Interview
with our former CFO

Looking back on our company’s 25th anniversary, Héctor reflects on our achievements and opportunities. He also discusses our operating highlights, the sale of our majority stake in Coca‑Cola FEMSA Philippines, our M&A strategy, and our steps to strengthen our capital structure and financial flexibility, while maximizing shareholder return.

Hi, Héctor. 2018 marks the 25^th anniversary of Coca-Cola FEMSA. As its CFO over the course of these 25 years, could you summarize the company’s achievements?

For me and for our company, this marks a very impressive 25-year journey. Beginning in 1993, two landmark events took place when FEMSA and The Coca-Cola Company incorporated Coca-Cola FEMSA and, subsequently, began trading the new company’s shares on the New York Stock Exchange (NYSE) and the Mexican Bolsa (BMV). At the time of its IPO, Coca-Cola FEMSA was valued at US$1 billion.

We took our first step abroad with the acquisition of Coca‑Cola’s bottling franchise in Buenos Aires, Argentina, in 1994. Our initial entry into South America offered an important opportunity to rebuild our entire business model, while developing Right Execution Daily (RED) and segmented execution to maximize our operations’ potential.

In 2003, we seized a leadership position in the beverage industry with our watershed acquisition of Panamco.

This acquisition enabled us to become the world’s second largest Coca-Cola bottler, expanding our presence to serve 174 million consumers across nine of Latin America’s most important markets—multiplying our volume six times.

From 2008 through 2016, we strengthened our company’s leadership position in Brazil with our acquisition and integration of four significant franchises: REMIL, Fluminense, Spaipa, and Vonpar. These transactions underscored the long-term strategic importance of the Brazilian market, increasing our presence to more than 50% of the Coca-Cola system countrywide.

Correspondingly, we bolstered our foremost footprint in Mexico through our merger of four important family-owned bottling franchises—Grupo Tampico, FOQUE, CIMSA, and YOLI—from 2011 through 2013. Moreover, through our joint venture with The Coca-Cola Company, we operated in the Philippines from 2013 to 2018. As a result of our turnaround strategy, we transformed the Philippine market and the operation’s infrastructure to achieve unmatched results.

We remained at the forefront of the industry’s evolution, transforming into a multi-category beverage company with a series of joint ventures with The Coca-Cola Company.

First, in 2007, our joint acquisition of Jugos Del Valle unlocked the potential of a powerful brand of fruit juices and beverages. Second, we established a joint partnership with Matte Leão, a Brazilian infusion and tea brand. Third, we embraced the value-added dairy category through our joint ventures with Estrella Azul in Panama, Santa Clara in Mexico, and Verde Campo in Brazil. Recently, we entered a new plant-based beverage category with our joint acquisition of AdeS in 2017.

Throughout this journey, we sustained our company’s strong capital structure and financial flexibility, maintaining our disciplined approach to capital allocation while capitalizing on our operational excellence to smoothly integrate new territories and beverage categories into our company. Consequently, we are now the largest non-alcoholic beverage company in Latin America—creating value for our shareholders by multiplying the original value of Coca-Cola FEMSA by 13 times.

Can you walk through the highlights of the company’s operations in Mexico, Central America, and South America for the year?

Guided by our clear strategic framework, we delivered solid results in a complex consumer, macroeconomic, and raw material environment. For the year, our reported sales volume remained flat at 3.3 billion unit cases, with transactions growing 0.7% to 19.7 billion. Total revenues decreased 0.5% to Ps. 182.3 billion. Operating income declined 1.3% to Ps. 24.7 billion. Operating cash flow declined 2.3% to Ps. 35.4 billion. Our net controlling interest income reached Ps. 13.9 billion, resulting in earnings per share of Ps. 6.62 (Ps. 66.21 per ADS), and net controlling interest income from continued operations reached Ps. 10.9 billion, resulting in earnings per share of Ps. 5.21 (Ps. 52.05 per ADS).

Mexico, our largest operation, delivered positive results in the face of a tough macroeconomic environment, exchange rate volatility, and election year uncertainty. By leveraging our pricing, currency hedging, productivity, and digital initiatives, we continued to increase our pricing ahead of inflation, driving our top-line growth while mitigating raw material cost and currency volatility.

Overall, our Central America operations’ positive performance was backed by our affordability strategy, coupled with the newly acquired ABASA and Los Volcanes territories in Guatemala. We significantly improved our profitability with the implementation of our pre-sale system in Guatemala. We also continued our turnaround in Costa Rica, while improving our profitability in Panama and confronting a challenging sociopolitical environment in Nicaragua.

Our second largest operation —Brazil—delivered consistent volume growth throughout the year, capitalizing on our affordability strategy. Our Brazilian operation also generated improved profitability thanks to our point-of-sale execution, digital commercial and distribution capabilities, and favorable sugar prices. Our diversified portfolio is well positioned to address the country’s gradually recovering consumer and macroeconomic environment.

