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27 Feb 2009

FEMSA Delivers Double-Digit Growth in 4Q08 and 2008

Friday, 02/27/2009, 8:19:05 am

Monterrey, Mexico, February 26, 2009 — Fomento Económico Mexicano, S.A.B. de C.V. (“FEMSA”) announced today its operational and financial results for the fourth quarter and full year 2008.
Fourth Quarter 2008 Highlights:
Consolidated total revenues grew 15.4% and income from operations grew 15.0%. In spite of the increasingly challenging economic environment and a more cautious consumer, FEMSA delivered robust growth in operating income driven by strong results at Coca-Cola FEMSA and FEMSA Comercio that more than offset the mixed results at FEMSA Cerveza.
Coca-Cola FEMSA total revenues and income from operations increased 23.9% and 25.7%, respectively. Driven by double-digit income from operations growth in Mercosur and Latincentro and robust growth in Mexico.
FEMSA Cerveza total revenues increased 8.6%. In an environment of healthy pricing and lapping solid 6.0% volume growth in 4Q07, sales volume decreased 0.7% in Mexico. In Brazil, volumes declined 3.5% having grown 9.3% in 4Q07, and as a result of unfavorable weather conditions. Export sales volume grew a robust 12.3%, despite the decline in the overall US import category. Continued raw material pressures and sustained marketing investments behind our brands across our operations resulted in a 9.3% decrease in income from operations.
FEMSA Comercio continued its pace of strong growth and margin expansion. Income from operations increased over 27.0% for the 8th consecutive quarter, resulting in an operating margin expansion of 110 basis points to reach 9.3%.
2008 Full Year Highlights:
Consolidated total revenues increased 13.9%. All operating units contributed to this top-line growth.
Consolidated income from operations increased 14.9%, driven by double-digit growth at Coca-Cola FEMSA and FEMSA Comercio.
Coca-Cola FEMSA total revenue and income from operations increased 19.8% and 19.2%, respectively. Strong growth in Mercosur, supported by the integration of Remil, and by Latincentro, as well as more tempered growth in Mexico drove these results.
FEMSA Cerveza total revenues increased 7.1%, mainly as a result of increases in average price per hectoliter across our main operations in local currencies. Income from operations decreased 1.9%, reflecting continued pressure on raw materials and sustained investment in our brands.
FEMSA Comercio income from operations increased 32.6%, reaching an all-time-high operating margin of 6.5% and resulting in a 100 basis point expansion. For the 7th consecutive year, income from operations increased over 25%, driven by the opening of 811 new stores during the year as well as by stable same store sales.

José Antonio Fernández, Chairman and CEO of FEMSA, commented: “2008 was a challenging year for businesses across geographies and industries, and yet, we were able to deliver double digit growth in revenues and income from operations. Over the past decade, our results underscore the strengths of an integrated beverage platform and continuous improvement driven at every stage of the value chain. During the year, every one of our business units advanced in the execution of our strategy, and today our competitive position and our skill set are stronger than ever before.
As we enter another tough year, the business environment continues to soften. Our products are defensive in nature and we expect the impact of the downturn to be relatively moderate, but clearly we are not immune and our consumers are going through difficult times. However, in terms of the business drivers that are within our control, we are taking broad measures to rationalize costs, expenses and investments at every level of the organization, so that we are in a good position to weather the storm and come out in even better shape than we are today”.
FEMSA Consolidated
Beginning on January 1st 2008, in accordance to changes in the Mexican Financial Reporting Standards (Mexican FRS) related to inflation effects, we discontinued inflation accounting for our subsidiaries in Mexico, Guatemala, Panama, Colombia and Brazil. 2008 figures for these subsidiaries are therefore in nominal pesos. For the rest of our subsidiaries in Nicaragua, Costa Rica, Venezuela and Argentina, we applied inflation accounting during 2008. For comparison purposes, the figures for 2007 have been restated in Mexican pesos with purchasing power as of December 31, 2007.
As a useful reference, we note that local currencies in our major operations depreciated against the US dollar during 2008, particularly during the fourth quarter. The Mexican Peso depreciated approximately 25% in the quarter and for the year, and the Brazilian Real approximately 32% and 22% in the quarter and for the year, respectively.
