Business Context and Reporting Period
Company: Coca-Cola FEMSA, S.A. de C.V.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2002
Accounting Basis: Mexican GAAP (with reconciliations to U.S. GAAP provided)
Business Overview: The largest Coca-Cola bottler in Latin America and the second largest globally. Operations are concentrated in Mexico (Valley of Mexico and Southeast Mexico territories) and Argentina (Buenos Aires territory). Approximately 98% of net sales are derived from Coca-Cola trademark beverages.
Key Financial Metrics (Year Ended Dec 31, 2002)
| Metric | U.S. Dollars (Millions) | Constant Mexican Pesos (Millions) |
|---|---|---|
| Net Sales | $1,672.4 | Ps. 17,491.5 |
| Total Revenues | $1,684.7 | Ps. 17,620.0 |
| Gross Profit | $907.3 | Ps. 9,490.0 |
| Income from Operations | $424.5 | Ps. 4,440.2 |
| Net Income (Mexican GAAP) | $245.2 | Ps. 2,564.2 |
| Net Income (U.S. GAAP) | $241.3 | Ps. 2,524.0 |
| Income Per Share (Mexican GAAP) | $0.17 | Ps. 1.80 |
| Total Assets | $1,546.3 | Ps. 16,172.5 |
| Long-Term Debt | $303.1 | Ps. 3,169.8 |
| Total Stockholders' Equity | $872.3 | Ps. 9,123.9 |
| Capital Expenditures | $128.2 | Ps. 1,340.9 |
| Dividends Paid | $55.9 | Ps. 585.0 |
Note: U.S. Dollar amounts are translated at Ps. 10.459 to U.S.$1.00 (Dec 31, 2002 rate) for convenience only.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net sales increased 5.3% to Ps. 17,491.5 million. Growth was driven by a 6.7% increase in Mexican territories, which offset an 8.2% decline in the Buenos Aires territory due to Argentina's economic crisis.
- Profitability: Net income increased 16.4% to Ps. 2,564.2 million. Operating income grew 14.6% to Ps. 4,440.2 million, aided by a 3.2% increase in average price per unit case and lower goodwill amortization.
- Argentina Impairment: The company recognized a non-cash goodwill impairment charge of Ps. 401.8 million related to its Argentine subsidiary (Coca-Cola FEMSA de Buenos Aires) due to economic instability and currency devaluation. This was recorded under "Other expenses, net."
- Financing Gains: The "Integral cost of financing" turned into a net gain of Ps. 501.2 million in 2002 (vs. a loss of Ps. 143.2 million in 2001). This was primarily due to foreign exchange gains on U.S. dollar-denominated cash positions and a gain on monetary position resulting from inflation in Argentina.
- Volume Trends: Total unit case sales volume increased 2.1% to 620.3 million. Mexican territories saw a 5.6% volume increase, while Buenos Aires volume declined 11.0%.
Guidance, Outlook, Risks, and Unusual Items
Panamco Acquisition (Subsequent Event)
On May 6, 2003, the company completed the acquisition of Panamerican Beverages, Inc. (Panamco) for approximately U.S.$3.7 billion. This transaction significantly expands operations into Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, and Brazil. The acquisition was financed through new debt (approx. U.S.$1.98 billion), equity contributions, and assumed debt. Panamco results are not included in the 2002 financial statements.
Outlook and Strategy
- Integration: Management plans to integrate Panamco's Mexican operations to realize synergies in distribution, manufacturing, and procurement.
- Capital Expenditures: Estimated at approximately U.S.$350 million for 2003, focused on integrating new territories and market investments.
- Dividends: Shareholders decided in March 2003 not to distribute dividends for the 2003 fiscal year.
Key Risks
- Concentration Risk: 98% of sales depend on Coca-Cola trademark beverages; bottler agreements are subject to renewal and termination by The Coca-Cola Company.
- Currency Risk: All long-term debt is denominated in U.S. dollars. Depreciation of the Mexican peso increases debt service costs and can result in foreign exchange losses.
- Country Risk: Operations in Argentina face continued economic instability. New Panamco territories introduce risks related to political conditions, exchange controls (e.g., Venezuela), and inflation.
- Raw Materials: Prices for aluminum, plastic, and sweeteners are often quoted in U.S. dollars. A 20% excise tax on HFCS-sweetened drinks in Mexico forced a conversion to sugar-cane production.
- Legal Proceedings: The Mexican Antitrust Commission found the company engaged in monopolistic practices regarding exclusivity arrangements with retailers in 2002; the company has appealed this ruling.
Investor Verification Checklist
- Panamco Integration: Verify the progress of operational integration and the realization of projected synergies in the Mexican market.
- Debt Servicing: Monitor the company's ability to service the significant new U.S. dollar-denominated debt incurred for the Panamco acquisition, particularly given the volatility of the Mexican peso.
- Argentina Performance: Track the recovery of sales volume and profitability in the Buenos Aires territory amidst ongoing economic uncertainty.
- Regulatory Environment: Monitor the outcome of the Mexican Antitrust Commission appeal and potential changes in excise taxes on soft drinks in Mexico and Argentina.
- Dividend Policy: Confirm the rationale for the suspension of dividends in 2003 and future payout expectations given the increased leverage.