Mexico: FEMSA revenues increased by 13% in 2Q 2006

Fomento Económico Mexicano, S.A. de C.V. (“FEMSA”) announced July 28 its operational and financial results for the second quarter and first half of 2006. 2Q 2006 consolidated total revenues increased 13%, reaching Ps. 31.869 billion. Income from operations increased 9%, reaching Ps. 4.846 billion. All operating units contributed to this growth. Net majority income increased 22%, reaching Ps. 1.820 billion.

“A robust consumer environment continued through the second quarter in our main markets, particularly Mexico, and we capitalized on it as our beer operations delivered compelling volume growth with strong pricing. We continued to open Oxxo stores at a rapid pace, surpassing 700 net new stores opened in the past twelve months, and Coca-Cola FEMSA delivered solid growth in the face of tough year-on-year comparisons. Specific events such as the FIFA World Cup and the run-up to Mexican elections helped spur demand for all our businesses. The FEMSA team continues to execute on our strategy, and we are well on our way to achieving another banner year for our company,” commented José Antonio Fernández, Chairman and CEO of FEMSA.

FEMSA Consolidated

Total revenues increased 13.2% to Ps. 31.869 billion in 2Q06. This increase was driven by revenue growth in every one of our business units, with 23.0% total revenue growth at the Oxxo retail chain, 10.2% at FEMSA Cerveza, and 3.9% at Coca-Cola FEMSA.

For the first half of 2006, consolidated total revenues increased 14.1% to Ps. 59.543 billion. Gross profit increased 11.8% to Ps. 14.960 billion in 2Q06, resulting in a 60 basis point decrease in gross margin, reaching 46.9% of total revenues. The gross margin improvement of 180 basis points at FEMSA Cerveza was not enough to compensate for the gross margin contraction of 120 basis points at Coca-Cola FEMSA, the inclusion of lower margin Kaiser operations, and the greater contribution of lower margin Oxxo retail operations in FEMSA’s consolidated results.

For the first half of 2006, gross profit increased 13.5% to Ps. 27.614 billion. The gross margin decreased 20 basis points from the same period of 2005 to 46.4% of total revenues primarily due to the greater contribution of the Oxxo retail operations in FEMSA’s consolidated results and the inclusion of lower margin Kaiser operations.

Income from operations increased 9.1% to Ps. 4.846 billion in 2Q06, resulting in a 60 basis point contraction in the operating margin, reaching 15.2% in the quarter. The decrease in operating margin was primarily attributable to the increased contribution of the Oxxo retail chain, the inclusion of Kaiser in our consolidated results, and a 60 basis point decrease in Coca-Cola FEMSA’s operating margin. Partially offsetting this decrease was a 170 basis point margin improvement at FEMSA Cerveza.

For the first half of 2006, income from operations increased 11.1% to Ps. 8.129 billion. The consolidated operating margin decreased 30 basis points from 2005 levels, reaching 13.7% of total revenues.

Net income decreased 1.4% to Ps. 2.219 billion in 2Q06. In spite of strong growth in income from operations, a decrease in net interest expense and a reduction in the effective tax rate, these factors did not fully offset a lower monetary gain due to the inflationary impact on our reduced net liabilities, and a foreign exchange loss due to the sequential devaluation of the Mexican peso as applied to our US dollar debt. The effective tax rate for the quarter was 33.0%.

For the first half of 2006, net income increased 13.6% to Ps. 3.878 billion due to strong growth in income from operations combined with a decrease in net interest expense and a reduction in the effective tax rate.

Net majority income per FEMSA Unit was Ps. 1.526 in 2Q06 (FEMSA Units consist of FEMSA BD Units and FEMSA B Units. Each FEMSA BD Unit is comprised of one Series B Share, two Series D-B Shares and two Series D-L Shares. Each FEMSA B Unit is comprised of five Series B Shares. The number of FEMSA Units outstanding as of June 30, 2006 was 1,192,742,090 equivalent to the total number of FEMSA Shares outstanding as of the same date, divided by 5). Net majority income per FEMSA ADS, using an exchange rate of Ps. 11.3973 per dollar, was US$ 1.339 in the quarter. Capital expenditures increased 34.3% to Ps. 2.040 billion in 2Q06, reflecting increased investment in all three main business units in line with our budget.

As of June 30, 2006, FEMSA recorded a cash balance of Ps. 8.680 billion (US$ 762 million), short-term debt of Ps. 9.004 billion (US$ 790 million) and long-term debt of Ps. 27.843 billion (US$ 2.443 billion), for a net debt balance of Ps. 28.167 billion (US$2.471 billion).

Beer – FEMSA Cerveza

Domestic sales volume in Mexico increased 7.6% to 7.022 million hectoliters in 2Q06, reflecting a strong consumer environment and successful marketing and commercial strategies put in place for our Tecate Light, Sol, and Indio brands, as well as favorable seasonality due to the timing of the Easter holiday and a positive effect from the FIFA World Cup.

For the first half of 2006, domestic sales volume increased 5.8% to 12.536 million hectoliters.

Export sales volume decreased 0.5% to 0.761 million hectoliters in 2Q06, as inventory built up in the U.S. market from the first quarter worked its way through the channel in 2Q. Year to date export sales volume increased 15.4% to 1.406 million hectoliters, well on track to achieve our export sales volume objectives for 2006. Together with Heineken USA, we continue to increase coverage and marketing for our brands in the U.S.

