KOF

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, 2008
Accounting Standards: Mexican Financial Reporting Standards (Mexican FRS) with reconciliation to U.S. GAAP.
Overview: The company is 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, Colombia, Venezuela, Brazil, and Argentina. The 2008 period was marked by the acquisition of the REMIL bottling franchise in Brazil and the integration of Jugos del Valle products, alongside significant macroeconomic headwinds including the devaluation of the Mexican peso and a global financial crisis impacting emerging markets.

Key Financial Metrics (2008)

Note: U.S. Dollar amounts are translated at the year-end exchange rate of Ps. 13.8320 to US$ 1.00.

Material Changes vs. Prior Period (2007)

• Revenue Growth: Total revenues increased 19.8% to Ps. 82,976 million, driven by growth in all divisions. The Latincentro and Venezuela divisions accounted for over 45% of this growth, while the Mercosur division saw significant growth due to the integration of the REMIL acquisition in Brazil.
• Volume vs. Price: Total sales volume increased 5.8% to 2,242.8 million unit cases. Excluding the REMIL acquisition, organic volume growth was 2.6%. The consolidated average price per unit case grew 12.5% to Ps. 35.93, reflecting price increases and the addition of higher-priced Jugos del Valle products.
• Profitability Decline: Despite revenue growth, consolidated majority net income decreased 19.0% to Ps. 5,598 million. This decline was primarily attributed to a significant foreign exchange loss (Ps. 1,477 million) resulting from the devaluation of the Mexican peso against the U.S. dollar, which impacted U.S. dollar-denominated debt.
• Comprehensive Financing Result: The comprehensive financing result shifted from a net gain of Ps. 345 million in 2007 to a net expense of Ps. 3,552 million in 2008. This was driven by foreign exchange losses and a less favorable monetary position due to the discontinuation of inflationary accounting for subsidiaries in non-inflationary economies (Mexico, Guatemala, Panama, Colombia, Brazil).
• Segment Performance:
  • Mexico: Revenues increased 3.8%; Income from operations increased 4.3%.
  • Venezuela: Revenues surged 55.2% due to price increases and exchange rate translation effects, though volume declined 1.1% due to operating disruptions.
  • Mercosur: Revenues increased 38.4% (excluding beer), driven largely by the REMIL acquisition.

Guidance, Outlook, Risks, and Unusual Items

• Outlook & Guidance: The company does not provide specific numerical guidance for 2009 in this filing. Management expects operations outside Mexico to continue growing as a percentage of net sales. Capital expenditures for 2009 are budgeted at up to US$ 320 million, focused on manufacturing lines, returnable bottles, coolers, and distribution network improvements.
• Key Risks:
  • Relationship with The Coca-Cola Company: Approximately 98% of sales volume is derived from Coca-Cola trademark beverages. The Coca-Cola Company can unilaterally set concentrate prices and has significant influence over business conduct.
  • Currency Fluctuation: Significant devaluation of the Mexican peso and other local currencies (Brazilian real, Colombian peso) against the U.S. dollar increases costs for U.S. dollar-denominated raw materials and debt service.
  • Economic Conditions: The Mexican economy contracted in late 2008, with GDP expected to contract by approximately 5% in 2009. Similar contractions are predicted for Venezuela, Brazil, and Argentina.
  • Raw Material Costs: Prices for concentrate, packaging materials (resin, aluminum), and sweeteners are volatile. Concentrate price increases scheduled for Mexico were expected to be fully implemented in 2009.
  • Regulatory & Political: Risks include potential price controls, new taxes on sparkling beverages, water supply shortages, and political instability in operating countries.
• Unusual Items:
  • Acquisitions: Acquired REMIL (Brazil) for US$ 364.1 million and Agua De Los Angeles (Mexico) for US$ 18.3 million in 2008. In early 2009, acquired the Brisa bottled water business in Colombia for US$ 92 million (shared with The Coca-Cola Company).
  • Accounting Changes: Discontinued inflationary accounting for subsidiaries in non-inflationary economies effective January 1, 2008, under new Mexican FRS (NIF B-10).
  • Other Expenses: Included Ps. 1,831 million in "Other expenses, net," comprising write-offs of fixed assets from closing production facilities, losses on asset sales, and employee profit sharing.

Important Facts for Investor Verification

• Debt Maturity: Verify the company's ability to refinance or repay significant debt maturities in 2009, including US$ 266 million in 7.25% Senior Notes and Ps. 500 million in Mexican peso bonds.
• Concentrate Pricing: Monitor the full implementation of concentrate price increases in Mexico scheduled for 2009 and the impact on gross margins.
• Exchange Rate Exposure: Assess the ongoing impact of the Mexican peso's volatility on reported earnings and debt service costs, given that a significant portion of debt is U.S. dollar-denominated.
• Venezuela Operations: Review the stability of operations in Venezuela, which faced operating disruptions, sugar shortages, and exchange controls in 2008.
• Integration of Acquisitions: Evaluate the financial performance and integration progress of the REMIL (Brazil) and Jugos del Valle acquisitions.
• Dividend Policy: Note that dividends are declared in Mexican pesos; U.S. dollar amounts received by ADS holders are subject to exchange rate fluctuations at the time of payment.