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, 2006
Business Overview: 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 (Guatemala, Nicaragua, Costa Rica, Panama), Colombia, Venezuela, Argentina, and Brazil. Approximately 95% of sales volume is derived from Coca-Cola trademark beverages.
Key Financial Metrics (2006)
Note: Financial statements are prepared under Mexican Financial Reporting Standards (Mexican FRS). U.S. GAAP reconciliations are provided where significant differences exist.
| Metric | 2006 (Mexican FRS) | 2006 (U.S. GAAP) | 2005 (Mexican FRS) |
|---|---|---|---|
| Net Sales | Ps. 57,539 million ($5,328 million) | Ps. 57,539 million | Ps. 53,601 million |
| Total Revenues | Ps. 57,738 million ($5,346 million) | Ps. 57,768 million | Ps. 53,997 million |
| Income from Operations | Ps. 9,456 million ($875 million) | Ps. 8,432 million ($781 million) | Ps. 9,218 million |
| Net Income (Majority) | Ps. 4,883 million ($452 million) | Ps. 4,919 million ($455 million) | Ps. 4,759 million |
| EPS (Majority) | Ps. 2.64 ($0.24) | Ps. 2.76 ($0.27) | Ps. 2.58 |
| Total Assets | Ps. 75,024 million ($6,947 million) | Ps. 75,708 million ($7,010 million) | Ps. 71,034 million |
| Total Debt | Ps. 19,351 million ($1,792 million) | Ps. 19,351 million | Ps. 21,005 million |
| Cash & Equivalents | Ps. 4,473 million ($414 million) | Ps. 4,473 million | Ps. 2,122 million |
| Capital Expenditures | Ps. 2,615 million ($242 million) | Ps. 2,615 million | Ps. 2,219 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 6.9% to Ps. 57,738 million, driven by volume growth (5.8% increase to 1,998.1 million unit cases) and price increases in Venezuela, Central America, Brazil, and Colombia. Brazil, Venezuela, and Mexico accounted for 69% of incremental revenues.
- Profitability: Operating income increased 2.6% to Ps. 9,456 million. However, operating margins decreased 70 basis points to 16.4% due to higher raw material costs (sweeteners, resin) and a shift toward non-returnable packaging. Gross margin declined 130 basis points.
- Segment Performance:
- Mexico: Revenues up 2.4%; operating income slightly up. Margin declined due to lower average prices and higher operating expenses.
- Venezuela: Revenues up 11.2%, but operating income dropped 39% to Ps. 169 million due to raw material price hikes and operating disruptions.
- Brazil: Revenues up 18.5% (including beer sales); operating income up 10.0%.
- Argentina: Operating income declined 10.1% due to higher freight and salary costs.
- Debt Reduction: Total indebtedness decreased to Ps. 19,351 million from Ps. 21,005 million in 2005. Short-term debt decreased significantly, while long-term debt remained relatively stable.
- Accounting Changes: A change in the estimated useful life of refrigeration equipment in Mexico (from 5 to 7 years) reduced amortization expenses by Ps. 127 million, boosting operating income.
Guidance, Outlook, and Risks
- Capital Expenditures: Estimated at approximately US$ 300 million (Ps. 3,279 million) for 2007, focused on returnable bottles, refrigeration equipment, and distribution network improvements.
- Strategic Acquisitions: Announced a definitive agreement to acquire Jugos del Valle (a major juice producer) for approximately US$ 470 million. Status: The Mexican Antitrust Commission (CFC) announced an objection to the acquisition in May 2007; the company is considering options including seeking reconsideration.
- Key Risks:
- Concentrate Pricing: The Coca-Cola Company unilaterally sets concentrate prices. Prices were scheduled to increase in Mexico starting 2007 and Brazil starting 2006.
- Raw Materials: Exposure to volatile prices for sugar, resin, and packaging materials, many of which are priced in U.S. dollars.
- Political/Economic Instability: Significant risks in Venezuela (currency devaluation, exchange controls, sugar shortages) and Argentina (inflation, economic volatility).
- Regulatory: Antitrust investigations in Mexico, Costa Rica, and Brazil; potential for new taxes on soft drinks in various jurisdictions.
- Water Supply: Dependence on water concessions in Mexico; risk of termination or reduction of water rights.
Investor Verification Checklist
- Jugos del Valle Acquisition: Verify the final regulatory outcome of the CFC objection and the likelihood of closing the deal.
- Concentrate Price Increases: Assess the impact of the scheduled concentrate price hikes in Mexico (2007) on future margins.
- Venezuela Operations: Monitor the stability of operations, sugar availability, and the ability to repatriate earnings given exchange controls.
- Raw Material Costs: Track trends in global resin and sugar prices and their pass-through to local markets.
- Accounting Reconciliation: Review the reconciliation between Mexican FRS and U.S. GAAP, specifically regarding inflation adjustments, labor liabilities, and intangible assets.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly the maximum net leverage ratio, given the economic volatility in key markets.