Total revenues increased 15.4% compared to 4Q07, to Ps. 44.816 billion. Coca-Cola FEMSA and FEMSA Comercio together accounted for over 90% of the consolidated revenue increase, while FEMSA Cerveza provided the balance.
For the full year of 2008, consolidated total revenues increased 13.9% to Ps. 168.022 billion. This growth resulted from double-digit growth at Coca-Cola FEMSA and FEMSA Comercio, combined with high-single digit growth at FEMSA Cerveza.
Gross profit increased 14.8% compared to 4Q07 to Ps. 20.945 billion in 4Q08. Gross margin decreased 30 basis points compared to the same period in 2007 to 46.7%. FEMSA Comercio gross profit improvement partially offset cost pressures at Coca-Cola FEMSA, coming from the integration of Jugos del Valle, which is currently a lower-profitability business, and the depreciation of the local currencies as applied to our US dollar denominated cost, as well as raw material pressure at FEMSA Cerveza.
For the full year of 2008, gross profit increased 14.5% to Ps. 77.623 billion. Gross margin rose 20 basis points compared to the same period in 2007 to 46.2% of total revenues. FEMSA Comercio’s gross profit increase more than offset raw material pressure at Coca-Cola FEMSA and FEMSA Cerveza and the depreciation of the local currencies against the US dollar as applied to our dollar denominated costs.
Income from operations increased 15.0% to Ps. 6.712 billion in 4Q08 as compared to the same period in 2007; double-digit growth at Coca-Cola FEMSA and FEMSA Comercio more than offset an operating income decline at FEMSA Cerveza. Consolidated operating margin remained flat as compared to 4Q07 at 15.0%, FEMSA Comercio and Coca-Cola FEMSA operating margin improvement offset margin pressure at FEMSA Cerveza.
For the full year of 2008, income from operations increased 14.9% to Ps. 22.684 billion. Our consolidated operating margin for the year reached 13.5%, an improvement of 10 basis points as compared to the same period in 2007, as FEMSA Comercio operating margin improvement offset margin pressure at FEMSA Cerveza and Coca-Cola FEMSA.
Net income decreased 75.9% compared to 4Q07 to Ps. 868 million in 4Q08, reflecting a higher integral result of financing during the quarter. This increase resulted from (i) a shift from a gain to a non-cash loss in our foreign exchange position, due to the depreciation of the local currencies in our markets against the US dollar, as applied to our liability position, (ii) a shift from a gain to a loss in certain derivative instruments that do not meet hedging criteria for accounting purposes, driven by the mark-to-market recognition in our US dollar cross currency swaps and to a lesser extent, the unwinding of certain commodity hedges and iii) a shift from a gain to a loss in monetary position, reflecting changes in the Mexican Financial Reporting Standards, as inflationary adjustment is no longer applied to the vast majority of our liability position. During the quarter, the increase in other expenses resulted mainly from write-off expenses derived from asset rationalization at Coca-Cola FEMSA in Mexico. The effective tax rate was 41.2% in 4Q08 compared with 31.5% in 4Q07, as a result of lower income before taxes, and reflecting the change in the Mexican Financial Reporting Standards, pursuant to which inflation adjustments are no longer made for accounting purposes but continue to be made for tax purposes.
For the full year of 2008, in spite of robust growth in income from operations, net income decreased 22.3% compared to the same period of 2007 to Ps. 9.278 billion, mainly due to the first two factors described above for the fourth quarter as well as lower gains on monetary position. The effective tax rate was 31.2% in 2008 compared with 29.3% in 2007, reflecting additional tax provisions in some of our operations which partially offset the same factors mentioned above for the fourth quarter.
Net majority income decreased 77.8% over 4Q07, resulting in Ps. 0.16 per FEMSA Unit1 in 4Q08. Net majority income per FEMSA ADS was US$ 0.12 for the quarter. Net majority income decreased 21.2% over 2007, resulting in Ps. 1.87 per FEMSA Unit1 (US$ 1.36 per FEMSA ADS) for the 2008.
