Question-and-Answer Session
Operator
Thank you sir. [Operator Instructions]. And your first question comes from the line of Robert Ford with Merrill Lynch. Please proceed.
Robert Ford - Merrill Lynch
Hey good day everybody. Héctor, congratulations on the quarter. I was curious with respect to Columbia, what percentage of the decline in cost of goods sold is coming from depreciation, and what makes up the balance of that decline?
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
Bob, let me take on that one, but I don't know exactly what is the percentage of depreciation. One as I mentioned the introduction in Columbia that is important is that some of the raw materials are pricing in Columbia [ph] and the Colombian peso is then same up like to certain extend to Brazilian real had been strengthening the reserve, we are trying versus revolver [ph], so we have benefited in this last quarters, during these last year in Colombia and Brazil because of this translational effect of raw materials. Let me go back with that number and check and maybe I also can come on and talk about --
Unidentified Analyst
I thought that will be great. And with respect to sweetener in Mexico, spot markets right now down over 30%. What do you anticipate would be your... your decline in sweetener costs in the fourth quarter in Mexico specifically, what you anticipate going into 2008?
Operator
And your next question comes from Lorre Serra with Morgan Stanley. Please proceed.
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
I got an answer to that question, sorry Rob. Sweetener cost in Mexico, one difference that we have with some of the rest of the bottlers is that in limited we have been using high fructose in some of our products. High fructose is still being used importantly, I'd say that's somewhere around 20% for our units and try to talk when you compare that sweetener this is the importance versus the levelness the price reflected last year, we are still at a higher level than last year. But it still is a very competitive level versus the [indiscernible] and refined sugar. So you have... so we have seen some reduction in the cost of cane sugar and we are using a bit more of that. We are still slightly a very good effect than we have last year of a very low price on high fructose. So in our case, Rob, we noticed that a significant reduction of volumes [ph] you have seen in some of that or you might be seeing in some of the Mexican bottlers because of again, their reliance on high fructose and the volatility that we are experiencing in import price. With respect to the cane sugar, we are seeing that reduction that we mentioned and we are clearly shifting as appropriate or as convenient to use a better mix of cane sugar or high fructose depending how those two sweeteners behave in the marketplace.
Operator
And your next question comes from the line of Lorre Serra. Please proceed ma'am.
Lorre Serra - Morgan Stanley
Good afternoon, Hector. Getting... say, in next couple of second, I wanted to understand this is the second quarter in a row where we have seen good revenue growth from Mexico, but the operating expenses have grown in line with revenue growth. And you mentioned in the last quarter conference call that you saw you'd get positive operating leverage. So, can you talk a little bit about why that didn't happen this quarter, and your outlook going forward? Thanks
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
Good afternoon. We have I think that in some of the buyers that we have control in Mexico, we're having very good control, specifically speaking about SG&A. We have a little bit of bump in marketing expense because of all the Coca-Cola Zero production and some of the promotional campaign that we are carrying presently as we have to see some negative stress because of the use of sugar [Indiscernible]. But more importantly, Lorre I think that we found some one-time events that our auditors have requested us to record in a different way, some of the... what we call in the Spanish called [Foreign language] the extra payment that given to workers for the vacation, there is an extra payment that takes the... at the anniversary of every worker in the company. We were reporting that as we were paying those extra things benefit to each worker and the auditors request us to change that so that we registered the amount that has been... that we owe to the workers which has not been paid, that has been accumulated because the worker doesn't working with us. That is creating a basically one-time effect in this year, but my estimate is along 5 to $6 million, that next year we will not have that's an extraordinary event that we have. We have a couple of other things that have increased which are not... which are outside of our control, which are some of the insurance prices for health insurance that we have with our workers and also freights expenses have increased so what is happening in some of the markets and you see regarding this initial report Lorre, not only Mexico, is that some of the strategic inflation that we have in some of the services or materials that we've received from suppliers... outside suppliers that specific inflation has been on the big players than what we saw... what you see in the country as they report their inflation. So I will say that the main basic thing that we have in the SG&A line in Mexico is a little bit of marketing in terms of Coca-Cola Zero and a little bit of freight expenses because of increases in rate, but more permanent thing and that we are able to negotiate some of the other stuffs. The insurance policy for folks and health insurance and the thing with the fringe benefit for the workers that is basically as we said that the auditors annual report asking us to have or supposed to register in the expenses at least topic. And it will set up the very fact of the reserve; the situation we're facing.
Lorre Serra - Morgan Stanley
: Yes, thanks.
Operator
[Operator Instructions]. And your next question comes from the line of Andrea Teixeira. Please proceed.
