COCA COLA FEMSA SAB DE CV annual report, Q4 FY2020

Business context and reporting period

Coca-Cola FEMSA, S.A.B. de C.V. filed its audited annual Form 20-F on April 8, 2021, for the fiscal year ended December 31, 2020. The company is a Coca-Cola franchise bottler operating in Mexico, Central America, Colombia, Brazil, Argentina and Uruguay, and reports under IFRS in Mexican pesos. This is a full-year filing, not a standalone fourth-quarter report.

Key financial metrics

Unless otherwise noted, amounts are in millions of Mexican pesos.

• Total sales volume declined 2.5% to 3,284.4 million unit cases; transactions fell 14.0%. Reported average price per unit case decreased 3.5% to Ps.50.63.
• Current assets were Ps.72,440 and current liabilities Ps.42,845; the current ratio was 1.69, versus 1.11 in 2019. Year-end net debt, calculated as debt less cash, was Ps.43,981, down from Ps.49,486.
• Net cash used in investing activities was Ps.10,508; net cash from financing activities was Ps.417, compared with net cash used of Ps.22,794 in 2019. Dividends paid in 2020 were Ps.10,278.
• Interest expense was Ps.7,894, compared with Ps.6,904 in 2019. Management reported a comprehensive financing expense of Ps.6,679, up from Ps.6,071.
• Debt was 85.1% fixed-rate before considering the weighted-average life measure; after swaps, variable-rate debt was 7.4% on a weighted-average-life basis. The company reported compliance with debt covenants.

Material changes, outlook and risks

• COVID-19 and performance: Restrictions and weaker on-premise demand affected sales volume and product mix. Management cited resilient traditional retail, growth in digital and direct-to-home channels, cost reductions and tighter capital-spending controls. Currency depreciation also raised some U.S.-dollar-linked input costs.
• Segment results: Mexico and Central America revenue declined 2.3%, while gross profit rose 1.0% and margin expanded 1.6 percentage points to 49.5%. South America revenue declined 9.8% as reported, including unfavorable currency translation; management said it increased 3.6% on a comparable basis. South America gross profit fell 14.9% and margin contracted 2.3 percentage points to 38.9%.
• Unusual items: 2020 revenue included Ps.1,359 of Brazilian tax-recovery entitlements. Other expenses, net, increased to Ps.3,611, primarily reflecting impairments associated with Estrella Azul and Leão Alimentos. The effective income tax rate rose to 33.8% from 30.7%.
• Capital and outlook: The company issued US$705 million of 1.850% senior notes due 2032, designated as green bonds, and issued US$1,250 million of 2.750% senior notes due 2030. It budgeted 2021 capital expenditures at 6.0%–6.5% of revenue, subject to market conditions and the pandemic, and expected internally generated funds to cover the budget. No broader earnings or revenue guidance is stated in the provided filing text.
• Other developments: The company sold its joint venture’s Estrella Azul business in Panama in 2020. A new Brazil beer-distribution agreement with Heineken, signed in February 2021, was subject to Brazilian antitrust approval; it would add Eisenbahn and other premium brands and end distribution of Heineken and Amstel.
• Principal risks: Continued pandemic effects; currency, interest-rate and commodity-price volatility; dependence on Coca-Cola bottler agreements and concentrate supply; consumer-health and packaging regulation, taxes and price controls; water availability; competition; and legal, tax and environmental proceedings. Argentina is accounted for as a hyperinflationary economy.
• Contingencies: Recorded provisions for tax, labor and legal matters totaled Ps.5,100. Separately, possible unsettled lawsuits and uncertain tax positions were estimated at Ps.80,795; management did not expect their ultimate resolution to materially affect consolidated results or financial position. Brazilian tax contingencies of Ps.7,342 were collateralized.
• The independent auditor issued an unqualified opinion on the IFRS financial statements and on internal control over financial reporting.

Important facts for investors to verify

• Review the drivers and sustainability of the sales and transaction declines, especially the sharp reduction in bottled-water volumes and the recovery of on-premise channels.
• Assess whether cash generation and liquidity remain adequate as debt rose and the business faces continuing currency and pandemic uncertainty; verify debt maturities, refinancing needs and cash accessibility across countries.
• Examine the Brazilian tax-recovery amounts included in revenue and the status and potential timing of the separately disclosed tax disputes and collateral.
• Check the assumptions underlying impairments and the recoverability of Ps.100,082 in goodwill and distribution rights, as well as deferred tax assets, which depend on forecasts and market conditions.
• Confirm approval and implementation of the new Heineken Brazil agreement, its financial effect, and the implications of ending Heineken and Amstel distribution.