20-F 1 kofform20f_2011.htm FORM 20F 2011 kofform20f_2011.htm - Generated by SEC Publisher for SEC Filing

As filed with the Securities and Exchange Commission on April 25, 2012.

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011
Commission file number 1-12260

Coca‑Cola FEMSA, S.A.B. de C.V.
(Exact name of registrant as specified in its charter)

Not Applicable
(Translation of registrant’s name into English)

United Mexican States
(Jurisdiction of incorporation or organization)

Guillermo González Camarena No. 600
Centro de Ciudad Santa Fe
01210 México, D.F., México
(Address of principal executive offices)

José Castro

Guillermo González Camarena No. 600
Centro de Ciudad Santa Fe
01210 México, D.F., México

(52-55) 5081-5120/5121

krelations@kof.com.mx

(Name, telephone, e-mail and/or facsimile number and
address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

American Depositary shares, each representing 10 Series L shares, without par value

New York Stock Exchange, Inc.

Series L shares, without par value

New York Stock Exchange, Inc. (not for trading, for listing purposes only)

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

The number of outstanding shares of each class of capital or common stock as of December 31, 2011 was

992,078,519

Series A shares, without par value

583,545,678

Series D shares, without par value

334,406,004

Series L shares, without par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x Yes

¨ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

¨ Yes

x No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  N/A 

¨ Yes

¨ No

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

x Yes

¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated filer  

Accelerated filer ¨   

Non-accelerated filer ¨   

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ¨   

IFRS ¨ 

Other  

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

¨ Item 17

x Item 18

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes

x No

 

 

 

 

 

TABLE OF CONTENTS

    Page 
 
  Introduction  1  
Item 1.   Not Applicable  2  
Item 2.   Not Applicable  2  
Item 3.   Key Information  2  
  Selected Consolidated Financial Data  2  
  Dividends and Dividend Policy  6  
  Exchange Rate Information  7  
  Risk Factors  8  
Item 4.   Information on the Company  16  
  The Company  16  
  Regulation  32  
  Bottler Agreements  38  
  Description of Property, Plant and Equipment  40  
  Significant Subsidiaries  42  
Item 4A.   Unresolved Staff Comments  43  
Item 5.   Operating and Financial Review and Prospects  43  
Item 6.   Directors, Senior Management and Employees  65  
Item 7.   Major Shareholders and Related Party Transactions  80  
  Major Shareholders  80  
  Related Party Transactions  84  
Item 8.   Financial Information  86  
  Consolidated Statements and Other Financial Information  86  
  Legal Proceedings  88  
Item 9.   The Offer and Listing  89  
  Trading Markets  89  
  Trading on the Mexican Stock Exchange  91  
Item 10.   Additional Information  92  
  Bylaws  92  
  Material Agreements  100  
  Taxation  101  
  Documents on Display  103  
Item 11.   Quantitative and Qualitative Disclosures about Market Risk  105  
Item 12.   Description of Securities Other than Equity Securities  109  
Item 12.A.   Debt Securities  109  
Item 12.B.   Warrants and Rights  109  
Item 12.C.   Other Securities  109  
Item 12.D.   American Depositary Shares  109  
Items 13-14.   Not Applicable  110  
Item 15.   Controls and Procedures  110  
Item 16A.   Audit Committee Financial Expert  112  
Item 16B.   Code of Ethics  112  
Item 16C.   Principal Accountant Fees and Services  112  
Item 16D.   Not Applicable  113  
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers  113  
Item 16F.   Not Applicable  113  
Item 16G.   Corporate Governance  113  
Item 16H.   Not Applicable 113  
Item 17.   Not Applicable  116  
Item 18.   Financial Statements  116  
Item 19.   Exhibits  116  

 

 i

 


 

 

INTRODUCTION

References

Unless the context otherwise requires, the terms “Coca-Cola FEMSA,” “our company,” “we,” “us” and “our” are used in this annual report to refer to Coca-Cola FEMSA, S.A.B. de C.V. and its subsidiaries on a consolidated basis.

References herein to “U.S. dollars,” “US$,” “dollars” or “$” are to the lawful currency of the United States of America. References herein to “Mexican pesos” or “Ps.” are to the lawful currency of Mexico.

“Sparkling beverages” as used in this annual report refers to nonalcoholic carbonated beverages.  “Still beverages” refers to nonalcoholic non-carbonated beverages.  Non-flavored waters, whether or not carbonated, are referred to as “waters.”

References to Coca-Cola  trademark beverages in this annual report refer to products described in “Item 4. Information on the Company—The Company—Our Products.”

Currency Translations and Estimates

This annual report contains translations of certain Mexican peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the Mexican peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, such U.S. dollar amounts have been translated from Mexican pesos at an exchange rate of Ps. 13.95 to US$ 1.00, the exchange rate for Mexican pesos on December 30, 2011, the last day in 2011 for which information is available, according to the U.S. Federal Reserve Board. On April 20, 2012, this exchange rate was Ps. 13.12 to US$ 1.00. See “Item 3. Key Information—Exchange Rate Information” for information regarding exchange rates since January 1, 2007.

