Interview

Q) Hi, Héctor. First off, could you guide us through Coca-Cola FEMSA’s results for 2016?

A) Yes. We successfully navigated a very challenging consumer, currency, and raw material environment to deliver good comparable⁽¹⁾ top- and bottom-line results. For the year, our comparable transactions outpaced our volume growth—reaching 18.9 billion. Our total revenues grew 6.6% to Ps. 157.3 billion. Our operating income rose 4.0% to Ps. 22.6 billion. Our operating cash flow grew 4.0% to Ps. 30.9 billion, and our net controlling interest income increased 0.6% to Ps. 9.3 billion, resulting in earnings per share of Ps. 4.48 (Ps. 44.82 per ADS).

(1) Excluding the effects of mergers, acquisitions, and divestitures; exchange rate movements; and hyperinflationary economies such as Venezuela.

We also made two dividend payments for a total amount of Ps. 6.9 billion (or Ps. 3.35 per share), underscoring our company’s commitment to shareholder return.

Q) Can you give us a sense of the factors that drove your performance for the year?

A) Our positive performance was driven by our focus on transactions and pricing, our strong point-of-sale execution, our proactive currency and raw material hedging strategy, and our operating and financial discipline. During the year, our transactions continued to outperform our volumes in key markets such as Mexico, Colombia, and Argentina. As we leveraged our pricing flexibility, our average prices per unit case grew ahead of inflation in most of our markets. Moreover, our top-line price and revenue management initiatives, coupled with our financial discipline, enabled us to weather a generally volatile currency and raw material environment while mitigating margin pressures.

Q) Can you tell us about your company’s most important milestones in 2016?

A) Looking back, we achieved three important milestones. First, we reached a broad new cooperation framework with our partner The Coca-Cola Company. This cooperation framework is designed to maintain our close, accretive, mutually beneficial business relationship over the long term.

Among the core elements of this new framework, we agreed to gradually increase concentrate prices for sparkling beverages in Mexico over a three-year period, beginning July of 2017. Given both companies’ commitment to implementing commercial, marketing, and productivity strategies to maximize their profitability, we are confident that we will mitigate the effects of concentrate price adjustments.

With respect to The Coca-Cola Company’s Bottling Investment Group territories, we reached an understanding to assess on a preferred basis the acquisition of specific franchises in Latin America, the U.S., and other regions that it might divest in the future. Thanks to this agreement, we will continue our track record of inorganic growth, consolidating our position as a diversified multi-category global beverage leader.

Second, we acquired Vonpar through our Brazilian subsidiary. The form of payment for this transaction underscores our flexible approach to mergers and acquisitions. It ensures that our company will continue to enjoy the financial flexibility to capture the next wave of inorganic growth in our industry, while continuing to invest in our company’s organic growth.

Third, together with our partner The Coca-Cola Company, we agreed to acquire Unilever’s AdeS soy-based beverage business⁽²⁾. As the leading soy-based beverages brand in Latin America, AdeS will complement and develop our non-carbonated beverage portfolio, offering our consumers a wider array of nutritious and delicious choices.

(2) We expect the closing of the transaction to occur in the first quarter of 2017.

Q) With respect to Vonpar, could you give us a sense of how this acquisition will positively impact you, including possible synergies?

A) Fundamentally, the Vonpar transaction will enable us to consolidate our leading position in Brazil—serving more than 88 million consumers and almost half of the Coca-Cola system’s volume in the country. We also expect to capture approximately R$65 million of synergies at the EBITDA level over the next 18 to 24 months. These synergies will result from reconfiguration of the logistics network, manufacturing optimization, administrative efficiencies, and implementation of our commercial practices.

Q) With your consolidation of this operation in 2017, could you give us an update of the results of your turnaround efforts in the Philippines?

A) Basically, our successful turnaround in the Philippines is focused on three pillars: portfolio, route to market, and supply chain. Among our initiatives, we simplified the portfolio of predominantly returnable glass bottles, concentrating on the highest potential SKUs. To balance our portfolio, we introduced a revolutionary mix of popular single-serve, one-way PET presentations—enabling us to regain market share in the Philippines’ most important markets.

We also turned around our route to market by regaining direct contact with our customers through the rollout of our pre-sale platform and deploying a dedicated sales force for our wholesalers to capture greater value from this important channel. We further strengthened our supply chain, modernizing our production capacity while gaining full control of distribution and logistics. Through our enhanced supply-chain capabilities, we are improving productivity, maximizing operating efficiency, and optimizing warehouse management and logistics.

As a result of our turnaround efforts, we delivered encouraging top- and bottom-line results for the year—marked by high single-digit transaction and volume growth. Looking ahead, our profitable transformation of our business in the Philippines should contribute to our consolidated results in 2017.

Q) Héctor, could you tell us about the steps you’re taking to strengthen your capital structure and financial flexibility?

A) As always, we continue to take proactive steps to further strengthen our capital structure and financial flexibility. On top of our emphasis on operating efficiency, our increased focus on financial discipline across our organization enables us to continue deleveraging our company’s balance sheet, while enhancing our strong cash flow generation. For example, our more efficient, prudent, and strict working capital and capital investment management, our development of the talent and capability to carry out in-depth financial and profitability analysis on many fronts, and our organizational transformation yield increased efficiency, together with agility to make more, better informed decisions across our territories.

For the year, our reported operating cash flow grew 13.6% to Ps. 35.5 billion. Consequently, our net-debt-to-operating cash flow ratio, including hedges, was 2.3 times at the end of 2016, highlighting the solid financial position of our company.

Q) Just to ask a follow-up question, what is your approach to capital allocation?

A) We maintain a disciplined approach to capital allocation, as we continue to optimize our maintenance, growth, and strategic capital expenditures—including a disciplined valuation approach to capture inorganic growth—to maximize our return on invested capital and deliver sustainable profitable growth for our shareholders. Furthermore, our centers of excellence (CoEs) not only enable centralized collaboration and knowledge sharing to benefit our operations, but also provide the potential to generate significant operating efficiencies and savings, along with opportunities to defer capital expenditures through better asset management and innovative distribution models.

Q) Looking forward, how well are you prepared to cope with the challenges that you anticipate in the upcoming year?

A) Entering 2017, we are even better prepared to navigate the headwinds we will face over the coming year—from ongoing currency and raw material volatility to continued consumer and economic challenges. Bolstered by our alignment with our partner The Coca-Cola Company, we enjoy a strong, resilient business profile thanks to our active currency and raw material hedging positions, improved currency exposure on our balance sheet, and solid overall financial position. Among our initiatives, we proactively moved to reduce our net dollar debt exposure to zero by the end of 2016. With all of our net debt denominated in local currencies, we should mitigate the effect of foreign exchange volatility going forward.

Q) Finally, what is your take on the factors that will drive your performance in 2017?

A) Through our CoEs, we are building a sustainable competitive advantage. By developing our commercial, distribution and logistics, manufacturing, and IT capabilities, they provide considerable opportunities to not only generate operating efficiencies and savings, but also drive innovation and foster talent development across our organization.

Moreover, our talent for innovation will enable us to continue transforming our diversified product portfolio, including a delicious, nutritious array of sparkling beverages, waters, isotonics, juices, dairy, and other choices for our consumers’ enjoyment.

Looking ahead, our financial and operating discipline, our strong and committed team of professionals, and our ability to adapt to the changing market dynamics of our geographically diversified portfolio of territories will enable us to capture the long-term growth opportunities that we envision in the non-alcoholic beverage industry and to continue creating sustainable value for our shareholders.