Andrea Teixeira - JP Morgan
Hi good afternoon everybody. Héctor, I just wanted to... if you can elaborate on the price environment, I understand that this question could be due to and there is the likelihood that we have other brands has increasing price, if you can comment on specifically the big brands, how you feel of the competitive environment in the first quarter in '08 thank you... in Mexico, specifically. Thank you.
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
Yes, Andrea, good afternoon. Yes, you are right, and we refer this to a more stable competitive environment in Mexico. What has been happening is that we have received... they are saying that some of the competitors are seeing more pressure, some of the raw materials. We saw the PVB increasing the prices on the multi-serve presentations and flavors. And because of that we needed to adjust our multi-serve presentations, for flavors also to price it to the same level, basically moving from 13 to 14 pesos in the 2.5 liter presentation. And last week we took the decision to increase some of the single representation from brand Coca-Cola. The market has not yet reacted to that, but it will, the result of which will give some of the inflationary pressure that we have received and price playing in some other raw materials and services from the different industry. So I think that in general, we feel confident that this pricing increase that we are going to... we will be able to deliver that. So we are seeing a more stable pricing environment in Mexico business, if you will, in question.
Andrea Teixeira - JP Morgan
Okay, great. Thank you very much.
Operator
And your next question comes from the line of Alex Robarts with Santander. Please proceed.
Alex Robarts - Santander
Hi good afternoon everybody. I guess I just want to go back to the raw materials. As you see the oil price the way that it's been and I can appreciate that there has been an increase in some of the PET capacity around the world, but how are you guys looking at your PET price kind of in the first six months of 2008. I think some reports talk about it maybe 10% or 5% increase expected in Brazil in general in the industry. Mexico, I've seen some news as well. And I guess related to that on the raw materials front, we haven't talked about concentrate prices in Mexico, I just wanted to confirm some earlier guidance that you had given us that in fact cite in general, we'll have another... I guess it's about $20 million increase in that Mexican concentrate price, if you could comment on that. Thank you.
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
Yes, Alex good afternoon. Let me talk in general to some of the raw material environment that we're seeing. We have obviously with the volatility on the oil prices, we have started to see some increases in some of the... in the course that we have for the future acquisition of PET bottles or resin. There is no doubt about that the fuel prices at this level that starts to influence some of the PET prices. For example, in Mexico, if we look at the CC [ph] of the third quarter, the cost per bottle that we have is down versus the previous year somewhere in the area of around 10% on PET prices. On the other hand, we have sweetener as I mentioned earlier especially high fructose increasing importantly versus last year and barring in the total nature of our different sweetener is creating a somewhere around 10%, 11% increase in the sweetener costs for us in Mexico. So, there is a lot of volatility on that and that we have explained in the past that the all the markets where we've gone we've seen some of these volatilities in the sweetener case in Brazil because the contact number 11 is a perfect hedge versus the prices that we have in the Brazil. We're doing some of that activity. In Brazil we have very low cost of sweetener. We're basically at the international prices at around $0.10 per pound. So, that's and we are analyzing the possibility of taking some of the hedging activity in the Brazil.
So, the environment going forward, I see a lot of volatility, it is difficult to predict because obviously oil prices will influence the cost or the cost of direction. And sweetener I think that in general we are seeing that a better environment for the industry and for us this quarter and the following quarter. That will have a very important positive impact in the... for our company. So in general, I do see a lot of volatility going forward. With respect to cost increase, yes, we have the second stage of this increase in the influence for next year and quite a similar to that number that we mentioned around $10 million. Well, we have mentioned that the Coca-Cola Company is also contributing a little more resources to that to the marketing effects are broadly... the net effect for us will be broadly around the I will say $17 million, $18 million, I suppose to be $20 million. And I think that's what I configure now to with respect to environment in raw materials, [Indiscernible] try to answer to your questions.
Alex Robarts - Santander
Yes, yes good. Thank you.
Operator
And your next question comes from the line of Sohail Amir with [Indiscernible]. Please proceed.
Unidentified Analyst
Good afternoon.
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
Hello.
Unidentified Analyst
My question was really with regards to I am trying to understand that from what I read, there has been... you experienced higher sugar prices in Mexico and Argentina and everywhere else it seems that you have experienced low sugar prices. So, I am just hoping if you can elaborate on the dynamics in terms of the cost of sugar you are seeing in the region, and explain somewhat the differences between these increases and reductions in the sugar prices?
