30 Apr 2009

FEMSA Delivers Double-Digit and Operating Income Growth in 1Q09

Thursday, 04/30/2009, 7:30:55 am

Monterrey, Mexico, April 30, 2009 — Fomento Económico Mexicano, S.A.B. de C.V. (“FEMSA”) announced today its operational and financial results for the first quarter of 2009.
First Quarter 2009 Highlights:
Consolidated total revenues and income from operations grew 20.1%, however, net income declined 27.9%.
- In spite of the challenging economic environment and continuous pressure from the devaluation of the local currencies in our main markets against the US dollar, FEMSA delivered another quarter of strong growth in revenues and income from operations, driven by double-digit performance across our business units.
- Net income decrease of 27.9% was driven by higher integral result of financing in the quarter, while net majority income declined 39.4%.
Coca-Cola FEMSA total revenues and income from operations increased 30.5% and 17.3%, respectively.
- Driven by double-digit growth in income from operations in Mercosur and Latincentro and stable growth in Mexico.
FEMSA Cerveza total revenues increased 10.4% and income from operations increased 13.8%.
- Sales volume in Mexico decreased 3.0%, compared to the solid 7.1% volume growth in 1Q08. Brazil sales volume increased 1.9% in spite of price increases implemented over the past three quarters, and export sales volume grew 2.2%, despite the decline in the overall US import category.
- Strong top-line growth, combined with tight operating expense containment and the deferral of some marketing expenses, offset raw material pressures resulting in a 13.8% increase in income from operations.
FEMSA Comercio continued its pace of strong growth and margin expansion.
- Income from operations increased over 25% for the ninth consecutive quarter, resulting in an operating margin expansion of 60 basis points to reach 4.1%.
José Antonio Fernández, Chairman and CEO of FEMSA, commented: “Our first quarter results reflect the strength of our strategy and our integrated beverage platform as well as our team’s ability to adjust our business levers to navigate these turbulent waters. We are encouraged by the resilience of our operations across businesses and across territories. However the pressures of the environment, specifically raw material costs and exchange rate, continue to impact our results. Going forward, we are cautious as we see signs that the deceleration of economic activity will continue for some time, while levels of macroeconomic uncertainty remain high. And yet, we are confident that we will continue to deliver solid results and will emerge from the current downturn a leaner and stronger company.”
FEMSA Consolidated
As a useful reference, we note that local currencies in our major operations depreciated against the US dollar particularly starting in the fourth quarter of 2008 and continued depreciating during 1Q09. In this period, the Mexican Peso depreciated approximately 34% and the Brazilian Real approximately 32%, year over year.
Total revenues increased 20.1% compared to 1Q08, to Ps. 43.445 billion. Coca-Cola FEMSA accounted for approximately 73% of the incremental consolidated revenue, while FEMSA Comercio and FEMSA Cerveza provided the balance.
Gross profit increased 18.6% compared to 1Q08 to Ps. 19.301 billion in 1Q09. Gross margin decreased 60 basis points compared to the same period in 2008 to 44.4% of total revenues. FEMSA Comercio’s gross profit improvement partially offset raw-material cost pressures at Coca-Cola FEMSA and FEMSA Cerveza, as well as the depreciation of the local currencies as applied to our US dollar denominated costs.
Income from operations increased 20.1% to Ps. 4.781 billion in 1Q09 as compared to the same period in 2008, driven by double-digit growth in all of our business units. Consolidated operating margin was flat as compared to 1Q08 at 11.0%, as FEMSA Comercio and FEMSA Cerveza operating margin improvement and expense containment initiatives offset margin pressure at Coca-Cola FEMSA.
Net income decreased 27.9% compared to 1Q08 to Ps. 1.470 billion in 1Q09, primarily as a result of a higher integral result of financing during the quarter. This increase resulted from the appreciation of the US dollar against our local currencies as applied to our liability position, and higher interest expenses. The effective tax rate was 37.4% in 1Q09 compared with 31.8% in 1Q08, due to lower income before taxes.
Net majority income decreased 39.4% over 1Q08, resulting in Ps. 0.22 per FEMSA Unit1 in 1Q09. Net majority income per FEMSA ADS was US$ 0.15 for the quarter.
Capital expenditures increased 13.3% over 1Q08 to Ps. 2.233 billion in 1Q09, mainly driven by manufacturing investments at Coca-Cola FEMSA, and the accelerated expansion in store openings at FEMSA Comercio.
Our consolidated balance sheet as of March 31, 2009, recorded a cash balance of Ps. 12.507 billion (US$ 880.2 million), an increase of Ps. 1.018 billion (US$ 71.6 million) compared to the same period of 2008. Short-term debt was Ps. 15.494 billion (US$ 1.090 billion) while long-term debt was Ps. 31.606 billion (US$ 2.224 billion). Our net debt increased by Ps. 5.545 billion (US$390.2 million) mainly reflecting the appreciation of the US dollar as applied to our US dollar liability position, new bank loans and the issuance of Ps. 2.0 billion in Certificados Bursátiles by Coca-Cola FEMSA in January 2009.
Consistent with FEMSA’s conservative approach, as of March 31, 2009, our ratio of net debt to EBITDA2 was only 1.1x, while our mix of US dollar-denominated debt represented 19.9% (9% when measured as percentage of our net debt) and our mix of fixed interest rate represented 50.3%. In terms of our debt profile, we had approximately Ps. 13.4 billion (US$ 945 million) coming due in 2009, which have been totally refinanced as of April 29, 2009. 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 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, according to our policy.
