Q2 2004 COCA-COLA FEMSA S A DE C V Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen. Welcome to Coca-Cola FEMSA's second quarter 2004 earnings conference call. My name is Alisa and I will be your operator. [OPERATOR INSTRUCTIONS]

This 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 management's 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.

Financial information for the second quarter and six months ended June 30, 2004, on a consolidated basis and by country include three-month and six-month results of the original Coca-Cola FEMSA's territories, Valley of Mexico, south-east of Mexico and Buenos Aires, Argentina, and all of our new territories acquired from Panamco. Our consolidated results for the second quarter of 2003 include 3 months of our original territories and 2 months of our new territories acquired from Panamco on a quarterly basis. 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.

As a reminder, ladies and gentlemen, this conference call is being recorded. I would now like to introduce your host for today's call, Mr. Hector Trevino, Chief Financial Officer for Coca-Cola FEMSA. Please go ahead, sir.

HECTOR TREVINO, CFO, COCA-COLA FEMSA: Good morning, everyone. Thank you for joining us today. After speaking with investors throughout the year, I have noticed an increasing interest in our Mexican operations. For this reason, today I'm pleased to be joined by John Santa Maria, Chief Operating Officer of our Mexican operations.

Each of us will make a few remarks of our Company's performance during the quarter. However, we plan to use most of the time for questions and answers. I will provide you with a brief summary of our performance in our Latin Central American subdivisions. John will follow with his remarks about Mexico. And then I will close with a financial overview.

In Central America, we post incremental carbonated soft drink volumes of approximately 2%, despite the price increases implemented in Guatemala and Costa Rica during the quarter. Volumes of brand Coca-Cola increased approximately 2.5%. Our core Coca-Cola brand still represents 70% of total volumes sold in the region.

For the first time since we took over consolidated Guatemalan operations, we surpassed our main competitor in market share volumes in both CSDs colas and flavors. Our price increases were eventually followed by the competition. Our 2L returnable PET 600ml and one way PET presentations contributed significantly to these results. Guatemala was the driver of volume growth in the region, and Costa Rica and Panama led in the way in terms of profitability.

In Costa Rica, we launched Tai, the value protection brand we successfully launched in Argentina to provide a more affordable product to direct clients and core customer segments.

In Colombia, recent management changes and our strong focus on brand Coca-Cola are generating positive results. Volumes of brand Coca-Cola increased 3.5% during the quarter, with Coca-Cola Vanilla contributing more than 25% of the Cola segment's incremental volumes. Brand Coca-Cola's volume growth more than offset the volume decline in flavored carbonated soft drinks.

In May, we implemented an across-the-board price increase of 14%, which was eventually followed by the competition. Despite this price increase, volumes of brand Coca-Cola, as I said, increased driven by revenue and packaging management strategies for each channel and geographic region, brand innovation, with the launch of Coca-Cola Vanilla, tactical

investments in media coverage to revitalize the Coca-Cola brand among young consumers, incremental point-of-sale brand coverage and a strong focus on multi-serving package availability to foster future carbonated soft drink consumption.

During the quarter, we also launched a 1.25L returnable presentation of Quatro, our grapefruit-flavored carbonated soft drink brand. We continue evaluating several package and product strategies with the Coca-Cola Company to foster growth of flavored carbonated soft drink brands.

Our implementation of revenue management strategies, aimed at increasing the profitability of the Water business, caused our Water sales volumes to decline 17%. This quarter, Bottled Water volumes represented 14.2% of total sales volume, down from 17% in the same period a year ago.

We feel confident that the strategies that we have implemented over the last 14 months will help us to improve our profitability in a more sustainable way going forward.

In Venezuela, volumes increased 7.4%, despite a 14% weighted average price increase implemented at the end of the previous quarter. During the quarter, incremental volume growth was led by an improved value proposition of CSDs, flavored, multi-serving presentations, such as the 1.5L and 2.25L non-returnable PET packages [indiscernible] and Grapette respectively. These packages help us to implement better pricing architecture and packaging segmentation per channel, driving flavored carbonated soft drinks to account for 70% of incremental volumes. Our Juice-based, non-carbonated orange flavored brand, Sunfield, accounted for the majority of the remaining growth.

