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26 Apr 2010

FEMSA Grows Operating Income 9.8% in 1Q10


Monday, 04/26/2010, 8:40:41 am

Monterrey, Mexico, April 26, 2010 — Fomento Económico Mexicano, S.A.B. de C.V. (“FEMSA”) announced today its operational and financial results for the first quarter. First Quarter 2010 Highlights:

• Consolidated total revenues and income from operations grew 6.2% and 9.8%, respectively, compared to the first quarter 2009, in spite of a challenging economic environment.

• Coca-Cola FEMSA total revenues and income from operations increased 4.7% and 6.4%, respectively. Double-digit income from operations growth in Latincentro and Mercosur divisions drove these results.

• FEMSA Cerveza income from operations increased 12.7%. Top-line growth mainly due to higher price per hectoliter in Mexico and strong volume growth in Brazil, combined with lower cost pressures, resulted in an operating margin expansion of 70 basis points.

• FEMSA Comercio continued its pace of strong growth and margin expansion. Income from operations increased 28.7%, resulting in an operating margin expansion of 50 basis points.

José Antonio Fernández, Chairman and CEO of FEMSA, commented: “The first quarter of 2010 demonstrated once again the strength of our diversified platform. While beverage consumers in Mexico were pressured by prevailing macroeconomic challenges, compounded by incremental taxes and affected by cold weather, we saw very solid numbers come out of our South American operations. While comparable sales growth was negative in FEMSA Comercio’s northern border Mexican markets, we saw healthy trends in the center and south. And so, today we are able to report a solid set of numbers, with meaningful growth in operating income as well as margin expansion at every one of our businesses.

In addition to that, today we are well on our way to closing the strategic Heineken transaction. Heineken shareholders have already voted in favor of the operation, most relevant regulators have signaled the green light as well, and later today we expect the shareholders of FEMSA to approve the transaction. And so, we are almost at the starting point of a new stage for our company, one that fills us with optimism and enthusiasm. We stand ready and energized to continue driving FEMSA along a path of long-term growth and value creation. And we hope you come along for the ride.”


FEMSA Consolidated

As of March 31, 2010 the Mexican Peso and Brazilian Real appreciated approximately 13% and 23% respectively, against the US dollar as compared to the same period of 2009. During the same period, the Mexican Peso depreciated approximately 13% against the Brazilian Real.

Total revenues increased 6.2% compared to 1Q09 to Ps. 46.132 billion. FEMSA Comercio accounted for more than 60% of the incremental consolidated revenues, while Coca-Cola FEMSA and FEMSA Cerveza provided the balance.

Gross profit increased 5.9% compared to 1Q09 to Ps. 20.448 billion in 1Q10. Gross margin decreased 10 basis points compared to the same period in 2009 to 44.3% of total revenues. FEMSA Comercio and FEMSA Cerveza gross profit improvement more than offset raw material cost pressures at Coca-Cola FEMSA, driven largely by year-over-year increases in raw materials, especially sweetener costs, which were partially offset by the appreciation of local currencies as applied to our US dollar-denominated inputs.

Income from operations increased 9.8% to Ps. 5.272 billion in 1Q10 as compared to the same period in 2009. Coca-Cola FEMSA accounted for more than 45% of the incremental income from operations, while FEMSA Comercio accounted approximately 30% and FEMSA Cerveza provided the balance. Consolidated operating margin increased 30 basis points compared to 1Q09 to 11.4% of total revenues, due mainly to operating margin improvement at FEMSA Cerveza and FEMSA Comercio.

Net income increased two-fold compared to 1Q09 to Ps. 3.092 billion in 1Q10, driven mainly by lower integral result of financing during the quarter. This decrease resulted largely from a lower interest expense, a gain on certain derivative instruments over a low comparison base in the same period of 2009 and a lower foreign exchange non-cash loss. The effective income tax rate was 26.9% in 1Q10 due to a higher income before tax base.

Net majority income for 1Q10 resulted in Ps. 0.56 per FEMSA Unit1. Net majority income per FEMSA ADS was US$ 0.45 for the quarter.

