Q2 2003 COCA-COLA FEMSA S A DE C V Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen. And welcome to the Coca-Cola FEMSA second quarter results conference call. (CALLER INSTRUCTIONS). As a reminder, this call is been recorded for replay purposes. 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 managed 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. I would now like to turn the program over to your host for today's call, Mr. Hector Trevino, Chief Financial Officer of Coca-Cola FEMSA. Please go ahead.

HECTOR TREVINO GUTIERREZ, CFO, COCA-COLA FEMSA: Good morning. And welcome to Coca-Cola FEMSA's conference call to discuss our second quarter 2003 results. Before we start providing detailed information about our operations, I want to highlight that our second quarter financial information includes three months results of the original Coca-Cola FEMSA's territories and only two months of our 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. However, we're providing volumes growth information for the three months of the second quarter 2003 and all of our territories' volume growth three years, therefore, are comparable with previous periods. We will continue our commitment to remain at the forefront of corporate disclosure, a quality that is already distinguished us in our industry. Now let me talk about our operations. The past three months have been of tremendous excitement for all of us at the new Coca-Cola FEMSA. We're about to complete our first 100 days running our new territories and we're well ahead in the implementation of a huge transformation process. For example, we have closed four of the 52 plants we had on May 6, 2003 when we finalized the acquisition, including one plant in the Bajio region of Mexico, one in Panama and two in Venezuela. We have also closed 15 distribution centers in the Bajio and Gulf regions in Mexico, reducing them to 82 from 97. We are changing organizational and compensation structures to match them to the operating needs and to the targeted performance standards of Coca-Cola FEMSA.

We have deployed Glennis Patrick (ph) from Mexico and Argentina to our new territories in the areas of Finance, Human Resources, Distribution and Commercialization, reinforcing the existing talent and management expertise of our local operators in Central and South America. We're improving internal controls and confirming quality controls and procedures. Our goal is to replicate Coca-Cola FEMSA's internal control in all of our new territories 18 months from now. As of June of this year, the Valley of Mexico, the southeast of Mexico and Buenos Aires are using exactly the same SAP system platform. We're implementing this same platform to our New Mexican territories. We expect to have it ready during 2004. In July we initiated the rollout of SAP beverage industry solution in two of our distribution facilities in the Valley of Mexico. This initiative should provide room for internal efficiencies because it replaces the old Basis systems as the operating system gathering market information. This initiative will provide us with online marketing information which will enhance our capabilities to implement pricing strategies per SKU and customer. We have been able to refinance the majority of our standing bridge loans. Now 50 percent of our total debt is denominated in local currencies. I'm very pleased with the rapid pace of which the integration of our operation is progressing. In Mexico we're implementing an aggressive restructuring process and developing packaging, pricing and product initiatives that are strengthening our market presence and execution potential. In Mexico, excluding volume generated from promotional activity with powered products last year, volume grew by 4 percent during the quarter. This strong performance was mainly driven by the 3.8 volume growth generated by brand Coca-Cola in the Valley of Mexico, mainly driven by the (inaudible) of its 2.5-liter returnable packaging presentation.

The strong performance of our carbonated soft drink flavored brands in all of our Mexican territories, mainly driven by Lift Manzana Verde Fanta Multi-Flavors. Carbonated soft flavor volumes increased 13 percent in our Mexican territories during the quarter. And also by the strong performance of Ciel Stillwater growing volumes by more than 100 percent in the Valley of Mexico, mainly driven by the incremental volumes of the 5 liter non-returnable packaging presentation. Again, excluding volume generated from promotional activity with powered products last year, carbonated soft drinks flavors generated almost 55 percent of incremental growth during the quarter. Ciel sparkling water accounted for more than 30 percent and (inaudible) was produced by brand Coca-Cola. The Valley of Mexico represented 77 percent of the incremental volumes generated by our Mexican territories during the quarter. The 2.5-liter returnable presentation for brand Coca-Cola is offering a compelling value proposition for consumers, expanding the carbonated soft drink market and reinforcing the brand equity of Coca-Cola. We already initiated the rollout of this presentation in the city of Puebla at 12 pesos with very good results. And we have also started the rollout to this presentations in selected cities in the rest of our territories. Now our new Mexican territories, the Gulf and Bajio regions, we're implementing several pricing and packaging initiatives for distribution channel that should help increase the profitability our portfolio approach and pave the way for the introduction of new SKUs. For example, in the Gulf region we initiated (inaudible) pricing process focusing on increasing prices for the 2-liter returnable presentation for brand Coca-Cola from 10 pesos to 11 or 12 pesos based on economic areas. We anticipate a strong contribution to volume growth from brand Coca-Cola during the rest of the year all over our Mexican territories.

We are also increasing the profitability of our jug water business segmenting our customer base by territories, pricing at a premium jug water delivery versus mom-and-pops. This execution is helping us to increase the pricing range of our Stillwater jugs from 13 to 16 pesos to a pricing range of 17 to 20 pesos. Water volumes remain almost flat in our new Mexican territories, however, they are becoming more profitable due to this higher price range. In the city of Puebla, we have also initiated the rollout of the 5 liter non-returnable presentation for Stillwater brand Ciel. We increased the production capacity of this presentation to better serve the incremental demand in the Valley of Mexico and eventually our new territories. Our Mexican operations reached of 25.6 percent operating income margin during the second quarter, mainly driven by incremental (inaudible) volumes, lower distribution, fixed cost achieved by the closing of the distribution facilities, and initial reduction of headcount overlap to the value chain, and lower corporate expenses derived by the closing of the former Panamco corporate offices in Mexico City and (inaudible). In our Latin Center division that comprises the territory of Guatemala and Nicaragua, Costa Rica, Panama, Columbia and Venezuela, we are developing a strong divisional office in charge of putting Coca-Cola franchise business model in place. We are in the process of implementing internal controls, standardizing system platforms and replicating quality control and maintenance models. Productivity increases and better operating practices need to be in place while manufacturing and (inaudible) assets are being restructured. Once these capabilities are in place we will concentrate on implementing initiatives directed to increase soft drink per capita consumption.

In Central America we will strengthen the market presence of the Coca-Cola Company brands, introducing new packaging presentations and implementing revenue management initiatives to capture more effectively different consumption locations, making soft drink products more attractive for our consumers. We are reorganizing the way we go to market by redesigning pre-sell practices and delivery routes in order to increase the effectiveness and the efficiency of our execution efforts. These initiatives are paving the way for our reorganization of distribution facilities to increase warehouse productivity. Developing the right return on our packaging strategy will strengthen the market presence of our brands in Central America. For example, we launched a 2-liter returnable presentation for brand Coca-Cola in Nicaragua using the packaging presentations that were phased out from the Valley of Mexico. This initiative is an example of the coordinated efforts that our Company can implement, extracting more value from existing assets, developing different strategies simultaneously in several market countries. In Columbia, even though the manufacturing sector of the economy shows signs of recovery, the …