Fomento Economico Mexicano S.A.B. de C.V. (FMX)

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Fomento Econmico Mexicano, S.A.B de C.V (FMX)

Q3 2007 Earnings Call

October 29, 2007, 12:00 PM ET


Javier Astaburuaga - CFO

Juan Fonseca - IR


Lauren Torres - HSBC

Tufic Salem - Credit Suisse

Reinaldo Santana - Deutsche Bank

Andrea Teixeira - J.P. Morgan

Loredana Serra - Morgan Stanley

Alexander Robarts - Santander

Robert Ford - Merrill Lynch

Sohel Amir - Lucite Research



Good morning everyone and welcome to FEMSA's Third Quarter 2007 Earnings Results Conference Call. As a reminder, today's conference is being recorded, and all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation.

During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance, and should be considered as good-faith estimates made by the company. These forward-looking statements reflect management's 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 now turn the conference over to Javier Astaburuaga, FEMSA's CFO. Please go ahead, Javier.

Javier Astaburuaga - Chief Financial Officer

Thank you. Hi good morning everyone. Welcome to FEMSA's third quarter 2007 earnings conference call. Joining me today are José Antonio [ph] and Juan Fonseca, both of whom you know well.

Our third quarter results once again show progress across our operations. But there were sensible differences among businesses and among markets. At Coco-cola FEMSA, our performance in the key Mexican market continued to improve, while most of other territories again delivered strong numbers. At Oxxo, same-store sales continued to recover after a slow start of the year and margins expanded significantly.

At FEMSA Cerveza, a promising start for the quarter in Mexico, quickly deteriorated as rainy weather again played a role in September, this time mainly in the Southeast of the country; and the competitive environment intensified as the level of promotional activity increased across several markets. On top of that, we continued to feel sustained pressure from higher raw material prices, mainly in soft commodities. And following our long-term strategy, we continue to invest in our brand building efforts in Mexico, Brazil and the U.S.

However, what said and done for the quarter, FEMSA consolidated achieved robust revenue and operating income growth above 7% in real terms, and majority net income increase up 10.4%.

Moving on to our business units; at FEMSA Cerveza, their margin growth in Mexico started strong during July and August, but slowed down significantly during September, delivering a 3.5% growth for the quarter. In Brazil, we managed to grow volumes by 6.7%, even as lapped the inventory build-up ahead of the relaunch of brand Kaiser in September of last year and brand Sol continued to perform according to plans.

In exports, volumes grew by just 2.3%, but wholesaler inventories depletions continued to run in the teens, on-track for full year double-digit volume growth, on the continued strength of Dos Equis, and Tecate.

Pricing in real terms in Mexico was flat year-on-year, are now at 1.6% sequentially. The three main reasons behind these numbers: one, the low inflation price increases implemented during the first half of the year; second, some favorable geographic and product mix effects; and third, the positive pricing effects of incremental domestic volume growth on their direct distribution during the second and third quarters through several small transactions across the country.

In Brazil, where we implemented a price increase late in the first quarter, revenue per hectoliter increased 1.7%, while in our exports revenues per hectoliter were 3% of the effect of inflation and a strong Peso offset a moderate increase of 0.7% in dollar terms.

Finally, revenues for packaging again fell during the quarter, reflecting the fact that we're no longer making any third-party sales of glass bottles, of Sol capacities being used to meet our own demand.

On the cost of sales front, we saw an increase of 6.4% resulting mainly from total volume growth of 4.1% and from higher prices for grains, which are now rich [ph] are up are up almost 30% year-over-year. However, the reported cost increase would have been in the high single-digits, were in not for the strong behavior of the Mexican Peso and the Brazilian Real. So pressure on our gross margins remained higher than we have anticipated.

Income from operations decreased 8.8%. Administrative expenses were again well contained during the quarter, following by 0.5 percentage point and selling expenses increased 7.9%, but still contribute with over a third of the increase, as we continued to invest in our brand portfolio. Yet we again managed to breakeven at the operating income level in Brazil for the quarter. It is important to note, that while our performance in Brazil is advancing according to plan, we are seeing a widespread increase in marketing activity by the Brazilian Brewer industry in general and therefore we are stepping up our own efforts accordingly.

Selling expenses ex-Brazil grew at the lowest rates in the past eight quarters, but still ahead of revenues. As we have mentioned in the past, the actual level of spending in our three main markets Mexico, Brazil and the U.S. is linked to our continuing investment in initiatives aimed at strengthening our long-term competitive position in Mexico and developing our brands in our three key markets.

All in, these results are better than the previous two quarters, but certainly weaker than our expectations for a marked recovery in the second half of the year. Softer Mexico volumes late in the quarter have prompted increased promotional activity, pressuring price across the board, a phenomena that we see continuing into the fourth quarter.

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