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, 2011
Accounting Standards: Mexican Financial Reporting Standards (Mexican FRS) with reconciliation to U.S. GAAP. The company is transitioning to International Financial Reporting Standards (IFRS) effective January 1, 2012.
Coca-Cola FEMSA is the largest franchise bottler of Coca-Cola trademark beverages in the world, operating in Mexico, Central America, Colombia, Venezuela, Brazil, and Argentina. In 2011, the company restructured its operations into two reportable segments: Mexico and Central America, and South America (excluding Venezuela, which is reported separately due to hyper-inflationary accounting requirements).
Key Financial Metrics (2011)
| Metric | 2011 (Mexican FRS) | 2011 (U.S. GAAP) |
|---|---|---|
| Total Revenues | Ps. 124,715 million (US$ 8,940 million) | Ps. 124,288 million (US$ 8,909 million) |
| Cost of Goods Sold | Ps. 67,488 million | Ps. 68,240 million |
| Gross Profit | Ps. 57,227 million | Ps. 56,048 million |
| Income from Operations | Ps. 20,152 million | Ps. 17,980 million |
| Consolidated Net Income | Ps. 11,169 million (US$ 801 million) | Ps. 11,015 million (US$ 790 million) |
| Net Controlling Interest Income | Ps. 10,615 million | Ps. 10,467 million |
| Earnings Per Share (Controlling) | Ps. 5.69 (US$ 0.41) | Ps. 5.61 (US$ 0.40) |
| Total Assets | Ps. 151,608 million (US$ 10,867 million) | Ps. 151,380 million (US$ 10,851 million) |
| Total Liabilities | Ps. 50,828 million (US$ 3,643 million) | Ps. 51,586 million (US$ 3,698 million) |
| Shareholders' Equity | Ps. 100,780 million (US$ 7,224 million) | Ps. 99,794 million (US$ 7,153 million) |
| Cash and Cash Equivalents | Ps. 12,331 million (US$ 883 million) | Ps. 12,140 million (US$ 873 million) |
| Total Debt | Ps. 22,574 million | Ps. 22,574 million |
| Capital Expenditures | Ps. 7,826 million (US$ 561 million) | Ps. 7,826 million |
Note: U.S. dollar amounts are translated at an exchange rate of Ps. 13.95 to US$ 1.00.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 20.5% to Ps. 124,715 million in 2011 compared to 2010. This growth was driven by double-digit revenue increases in the South America division and the Mexico & Central America division, partially due to the integration of Grupo Tampico (October 2011) and Grupo CIMSA (December 2011).
- Volume Growth: Total sales volume increased 6.0% to 2,648.7 million unit cases. Excluding the acquired territories, organic volume growth was 4.0%.
- Profitability: Consolidated net controlling interest income increased 8.3% to Ps. 10,615 million. Operating income increased 18.0% to Ps. 20,152 million.
- Margin Pressure: Gross margin decreased slightly to 45.9% in 2011 from 46.3% in 2010, primarily due to higher sweetener and PET (packaging) costs, partially offset by currency appreciation in Brazil, Colombia, and Mexico.
- Debt Increase: Total indebtedness increased by Ps. 5,223 million to Ps. 22,574 million, driven by the assumption of debt from recent mergers and dividend payments.
Guidance, Outlook, and Risks
Outlook and Strategy: The company plans to continue focusing on organic growth, product innovation, and strategic acquisitions to expand its geographic footprint. Capital expenditures for 2012 are budgeted at approximately US$ 700 million, focusing on production capacity (including a new plant in Brazil), market investments (coolers), and distribution network improvements. The company is transitioning to IFRS reporting starting in 2012.
Key Risks and Contingencies:
- Relationship with The Coca-Cola Company: The company is heavily dependent on its relationship with The Coca-Cola Company for concentrate supply, marketing support, and bottler agreement renewals. The Coca-Cola Company can unilaterally set concentrate prices.
- Raw Material Costs: Prices for resin, plastic ingots, and sweeteners (sugar/HFCS) are volatile and often denominated in U.S. dollars. In 2011, resin prices increased approximately 30% and sugar prices increased significantly in most operating countries.
- Foreign Exchange: Depreciation of local currencies (particularly the Mexican peso and Venezuelan bolivar) against the U.S. dollar increases the cost of raw materials and debt service. The company uses derivatives to hedge these risks.
- Regulatory Environment: The company faces price controls in Argentina and Venezuela. Venezuela also faces hyper-inflation and exchange controls, limiting the ability to remit dividends. New regulations in Costa Rica restrict the sale of sugary beverages in schools.
- Legal Proceedings: The company is involved in various tax, labor, and antitrust proceedings, particularly in Mexico, Brazil, and Venezuela. Recorded loss contingencies totaled Ps. 2,284 million as of December 31, 2011.
Important Facts for Investors to Verify
- Accounting Transition: Verify the impact of the transition from Mexican FRS to IFRS on future financial reporting, specifically regarding the treatment of inflation, employee benefits, and business combinations.
- Acquisition Integration: Monitor the integration progress and financial contribution of the recently acquired Grupo Tampico and Grupo CIMSA bottlers in Mexico.
- Venezuela Operations: Assess the ongoing impact of hyper-inflation, exchange controls, and price regulations on the company's Venezuelan operations, which are reported separately and carry significant risk.
- Raw Material Hedging: Review the effectiveness of the company's hedging strategies against rising costs of resin, sugar, and HFCS, and the impact of U.S. dollar fluctuations.
- Dividend Policy: Confirm the declaration and payment of the proposed 2011 dividend of Ps. 2.77 per share, scheduled for May 30, 2012.