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28 Oct 2009

FEMSA Achieves 27.2% Operating Income Growth in 3Q09


Wednesday, 10/28/2009, 7:39:01 am

Monterrey, Mexico, October 28, 2009 — Fomento Económico Mexicano, S.A.B. de C.V. (“FEMSA”) today announced its operational and financial results for the third quarter of 2009.

Third Quarter 2009 Highlights:

 

Consolidated total revenues and income from operations grew 21.4% and 27.2%, respectively, compared to the third quarter 2008.

- In spite of a challenging economic environment, FEMSA again delivered a quarter of strong growth in revenues and income from operations, driven by double-digit performance in all of our operations.

 

Coca-Cola FEMSA total revenues and income from operations increased 31.5% and 24.0%, respectively.

- Driven by double-digit growth in income from operations in its Latincentro and Mercosur divisions, combined with stable results in its Mexico division.

 

FEMSA Cerveza total revenues increased 13.1%, while income from operations increased 19.4%.

- Sales volume in Mexico increased 1.5% and price per hectoliter grew 6.4%. Brazil sales volume decreased 3.9% and Export sales volume rose a solid 12.3%.

- Top-line growth combined with operating expense containment offset raw material cost pressures, resulting in an increase of 19.4% in income from operations and 70 basis points of operating margin expansion.

 

FEMSA Comercio continued its pace of strong growth and margin expansion.

- Income from operations increased by 55.0% resulting in an operating margin expansion of 230 basis points compared to the third quarter of 2008, to reach 8.8%.

 

José Antonio Fernández, Chairman and CEO of FEMSA, commented: “This year is providing one of the most challenging economic environments we have faced in a long time, and yet our team keeps finding ways to leverage our platform to grow, to improve, and ultimately to thrive. This quarter we are again delivering double-digit growth in operating income, in-line with the first half of the year, as our international operations more than offset the prolonged weakness of the Mexican market. Going forward, we are faced with even more hurdles, including potential incremental taxation in Mexico in 2010. The long-awaited recovery in the US has yet to materialize and as a result, employment in our key northern hubs remains soft. However, we are confident that we can continue to meet and exceed our objectives as we have up until this point.”

FEMSA Consolidated

Our results of operations have been affected by the depreciation of local currencies against the US dollar in most of our operations, particularly beginning in the fourth quarter of 2008, and continuing through the third quarter of 2009. As of September 30, 2009 the Mexican Peso depreciated approximately 25.1% and Brazilian Real appreciated approximately 7.1% compared to the same period of 2008.

Total revenues increased 21.4% compared to 3Q08, to Ps. 50.647 billion. Coca-Cola FEMSA accounted for approximately 70% of the incremental consolidated revenues, while FEMSA Cerveza and FEMSA Comercio provided the balance. For the first nine months of 2009, consolidated total revenues increased 19.9% to Ps. 142.917 billion.

Gross profit increased 21.7% compared to 3Q08 to Ps. 23.454 billion in 3Q09. Gross margin increased 10 basis points compared to the same period in 2008 to 46.3% of total revenues. FEMSA Comercio´s gross profit improvement more than offset raw-material cost pressures at Coca-Cola FEMSA and FEMSA Cerveza, as well as the depreciation of local currencies as applied to our US dollar-denominated costs.

For the first nine months of 2009, gross profit increased 19.3% to Ps. 65.547 billion. Gross margin contracted 20 basis points compared to the same period in 2008 to 45.9% of total revenues. FEMSA Comercio´s gross profit improvement partially offset raw-material cost pressures at FEMSA Cerveza and Coca-Cola FEMSA, as well as the depreciation of the local currencies as applied to our US dollar- denominated costs.

