Coca-Cola FEMSA, S.A.B. de C.V. — 2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019; filed April 17, 2020. This is an annual report, not a standalone 2019 fourth-quarter filing. Financial statements are prepared under IFRS and presented principally in nominal Mexican pesos. Dollar conversions are for convenience only.
Business context
Coca-Cola FEMSA is a major Coca-Cola bottler operating in Mexico, Central America, Brazil, Colombia, Argentina and Uruguay. It also distributes Heineken beer in parts of Brazil. The company’s 2019 reporting segments were Mexico and Central America, and South America. Acquisitions of Guatemalan bottlers ABASA and Los Volcanes and Uruguay’s Monresa, completed in 2018, affected year-over-year comparability.
Key financial metrics
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Total revenue | Ps.194,471 million | Ps.182,342 million | Up 6.7%; comparable growth was 10.8% per management. |
| Sales volume | 3,368.9 million unit cases | 3,321.8 million | Up 1.4%. |
| Gross profit / margin | Ps.87,507 million / 45.0% | Ps.83,938 million / 46.0% | Profit up 4.3%; margin down 100 basis points. |
| Net income from continuing operations | Ps.12,630 million | Ps.11,704 million | Up about 7.9%. |
| Consolidated net income | Ps.12,630 million | Ps.15,070 million | Down about 16.2%; 2018 included income from discontinued Philippines operations. |
| Net income attributable to parent, continuing operations | Ps.12,101 million | Ps.10,936 million | Up about 10.6%. Total parent-attributable income was Ps.13,911 million in 2018 including discontinued operations. |
| Operating cash flow, continuing operations | Ps.31,289 million | Ps.27,581 million | Up about 13.4%. |
| Capital expenditures | Ps.11,465 million | Ps.11,069 million | Primarily capacity, coolers, returnable packaging, distribution and IT. |
| Cash and cash equivalents | Ps.20,491 million | Ps.23,727 million | Down Ps.3,236 million. |
| Total debt | Ps.69,977 million | Ps.81,805 million | Down Ps.11,828 million; 2019 year-end net debt was approximately Ps.49,486 million. |
| Current ratio | 1.11 | 1.26 | Current assets divided by current liabilities. |
The company reported a 6.5% net income margin in 2019, versus 8.3% in 2018, reflecting the consolidated-income comparison that includes discontinued operations in 2018. Cash flow from operating activities covered interest and capital spending; investing cash flow was negative Ps.10,744 million and financing cash flow was negative Ps.22,794 million. Dividends paid were Ps.7,440 million.
Material changes and unusual items
- Revenue increased on pricing, volume growth in Brazil and Central America, and consolidation of the 2018 acquisitions; currency translation, particularly the Argentine peso, Brazilian real and Colombian peso, reduced reported results.
- Gross margin contracted as pricing initiatives and lower PET resin costs were offset by higher concentrate costs in Mexico and Brazil and currency effects on U.S.-dollar-linked inputs.
- South America gross profit fell 1.8% and its margin declined 230 basis points to 41.2%, while Mexico and Central America gross profit rose 8.8% and its margin fell 20 basis points to 47.9%.
- Brazil-related tax recoveries contributed to other operating revenue; the filing records Ps.2,129 million of other operating revenues in 2019, including a tax-reclaim effect. Investors should distinguish this item from recurring beverage sales.
- Other expenses included Ps.1,062 million of severance associated with an efficiency program. The company also recorded a Ps.948 million impairment of its investment in Compañía Panameña de Bebidas.
- IFRS 16 was adopted in 2019 using the modified retrospective approach, adding recognized right-of-use assets and lease liabilities; 2018 was not restated, limiting comparability of certain costs and balance-sheet items.
- Argentina was treated as hyperinflationary. Venezuela was deconsolidated from 2018, and the Philippines business was sold in December 2018 and reported as discontinued operations in the comparative period.
Outlook, risks and contingencies
- Management budgeted approximately US$648 million (Ps.12,212 million at the stated year-end exchange rate) of 2020 capital expenditures, expected to be funded by internally generated cash. It cautioned that the plan could change with market conditions, financial resources and COVID-19.
- The filing, dated during the early COVID-19 outbreak, says the full business and financial impact was uncertain and could not be predicted. Restrictions, reduced restaurant and on-premise activity, channel shifts, supply disruption and currency depreciation could affect sales, costs and cash flows.
- At the March 17, 2020 shareholders’ meeting, the company approved a dividend of Ps.4.86 per unit, payable in two installments in May and November 2020. Management described this as a 37% increase over the prior fiscal-year dividend payment; dividends remain subject to business conditions and applicable approvals.
- After year-end, the company issued US$1.25 billion of 2.750% notes due 2030, using proceeds to repay its 3.875% notes due 2023 and for general corporate purposes. It also issued Ps.3,000 million of fixed-rate and Ps.1,727 million of floating-rate Mexican certificates, repaid its 4.625% notes at maturity, and borrowed Ps.10,000 million short term in March 2020.
- Key exposures include reliance on Coca-Cola bottler agreements and concentrate supply, raw-material prices, foreign exchange and interest rates, beverage taxes and health or packaging regulation, water availability, competition, and economic and political conditions across its markets.
- Recorded provisions for tax, labor and legal matters totaled Ps.7,983 million at year-end. Separately, management disclosed approximately Ps.77,649 million of unsettled lawsuits and contingencies assessed as less than probable but not remote, including approximately Ps.53,937 million of possible Brazilian tax contingencies. Brazilian tax disputes of Ps.10,471 million were collateralized.
- The company reported compliance with debt covenants and effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- How much of 2019 revenue and operating performance depended on the Brazilian tax-reclaim item, and whether further recovery is expected.
- The trajectory of gross margins and concentrate costs, especially in Mexico and Brazil, and the degree to which pricing can offset input inflation and currency moves.
- COVID-19’s subsequent effects on volumes, sales channels, costs, cash generation and the planned 2020 capital program.
- The maturity and refinancing profile of debt after the 2020 issuances and repayments, including currency and variable-rate exposure.
- The status and potential outcomes of the disclosed Brazilian tax disputes, other contingencies and the impairment-sensitive goodwill and distribution-rights valuations.
- Whether the approved dividend is sustainable given cash needs, leverage, exchange controls and evolving operating conditions.