Capital expenditures increased 38.2% over 4Q07 to Ps. 5.409 billion in 4Q08, resulting from increased investment in the beverage business units related to additional capacity and distribution assets, and the accelerated expansion in store openings at FEMSA Comercio. For the full year of 2008, capital expenditures increased 26.4% over 2007 to Ps. 14.234 billion for the same reasons.
The consolidated balance sheet as of December 31, 2008, recorded a cash balance of Ps. 9.110 billion (US$ 658.6 million), a decrease of Ps. 1,346 million (US$ 97.3 million) compared to the same period of 2007, mainly as a result of cash acquisitions made by Coca-Cola FEMSA over the last twelve months, including Remil, and the payment of the maturities of our certificados bursátiles during the year. Short-term debt was Ps. 11.648 billion (US$ 842.1 million) while long-term debt was Ps. 31.275 billion (US$ 2.261 billion). Our net debt increased by Ps. 4.241 billion (US$306.6 million) mainly driven by the appreciation of the US dollar as applied to our US dollar liability position and by cash acquisitions described above.
Consistent with FEMSA’s conservative approach, as of December 31, 2008, our ratio of net debt to EBITDA2 was only 1.1x, while our mix of US dollar-denominated debt represented 22.6% and our mix of fixed interest rate represented 55.0%. In terms of our debt profile, we have approximately Ps. 11.6 billion coming due in 2009, we expect to refinance Ps. 9.3 billion and to pay down the balance with internal cash generation. 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 to leverage and risk management and makes limited use of derivative instruments to reduce the volatility and uncertainty of operating results by hedging risks such as interest rate, foreign exchange and the price of certain 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 or visit
Beer – FEMSA Cerveza
Mexico sales volume decreased 0.7% to 7.118 million hectoliters in 4Q08 compared with 4Q07. This decrease reflects an increasingly cautious consumer as well as price increases implemented in the first and third quarters of 2008. Our Tecate brand family had another quarter of strong performance and our new line extensions, such as Sol Limón y Sal and Sol Cero, delivered encouraging results. For the full year of 2008, despite solid volume growth during the first half of the year, consumer demand softened during the second half, reflecting strong pricing and tough comparisons, resulting in a 1.6% increase in sales volume to 27.393 million hectoliters.
Brazil sales volume declined 3.5% in 4Q08 over a solid 9.3% volume growth in 4Q07, to 3.146 million hectoliters. This decrease reflects price increases implemented at the end of the third quarter, ahead of our competitors, and to a lesser extent unfavorable weather conditions. For the full year of 2008, Brazil sales volume increased 3.9% to 10.181 million hectoliters outpacing industry growth for the second consecutive year.
Export sales volume increased 12.3% in 4Q08, cycling a 19.3% growth in 4Q07, to 752 thousand hectoliters in 4Q08, despite a challenging economic environment in the US. This increase was mainly driven by our Dos Equis and Tecate brands in the US as well as by Sol in other key markets. For the full year of 2008, export sales volume increased 9.3% to 3.479 million hectoliters, well above import category and total industry growth in the US.
Total revenues increased 8.6% over 4Q07 to Ps. 11.492 billion in 4Q08. Higher average price per hectoliter mainly in Mexico, combined with solid volume growth in exports, drove these results. Mexican beer sales represented 73.8% of total beer revenues, while Brazil and Export beer sales reached 17.3% and 8.9% of total beer revenues, respectively.
Mexico price per hectoliter increased 10.0% over 4Q07 to Ps. 1,096.9 in 4Q08, resulting from price increases implemented during the year as well as from the positive pricing effect of incremental domestic volume brought under direct distribution during the last twelve months, which now stands at 91% of our total domestic volume. Brazil price per hectoliter in Mexican pesos decreased 1.7% to Ps. 583.3 compared to the same period in 2007, driven by the depreciation of the Brazilian Real versus the Mexican Peso. However price per hectoliter in local currency was 5.8% higher, as a result of price increases implemented late in the year. Export price per hectoliter in Mexican pesos increased 16.7% to Ps. 1,251.9 in 4Q08 as compared with 4Q07, reflecting the Mexican peso depreciation versus the dollar. In US dollar terms, price per hectoliter declined 1.8% due to changes in product mix and moderate price increases implemented during the year.