Income from operations increased 27.2% to Ps. 7.219 billion in 3Q09 as compared to the same period in 2008, driven by double-digit income growth in all of our operations. Coca-Cola FEMSA accounted for approximately half of the incremental consolidated income from operations, while FEMSA Comercio and FEMSA Cerveza provided the balance. Consolidated operating margin expanded 70 basis points as compared to 3Q08 to 14.3%, as operating margin improvement and expense containment initiatives at FEMSA Cerveza and FEMSA Comercio offset gross margin pressure at the beverage operations.

For the first nine months of 2009, income from operations increased 20.9% to Ps. 18.826 billion. Our consolidated operating margin year-to-date was 13.2% as a percentage of total revenues, an increase of 10 basis points as compared to the same period of 2008, driven mainly by robust top-line growth and expense containment initiatives across our operations, as well as by gross margin expansion at FEMSA Comercio, which together offset raw material pressures at the beverage operations.

Net income increased 46.0% compared to 3Q08 to Ps. 3.743 billion in 3Q09, mainly as a result of the growth in income from operations and lower integral result of financing during the quarter, driven by a smaller impact from foreign exchange losses than in 3Q08. The effective tax rate was 32.1% in 3Q09 compared with 33.1% in 3Q08.

For the first nine months of 2009, net income increased 10.0% to Ps. 8.957 billion, compared to the same period of 2008, primarily as a result of income from operations growth being partially offset by an increase in the integral result of financing during the period. Such increase resulted from the appreciation of the US dollar against our local currencies as applied to our liability position and from higher interest expense. The effective tax rate was 32.1% for the first nine months of 2009, compared with 30.4% in the same period of 2008.

Net majority income increased 24.8% over 3Q08, resulting in Ps. 0.70 per FEMSA Unit1 in 3Q09. Net majority income per FEMSA ADS was US$ 0.52 for the quarter. For the first nine months of 2009, net majority income per FEMSA Unit1 was Ps. 1.63 (US$ 1.21 per ADS).

Capital expenditures decreased 20.4% over 3Q08 to Ps. 3.183 billion in 3Q09, mainly driven by the rationalization and deferral of investments in FEMSA Cerveza, and a slight slowdown in store openings at FEMSA Comercio during the quarter, which partially offset higher manufacturing investments at Coca-Cola FEMSA.

Our consolidated balance sheet as of September 30, 2009, recorded a cash balance of Ps. 16.801 billion (US$ 1.246 billion), an increase of Ps. 11.047 billion (US$ 819.5 million) compared to the same period in 2008, reflecting strong cash generation at all of our operations, mainly Coca-Cola FEMSA. Short-term debt was Ps. 8.552 billion (US$ 634 million) while long-term debt was Ps. 33.753 billion (US$ 2.504 billion). Our net debt decreased by Ps. 7.035 billion (US$ 521.9 million) for a net debt balance of Ps. 25.504 billion (US$ 1.892 billion).

Consistent with what we believe to be FEMSA’s conservative approach, as of September 30, 2009, our ratio of net debt to EBITDA2 was only 0.7x, while our mix of US dollar-denominated debt represented 12.2% and our mix of fixed interest rate represented 42.3% of this debt. In terms of our debt profile, we only had approximately Ps. 747.9 million (US$ 55 million) coming due in the remaining months of 2009, which have already been refinanced. For 2010 and 2011, we have minor debt maturities, and our debt profile currently extends as far out as 2017.

As a matter of policy, FEMSA follows what it considers to be a conservative approach with respect to its leverage position and seeks to maintain low leverage ratios. FEMSA also seeks to manage risk through derivative instruments, through which it aims to minimize the volatility and uncertainty of operating results by hedging interest rates, foreign exchange rates and the prices of certain of our raw materials.

Soft Drinks – Coca-Cola FEMSA

Coca-Cola FEMSA’s financial results and discussion are incorporated by reference from Coca-Cola FEMSA’s press release, which is attached to this press release's PDF or visit www.coca-colafemsa.com.

