Business context and reporting period
Embotelladora Andina S.A. (Andina Bottling Company) filed this audited IFRS Form 20-F on April 25, 2019, for the fiscal year ended December 31, 2018. The filing provides annual results, not standalone fourth-quarter figures; the text does not provide clear Q4-only financial values. Amounts below are in millions of Chilean pesos (Ch$) unless noted.
Andina bottles and distributes Coca-Cola products in territories in Chile, Brazil, Argentina and Paraguay, and also sells other beverages, beer, spirits and packaging. It reported 750.6 million unit cases sold in 2018, down 0.8% from 2017. Coca-Cola trademark soft drinks generated 69.7% of consolidated sales.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | Ch$1,672,916 | Ch$1,848,879 |
| Gross profit / margin | Ch$704,888 / 42.1% | Ch$779,854 / 42.2% |
| Net income / margin | Ch$97,451 / 5.8% | Ch$119,001 / 6.4% |
| Operating cash flow | Ch$235,279 | Ch$247,960 |
| Cash used in investing activities | Ch$118,086 | Ch$168,831 |
| Cash used in financing activities | Ch$114,635 | Ch$78,346 |
| Capital expenditures | Ch$121,063 | Ch$168,858 |
- Sales fell 9.5%, chiefly because the Argentine peso and Brazilian real weakened against the Chilean peso; local price increases and volume gains in Chile, Brazil and Paraguay partly offset the currency effect. Argentina’s reported sales declined 25.3%, Brazil’s 10.5%; Chile’s rose 3.5% and Paraguay’s 5.9%.
- Group sales volume declined 0.8%. Soft-drink volume fell 1.5%; water volume rose 0.7% and juice volume rose 7.2%. Argentina’s total volume fell 4.5%, while Paraguay’s grew 4.9%.
- Cost of sales decreased 9.4%, but was essentially unchanged as a share of sales (57.9% versus 57.8%). Lower reported costs from currency translation and lower sugar costs/use were partly offset by dollar-denominated input costs and higher PET resin costs.
- Distribution, administrative and sales expenses decreased 11.4% to Ch$479,518, or 28.7% of sales versus 29.3%. Other expenses, net, increased to Ch$72,354 from Ch$67,928; this included Ch$9,583 of expenses associated with the partial bond repurchase.
- Income before tax was Ch$153,016, down from Ch$170,798. Income tax expense increased to Ch$55,565 from Ch$51,798.
Balance sheet, debt and liquidity
- At year-end, cash and cash equivalents were Ch$137,539; current assets were Ch$481,586 and current liabilities Ch$419,862. Total assets were Ch$2,214,505 and equity Ch$863,715.
- Current and non-current financial liabilities were Ch$56,115 and Ch$716,564, respectively. The company reported total liabilities of Ch$1,350,790, excluding non-controlling interests.
- In October 2018, Andina repurchased US$210 million of its US$575 million 2023 senior notes and refinanced the repurchase with UF5.7 million of Series F local bonds, due 2039, at a 2.8% annual rate. US$365 million of senior notes remained outstanding. The filing reports compliance with debt covenants at year-end.
- Andina reported Ch$250,966 of unused short-term credit lines at December 31, 2018. It said operating cash flow is its principal funding source and management believed resources were available for operations, capital spending, debt service and dividends.
- Dividends paid during 2018 were reported as Ch$85,475 in the selected financial data; the cash flow statement reports Ch$87,536 of dividend payments by the reporting entity.
Material changes, outlook and risks
- Argentina was classified as hyperinflationary in 2018, leading Andina to apply IAS 29 from January 1, 2018 and translate Argentine results at the period-end exchange rate. Comparative 2017 and 2016 figures were not restated. The filing reports 47.6% Argentine inflation for 2018 and a net income-statement loss of Ch$15,744 from inflation restatement and closing-rate translation; initial adoption increased opening retained earnings by Ch$79,500.
- Andina opened its Duque de Caxias plant in Brazil in 2018. Production was 17 million unit cases in its first year; management expected 54 million in 2019. The company budgeted US$160–180 million of 2019 capital expenditures, mainly for capacity, returnable containers and cold equipment, and expected internally generated funds to finance a large part. No earnings or revenue guidance is provided.
- Foreign exchange is a material exposure: 65.9% of 2018 revenue and 63.3% of adjusted EBITDA came from Argentina, Brazil and Paraguay. Andina said currency effects materially reduced reported results; it hedged almost all U.S.-dollar-denominated financial liabilities through cross-currency swaps and had US$56.8 million of currency forwards outstanding for expected raw-material purchases.
- Key business risks include reliance on Coca-Cola bottler agreements and concentrate pricing, competition and price pressure, consumer and regulatory shifts involving sugar and packaging, raw-material and energy costs, water availability, and political, inflation, exchange-control and economic volatility in its markets. Certain Chilean bottler agreements expire in 2019 and 2023; Paraguay’s expires in 2020, and Brazil’s and Argentina’s in 2022. Renewal is at Coca-Cola’s discretion.
- Brazilian subsidiary Rio de Janeiro Refrescos faces IPI tax proceedings with an approximate aggregate amount of BRL1.99 billion. Andina disputes the claims; counsel assessed most as possible to remote, and the final outcome remains uncertain. Separately, an arbitration concerns Heineken’s attempt to terminate the Brazilian distribution agreement before its stated 2022 expiry; Heineken products represented 18.7% of Brazilian revenue in 2018.
- Provisions for legal contingencies totaled Ch$62,453 at year-end, including Ch$55,519 in Brazil. The filing says management considers other unprovided contingencies unlikely to materially affect income or equity. Andina also reported no material off-balance-sheet arrangements and no subsequent events significantly affecting its year-end financial position.
Important facts for investors to verify
- Reconcile the effect of IAS 29 and Argentina’s sharp currency depreciation with reported versus local-currency sales, costs and earnings.
- Monitor volume, pricing and market-share trends by country, particularly the declines in soft drinks and Argentina’s total volume.
- Review the status and renewal terms of Coca-Cola bottler agreements, especially the Chilean agreement expiring in 2019.
- Track the Heineken arbitration and the Brazilian IPI tax proceedings, including any changes to provisions or assessed exposure.
- Check debt maturities, covenant headroom, available credit lines and funding for the US$160–180 million 2019 capital budget.