To the extent that estimates are contained in this annual report, we believe such estimates, which are based on internal data, are reliable. Amounts in this annual report are rounded, and the totals may therefore not precisely equal the sum of the numbers presented.

Sources

Certain information contained in this annual report has been computed based upon statistics prepared by the Instituto Nacional de Estadística y Geografía de Mexico (the National Institute of Statistics and Geography), the Federal Reserve Bank of New York, the U.S Federal Reserve Board, the Banco de México (the Central Bank of Mexico), the Comisión Nacional Bancaria y de Valores of Mexico (the National Banking and Securities Commission, or the CNBV), local entities in each country and upon our estimates.

Forward-Looking Information

This annual report contains words such as “believe,” “expect,” “anticipate” and similar expressions that identify forward-looking statements.  Use of these words reflects our views about future events and financial performance. Actual results could differ materially from those projected in these forward-looking statements as a result of various factors that may be beyond our control, including, but not limited to, effects on our company from changes in our relationship with The Coca-Cola Company, movements in the prices of raw materials, competition, significant developments in economic or political conditions in Latin America or changes in our regulatory environment. Accordingly, we caution readers not to place undue reliance on these forward-looking statements. In any event, these statements speak only as of their respective dates, and we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise. 

1

 


 

 

Business Divisions

During 2011, we restructured our internal operations in order to have the necessary flexibility to manage our business going forward, extend our track record of growth and better reflect the geographic characteristics of our business. Previously, we managed our business under three divisions—Mexico, Latincentro, and Mercosur. As a result of these changes, we organized our operations into the following two reportable segments: (i) Mexico and Central America division (comprising the following countries: Mexico, Guatemala, Nicaragua, Costa Rica and Panama) and (ii) South America division (comprising the following countries: Brazil, Argentina, Colombia and Venezuela).  However, because Venezuela operates in an economy with exchange control and hyper-inflation, Bulletin B-5 “Information by Segments”, does not allow its aggregation into the South America segment for purposes of our consolidated financial statements. See “Item 4. Information on the Company—The Company—Business Strategy.”

Item 1.  Not Applicable

Item 2.  Not Applicable

Item 3.  Key Information

SELECTED CONSOLIDATED FINANCIAL DATA 

This annual report includes (under Item 18) our audited consolidated balance sheets as of December 31, 2011 and 2010 and the related consolidated statements of income and changes in shareholders’ equity and cash flows for the years ended December 31, 2011, 2010, and 2009. Our consolidated financial statements for those years were prepared in accordance with Mexican Financial Reporting Standards, which we sometimes refer to as Mexican FRS. Mexican FRS differs in certain significant respects from generally accepted accounting principles in the United States, or U.S. GAAP. Notes 26 and 27 to our consolidated financial statements provide a description of the principal differences between Mexican Financial Reporting Standards and U.S. GAAP as they relate to us, together with reconciliation to U.S. GAAP of net income and shareholders’ equity.

Beginning in 2012, Mexican issuers with securities registered in the National Securities Registry (Registro Nacional de Valores) of the Comisión Nacional Bancaria y de Valores (Mexican National Banking and Securities Commission, or the CNBV) are required to prepare financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, which we refer to as IFRS.  Accordingly, as of January 1, 2012, we are preparing our financial information in accordance with IFRS on a comparable basis.  See Note 28 to our audited consolidated financial statements.

Through December 31, 2007, Mexican FRS required us to recognize effects of inflation in our financial statements and re-express financial statements from prior periods in constant pesos as of the end of the most recent period presented. For periods beginning in 2008, we adopted Norma de Información Financiera (NIF) B-10 “Effects of Inflation” under Mexican Financial Reporting Standards.  Under this rule, the previous inflation accounting rules requiring us to re-express prior years to reflect the impact of current period inflation no longer apply, unless the economic environment in which we operate qualifies as inflationary pursuant to Mexican Financial Reporting Standards. An economic environment is inflationary if the cumulative inflation equals or exceeds an aggregate of 26% over the preceding three consecutive years. As a result, we ceased to recognize the effects of inflation on our financial information for our subsidiaries in Mexico, Guatemala, Panama, Colombia and Brazil. For the rest of our subsidiaries in Argentina, Venezuela, Costa Rica and Nicaragua, we continue,as of December 31, 2011, applying inflationary accounting in accordance with Mexican Financial Reporting Standards.

Pursuant to Mexican FRS, the information presented in this annual report presents financial information for 2011, 2010, and 2009 in nominal terms that has been presented in Mexican pesos, taking into account local inflation of each inflationary economic environment and converting from local currency to Mexican pesos using the official exchange rate at the end of the period published by the local central bank of each country categorized as an inflationary economic environment. For each non-inflationary economic environment, local currency is converted to Mexican pesos using the year-end exchange rate for assets and liabilities, the historical exchange rate for shareholders’ equity and the average exchange rate for the income statement. Our financial information for 2007 is expressed in constant pesos as of December 31, 2007.