Beer – FEMSA Cerveza

Mexico sales volume increased 1.5% to 6.859 million hectoliters in 3Q09, in the context of a still challenging economic environment, particularly in our key northern markets. Our Tecate brand family and Indio once again delivered strong growth. Furthermore, Mexico price per hectoliter showed robust growth of 6.4% over 3Q08 to Ps. 1,156.7 in 3Q09, resulting from price increases implemented during the second quarter of 2009, in addition to the increases carried out late in the third quarter of 2008. Mexico beer revenues were up 8.0% over 3Q08 mainly driven by stable volumes and healthy prices.

For the first nine months of 2009, Mexico sales volume decreased 2.6% to 19.754 million hectoliters and price per hectoliter grew 7.6% over the comparable period in 2008.

Brazil sales volume decreased 3.9% in 3Q09, against a tough comparable figure of 8.0% volume growth in 3Q08, to 2.278 million hectoliters, while Brazil price per hectoliter calculated in Mexican pesos increased 15.3% to Ps. 744.2 compared to the same period in 2008, largely driven by the strength of the Brazilian Real. Price per hectoliter in local currency increased by 0.9%. Brazil beer revenues were up 10.9% in Mexican pesos over 3Q08.

For the first nine months of 2009, Brazil sales volume decreased 3.4% to 6.799 million hectoliters.

Export sales volume increased 12.3% in 3Q09 to 1.065 million hectoliters, despite a challenging economic environment across export markets and a tough comparable figure of 10.0% volume growth in 3Q08. This increase was mainly driven by our Dos Equis brand in the US as well as by Sol in other key markets. Export price per hectoliter in Mexican pesos increased 38.3% to Ps. 1,333.3 in 3Q09 as compared with 3Q08, reflecting the Mexican peso depreciation against the US dollar. In US dollar terms, price per hectoliter increased 6.7% mainly due to moderate price increases implemented for our Tecate brand, as well as a favorable brand mix shift from Tecate to higher-priced Dos Equis. As a result, Export beer revenues were up 55.2% over 3Q08.

For the first nine months of 2009, export sales volume increased 5.8% to 2.885 million hectoliters.

Total revenues increased 13.1% over 3Q08 to Ps. 12.042 billion in 3Q09. Higher average price per hectoliter in pesos in all of our markets drove these results. Mexican beer sales represented 71.8% of total beer revenues, while Brazil and Export beer sales reached 15.3% and 12.9% of total beer revenues, respectively in 3Q09.

For the first nine months of 2009, total revenues increased 10.0% to Ps. 33.975 billion mainly driven by a 9.4% increase in beer revenues due to higher average unit price across our operations. Mexican beer revenues reached 72.1% of total beer revenues, down from 75.3% in the comparable period in 2008. Brazil beer revenues represented 15.4% of total beer revenues, up from 15.3% in the same period of 2008. Export beer revenues were 12.4% of total beer revenues, up from 9.4% in the comparable period in 2008.

Cost of sales was Ps. 5.682 billion in 3Q09, an increase of 16.0% compared with 3Q08, which was above the 13.1% growth in total revenues. Cost per hectoliter increased by 14.6% over 3Q08, as a result of i) the depreciation of the Mexican peso against the US dollar and the Brazilian Real, as applied to the unhedged portion of input costs denominated in foreign currencies, and ii) year-over-year increases in the cost of raw materials, particularly in grains and to a lesser extent aluminum. Gross profit increased 10.6% over 3Q08 to Ps. 6.360 billion in 3Q09, however as a percentage of revenues, gross margin declined 120 basis points from 54.0% in 3Q08 to 52.8% in 3Q09 as a result of these cost increases.

For the first nine months of 2009, cost of sales increased 15.6% to Ps. 16.314 billion. Gross margin year-to-date contracted by 230 basis points to 52.0% of total revenues as a result of these cost increases.

