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, 2009
Accounting Basis: Mexican Financial Reporting Standards (Mexican FRS) with reconciliation to U.S. GAAP.
Overview: The Company is the largest bottler of Coca-Cola trademark beverages in Latin America and the second largest in the world by sales volume. Operations span Mexico, Central America, Colombia, Venezuela, Brazil, and Argentina. Approximately 99% of sales volume is derived from Coca-Cola trademark beverages.
Key Financial Metrics (2009)
| Metric | Value (Mexican FRS) | Value (U.S. GAAP) |
|---|---|---|
| Total Revenues | Ps. 102,767 million (US$ 7,870 million) | Ps. 100,393 million (US$ 7,688 million) |
| Net Income | Ps. 8,970 million (US$ 687 million) | Ps. 8,853 million (US$ 678 million) |
| Net Controlling Interest Income | Ps. 8,523 million | Ps. 8,407 million |
| Income from Operations | Ps. 15,835 million | Ps. 14,215 million |
| Operating Margin | 15.4% | 14.1% |
| Net Debt | Ps. 6,185 million (Total Debt Ps. 15,925m less Cash Ps. 9,740m) | N/A |
| Cash and Cash Equivalents | Ps. 9,740 million (US$ 746 million) | Ps. 9,740 million |
| Capital Expenditures | Ps. 6,282 million (US$ 481 million) | N/A |
| Dividends Paid | Ps. 1,344 million | N/A |
Material Changes vs. Prior Period (2008)
- Revenue Growth: Total revenues increased 23.9% to Ps. 102,767 million. Growth was driven by organic volume increases (approx. 75% of incremental revenue), acquisitions (REMIL in Brazil and Brisa in Colombia), and positive currency translation effects.
- Volume Growth: Total sales volume increased 8.3% to 2,428.6 million unit cases. Organic volume growth was 5.1% excluding acquisitions.
- Profitability: Net controlling interest income increased 52.3% to Ps. 8,523 million. Operating income increased 15.6% to Ps. 15,835 million.
- Margin Pressure: Gross margin decreased 60 basis points to 46.5% due to higher raw material costs (sweeteners, concentrate price increases) and currency devaluation impacts on USD-denominated costs, partially offset by lower resin costs.
- Financing Result: Comprehensive financing result improved significantly, recording an expense of Ps. 1,373 million compared to Ps. 3,552 million in 2008, primarily due to the appreciation of the Mexican peso against the U.S. dollar and lower gross debt.
- Segment Performance:
- Mexico: Revenues up 8.8%; Operating income up 2.0%.
- Latincentro: Revenues up 25.0%; Operating income up 23.9% (driven by Brisa acquisition and Jugos del Valle expansion).
- Venezuela: Revenues up 47.7%; Operating income up 40.8% (driven by price increases and volume growth despite operational disruptions).
- Mercosur: Revenues up 30.0%; Operating income up 27.5% (driven by REMIL integration).
Guidance, Outlook, Risks, and Unusual Items
- Dividend Outlook: The Board proposed an ordinary dividend of Ps. 2,604 million in February 2010 (approved April 2010), representing a 94% increase over the prior year's dividend.
- Capital Expenditures: Budgeted up to US$ 500 million for 2010, focused on manufacturing lines, returnable bottles, coolers, distribution network improvements, and IT.
- Debt Issuance: Issued US$ 500 million of 4.625% Senior Notes due 2020 in February 2010. Proceeds were used to repay maturing Mexican peso-denominated bonds.
- Key Risks:
- Venezuela Devaluation: In January 2010, the Venezuelan government devalued the bolivar and established a multiple exchange rate system. This is expected to reduce shareholders' equity by approximately Ps. 3,700 million and increase operating costs.
- Raw Material Costs: Prices for concentrate, sweeteners, and packaging materials (tied to oil prices) remain volatile. Concentrate price increases were fully implemented in Mexico in 2009.
- Regulatory/Tax: New Mexican tax reforms effective January 1, 2010, increased the income tax rate to 30% (2010-2012) and VAT to 16%. Price controls exist in Argentina.
- Relationship with The Coca-Cola Company: The Company relies on The Coca-Cola Company for concentrate supply, marketing support, and bottler agreement renewals.
- Unusual Items:
- Acquisitions: Acquired Brisa bottled water business in Colombia (June 2009) and REMIL in Brazil (June 2008, fully consolidated in 2009).
- Legal Proceedings: Ongoing antitrust investigations in Mexico, Costa Rica, and Brazil. Tax contingencies in Venezuela and Brazil.
Important Facts for Investor Verification
- Accounting Standards: Verify the reconciliation between Mexican FRS and U.S. GAAP, particularly regarding inflation accounting (discontinued for non-inflationary economies in 2008) and the treatment of intangible assets.
- Venezuela Impact: Assess the full financial impact of the January 2010 bolivar devaluation and the new multiple exchange rate system on future earnings and equity.
- Concentrate Pricing: Monitor future concentrate price adjustments by The Coca-Cola Company, which directly impact Cost of Goods Sold.
- Debt Maturities: Review the schedule of debt maturities, particularly the US$ 500 million Senior Notes issued in early 2010 and remaining Mexican peso-denominated bonds.
- Dividend Policy: Confirm the sustainability of the 94% dividend increase given the tax rate changes in Mexico and potential margin pressures.
- Legal Contingencies: Evaluate the potential financial exposure from antitrust investigations and tax disputes in Brazil and Venezuela.