2

 


 

 

Pursuant to Mexican FRS, in our consolidated financial statements and the selected financial information set forth below:

·         In inflationary economic environments, the figures are restated for inflation based on the local consumer price index.

·         In inflationary economic environments, gains and losses in purchasing power from holding monetary liabilities or assets are recognized in the “Comprehensive financing result” line in the income statement.

·         Financial statements for 2011, 2010, and 2009 are stated in nominal Mexican pesos.

·         Beginning in 2008, as a result of discontinuing inflationary accounting for subsidiaries that operate in non-inflationary economic environments, the financial statements are no longer considered to be presented in a reporting currency that comprehensively includes the effects of price level changes; therefore, the inflationary effects of inflationary economic environments arising in 2011, 2010, 2009 and 2008 result in a difference to be reconciled for U.S. GAAP purposes.  See Notes 26 and 27 to our consolidated financial statements.

Our non-Mexican subsidiaries maintain their accounting records in the currency and in accordance with accounting principles generally accepted in the country where they are located. For presentation in our consolidated financial statements, we adjust these accounting records into Mexican Financial Reporting Standards and reported in Mexican pesos under these standards.

The following table presents selected financial information of our company. This information should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements, including the notes thereto.  The selected financial information contained herein is presented on a consolidated basis, and is not necessarily indicative of our financial position or results from operations at or for any future date or period.  See Note 4 to our consolidated financial statements for our significant accounting policies.

 

 

Year Ended December 31,

 

2011(1)

2011

2010

2009(2)

2008(3)

2007

 

(2011, 2010, 2009 and 2008 in millions of Mexican pesos or millions of U.S. dollars; 2007 in millions of constant Mexican pesos as of December 31, 2007, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

Mexican FRS

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 US$

8,940

 Ps.

124,715

 Ps.

103,456

 Ps.

102,767

 Ps.

 82,976

 Ps.

69,251

Cost of goods sold

 

4,838

 

67,488

 

55,534

 

54,952

 

43,895

 

35,876

Gross profit

 

4,102

 

57,227

 

47,922

 

47,815

 

39,081

 

33,375

Operating expenses

 

2,657

 

37,075

 

30,843

 

31,980

 

25,386

 

21,889

Income from operations

 

1,445

 

20,152

 

17,079

 

15,835

 

13,695

 

11,486

Comprehensive financing result

 

76

 

1,058

 

1,228

 

1,373

 

3,552

 

345

Other expenses, net

 

167

 

2,326

 

1,292

 

1,449

 

1,831

 

702

Income taxes

 

401

 

5,599

 

4,260

 

4,043

 

2,486

 

3,336

Consolidated net income

 

801

 

11,169

 

10,299

 

8,970

 

5,826

 

7,103

Controlling interest net income

 

761

 

10,615

 

9,800

 

8,523

 

5,598

 

6,908

Non-controlling interest net income

 

40

 

554

 

499

 

447

 

228

 

195

Net controlling income per share(4)

 

0.41

 

5.69

 

5.31

 

4.62

 

3.03

 

3.74

 

 

 

     

 

 

 

 

 

 

 

U.S. GAAP

 

 

     

 

 

 

 

 

 

 

Total revenues

 US$

8,909

 Ps.

124, 288

 Ps.

103,122

 Ps.

100,393

 Ps.

 81,099

 Ps.

69,131

Cost of goods sold

 

4, 891

 

68,240

 

55,944

 

54,335

 

43,490

 

36,118

Gross profit

 

4, 018

 

56,048

 

47,178

 

46,058

 

37,609

 

33,013

Operating expenses

 

2,729

 

38,068

 

31,770

 

31,843

 

25,567

 

22,279

Income from operations

 

1,289

 

17,980

 

15,408

 

14,215

 

12,042

 

10,734

Comprehensive financing result

 

82

 

1,149

 

1,260

 

1,752

 

3,917

 

278

Other expenses, net

 

34

 

480

 

163

 

226

 

440

 

241

Income taxes

 

389

 

5,422

 

4,097

 

3,525

 

1,987

 

3,272

Consolidated net income(5)

 

790

 

11,015

 

10,105

 

8,853

 

5,802

 

6,953

Controlling interest net income

 

751

 

10,467

 

9,608

 

8,407

 

5,571

 

6,765

Non-controlling interest net income

 

39

 

548

 

497

 

446

 

231

 

188

Net controlling income per share(4)

 

0. 40

 

5.61

 

5.20

 

4.55

 

3.02

 

3.66

 

3

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

Mexican FRS

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and marketable securities

 US$

907

 Ps.

12,661

 Ps.

 12,534

 Ps.

9,954

 Ps.

6,583

 Ps.

7,780

Other current assets

 

1,392

 

19,413

 

13,902

 

13,685

 

11,409

 

9,681

Property, plant and equipment, net

 

2,975

 

41,502

 

31,874

 

31,007

 

28,157

 

23,662

Intangible assets, net

 

5,066

 

70,675

 

51,213

 

50,898

 

47,453

 

42,458

Other assets, net

 

527

 

7,357

 

4,538

 

5,117

 

4,356

 

3,597

Total assets

 

10,867

 

151,608

 

114,061

 

110,661

 

97,958

 

87,178

Short-term bank loans and notes payable

 

397

 

5,540

 

1,840

 

5,427

 

6,119

 

4,814

Other current liabilities

 

1,401

 

19,537

 

15,806

 

18,021

 

15,214

 

11,496

Long-term bank loans and notes payable.