Income from operations increased 19.4% compared with 3Q08 to Ps. 1.800 billion in 3Q09, as continued rationalization and containment efforts at the selling expense level in Mexico and Brazil helped to offset gross margin pressures, as well as the effect of the peso depreciation as applied to marketing expenses in the US and Brazil. Operating expenses increased by 7.5%, which was less than total revenues growth continuing the trend of previous quarters in 2009, and as a result operating margin increased by 70 basis points, offsetting the contraction experienced at the gross margin level.

For the first nine months of 2009, income from operations increased 9.5% to Ps. 4.308 billion, resulting in a stable operating margin of 12.7%, as compared to the same period of 2009.

FEMSA Comercio

Total revenues increased 14.6% compared to 3Q08 to Ps. 14.080 billion in 3Q09 mainly driven by the opening of 183 net new stores in the quarter, for a total increase of 906 net new stores in the last twelve months. As of September 30, 2009, FEMSA Comercio had a total of 6,994 convenience stores in Mexico, on track to surpass its objective for the year. Same-store sales increased an average of 2.9% for the quarter over 3Q08, driven by a 2.9% increase in store traffic, and a stable average customer ticket. The same-store sales, ticket and traffic dynamics reflect the effects observed in 2008 and the previous quarters of 2009 from the continued mix shift from prepaid wireless phone cards to the sale of electronic air-time, for which only the margin is recorded, not the full amount of the air-time recharge. On a comparable basis excluding this change, the average ticket would have grown in the low-single-digits in 3Q09.

For the first nine months of 2009, total revenues increased 12.9% to Ps. 39.435 billion. FEMSA Comercio´s same-store sales increased an average of 0.6%, which reflects the mix shift from prepaid wireless phone cards to the sale of electronic air-time, as described above.

Gross profit increased by 21.2% in 3Q09 compared to 3Q08, resulting in a 180 basis point gross margin expansion reaching 32.9% of revenues. This increase reflects more effective collaboration and execution with our key supplier partners and a positive mix shift due to the growth in higher margin categories and to a lesser extent, the continued shift towards electronic air-time recharges as described above. For the first nine months of 2009, gross margin expanded by 200 basis points to 31.7% of total revenues to Ps. 12.514 billion.

Income from operations increased 55.0% over 3Q08 to Ps. 1.232 billion in 3Q09. Operating expenses increased 12.3% to Ps. 3.405 billion driven by the growing number of stores, which were partially offset by broad expense-containment initiatives at the store level, as well as by scale-driven efficiencies. As a result, operating margin expanded 230 basis points over 3Q08 reaching 8.8% of total revenues.

For the first nine months of 2009, income from operations increased 44.5% to Ps. 2.801 billion, resulting in an operating margin of 7.1%, a 160 basis point expansion from the prior year.

Recent Developments

In relation to recent press reports, on October 1, 2009, FEMSA confirmed that it is in discussions with several parties to explore opportunities involving its beer business. However, there can be no assurance that such discussions will lead to any definitive agreement.

♦♦♦

We are a holding company whose principal activities are grouped under the following sub-holding companies and carried out by their respective operating subsidiaries: Coca-Cola FEMSA, S.A.B. de C.V., which engages in the production, distribution and marketing of non-alcoholic beverages; FEMSA Cerveza, S.A. de C.V., which engages in the production, distribution and marketing of beer and flavored alcoholic beverages; and FEMSA Comercio, S.A. de C.V., which engages in the operation of convenience stores.

The translations of Mexican pesos into US dollars are included solely for the convenience of the reader, using the noon day buying rate for pesos as published by the Federal Reserve Bank of New York at September 30, 2009, which was 13.4805 Mexican pesos per US dollar.

 

FORWARD LOOKING STATEMENTS

This report may contain certain forward-looking statements concerning our future performance that should be considered as good faith estimates made by us. These forward-looking statements reflect management’s expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which could materially impact our actual performance.

♦♦♦

To obtain the complete version of this results report, with graphics, tables and additional comments, we invite you to download the PDF version, or you can visit the Financial Reports section of Investor Relations.

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