In Colombia, our operation continued to gain traction in a challenging competitive environment. We achieved modest volume growth most of the year thanks to our affordability strategy, achieving notable growth in our returnable colas portfolio.

Finally, in Argentina, we faced a very challenging macroeconomic environment marked by hyperinflation, substantial currency devaluation, and a deteriorating consumer environment. Nonetheless, our operation’s management of the variables within its control—from our affordable portfolio to our pricing and currency hedging initiatives and cost and expense controls—prepare us better than ever to confront these challenges and protect our profitability.

According to International Reporting Standards, we adopted hyperinflationary accounting for our Argentina operation as of July 1, 2018. Consequently, we began to report our results for any given month in real terms to the end of the actual reporting period. We are also required to use the exchange rate at the end of the actual reporting period to translate the reported results of our Argentina operation to Mexican pesos.

Notably, the adoption of hyperinflationary accounting means that our company’s reported results for our Argentina operation are not comparable to previous years. Therefore, to provide our investors with a more useful representation of our company’s performance, we provide “comparable” results that exclude the results of hyperinflationary subsidiaries, among other effects.

Could you briefly discuss the company’s decision to exercise its put option and sell its majority stake in Coca-Cola FEMSA Philippines, Inc.? Also, how does the company plan to use the resources from the sale of that asset?

We enjoyed the opportunity to operate in the Philippines for over five years, leading an efficient turnaround of that operation. As part of our acquisition of a 51% stake in Coca‑Cola FEMSA Philippines, Inc., on January 25, 2013, our company obtained a put option to sell back to The Coca-Cola Company no less than all of our shares at a price determined according to an agreed formula, which could not exceed the aggregate enterprise value of the original purchase.

Given the change of conditions for the Philippines’ business outlook—marked by the introduction of an excise tax that considerably disrupted the market—and our disciplined approach to capital allocation—focused on driving shareholder returns—our Board of Directors concluded that exercising our put option represented the best course of action for our shareholders.

On December 13, 2018, we closed the transaction to sell our company’s 51% stake in Coca-Cola FEMSA Philippines for an aggregate amount of US$715 million. Our company plans to use the proceeds from this transaction for debt repayment and general corporate purposes.

Could you update us on the company’s recent acquisitions of ABASA and Los Volcanes in Guatemala and MONRESA in Uruguay?

Our company’s recent acquisitions of ABASA, Los Volcanes, and MONRESA are a testament to our positive relationship with The Coca-Cola Company. Previously operated by The Coca-Cola Company, these three important franchise territories expand our company’s geographic footprint to 10 countries across Latin America. Consolidated on May 1, 2018, ABASA serves the northwest region of Guatemala, while Los Volcanes serves the country’s southwest region, enabling us to develop this market through portfolio standardization and cost savings initiatives. Consolidated on July 1, 2018, MONRESA serves all of the territory of Uruguay; its proximity to our Argentina operation will allow us to capture important synergies.

Could you also talk a bit about the steps the company took to improve the profitability of its portfolio?

Among our strategic portfolio initiatives, we continued to reduce the sugar content of our sparkling beverages to satisfy our consumers’ lifestyles while improving the productivity and profitability of our winning product portfolio. We also satisfied our cost-conscious consumers’ growing demand through our portfolio of affordable, returnable packaging alternatives at the right price points. For example, our affordable, returnable presentations enabled us to increase our consumer base and achieve important volume growth—particularly within our cola portfolio—across our Colombian, Guatemalan, and Costa Rican markets. Moreover, consistent with our efficient resource management and packaging optimization, we continued to deploy a wide-ranging light-weighting strategy for our operations’ PET presentations and caps. We further integrated a greater percentage of recycled material into our PET packages.

Could you further update us on the steps taken to strengthen the company’s capital structure and financial flexibility, while maximizing shareholder return?

As I noted earlier, consistent with our mandate to deleverage our company’s balance sheet, we plan to primarily use the proceeds from the sale of our company’s 51% stake in Coca-Cola FEMSA Philippines, Inc., to repay debt and further strengthen our company’s financial position. Moreover, consistent with our commitment to minimize our exposure to foreign currency denominated debt, our net debt holds zero exposure to U.S. dollars.

Through our actions, we bolstered our balance sheet, improved our debt maturity profile, and enhanced our financial flexibility. Thanks to our commitment to operating efficiency, leverage metrics, and disciplined risk management, both Moody’s and Standard and Poor’s (“S&P”) affirmed their credit ratings on our company and revised their outlook from negative to stable, reflecting our strong liquidity and satisfactory credit metrics.

Furthermore, we made two dividend payments for a total amount of over Ps. 7.0 billion (or Ps. 3.35 per share), underscoring our company’s commitment to shareholder return.