 

1,221

 

17,034

 

15,511

 

10,498

 

12,455

 

14,102

Other long-term liabilities

 

624

 

8,717

 

7,023

 

8,243

 

6,554

 

5,985

Total liabilities

 

3,643

 

50,828

 

40,180

 

42,189

 

40,342

 

36,397

Shareholders’ equity

 

7,224

 

100,780

 

73,881

 

68,472

 

57,616

 

50,781

Capital stock

 

228

 

3,178

 

3,116

 

3,116

 

3,116

 

3,116

Non-controlling interest in consolidated subsidiaries

 

221

 

3,089

 

2,602

 

2,296

 

1,703

 

1,641

Controlling interest

 

7,003

 

97,691

 

71,279

 

66,176

 

55,913

 

49,140

U.S. GAAP

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and marketable securities

 US$

873

 Ps.

12,173

 Ps.

12,140

 Ps.

 9,740

 Ps.

6,192

 Ps.

7,542

Other current assets

 

1,486

 

20,738

 

15,081

 

14,936

 

12,493

 

10,523

Property, plant and equipment, net

 

2,971

 

41,442

 

32,032

 

29,600

 

27,967

 

22,996

Intangible assets, net

 

5,003

 

69,795

 

50,697

 

49,336

 

46,580

 

42,458

Other assets, net

 

518

 

7,232

 

5,063

 

4,817

 

4,741

 

5,063

Total assets

 

10,851

 

151,380

 

115,013

 

108,429

 

97,973

 

88,582

Short-term bank loans and notes payable

 

397

 

5,540

 

1,840

 

5,427

 

6,119

 

4,814

Other current liabilities

 

1,401

 

19,540

 

15,816

 

18,033

 

15,226

 

11,430

Long-term bank loans and notes payable

 

1,221

 

17,034

 

15,511

 

10,497

 

12,455

 

14,102

Other long-term liabilities

 

679

 

9,472

 

8,378

 

8,435

 

7,705

 

7,111

Total liabilities

 

3,698

 

51,586

 

41,545

 

42,392

 

41,505

 

37,457

Equity

 

7,153

 

99,794

 

73,468

 

66,037

 

56,468

 

51,125

Non-controlling interest in consolidated subsidiaries

 

224

 

3,124

 

2,633

 

2,333

 

1,707

 

1,653

Controlling interest

 

6,929

 

96,670

 

70,835

 

63,704

 

54,761

 

49,472

Capital stock

 

228

 

3,178

 

3,116

 

3,116

 

3,116

 

3,116

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

Mexican FRS

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation(5)

 US$

298

 Ps.

4,163

 Ps.

3,333

 Ps.

3,472

 Ps.

3,022

 Ps.

2,586

Capital expenditures(6)

 

561

 

7,826

 

7,478

 

6,282

 

4,802

 

3,682

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. GAAP

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation(5)

 US$

300

 Ps.

4,192

 Ps.

3,381

 Ps.

3,696

 Ps.

3,151

 Ps.

2,717

 

(1) 

Translation to U.S. dollar amounts at an exchange rate of Ps. 13.95 to US$ 1.00 solely for the convenience of the reader.
Includes results from the operations of Grupo Tampico from October.2011 and from Grupo CIMSA from December 2011. See “Item 4—Information on the Company—The Company—Corporate History.”

(2)  Includes results from the operations of Brisa from June 2009.  See “Item 4—Information on the Company—The Company—Corporate History.”
(3)  Includes results from the operations of REMIL from June 2008.  See “Item 4—Information on the Company—The Company—Corporate History.”
(4) 

Computed on the basis of 1,865.3 million for 2011 and 1,846.5 million for previous years million shares outstanding.

(5) 

Includes depreciation of coolers reclassified to property, plant and equipment during 2009.

(6) 

Expressed in nominal Mexican pesos.

4

 


 

 

 

DIVIDENDS AND DIVIDEND POLICY

 

The following table sets forth the nominal amount in Mexican pesos of dividends declared and paid per share each year and the U.S. dollar amounts on a per share basis actually paid to holders of American Depositary Shares, which we refer to as ADSs, on each of the respective payment dates.

Fiscal Year with Respect
to which Dividend was Declared

 

 

Date Dividend Paid

Mexican Pesos
per Share (Nominal)

U.S. Dollars per Share(1)

2007

May 6, 2008

0.512

0.049

2008

April 13, 2009

0.727

0.054

2009

April 26, 2010

1.410

0.116

2010

April 27, 2011

2.360

0.204

2011

May 30, 2012(2)

2.770

(3)

 

(1)                 Expressed in U.S. dollars using the exchange rate applicable when the dividend was paid.