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
Yes, you are right, what you have read is correct. In Mexico and Argentina, we have experienced some increases in the sweetener cost. Mainly it's a result of the fact those are the two places where we use a substantial amount of high fructose, and is very lean to the corn prices and then let you know, some of these commodities have increased importantly in price. The areas where we are using basically cane sugar, we are having reductions in prices with the exception of Venezuela that because of the scarcity effect and the fact that it is very difficult to import that raw material into the country, there is an element of scarcity that is causing a slight increase in sweeteners basically around 1% increase in our case. And it's important also to point out that Argentina even with the increase with important increase in the cost of sweetener because of the high fructose continues to be one of the lowest cost that we have for sweeteners in the nine countries that we have. The lowest price that you can imagine is now Brazil because as a reflection of the international pricing for sugar. But, it is basically at the same level that we have for Argentina in terms of the high fructose. So, even though Argentina is suffering a lot versus last year, it continuous to be at the very, very attractive level in terms of sweetener costs. And that has to do also with all the favorable agricultural environment in Argentina for some of this things. The difficult area obviously is when you go to countries like Mexico where we pay mostly two or two and half times the cost of international prices and when you guys increases an already large price, that's where we actually with more tension. And that's basically the idea with respect to the sweetener environment in our operation.
Operator
[Operator Instructions]. And now sir you have a follow-up question from the line of Robert Ford. Please proceed.
Robert Ford - Merrill Lynch
Thank you. Hi Treviño, I want to ask what you anticipated in terms of the impact from the change in Mexican GAAP away from its inflation adjust accounting?
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
Yes, Bob. We anticipate... it's one of your math, but it's close to our math in terms of explaining some of the numbers. I'd really try to... we are projecting to 2% next quarter that's going into a second on next year. Basically the idea is that accounting regulations are now calling for concrete structure in that three year period, less than 26% accumulated inflation would no longer apply inflationary account. So in other words, five of the nine countries will go to non-inflationary accounting and therefore all the numbers will be presented in nominal terms. The third year, then will you for an example Mexico, because that's obviously an important country for us. Mexico in 2008 we'll have to present all financial information in nominal basis. 2007 we'll continue to be presenting year-end basis. And then going forward, every time we compare the years will be nominal basis of one year versus nominal basis of the previous years, similar update similar to the GAAP [ph]. The countries, where we continue to have inflationary accounting will be Nicaragua and Costa Rica and Venezuela and Argentina. So, we have our mix full reporting inflationary accounting, in fact going through non-inflationary accounting and partly, where we have to do a better job trying to spend some of this with our communication. The tricky part here is that if that country goes above this 26% accumulated inflation in three years, then we'll have to go back to inflationary accounting and to restate the years that this country will report on the non-inflationary accounting. So it's a little bit tricky Rob, and I see that as we will need an explanation from you guys to... for you guys to why we don't want... we try to explain the information that we'll start presenting that first quarter of next year.
Robert Ford - Merrill Lynch
It's okay. I think I have got accustomed to the volatility in terms of the restatement of the historical periods. And it makes perfect sense, which is kind of scary to me. But your cash and your debt that's primarily dealt in Mexico, right? So for the most part that formal [ph], I suspect will go away; is that correct?
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
Yes. The formal [ph] will go away basically.
Robert Ford - Merrill Lynch
And Héctor, will all your periods be expressed next year and end of 2007 pesos, so the March quarter, the June quarter everything will comp against year-end 2007 constant currency number for the prior year? I mean at least for Mexico and the countries that will be in nominal terms or whatever you want to comp on, I know you will be frozen in time with the exception of the countries that are not?
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
No, for the rate we will work it, for example let's place our bills in first quarter 2008 Mexico, we will be reporting the numbers for the first quarter of 2008 nominal pesos and the comparison versus last year, will give the numbers we reported, which are stated in constant pesos 2007.
Robert Ford - Merrill Lynch
Yes.
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
So that we will have that problem in the first year, because we will not be comparing exactly the same pesos.
Robert Ford - Merrill Lynch
Thanks.
Operator
And your next question comes from the line of Celso Sanchez with Citi. Please proceed.
Celso Sanchez - Salomon Smith Barney
Hi. just a follow-up for the last question to clarify when you reported first quarter '08, the first quarter of '07 number we reported in March '07 pesos or December '07 pesos, just to be clear.
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
Yes, so again, let me clarify that. First quarter Mexico 2008 in nominal pesos in the first quarter 2007 will be in December 2006 pesos...
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
December '07 pesos.
Celso Sanchez - Salomon Smith Barney
That answers my question, thank you for your clarification. Now my question really relates to Brazil and [indiscernible] and as I understand it that's something that you should be having taking over or upcoming drug involved starting in early next year. If you could just confirm that timing and also in the interim and given that a partners territory you've always had a chance to look quite closely at things and give us a sense of what your priorities might be and what kind of timeframe you have for working on certain things whether it's just execution initially, if its coverage of... that which is beyond just sparkling and what opportunities there might be with the beer business as we see it.