For the full year of 2008, total revenues increased 7.1% to Ps. 42.385 billion. Mexican beer revenues reached 74.9% of total beer revenues up from 74.6% in the same period of 2007. Brazil beer revenues represented 15.8% of total beer revenues, down from 16.2% in the comparable period in 2007. Export beer revenues were 9.2% of total beer revenues, in line with the comparable period in 2007.
Cost of sales was Ps. 5.425 billion in 4Q08, an increase of 13.5% compared with 4Q07, well ahead of the 8.6% growth in total revenues. Cost per hectoliter increased by 14.4% as a result of continuous cost pressure coming particularly from higher grain prices resulting from hedging agreements, and the Mexican peso depreciation of 25% as applied to our dollar-denominated costs. Gross profit increased 4.6% over 4Q07 to Ps. 6.067 billion in 4Q08, while gross margin declined by 200 basis points from 54.8% in 4Q07 to 52.8% in 4Q08.
For the full year of 2008, cost of sales increased 9.6% to Ps. 19.540 billion. Gross margin declined by 100 basis points to 53.9%.
Income from operations decreased 9.3% compared to 4Q07 to Ps. 1,461 million in 4Q08, representing a margin decline of 250 basis points, driven mainly by the increase in cost per hectoliter. Cost pressure experienced during the quarter and an increase in selling expenses more than offset the robust top-line growth and administrative expense rationalization. Operating expenses increased 9.9% over 4Q07 to Ps. 4.606 billion, resulting from incremental selling expenses driven by (i) the incremental volumes that we brought under our direct distribution network, (ii) higher advertisement expense for our core export brands combined with the effect of the peso depreciation versus the US dollar as applied to these expenses, and (iii) continuous marketing investment behind our brands and at the point of sale in Mexico. Approximately 60% of the incremental selling expenses are driven by the first two items.
For the full year of 2008, income from operations decreased 1.9% to Ps. 5.394 billion, representing 12.7% of total revenues, or 120 basis points below 2007, reflecting mainly the decline in gross margin.
FEMSA Comercio
Total revenues increased 11.1% over 4Q07 to Ps. 12.206 billion in 4Q08 driven by the opening of 286 net new stores in the quarter, for a total of 811 net new store openings in the year, with stable same-store sales. As of December 31, 2008, there were a total of 6,374 stores in Mexico, exceeding the objective for the year. Same-store sales were virtually flat, up an average of 0.1% for the quarter over 4Q07, driven by a 12.1% increase in store traffic, which more than offset a 10.7% decline in the average customer ticket. As was the case during the first nine months of 2008, store ticket and traffic dynamics 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 4Q08.
For the full year of 2008, total revenues increased 12.0% to Ps. 47.146 billion. FEMSA Comercio same-store sales increased an average of 0.4% driven by a 13.0% increase in store traffic, which more than offset an 11.2% reduction in average ticket.
Gross profit increased by 26.0% in 4Q08 compared to 4Q07, resulting in a 410 basis point gross margin expansion reaching 34.4%. This increase largely reflects the shift towards electronic air-time recharges as described above. The balance came from growth in higher-margin categories such as cigarettes and ready-to-drink coffee, among others, as well as better pricing strategies and improved commercial terms with our supplier partners. For the full year of 2008, gross margin expanded by 290 basis points to 30.9%.
Income from operations increased 27.0% over 4Q07 to Ps. 1.139 billion in 4Q08. Operating expenses increased 25.6% to Ps. 3,060 million, mainly driven by incremental selling expenses such as higher energy costs at the store level and expenses related to the strengthening of FEMSA Comercio’s organizational structure, as planned. Operating margin expanded 110 basis points over 4Q07 reaching 9.3%, as the strong expansion of the gross margin more than offset the increase in operating expenses.
For the full year of 2008, income from operations increased 32.6% to Ps. 3.077 billion, resulting in an all-time high operating margin of 6.5%, a 100 basis point expansion as compared to the previous year.
To obtain the complete version of this results report, we invite you to download the PDF version, or to visit the Financial Reports section of Investor Relations.
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