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

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

Q2 2008 Earnings Call

July 28 2008 11:00 am ET

Executives

Javier Astaburauaga - CFO

Juan Fonseca - IR

Genaro Borrego - Director of Corporate Affairs

Hector Trevino Gutierrez - CFO of Coca-Cola FEMSA

Analysts

Tufic Salem - Credit Suisse

Lauren Torres - HSBC

Robert Ford - Merrill Lynch

Alan Alanís - JPMorgan

Carlos Laboy - Credit Suisse

Lore Serra - Morgan Stanley

José Yordán - Deutsche Bank

Alex Robarts - Santander

Celso Sanchez - Citigroup

Presentation

Operator

Good morning, everyone and welcome to FEMSA's Second Quarter 2008 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 these should be considered 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 will now turn the conference over to Mr. Javier Astaburauaga, FEMSA's CFO.

Javier Astaburauaga

Thank you. Good morning, everyone. Welcome to FEMSA's Second Quarter 2008 Earnings Call. Joining with me today are Hector Trevino, Coca-Cola CFO, and Juan Fonseca, from FEMSA Investor Relations.

In an environment of sustained raw materials and inflationary pressures across our markets, during the second quarter, we were again able to grow our consolidated operating income, ahead of revenues and coming close to double-digits.

On a rolling 12 month basis, we have achieved operating leverage every single quarter, which highlights our team's commitment to grow on productivity gains, as well as the sustained benefits of our integrated business platform. All of our operations, soft drinks, beer, and OXXO stores contribute to our 7.7% topline growth, reaching 40.6 billion Pesos or $3.9 billion for the quarter.

In terms of the macroeconomic environment, even though we continued to see a resilient consumer demand, it is increasingly evident that overall growth expectations for the region, and particularly, for Mexico, are decreasing. The Central Bank has reduced its GDP forecast for the year by over a full percentage point, from 3.8 to 2.7%, while inflationary pressures continue to build and as a result interest rates continue to rise.

We will continue closely monitoring the economic evolution, as well as the different market dynamics, and we will keep adapting our strategies as needed going forward.

In terms of our results for the quarter, we should highlight that FEMSA Cerveza's positive pricing trends in the key Mexican markets, combined with contained administrative expenses, partially offset the continued pressure coming from grain prices and sustained marketing activity.

During the quarter, Coca-Cola FEMSA closed the acquisition of Remil, the new franchise territory in Brazil that was already consolidated in our June results, and continued capturing the benefits of integrating Jugos del Valle into its platform.

Meanwhile, OXXO opened 215 net new stores to reach 5,851 nationwide, picking up the pace of expansion and delivering strong bottom-line growth for the ninth consecutive quarter.

And altogether, FEMSA's consolidated operating income growth was 9.4%, with a slight margin expansion of 20 basis points, and net majority income increasing 12%.

I would like to remind you that beginning this year, according to [in accordance with] Mexican FRS, we have discontinued the use of inflation accounting. For comparison purposes, the figures for 2007 have been restated in Mexican pesos with purchasing power as of December 31st, 2007, and our results for 2008 are in current pesos.

Moving on to our business units in greater detail, FEMSA Cerveza delivered solid volume growth in the quarter, reflecting still resilient consumer demand trends, despite price increases implemented at the beginning of the year and to a lesser extent some unfavorable weather conditions experienced during June in Central Mexico.

Beer volume in Mexico increased 2.9%, lapping a 3.2% second quarter last year. In the US our exports grew 4.4%, lapping a very strong growth of 27% in the second quarter of 2007. Even as the overall economy in general, and the Beer import category in particular, continued to sputter. In fact, according to the various institutes, imports fell 3.1% during the first five months of 2008, so we are pleased with our performance in this key market.

In Brazil, our volume performance was back on track and we grew almost 13%, outpacing industry growth for the seventh consecutive quarter. Incremental volumes of our Sol brand contributed one third of our growth in the period. We continued to be in an investment phase in Brazil, allocating significant resources to the development of our brands. And we continue to be encouraged by the results achieved so far.

In terms of Mexico pricing, the price increase rolled out at the end of 2007 and through the first quarter of this year, together with incremental volumes from the state of Chiapas that were brought under our directive distribution early in the year, as well as some mix effects, resulted in almost 3% higher average price in real terms.

We must note that the second quarter figures reflect six months of the incremental pricing from Chiapas, so we can expect the effect from this additional volume to be less relevant during the third and fourth quarter.

In Brazil, revenue per hectoliter, in real terms, was stable in local currency and increased 2.3% in Mexican peso terms driven by depreciation of the Brazilian real against the Mexican peso.

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