Total revenues increased 10.2% to Ps. 8.384 billion in 2Q06, primarily resulting from a 10.7% increase in beer sales. Both total sales volume and domestic price per hectoliter positively contributed to beer sales growth, increasing 6.7% and 4.8%, respectively. The full impact of the January domestic price increase combined with a stable pricing environment and an increase in our direct distribution are reflected in the increased domestic unit price. Conversely, the export price per hectoliter decreased 4.2% in 2Q06 largely due to the strengthening of the peso in real terms, as well as a geographic and mix effect due to a lower comparison base in our West Coast volumes.

For the first half of 2006, total revenues increased 10.3% to Ps. 14.858 billion driven by a 10.3% increase in beer sales. Export beer sales volume represented 10.1% of total beer sales volume, up from 9.3% in the comparable period of last year.

Cost of sales increased 5.5% to Ps. 3.205 billion in 2Q06. This increase was below the increase in total revenues as a result of improved fixed cost absorption and productivity improvements, which more than compensated for the continued price increases of certain important raw materials such as aluminum and energy. Gross profit increased 13.4% to Ps. 5.179 billion in 2Q06, achieving 180 basis points of gross margin expansion and reaching a gross margin of 61.8%.

For the first half of 2006, cost of sales increased 5.7% to Ps. 5.811 billion. Gross margin grew by 170 basis points, reaching 60.9% of total revenues.

Income from operations increased 18.8% to Ps. 1.963 billion in 2Q06. This increase was driven by solid revenue growth and a lower cost of sales combined with stable operating expenses as a percentage of total revenues. Operating expenses increased 10.3% to Ps. 3.216 billion reaching 38.4% of total revenues in 2Q06. The main reasons for this increase were the stepped up marketing for our brands, enhancements to our operating structure, and costs related to our continuing efforts to transfer third-party domestic volume to our direct distribution platform. We achieved 170 basis points of operating margin expansion during the quarter, reaching 23.4% of total revenues.

For the first half of 2006, income from operations increased 18.6% to Ps. 2.935 billion, reaching 19.8% of total revenues.

Kaiser

On January 13, 2006, we acquired a controlling stake in Cervejarias Kaiser in Brazil. The information in this press release is for the second quarter and first half of 2006 of Kaiser under FEMSA Cerveza.

In 2Q06, Kaiser total revenues reached Ps. 944 million on sales volume of 1.854 million hectoliters. As we approached winter in Brazil, 2Q beer volumes were lower sequentially and therefore fixed cost absorption was lower during the period. Cost of sales reached Ps. 590 million, resulting in a gross margin of 37.5% of total revenues. Operating expenses represented 40.5% of total revenues at Ps. 382 million, with administrative expenses of Ps. 108 million and selling expenses of Ps. 274 million. The quarter showed an operating loss of Ps. 28 million in 2Q06.

As stated previously, we are focused on executing commercial strategies aimed at stabilizing the business, while we continue the process of analyzing and shaping what is to be the optimal brand and presentation portfolio going forward. Our turnaround plan is on track for 2006.

Oxxo Stores – FEMSA Comercio

Total revenues increased 23.0% to Ps. 8.933 billion in 2Q06. The primary reason for the increase was the opening of 152 net new Oxxo stores in the quarter, and a total of 706 net new Oxxo stores since 2Q05 for a total of 4,366 Oxxos nationwide. For the first half of 2006, total revenues increased 20.9% to Ps. 16.441 billion.

Same-store sales increased an average of 9.8% in 2Q06, driven by increases of 6.3% in store traffic and 3.3% in average ticket. These increases reflect stronger promotional activity and category management practices that are enabling Oxxo to drive more customers into the store, while realizing a slightly higher ticket per transaction.

For the first half of 2006, Oxxo same store sales increased an average of 8.6%, driven by increases of 6.4% in store traffic and 2.2% in average ticket.

Cost of sales increased 22.5% to Ps. 6.577 billion in 2Q06, resulting in a 30 basis point improvement in gross margin, reaching 26.4% of total revenues. This improvement resulted from better purchasing terms and coordinated efforts with our suppliers to provide the right promotions and the right products for consumers.

Income from operations increased 25.1% to Ps. 384 million. We continue to invest in Oxxo’s infrastructure in order to build a robust system that accommodates and leverages our rapid store growth. We are developing much stronger supply management and information technology capabilities, cognizant that these efforts put pressure on our margins in the short term. Even so, operating margin expanded by 10 basis points to 4.3% of total revenues in 2Q06 as the improved gross margin was partially offset by an increase in operating expenses. In addition to our investments in infrastructure, the growth in operating expenses during the quarter was driven by higher corporate management fees and higher energy tariffs in unseasonably warm weather, particularly in Northern Mexico.

For the first half of 2006, income from operations increased 17.2% to Ps. 566 million, resulting in an operating margin of 3.4%, a 20 basis point contraction from the prior year. This decline was driven by higher expenses related to the development of direct distribution capabilities and costs related to Oxxo’s robust store growth. Examples of these are increases in performance-based compensation as well as new personnel as we opened three new regional offices.

Shares of Femsa closed up 1.11 percent on Friday at 95.40 pesos. Its American Depositary Receipts climbed 1.7 percent to US$87.90. (US$1 = 11.307 pesos at end June)

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