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 decreased 3.0% to 5.878 million hectoliters in 1Q09 compared to solid 7.1% volume growth in 1Q08. This decrease partially reflects unfavorable calendar effects resulting from one calendar day less in February and the Easter period shifting to 2Q09, as well as price increases implemented during the last twelve months. Our Tecate brand family combined with Dos Equis had another quarter of particularly solid performance.
Brazil sales volume increased 1.9% in 1Q09, to 2.451 million hectoliters, in spite of price increases implemented since September 2008.
Export sales volume increased 2.2% in 1Q09, compared to solid 12.6% growth in 1Q08, to 786 thousand hectoliters in 1Q09, despite a challenging economic environment in the US. This increase was mainly driven by our Dos Equis brand in the US as well as by Sol in other key markets.
Total revenues increased 10.4% over 1Q08 to Ps. 10.054 billion in 1Q09. Higher average price per hectoliter in all of our operations, combined with volume growth in Exports and Brazil drove these results. Mexican beer sales represented 69.8% of total beer revenues, while Brazil and Export beer sales reached 18.2% and 12.0% of total beer revenues, respectively.
Mexico price per hectoliter showed robust growth of 6.2% over 1Q08 to Ps. 1,084.9 in 1Q09, resulting from price increases implemented during 2008 and to a lesser extent, from volumes brought under our own distribution network. Brazil price per hectoliter, calculated in Mexican pesos increased 18.4% to Ps. 678.0 compared to the same period in 2008. Price per hectoliter in local currency was 18.3% higher as a result of price increases implemented over the last three quarters ahead of the industry, as well as incremental volumes coming from our super premium portfolio led by the Heineken brand. Export price per hectoliter in Mexican pesos increased 40.6% to Ps. 1,396.8 in 1Q09 as compared with 1Q08, reflecting the Mexican peso depreciation against the US dollar. In US dollar terms, price per hectoliter increased 4.9% mainly due to price increases implemented over the last twelve months mainly in our Tecate brand.
Cost of sales was Ps. 5.108 billion in 1Q09, an increase of 19.1% compared with 1Q08, ahead of the 10.4% growth in total revenues. Cost per hectoliter increased by 20.7% as a result of continuous cost pressure coming from the effect of the Brazilian Real depreciation of approximately 32%, as applied to our dollar-denominated costs and raw materials increases across all regions, particularly in grains. Gross profit increased 2.6% over 1Q08 to Ps. 4.946 billion in 1Q09, however as a percentage of sales, gross margin declined 370 basis points from 52.9% in 1Q08 to 49.2% in 1Q09.
Income from operations increased 13.8% compared with 1Q08 to Ps. 766 million in 1Q09, resulting in a reduction of 390 basis points of selling and administrative expenses as a percentage of sales, and a 20 basis point improvement in operating margin in the quarter. Robust top-line growth together with a decline in administrative expenses, and a slight increase in selling expenses compared to 1Q08, more than offset the cost pressure experienced during the quarter. Expense containment initiatives implemented across territories and lower marketing investment in Brazil and Mexico, offset the effect of the peso depreciation as applied to our export marketing expenses, as well as incremental expenses driven by volumes brought under our own distribution network in Mexico.
FEMSA Comercio
Total revenues increased 10.4% compared to 1Q08 to Ps. 11.801 billion in 1Q09 driven by the opening of 168 net new stores in the quarter, for a total increase of 906 net new stores in the last twelve months. As of March 31, 2009, there were a total of 6,542 OXXO convenience stores in Mexico. Same-store sales decreased 1.8% for the quarter over 1Q08, due to a 4.1% decline in the average customer ticket, which more than offset the 2.3% increase in store traffic. This decrease reflects, in part, unfavorable calendar effects compared to the prior year as well as the effects seen in 2008 on same-store sales, ticket and traffic dynamics, which reflect the 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 mid-single-digits in 1Q09.
Gross profit increased by 20.6% in 1Q09 compared to 1Q08, resulting in a 250 basis point gross margin expansion reaching 30.1%. As was the case in several previous quarters, this increase largely reflects the shift towards electronic air-time recharges as described above and to a lesser extent, better pricing strategies and improved commercial terms with our supplier partners.
Income from operations increased 29.6% over 1Q08 to Ps. 481 million in 1Q09. Operating expenses increased 19.3% to Ps. 3,074 million, mainly resulting from the increased number of stores. Operating margin expanded 60 basis points over 1Q08 reaching 4.1%, as the strong expansion of the gross margin more than offset higher operating expenses.
Recent Developments
FEMSA Shareholder Meeting
On March 25, 2009, FEMSA held its Annual Ordinary General Shareholders Meeting, during which shareholders approved the payment of a cash dividend in the amount of Ps. 1,620 million, consisting of Ps. 0.100985875 per each Series “D” share and Ps. 0.0807887 per each Series “B” share, which amounts to Ps. 0.4847322 per “BD” Unit (BMV: FEMSAUBD) or Ps. 4.847322 per ADS (NYSE: FMX), and Ps. 0.4039435 per “B” Unit (BMV: FEMSAUB). The dividend payment will be split in two equal payments, payable on May 4, 2009 and November 3, 2009 with record dates of April 30, 2009 and October 30, 2009, respectively.
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 March 31, 2009, which was 14.21 Mexican pesos per US dollar.
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, we invite you to download the PDF version, or you can visit the Financial Reports section of Investor Relations.
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