Business Context and Reporting Period
Company: Coca-Cola FEMSA, S.A.B. de C.V.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2010
Accounting Standards: Mexican Financial Reporting Standards (Mexican FRS) with reconciliation to U.S. GAAP.
Business Overview: The largest publicly listed bottler of Coca-Cola trademark beverages in the world by sales volume. Operations span Mexico, Central America (Guatemala, Nicaragua, Costa Rica, Panama), Colombia, Venezuela, Brazil, and Argentina. Approximately 99% of sales volume is derived from Coca-Cola trademark beverages.
Key Financial Metrics (2010)
| Metric | 2010 (Mexican FRS) | 2010 (U.S. GAAP) | 2009 (Mexican FRS) |
|---|---|---|---|
| Total Revenues | Ps. 103,456 million (US$ 8,355 million) | Ps. 103,122 million (US$ 8,328 million) | Ps. 102,767 million |
| Cost of Goods Sold | Ps. 55,534 million | Ps. 55,944 million | Ps. 54,952 million |
| Gross Profit | Ps. 47,922 million | Ps. 47,178 million | Ps. 47,815 million |
| Income from Operations | Ps. 17,079 million | Ps. 15,408 million | Ps. 15,835 million |
| Consolidated Net Income | Ps. 10,299 million (US$ 832 million) | Ps. 10,105 million (US$ 816 million) | Ps. 8,970 million |
| Net Income (Controlling Interest) | Ps. 9,800 million | Ps. 9,608 million | Ps. 8,523 million |
| EPS (Controlling Interest) | Ps. 5.31 (US$ 0.43) | Ps. 5.20 (US$ 0.42) | Ps. 4.62 |
| Total Assets | Ps. 114,061 million | Ps. 115,013 million | Ps. 110,661 million |
| Total Liabilities | Ps. 40,180 million | Ps. 41,545 million | Ps. 42,189 million |
| Shareholders' Equity | Ps. 73,881 million | Ps. 73,468 million | Ps. 68,472 million |
| Cash & Cash Equivalents | Ps. 12,534 million | Ps. 12,140 million | Ps. 9,740 million |
| Total Debt | Ps. 17,351 million | Ps. 17,351 million | Ps. 15,925 million |
| Capital Expenditures | Ps. 7,478 million | Ps. 7,478 million | Ps. 6,282 million |
Note: U.S. Dollar amounts are translated at Ps. 12.3825 to US$ 1.00 (Dec 30, 2010 rate) for convenience only.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 0.7% to Ps. 103,456 million. On a currency-neutral basis (excluding the Brisa acquisition), revenues increased approximately 15%.
- Volume Growth: Total sales volume increased 2.9% to 2,499.5 million unit cases. Sparkling beverages contributed over 70% of incremental volumes, driven by the Coca-Cola brand.
- Profitability: Operating income increased 7.9% to Ps. 17,079 million. Operating margin expanded 110 basis points to 16.5%.
- Segment Performance:
- Mercosur (Brazil/Argentina): Revenues increased 21.0% and operating income increased 18.3%, driven by volume growth and price increases.
- Venezuela: Reported revenues declined 37.4% due to the devaluation of the Venezuelan bolivar. However, on a currency-neutral basis, revenues increased approximately 32%.
- Mexico: Revenues increased 5.4%, but operating income decreased 3.6% due to gross margin pressures and increased marketing investments.
- Dividends: Dividends declared and paid increased significantly to Ps. 2,612 million (Ps. 2.360 per share), a 67.4% increase compared to the prior year.
Guidance, Outlook, Risks, and Unusual Items
- Outlook & Strategy: Management aims to maximize growth and profitability through commercial model transformation, multi-segmentation strategies, and product innovation. Capital expenditures for 2011 are budgeted at approximately US$ 600 million, focusing on production capacity, coolers, and distribution infrastructure.
- Accounting Transition: The company will adopt International Financial Reporting Standards (IFRS) in 2012, as required for Mexican issuers.
- Key Risks:
- Relationship with The Coca-Cola Company: Approximately 99% of sales volume depends on Coca-Cola trademark beverages. The Coca-Cola Company unilaterally sets concentrate prices and can terminate bottler agreements.
- Foreign Exchange: Significant exposure to currency fluctuations, particularly the Mexican peso and Venezuelan bolivar. A 10% devaluation of the Mexican peso would increase financing expenses.
- Raw Material Costs: Prices for concentrate, sweeteners, and packaging (resin, aluminum) are volatile. Sweetener prices increased in 2010 across all territories.
- Regulatory & Political: Risks include price controls (currently in Argentina), tax increases (e.g., VAT increase in Mexico), and political instability in Venezuela (exchange controls, devaluation).
- Water Supply: Water is an essential component; shortages or failure to maintain concessions could adversely affect operations.
- Unusual Items:
- Venezuela Devaluation: In January 2010, the Venezuelan government devalued the bolivar and established a multiple exchange rate system, impacting reported revenues and equity.
- Acquisitions: Included results from the Brisa water business in Colombia (acquired Feb 2009) and REMIL in Brazil (acquired May 2008).
Important Facts for Investor Verification
- Concentrate Pricing: Verify the impact of The Coca-Cola Company's unilateral right to set concentrate prices, which are a percentage of retail price, on future gross margins.
- Venezuela Operations: Assess the sustainability of operations in Venezuela given exchange controls, devaluation risks, and the multiple exchange rate system.
- Debt Structure: Review the maturity profile of debt (Ps. 17.35 billion total) and the mix of fixed vs. variable rates (57% variable before swaps) to evaluate interest rate risk.
- IFRS Adoption: Monitor the impact of the transition from Mexican FRS to IFRS in 2012 on financial statement comparability.
- Related Party Transactions: Review significant transactions with FEMSA (sales to Oxxo, purchases of supplies) and The Coca-Cola Company (concentrate purchases, marketing contributions).
- Legal Contingencies: Note recorded loss contingencies of Ps. 2,152 million (tax, legal, labor) and pending lawsuits estimated at Ps. 5,767 million.