The introduction of Coca-Cola Vanilla and the incremental growth of Coca-Cola Light partially offset the volume decline of brand Coca-Cola, leaving the segment almost flat versus last year.

Now, I will talk about our [Brazilian] division. For the first time since the Panamco acquisition, our Brazilian operations are posting incremental CSD volume growth, mainly driven by brand Coca-Cola and its line extensions. We posted 9.7% growth in colas during the quarter.

Volume growth from brand Coca-Cola offset the volume decline in flavored carbonated soft drinks. The majority of the volume growth comes from the multi-serving presentations in 2.25L, 2.5L and 3L non-returnable presentations. These presentations have taken share from our 2L non-returnable presentation, which represented 52% of our total volume for the quarter, compared with 59% a year ago.

Despite generating a [indiscernible] incremental volumes from larger presentations, our average price per unit case in Brazil is improving because of our channel and product shift. We increased the percentage of total volumes sold to small retailers from 45% a year to more than 50% today.

In [indiscernible], average price per unit case is higher for small retailers than supermarkets. At the same time, we are selling more volume of brand Coca-Cola and its line extensions, and less of our value protection brands, which are sold at lower prices and are less profitable for us.

The new volume growth has helped us to increase our share of industry CSDs to bring sales 300bp year-over-year. Market share gains in the cola category more than offset market share declines in flavored carbonated soft drinks. We continue concentrating our efforts on brand Coca-Cola and we are working closely with the Coca-Cola Company with the value of our portfolio of flavored CSD brands.

Our solution for turning around our Brazilian business, facing decreased consumption, has been supported by 1) taking more control of the execution functions, especially pre-sale, 2) developing a packing diversification strategy by channel, especially for brand Coca-Cola, and 3) improving our relationship with the rest of the Coca-Cola system to reduce industry trans-shipments, with the support of the Coca-Cola Company.

Our Argentine operations continue [indiscernible] posting strong volume and sales growth. Despite the different seasonality in South America's winter months, Argentina posted the highest operating income margin outside of Mexico. Recovering from Central Argentina, combined with price increases and a well-segmented strategic portfolio of brands and packages, foster volume and sales growth in every carbonated soft drink category.

During the quarter, 55% of incremental volumes were generated by our core Coca-Cola, Fanta and Sprite brands, with returnable presentations. 32% was generated by our Tai protection brand, and balanced mainly by our premium Coca-Cola Light and Sprite CO brands.

It is important to note that our Argentine operations are posting higher average prices per unit case, despite the higher volumes sold in lower-priced returnable presentations. This is a consequence of our well-implemented revenue management strategy by channel.

Now, I will ask John to comment on our Mexican operations.

JOHN SANTA MARIA, COO MEXICAN OPERATIONS, COCA-COLA FEMSA: Thank you, Hector. And hello to everyone. As you know, in Mexico, we faced tough year-over-year volume comparisons for the quarter, particularly in the Valley of Mexico, where a year ago we experienced record-levels of heat and launched our dual cola upsizing strategy from 2L to 2.5L presentations, both in one way PET and rough PET.

In comparison this year, we faced extreme cold weather and higher-than-normal rainfall, resulting in a very disappointing May. Total volumes decreased 6% during the quarter, mainly driven by jugged bottled water volume declines. Our carbonated soft drink volumes fell 1.8% for the quarter, as colas declined 3.6%, which was partially offset by a 4.2% increase in our flavored business. The vast majority of this decline took place in the Valley of Mexico, and the decline was evenly split between CSDs and Water.

Year-to-date, our total volume is 3.3% down, due to significant reductions in our jug water volumes, which represent more than 80% of the decline. In CSDs year-to-date, our volumes are slightly ahead of last year. Year-to-date, our jug Water volumes have declined more than 20%, mainly driven by tough weather conditions, a rapidly-changing competitive environment, given the expansion of jug Water resellers in the marketplace and the implementation of our price increase strategy intended to improve the profitability of our bottled Water business.

The second point I'd like to talk to you about is about price. As you have seen, our average price per unit case on a …