(2)                 Estimated payment date since dividends for 2011 have not been paid at the time of this annual report.

(3)                 Since dividends for 2011 have not been paid at the time of this annual report, the U.S. dollar per share amount has not been determined.

 

The declaration, amount and payment of dividends are subject to approval by a simple majority of the shareholders up to an amount equivalent to 20% of the preceding years’ retained earnings and by a majority of shareholders of each of Series A and Series D shares voting together as a single class above 20% of the preceding years’ retained earnings, generally upon the recommendation of our board of directors, and will depend upon our operating results, financial condition, capital requirements, general business conditions and the requirements of Mexican law.  Accordingly, our historical dividend payments are not necessarily indicative of future dividends.

Holders of Series L shares, including in the form of ADSs, are not entitled to vote on the declaration and payments of dividends.

5

 


 

 

EXCHANGE RATE INFORMATION

The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rate expressed in Mexican pesos per U.S. dollar.

Period

Exchange Rate

 

High

Low

Average(1)

End of Period

2007

11.27

10.67

10.93

10.92

2008

13.94

9.92

11.21

13.83

2009

15.41

12.63

13.58

13.06

2010

13.19

12.16

12.64

12.38

2011

14.25

11.51

12.43

13.95

 

Source:  U.S. Federal Reserve Board.

(1)     Average month-end rates.

 

Exchange Rate

 

High

Low

End of Period

 

 

 

 

 

 

 

 

2010:

 

 

 

First Quarter

Ps. 13.19

Ps. 12.30

Ps. 12.30

Second Quarter

13.14

12.16

12.83

Third Quarter

13.17

12.49

12.63

Fourth Quarter

12.61

12.21

12.38

 

 

 

 

2011:

 

 

 

First Quarter 

Ps. 12.25

Ps. 11.92

Ps. 11.92

Second Quarter

11.97

11.51

11.72

Third Quarter

13.87

11.57

13.77

Fourth Quarter 

14.25

13.10

13.95

December

13.99

13.49

13.95

 

 

 

 

2012:

 

 

 

First Quarter

Ps.13.75

Ps. 12.63

Ps. 12.81

January

13.75

12.93

13.04

February

12.95

12.63

12.79

March

12.99

12.63

12.81

 

Source:  U.S. Federal Reserve Board.

 

On April 20, 2012, the exchange rate was Ps. 13.12 to US$ 1.00, according to the U.S. Federal Reserve Board.

We pay all cash dividends in Mexican pesos.  As a result, exchange rate fluctuations will affect the U.S. dollar amounts received by holders of our ADSs, which represent ten Series L shares, on conversion by the depositary for our ADSs of cash dividends on the shares represented by such ADSs.  In addition, fluctuations in the exchange rate between the Mexican peso and the U.S. dollar would affect the market price of our ADSs. 

6

 


 

 

RISK FACTORS

Risks Related to Our Company

Our business depends on our relationship with The Coca-Cola Company, and changes in this relationship may adversely affect our results from operations and financial condition.

Substantially all of our sales are derived from sales of Coca-Cola trademark beverages.  We produce, market and distribute Coca-Cola trademark beverages through standard bottler agreements in certain territories in Mexico and Latin America, which we refer to as “our territories.”  See “Item 4. Information on the Company—The Company—Our Territories.”  Through its rights under our bottler agreements and as a large shareholder, The Coca-Cola Company has the right to participate in the process for making important decisions related to our business.

The Coca-Cola Company may unilaterally set the price for its concentrate.  In addition, under our bottler agreements, we are prohibited from bottling or distributing any other beverages without The Coca-Cola Company’s authorization or consent, and we may not transfer control of the bottler rights of any of our territories without consent of The Coca-Cola Company.

The Coca-Cola Company also makes significant contributions to our marketing expenses, although it is not required to contribute a particular amount.  Accordingly, The Coca-Cola Company may discontinue or reduce such contributions at any time.   

We depend on The Coca-Cola Company to renew our bottler agreements.  As of December 31, 2011, we had seven bottler agreements in Mexico, with each one corresponding to a different territory: (i) the agreements for Mexico´s Valley territory expires in June 2013 and April 2016, (ii) the agreements for the Central territory expires in May 2015 and July 2016 . (iii) the agreement for the Northeast territory expires in September 2014, (iv) the agreement for the Bajio territory expires in May 2015, and (v) the agreement for the Southeast territory expires in June 2013. Our bottler agreements with The Coca-Cola Company will expire for our territories in other countries as follows:  Argentina in September 2014; Brazil in April 2014; Colombia in June 2014; Venezuela in August 2016; Guatemala in March 2015; Costa Rica in September 2017; Nicaragua in May 2016; and Panama in November 2014.  All of our bottler agreements are automatically renewable for ten-year terms, subject to the right of either party to give prior notice that it does not wish to renew a specific agreement.  In addition, these agreements generally may be terminated in the case of material breach.  See “Item 4. Information on the Company—Bottler Agreements.”  Termination would prevent us from selling Coca-Cola  trademark beverages in the affected territory and would have an adverse effect on our business, financial conditions, results from operations and prospects.  