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
The timing is such that we experienced and that timings we are basically shooting for January 2nd as for [indiscernible]. We are in the process of due diligence and we are 80% there. We are working on the recommendations. And right now, we have a very positive view on this and the things that we are seeing is a well-run operation. It has improved importantly the profitability over there. We might end up with positive surprise that their profitability is already better than what we anticipated year-end 2007. And in terms of the priorities, I think that is... this has to do with the execution of the soft drink business, but also very importantly to start looking at the other category. Remember there is our feel for us is the first operation where we really have multi-category operation. We have... which has beer, which has juices, which has water, which has some mix product that are being manufactured by Europe company factor which sells Coca-Cola brand products. So I think that we really need to go and try to execute on the multi-segmentation, multi-categories that we are developing in Brazil. I think that's one of the positive to this about this acquisition is also about... this original footprint geographically that also will start broadly healthiness in understanding some of the areas of titles of problem; and obviously putting us in better perspective for things and acquisitions around those territories in the future. Territories that maybe were too higher way from us from... we were just discretionary in some part. So we are very positive about that. The team is already starting to working on it now, people there is working that's why, so that when generally second comes we have very good idea with the most management team and the commercial area teams and we'll have better idea in terms of our business plan and budget as we get closer to year-end.
Celso Sanchez - Salomon Smith Barney
Okay. And what was the value of product in that territory [ph] would you say they under index versus the national market share focus away?
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
Yes, definitely there, focus in value is present. It goes to some of the large series, but is basically for bottler and we are just trying to measure this a little bit of value and we are very excited about the opportunities in this region [ph].
Celso Sanchez - Salomon Smith Barney
And is that something that can be leveraged by you from day one or do you have to wait for the reservation of any participation and focus of value by the other bottler?
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
No and we will measure that from day one. The only once we have seen this tender offer, which we would pay on November 8th that's when the 20 business days expires for this tender offer, we'll take control of the operation in Brazil. The idea is that we will integrate that with sucrose malt that is already working and from day one we will start function to [ph]. The only resolution that is pending is the [indiscernible] resolution in Brazil, that's different. But in Mexico and Brazil, the entities [ph], operators... you can close the transaction and then they have to wait themselves one year to comment on the transaction. So we don't have to wait for any resolution in Brazil so far.
And in our opinion, all the documentation process is we've gathered which is... with the authorities in Brazil are finding [indiscernible]. We are waiting for their opinion and that opinion we might see that early 2008 that we were expecting there.
Celso Sanchez - Salomon Smith Barney
Okay thank you very much.
Operator
And your next question is a follow-up from the line of Sohail Amir [ph]. Please proceed.
Unidentified Analyst
Yes, just actually on the same topic of sugar and high fructose, I am just curious as to if you have the flexibility to change the mix in Argentina and Mexico in terms of... in favor of sugar away from HSTS to what extend you can do that and secondly, just related to your marketing expenses, I am curious are all marketing expenses expensed or do you capitalize some of them into your intangibles?
Héctor Treviño Gutierrez - Chief Financial and Administrative Officer
Yes we do have some flexibility to use a different mix of sweetener and there is like in Argentina high fructose continues to e the typical thing and also that's why we are using that. But in Argentina, we have much more flexibility than we have in Mexico. In Mexico because of the space of our working plans, that the high fructose is a more efficient product in terms of how you handle the high fructose in plants. In liquid state, you just got some stainless steel tanks and pipe to connect to all the corrosion facilities. In terms of this sugars then we're seeing different ways, it's basically on 50 kilo stock of sugar although there's now this ways called the mega pack that has 500 kilos that is also kind of some approximation, and with the sugar then you have to use filtration process that Mexico basically we are prevented from going 100% sugar because we will need to do some investment in all the process in the sugar before the production capacity -- before the bottling of the soft drink operation. So, in Argentina we can go very close to 100% sugar or 100% high fructose, it doesn't matter that much. In Mexico, we can still shift a mix that we have, but not to 100% sugar. But we already can increase sugar by another 20% or 30% from the level that we have. With respect to the marketing expenses, we have spend all sort of marketing expense. We anticipate more or less what is the expense that we anticipate in the year, so we majorly provide to our provisions for months so that we have more stable longer during the year, but all the marketing expenses are spend during the year.
Operator
Thank you all for joining in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.
Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
- To read the full transcript on Seeking Alpha, click here »
