ANDINA BOTTLING CO INC annual report, Q4 FY2019

Business context and reporting period

Embotelladora Andina S.A. (Andina Bottling Company) filed this Form 20-F on April 29, 2020, covering the fiscal year ended December 31, 2019. It is an annual report, not a standalone 2019 fourth-quarter report; separate Q4 results are not clearly provided. The company bottles and distributes Coca-Cola products and other beverages in Chile, Brazil, Argentina and Paraguay. Financial statements are audited IFRS statements presented in Chilean pesos (Ch$); amounts below are in Ch$ millions unless stated otherwise.

EY issued unqualified opinions on the financial statements and on internal control over financial reporting.

Financial performance and position

Financial liabilities were 783,921 at year-end (40,594 current and 743,327 non-current), including bonds, bank borrowing and lease liabilities. Cash less these liabilities implies approximately 626,353 of net financial liabilities; this is a simple calculation, not a company-defined covenant measure. The company reported compliance with debt covenants. Most debt was fixed-rate; currency swaps hedged nearly all U.S.-dollar financial obligations. A 2020 maturity includes the Series C local bonds due in August.

Material changes versus the prior comparable year

• Consolidated sales volume declined 0.6% to 746.4 million unit cases despite higher sales, reflecting improved average revenue per case and currency translation.
• Brazil sales rose 14.6% to 619,321 and Chile sales rose 6.7% to 608,952; Paraguay sales rose 6.2% to 158,892. Argentina sales fell 4.6% to 394,636, while its volume declined 11.7% amid difficult macroeconomic conditions.
• Cost of sales rose 8.3%, faster than revenue, lifting cost of sales to 58.9% of sales from 57.9%. Management cited higher concentrate costs in Brazil, currency effects on dollar-linked inputs and product mix; lower sugar costs partly offset these pressures.
• Distribution, administrative and sales expenses rose 2.8%, but declined as a share of sales to 27.7% from 28.7%.
• Net income benefited from a Brazilian PIS/COFINS tax-credit recovery: approximately 40,282 in other income and 39,781 in financial income. This was a material non-recurring item; related tax and associated costs should be considered when assessing underlying earnings.
• Argentina’s hyperinflation accounting under IAS 29 and closing-rate translation continued to affect comparability. The company reported Argentine inflation of 53.7% for 2019 and translated its results at the period-end exchange rate.

Outlook, commentary and risks

• Management budgeted US$160–170 million of capital expenditures for 2020, focused on technology, capacity, infrastructure, returnable packaging and cooling equipment. It said the plan was under review because of COVID-19; internally generated funds were expected to finance much of it.
• COVID-19 had caused sharp declines in on-premise sales and declines in wholesale, with more moderate effects in supermarkets and traditional channels as of mid-March 2020. Management said operations had not been required to close, it did not anticipate liquidity or covenant problems or significant impairments at that time, and the ultimate financial effect could not be reliably predicted.
• On January 21, 2020, Andina issued US$300 million of 30-year notes at a 3.95% coupon for general corporate purposes, with swaps intended to convert the dollar exposure to UF.
• Argentina reinstated foreign-exchange controls in September 2019, restricting dividend remittances without central-bank approval. Currency depreciation, hyperinflation and economic contraction are material risks across the operating markets.
• Brazilian tax authorities assert IPI-related claims totaling approximately R$2 billion (about US$488 million as described in the filing). The company disputes the claims; counsel assessed most as possible to remote. The Brazilian litigation provision was Ch$66,070 million, and total provisions for litigation were Ch$69,108 million.
• The Chilean Supreme Court remanded an antitrust complaint for a merits decision in December 2019; management considered the likelihood of loss low. Heineken distribution in Brazil is expected to continue until March 2022, after which a substitute supplier may be needed; Heineken products represented 21.7% of Brazilian net sales.
• Coca-Cola bottler agreements are central to the business and subject to renewal at the licensor’s discretion. The Paraguay agreement expires in September 2020; Brazil and Argentina agreements expire in 2022 and Chile’s in 2023.
• Other exposures include concentrate and packaging costs, foreign exchange, water availability, sugar and packaging regulation, competition, Chilean civil unrest, and changing consumer preferences. The Duque de Caxias tax incentives were due to expire in October 2020 and might not be renewed.

Most important facts for investors to verify

• How much of the 2019 earnings increase is attributable to the Brazilian tax-credit recovery, and what earnings level is sustainable without it?
• Whether 2020 sales, margins, cash generation and capital spending were materially affected by COVID-19 beyond the early trends described in the filing.
• The status, timing and collectability of Brazilian tax credits and the outcome and potential cash exposure of the IPI proceedings.
• Progress on renewing the Paraguay Coca-Cola bottler agreement and plans for the end of the Heineken distribution arrangement in Brazil.
• Whether Argentine exchange controls constrain subsidiary dividends, and how inflation, currency translation and local demand affect reported results and liquidity.
• Debt maturities, covenant headroom and the use and impact of the January 2020 bond proceeds and associated hedges.