The Coca-Cola Company and FEMSA have substantial influence on the conduct of our business, which may result in us taking actions contrary to the interests of our remaining shareholders.

The Coca-Cola Company and Fomento Económico Mexicano, S.A.B. de C.V., which we refer to as FEMSA, have substantial influence on the conduct of our business.  As of April 20, 2012, The Coca-Cola Company indirectly owns 29.4% of our outstanding capital stock, representing 37.0% of our capital stock with full voting rights.  The Coca-Cola Company is entitled to appoint five of our maximum of 21 directors and the vote of at least two of them is required to approve certain actions by our board of directors. As of April 20, 2012, FEMSA indirectly owns 50.0% of our outstanding capital stock, representing 63.0% of our capital stock with full voting rights.  FEMSA is entitled to appoint 13 of our maximum of 21 directors and all of our executive officers.  The Coca-Cola Company and FEMSA together, or only FEMSA in certain circumstances, have the power to determine the outcome of all actions requiring approval by our board of directors, and FEMSA and The Coca-Cola Company together, or only FEMSA in certain circumstances, have the power to determine the outcome of all actions requiring approval of our shareholders.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement.”  The interests of The Coca-Cola Company and FEMSA may be different from the interests of our remaining shareholders, which may result in us taking actions contrary to the interests of our remaining shareholders.

7

 


 

 

We have significant transactions with affiliates, particularly The Coca-Cola Company and FEMSA, which may create the potential for conflicts of interest and could result in less favorable terms to us.

We engage in transactions with subsidiaries of both The Coca-Cola Company and FEMSA.  Our main transactions with FEMSA include supply agreements under which we purchase certain supplies and equipment, a service agreement under which a FEMSA subsidiary transports finished products from our production facilities to distribution facilities in Mexico, sales of finished products to Oxxo, a Mexican convenience store chain owned by FEMSA, a service agreement under which a FEMSA subsidiary provides administrative services to us, and sales and distribution agreements with Cervejarias Kaiser Brasil S.A., or Cervejarias Kaiser.  We continue to distribute and sell the Kaiser  beer portfolio in our Brazilian territories through the 20-year term, consistent with arrangements in place with Cervejarias Kaiser since 2006, prior to the acquisition of Cervejarias Kaiser, a subsidiary of the Heineken Group, by Cuauhtémoc Moctezuma Holding, S.A. de C.V., formerly known as FEMSA Cerveza, S.A. de C.V. or FEMSA Cerveza. On April 30, 2010, the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group closed. See “Item 4.  Information on the Company—The Company—Product and Packaging Mix—South America, excluding Venezuela (Colombia, Brazil and Argentina).”  In addition, we have entered into cooperative marketing arrangements with The Coca-Cola Company.  We are a party to a number of bottler agreements with The Coca-Cola Company.  We also have agreed to develop still beverages and waters in our territories with The Coca-Cola Company and have entered into agreements to acquire companies with The Coca-Cola Company.  See “Item 7.  Major Shareholders and Related Party Transactions—Related Party Transactions.”

Our transactions with related parties may create the potential for conflicts of interest, which could result in terms less favorable to us than could be obtained from an unaffiliated third party.

Competition could adversely affect our financial performance.

The beverage industry in the territories in which we operate is highly competitive.  We face competition from other bottlers of sparkling beverages such as Pepsi  products, and from producers of low cost beverages or “B brands.”  We also compete in different beverage categories, other than sparkling beverages, such as water, juice-based beverages, teas, sport drinks and value-added dairy products.  Although competitive conditions are different in each of our territories, we compete principally in terms of price, packaging, consumer sales promotions, customer service and product innovation.  See “Item 4.  Information on the Company—The Company—Competition.”  There can be no assurances that we will be able to avoid lower pricing as a result of competitive pressure.  Lower pricing, changes made in response to competition and changes in consumer preferences may have an adverse effect on our financial performance.

Changes in consumer preference could reduce demand for some of our products.

The non-alcoholic beverage industry is rapidly evolving as a result of, among other things, changes in consumer preferences.  Specifically, consumers are becoming increasingly more aware of and concerned about environmental and health issues.  Concerns over the environmental impact of plastic may reduce the consumption of our products sold in plastic bottles or result in additional taxes that would adversely affect consumer demand.  In addition, researchers, health advocates and dietary guidelines are encouraging consumers to reduce their consumption of certain types of beverages sweetened with sugar and High Fructose Corn Syrup (“HFCS”), which could reduce demand for certain of our products.  A reduction in consumer demand would adversely affect our results from operations. 

Water shortages or any failure to maintain existing concessions could adversely affect our business.

Water is an essential component of all of our products.  We obtain water from various sources in our territories, including springs, wells, rivers and municipal and state water companies pursuant to either contracts to obtain water or pursuant to concessions granted by governments in our various territories. 