Capital expenditures remain flat over 1Q09 to Ps. 2.230 billion in 1Q10, driven by the rationalization of investments in FEMSA Cerveza, which offset higher manufacturing investments at Coca-Cola FEMSA and the incremental investments in FEMSA Comercio related to store expansion.

Our consolidated balance sheet as of March 31, 2010, recorded a cash balance of Ps. 21.622 billion (US$ 1.758 billion), an increase of Ps. 8.813 billion (US$ 717 million) compared to the same period in 2009, reflecting strong cash generation at all of our operations, particularly at Coca-Cola FEMSA. Short-term debt was Ps. 6.403 billion (US$ 521 million), while long-term debt was Ps. 39.752 billion (US$ 3.232 billion). During this quarter, Coca-Cola FEMSA placed a 10-year bond, which was used for short-term debt refinancing. Our net debt decreased by Ps. 9.758 billion (US$ 793 million) for a net debt balance of Ps. 24.533 billion (US$ 1.994 billion). Once the Heineken transaction closes, FEMSA will have a net debt position of approximately zero.

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 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 www.coca-colafemsa.com.


Beer – FEMSA Cerveza

Mexico sales volume decreased 6.0% to 5.523 million hectoliters in 1Q10, in the context of a still challenging economic environment accentuated by incremental taxation and strong price increases implemented during the beginning of the year. Mexico price per hectoliter increased 9.8% over 1Q09 to Ps. 1,191.5 in 1Q10. Mexico beer revenues increased 3.2% over 1Q09 driven by the robust price increases implemented during the quarter which offset the decrease in volumes.

Brazil sales volume increased 10.4% in 1Q10, to 2.706 million hectoliters, driven by a solid performance of Kaiser brand and double-digit growth from the Heineken brand. Brazil price per hectoliter calculated in Mexican pesos increased 9.8% to Ps. 744.4 compared to the same period in 2009, driven by the appreciation of the Brazilian Real. Price per hectoliter in local currency decreased 3.9% compared to 1Q09. Brazil beer revenues were up 21.2% in Mexican pesos over 1Q09 due to a positive exchange rate translation effect and strong volume growth.

Export sales volume increased 0.8% in 1Q10 to 792 thousand hectoliters, reflecting a still-challenging economic environment across our export markets, as well as volumes working through wholesaler inventory build up, mainly for our Tecate brand in the US. Export price per hectoliter in Mexican pesos decreased 10.6% to Ps. 1,248.2 in 1Q10 as compared with 1Q09. In US dollar terms, price per hectoliter increased 1.3% due to a favorable brand mix shift to higher-priced Dos Equis, which again grew in the double digits. As a result, Export beer revenues decreased 9.9% over 1Q09 reflecting the appreciation of the Mexican peso against the US dollar.

Total revenues increased 3.8% over 1Q09 to Ps. 10.433 billion in 1Q10. Strong average price per hectoliter in Mexico and sales volume increase in Brazil drove these results. Mexican beer sales represented 68.7% of total beer revenues, while Brazil and Export beer sales reached 21.0% and 10.3% of total beer revenues, respectively in 1Q10.

Cost of sales was Ps. 5.230 billion in 1Q10, an increase of 2.4% compared with 1Q09, reflecting the combined effect of the increase in cost of certain raw materials and the translation effect resulting from the depreciation of the Mexican peso against the Brazilian Real, partially offset by the appreciation of local currencies. Gross profit increased 5.2% over 1Q09 to Ps. 5.203 billion in 1Q10, as a percentage of revenues gross margin expanded 70 basis points from 49.2% in 1Q09 to 49.9% in 1Q10.

Income from operations increased 12.7% compared with 1Q09 to Ps. 887 million in 1Q10. Operating expenses increased by 3.8%, in line with total revenues growth. Administrative expenses increased over total revenues growth, due in part to a low comparison base in 1Q09, driven by tight expense-containment initiatives that were broadly implemented last year. Selling expenses increased slightly compared to 1Q09, due mainly to brandmarketing expenditures in anticipation of the World-Cup and other advertisement campaigns. As a percentage of revenues, operating margin increased by 70 basis points.


