driven by better execution and proper placement at the point of sale. The more the consumers go to our coolers to buy soft drinks, the more likely they will buy more of our water glass (ph).
In Colombia, it is fair to say that even though the micro economic environment is showing signs of a recovery for export related industries, disposable income remains depressed. We are focusing our efforts on designing the appropriate pricing architecture, reinforcing the presence of our existing returnable packages in family size and media (ph) presentations.
We intend to foster future consumption of soft drinks with our reintroduction campaign for our 2-liter returnable BP (ph) package and presentation of the CSC's (ph). Providing our customers with the a more affordable value proposition. It is important to highlight that during the quarter in Colombia, approximately 50% of the volume decline was driven by our revenue and asset management strategy aimed to increase the productivity of water glass (ph).
In Venezuela, we continue showing positive results, despite a weak economic environment, and a very depressed consumer purchasing capacity. Our main focus in Venezuela is to bring back our operations to a more sustainable path of profitability. We are evaluating different alternatives to make our operations more efficient to a full provision of the call by the chain (ph).
In the past in Venezuela, the lack of well-defined price and architecture, insufficient investment in returnable bottles, low channel segmentations and little marketing brand support, limit significantly the execution capabilities over the operations. We are focusing our strategy in fostering (inaudible) consumptions in returnable packaging presentations.
We are also adding more balls (ph) to the market in key packages, such as the one-liter returnable flat (ph) presentation for brand Coca-Cola, and the (inaudible) milliliter returnable glass presentation for our core branches. These strategies combined with basic channel marketing, higher pre-sale coverage and training in basic (inaudible) should help us to strengthen the brand equity of the Coca-Cola Company brands and improve the profitability to our business.
Now let me talk about our (inaudible) division. In Brazil, we have reversed negative profitability trends, achieving positive operating income every month into the third quarter of 2003, while increasing our carbonated soft drink share of revenue in this industry. On the packaging front, we launched the following initiatives. Upscaling from 2 liter to 2.25 liter BT (ph), to (inaudible) family size packaging presentations of our core flavor brands.
We also launched a 200 ml returnable glass packaging presentation for brand Coca-Cola, in the (inaudible) channel with a price of 50 cents (inaudible), marking the steel cap on the bottles. (Inaudible) to approximately $18 U.S. dollars (ph), targeting the low income side. We just initiated the roll out of our 1.5 liter and 1 liter non-returnable, BT packaging presentations for brand Coca-Cola, targeting new consumption locations.
We intend to continue developing new points of sale to initiate packing segmentation strategies by channel, and to diversify our packaging concentration from 2-liter non-returnable BT packages and aluminum cans. It is important to highlight that the volume decline during the quarter comes mainly from the 2-liter non-returnable BT aluminum can package and presentations, precisely the type of volume we are trying to diversify from the ones and the one handle in the bag by intermediaries. We will leave that packaging diversification combined with basic new (inaudible) channel segmentation, should bring profitable volume growth over time.
We also launched three new products during the quarter. (Inaudible) a flavor with orange, Coca-Cola lite with lemon and a new volume rotation brand called Symponea (ph), in orange, lemon-lime and (inaudible) flavors, only for small retailers. The new …