Business context and reporting period
Embotelladora Andina S.A. (Andina Bottling Company) filed this audited Form 20-F on April 27, 2018, for the fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide clear Q4-only financial results. Andina bottles and distributes Coca-Cola and other beverages in Chile, Brazil, Argentina and Paraguay. Financial statements are prepared under IFRS and presented in Chilean pesos (Ch$). Amounts below are Ch$ millions unless otherwise stated.
The company reported net sales of Ch$1,848,879 in 2017. Coca-Cola-branded soft drinks generated 72% of sales, and other beverages carrying Coca-Cola trademarks generated a further 22%. The financial statements received an unqualified audit opinion; the auditor also concluded internal control over financial reporting was effective.
Key financial and operating metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | 1,848,879 | 1,777,459 | +4.0% |
| Gross profit / gross margin | 779,854 / 42.2% | 743,549 / 41.8% | Profit +4.9%; margin +0.4 percentage points |
| Net income / net margin | 119,001 / 6.4% | 92,049 / 5.2% | Income +29.3% |
| Operating cash flow | 247,960 | 223,447 | +11.0% |
| Investing cash flow | (168,831) | (113,916) | Greater cash use |
| Financing cash flow | (78,346) | (98,225) | Lower cash use |
| Capital expenditures | 168,858 | 128,217 | +31.7% |
| Cash and cash equivalents at year-end | 136,242 | 141,264 | Down 3.6% |
| Total assets / total liabilities | 2,114,859 / 1,301,626 | 2,199,110 / 1,356,940 | Assets and liabilities both declined |
Current assets were Ch$484,010 versus current liabilities of Ch$428,287 at year-end; current financial liabilities were Ch$67,981. Non-current financial liabilities were Ch$675,767. The company reported compliance with its debt covenants. Operating cash flow less investing cash outflow left a net cash decrease of Ch$5,022 after exchange effects.
Total beverage volume was 756.3 million unit cases, down 2.9%. Soft-drink volume declined 4.1%; juice volume fell 3.2%, while water and beer volumes rose 3.8% and 12.7%, respectively. Sales rose despite lower overall volume, primarily due to higher revenue per unit case and favorable currency translation, partly offset by volume declines in Chile, Brazil and Argentina. Gross margin improved as cost of sales grew more slowly than sales; management cited higher sugar and Argentine labor costs, partly offset by lower volume-related costs and currency effects.
By geography, 2017 sales were Ch$551,873 in Chile, Ch$603,898 in Brazil, Ch$553,788 in Argentina and Ch$141,277 in Paraguay. Volumes declined in Chile, Brazil and Argentina, while Paraguay volume increased 4.8%. Brazil capital expenditures rose to Ch$81,322, chiefly reflecting investment in the Duque de Caxias plant.
Outlook, commentary, risks and unusual items
- Investment outlook: Andina budgeted approximately US$180–200 million of capital expenditures for 2018, mainly for machinery and equipment, returnable bottles and cases, and market equipment such as coolers. Management expected internally generated funds to finance a large part; the plan may change with market conditions and available resources.
- Capacity expansion: The Duque de Caxias plant in Brazil was expected to begin full operation in the first half of 2018 and increase Brazilian production capacity by about 30%.
- Portfolio and transaction: Andina began distributing AdeS products in its territories in 2017. In January 2018, it agreed with partners to acquire all of Novaverde, associated with the Guallarauco brand, subject to conditions including Chilean competition approval. The filing estimated a price of about 1,785,374 UF, less Novaverde’s financial debt, subject to adjustment.
- Franchise dependence: The Coca-Cola Company has significant influence over the business, including concentrate pricing and approval rights. The company says Coca-Cola-related trademarks accounted for 94% of 2017 net sales. Bottler agreements are discretionary and have differing expiration dates; Brazil’s agreement was undergoing renewal. Failure to renew or termination could materially affect operations.
- Litigation and contingencies: The company recorded provisions of Ch$65,624 for probable contingencies at year-end, down from Ch$73,082. Brazilian IPI tax-credit litigation remains a major uncertainty: claims have been stated at approximately R$1.28 billion, and Andina disputes their merits. The company disclosed an acquisition-related indemnity escrow of R$207.55 million, with its five-year term due to expire October 11, 2018. Favorable rulings also led to reversals of some Brazilian contingency provisions in 2017.
- Other material risks: Exposure includes foreign-exchange movements, inflation, sugar and packaging-material prices, competition and consumer health or labeling regulation, water availability, severe weather and natural disasters, labor disputes, and political and economic conditions in its markets. Currency translation reduced other comprehensive income by Ch$67,220 in 2017. Andina reported hedging almost all U.S.-dollar financial liabilities with cross-currency swaps and hedging US$62.8 million of forecast raw-material purchases.
- Dividends: Chilean law generally requires distribution of at least 30% of annual net income. Series B shares receive dividends 10% greater per share than Series A shares. Dividends declared or paid are not a guarantee of future distributions.
Important facts for investors to verify
- Confirm the latest status and renewal terms of the Brazilian Coca-Cola bottler agreement and other franchise licenses approaching expiration.
- Review the Brazilian IPI litigation, the remaining provision and the R$207.55 million escrow indemnity, including the effect of its October 2018 expiration.
- Track actual 2018 capital spending and the Duque de Caxias plant’s commissioning, capacity utilization and expected benefits.
- Assess whether pricing can offset falling soft-drink volumes and rising sugar, labor and packaging costs, particularly in Brazil and Argentina.
- Reconcile debt maturities, available credit lines, currency hedges and the impact of exchange-rate changes on cash, equity and reported earnings.
- Monitor completion and final purchase economics of the Novaverde transaction, including required regulatory approval.