FEMSA Comercio

Total revenues increased 14.3% compared to 1Q09 to Ps. 13.485 billion in 1Q10 mainly driven by the opening of 158 net new stores in the quarter, for a total increase of 950 net new stores in the last twelve months. As of March 31, 2010, FEMSA Comercio had a total of 7,492 convenience stores in Mexico, well on track to meet the objective for the year. Same-store sales increased an average of 3.0% for the quarter over 1Q09, driven by a 2.2% increase in store traffic and 0.4% increase in the average customer ticket. During the quarter, the samestore sales, ticket and traffic dynamics continued to reflect a smaller effect from the mix shift from physical prepaid wireless air-time cards to the sale of electronic air-time, for which only the margin is recorded, not the full amount of the electronic recharge. On a comparable basis excluding this change, the average ticket would have grown in the low-single digits in 1Q10.

Gross profit increased by 17.5% in 1Q10 compared to 1Q09, resulting in a 90 basis point gross margin expansion to reach 31.0% of total revenues. This increase reflects a positive mix shift due to the growth of higher margin categories, a more effective collaboration and execution with our key supplier partners combined with a more efficient use of promotion-related marketing resources, and to a lesser extent, the continued mix shift towards electronic air-time recharges as described above.

Income from operations increased 28.7% over 1Q09 to Ps. 619 million in 1Q10. Operating expenses increased 15.7% to Ps. 3,558 million, largely driven by the growing number of stores which were partially compensated by broad expense-containment initiatives at the store level as well as by scale-driven efficiencies. As a result, operating margin expanded 50 basis points over 1Q09 reaching 4.6% of total revenues.


Recent Developments

On March 10, 2010, FEMSA announced that subsidiaries of FEMSA have signed an agreement with subsidiaries of The Coca-Cola Company (NYSE: KO) to amend the Shareholders Agreement for Coca-Cola FEMSA, S.A.B. de C.V. ("Coca-Cola FEMSA") (NYSE: KOF, BMV: KOFL). The main purpose of the amendment is to set forth that the appointment and compensation of the chief executive officer and all officers reporting to the chief executive officer, as well as the adoption of decisions related to the ordinary operations of Coca-Cola FEMSA shall only require a simple majority vote of the board of directors. Decisions related to extraordinary matters (such as business acquisitions or combinations, among others), shall continue requiring of the vote of the majority of the board of directors, including the affirmative vote of two of the members appointed by The Coca-Cola Company. The amendment was approved at Coca-Cola FEMSA’s extraordinary shareholders meeting on April 14, 2010, and is reflected in the by-laws of Coca-Cola FEMSA.

On March 29, 2010, FEMSA announced that the Comisión Federal de Competencia, Mexico's anti-trust regulator, has approved without reservation the strategic exchange of 100% of the shares of the beer operations owned by FEMSA for an interest in Heineken (HEIA.NA; HEIN.AS; HEIO.NA; HEIO.AS), under the terms described in FEMSA's disclosure of January 11, 2010. Hart-Scott-Rodino approval has also been granted by the relevant trade authorities in the United States.

On April 14, 2010, Coca-Cola FEMSA held its Annual Ordinary General Shareholders Meeting during which its shareholders approved the Company’s consolidated financial statements for the year ended December 31, 2009, the declaration of dividends corresponding to fiscal year 2009 and the composition of the Board of Directors and Committees for 2010. Shareholders approved the payment of a cash dividend in the amount of approximately Ps. 2,604 million. The dividend will be paid as of April 26, 2010, in the amount of Ps. 1.41 per each ordinary share, equivalent to Ps. 14.10 per ADS.

On April 22, 2010, Heineken N.V. and Heineken Holding N.V. held their Annual General Meeting of Shareholders (AGM) and approved the acquisition of 100% of the shares of the beer operations owned by FEMSA, under the terms announced on January 11, 2010. The AGM of Heineken appointed, subject to the completion of the acquisition of FEMSA’s beer operations, Mr. Jose Antonio Fernandez Carbajal as member of the Board of Directors of Heineken Holding N.V. and Heineken N.V. Supervisory Board, and Mr. Javier Astaburuaga Sanjines as second representative in the Heineken N.V. Supervisory Board.


***

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, 2010, which was 12.3005 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.

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