We obtain the vast majority of the water used in our production pursuant to concessions to exploit wells, which are generally granted based on studies of the existing and projected groundwater supply.  Our existing water concessions or contracts to obtain water may be terminated by governmental authorities under certain circumstances and their renewal depends on receiving necessary authorizations from local and/or federal water authorities.  See “Item 4.  Information on the Company—Regulation—Water Supply Law.”  In some of our other territories, our existing water supply may not be sufficient to meet our future production needs, and the available water supply may be adversely affected by shortages or changes in governmental regulations and environmental changes.

8

 


 

 

 

We cannot assure you that water will be available in sufficient quantities to meet our future production needs or will prove sufficient to meet our water supply needs.

Increases in the prices of raw materials would increase our cost of goods sold and may adversely affect our results from operations.

In addition to water, our most significant raw materials are (1) concentrate, which we acquire from affiliates of The Coca-Cola Company, (2) packaging materials and (3) sweeteners.  Prices for sparkling beverages concentrate are determined by The Coca-Cola Company as a percentage of the weighted average retail price in local currency, net of applicable taxes.  In 2005, The Coca-Cola Company decided to gradually increase concentrate prices for sparkling beverages in Brazil and Mexico. These increases were fully implemented in Brazil in 2008 and in Mexico in 2009.  However, we may experience further increases in our territories in the future.  The prices for our remaining raw materials are driven by market prices and local availability as well as the imposition of import duties and import restrictions and fluctuations in exchange rates.  We are also required to meet all of our supply needs from suppliers approved by The Coca-Cola Company, which may limit the number of suppliers available to us.  Our sales prices are denominated in the local currency in each country in which we operate, while the prices of certain materials, including those used in the bottling of our products, mainly resin, ingots to make plastic bottles, finished plastic bottles, aluminum cans and HFCS, are paid in or determined with reference to the U.S. dollar, and therefore may increase if the U.S. dollar appreciates against the currency of the countries in which we operate, as was the case in 2008 and 2009.  While the U.S. dollar did not appreciate against the currency of the countries in which we operate in 2010 and most of 2011, we cannot assure you that an appreciation of the U.S. dollar with respect to such currencies will not occur in the future.  See “Item 4.  Information on the Company—The Company—Raw Materials.”  

Our most significant packaging raw material costs arise from the purchase of resin and plastic ingots to make plastic bottles and from the purchase of finished plastic bottles, the prices of which are tied to crude oil prices and global resin supply.  The average prices that we paid for resin and plastic ingots in U.S. dollars increased significantly in 2011, as compared to 2010.  We cannot provide any assurance that prices will not increase further in future periods.  Average sweetener prices, including sugar and HFCS, paid during 2011 were higher as compared to 2010 in all of the countries in which we operate.  During 2009 to 2011 international sugar prices were volatile due to various factors, including shifting demands, availability and climate issues affecting production and distribution.  Sugar prices in all of the countries in which we operate other than Brazil are subject to local regulations and other barriers to market entry that cause us to pay in excess of international market prices for sugar.  See “Item 4.  Information on the Company—The Company—Raw Materials.”  We cannot assure you that our raw material prices will not further increase in the future.  Increases in the prices of raw materials would increase our cost of goods sold and adversely affect our financial performance.

 

Taxes could adversely affect our business.

The countries in which we operate may adopt new tax laws or modify existing law to increase taxes applicable to our business.  For example, in Mexico, a general tax reform became effective on January 1, 2010, pursuant to which, as applicable to us, there is a temporary increase in the income tax rate from 28% to 30% from 2010 through 2012.  This increase will be followed by a reduction to 29% for the year 2013 and a further reduction in 2014 to return to the previous rate of 28%.  In addition, the value added tax (VAT) rate increased in 2010 from 15% to 16%.  This increase had an impact on our results from operations due to the reduction in disposable income of consumers.

In Panama there was an increase in a certain consumer tax, effective as of April 1, 2010, affecting syrups, powders and concentrate.  Some of these materials are used for the production of our sparkling beverages.  These taxes increased from 6% to 10%.

Our products are also subject to certain taxes in many of the countries in which we operate. Certain countries in Central America, Brazil and Argentina also impose taxes on sparkling beverages.  See “Item 4.  Information on the Company—Regulation—Taxation of Sparkling Beverages.”  We cannot assure you that any governmental authority in any country where we operate will not impose new taxes or increase taxes on our products in the future.  The imposition of new taxes or increases in taxes on our products may have a material adverse effect on our business, financial condition, prospects and results from operations.

9

 


 

 

Regulatory developments may adversely affect our business.

We are subject to regulation in each of the territories in which we operate.  The principal areas in which we are subject to regulation are environment, labor, taxation, health and antitrust.  Regulation can also affect our ability to set prices for our products.  See “Item 4.  Information on the Company—Regulation.”  The adoption of new laws or regulations or a stricter interpretation or enforcement thereof in the countries in which we operate may increase our operating costs or impose restrictions on our operations which, in turn, may adversely affect our financial condition, business and results from operations.  In particular, environmental standards are becoming more stringent in several of the countries in which we operate, and we are in the process of complying with these standards, although we cannot assure you that we will be able to meet any timelines for compliance established by the relevant regulatory authorities.  See “Item 4.  Information on the Company—Regulation—Environmental Matters.”  Further changes in current regulations may result in an increase in compliance costs, which may have an adverse effect on our future results from operations or financial condition.

Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which we operate.  We are currently subject to price controls in Argentina and Venezuela.  The imposition of these restrictions or voluntary price restraints in other territories may have an adverse effect on our results from operations and financial position.  See “Item 4.  Information on the Company—Regulation—Price Controls.”  We cannot assure you that governmental authorities in any country where we operate will not impose statutory price controls or that we will need to implement voluntary price restraints in the future.

In January 2010, the Venezuelan government amended the Ley para la Defensa y Acceso a las Personas a los Bienes y Servicios (Access to Goods and Services Defense Law).  Any violation by a company that produces, distributes and sells goods and services could lead to fines, penalties or the confiscation of the assets used to produce, distribute and sell these goods without compensation.  Although we believe we are in compliance with this law, consumer protection laws in Venezuela are subject to continuing review and changes, and any such changes could lead to an adverse impact on us.

 

In July 2011 the Venezuelan government passed the Ley de Costos y Precios Justos (Fair Costs and Prices Law). The purpose of this law is to establish the regulations and administrative processes necessary to maintain the price stability of, and equal access to, goods and services. The law also creates the National Ministry of Costs and Prices, whose main role is to oversee price controls and set maximum retail prices on certain consumer goods and services. Of our products, only certain of our still water beverages were affected by these regulations, which mandated to lower our sale prices as of April 2012.  Any failure to comply with this law would result in fines, temporary suspension or the closure of operations. While we are currently in compliance with this law, we cannot assure you that the Venezuelan government’s future regulation of goods and services will not result in a forced reduction of prices in other of our products, which could have a negative effect on our results of operations.

 

In January 2012, the Costa Rican government approved a decree which regulates the sale of food and beverages in schools. The decree came into effect in 2012.  Enforcement of this law will be gradual, from 2012 to 2014, depending on the specific characteristics of the food and beverage in question. According to the decree, the sale of specific sparkling beverages and still beverages that contain sugar, syrup or HFCS in any type of presentation in schools is prohibited. We will still be allowed to sell water and certain still beverages in schools. We cannot assure you that the Costa Rican government will not further restrict sales of other of our products in schools in the future; any such further restrictions could lead to an adverse impact on our results of operations.

 

Our operations have from time to time been subject to investigations and proceedings by antitrust authorities and litigation relating to alleged anticompetitive practices. We have also been subject to investigations and proceedings on environmental and labor matters. We cannot assure you that these investigations and proceedings could not have an adverse effect on our results from operations or financial condition. See “Item 8.  Financial Information—Legal Proceedings.” 

10

 


 

 

Weather conditions may adversely affect our results from operations.

Lower temperatures and higher rainfall may negatively impact consumer patterns, which may result in lower per capita consumption of our beverage offerings. Additionally, adverse weather conditions may affect road infrastructure in the territories in which we operate and limit our ability to sell and distribute our products, thus affecting our results from operations. As was the case in most of our territories in 2011, adverse weather conditions affected our sales in certain regions of these territories.

Risks Related to the Series L shares and the ADSs

Holders of our Series L shares have limited voting rights.

Holders of our Series L shares are entitled to vote only in certain circumstances. In general terms they may elect up to three of our maximum of 21 directors and are only entitled to vote on specific matters, including certain changes in our corporate form, mergers involving our company when our company is the merged entity or when the principal corporate purpose of the merged entity is not related to the corporate purpose of our company, the cancellation of the registration of our shares on the Mexican Stock Exchange or any other foreign stock exchange, and those matters for which the Ley de Mercado de Valores (Mexican Securities Market Law) expressly allows them to vote. As a result, Series L shareholders will not be able to influence our business or operations. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders” and “Item 10. Additional Information—Bylaws—Voting Rights, Transfer Restrictions and Certain Minority Rights.”

Holders of ADSs may not be able to vote at our shareholder meetings.

Our shares are traded on the New York Stock Exchange (NYSE) in the form of ADSs. Holders of our shares in the form of ADSs may not receive notice of shareholders meetings from our ADS depositary in sufficient time to enable such holders to return voting instructions to the ADS depositary in a timely manner.

The protections afforded to non-controlling interest shareholders in Mexico are different from those afforded to minority shareholders in the United States and investors may experience difficulties in enforcing civil liabilities against us or our directors, officers and controlling persons.

Under the Mexican Securities Market Law, the protections afforded to non-controlling interest shareholders are different from, and may be less than, those afforded to minority shareholders in the United States. Therefore, it may be more difficult for non-controlling interest shareholders to enforce their rights against us, our directors or our controlling interest shareholders than it would be for minority shareholders of a United States company.

In addition, we are organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States, and all or a substantial portion of our assets and the assets of our directors, officers and controlling persons are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States on such persons or to enforce judgments against them, including in any action based on civil liabilities under the U.S. federal securities laws.

The enforceability against our directors, officers and controlling persons in Mexico in actions for enforcement of judgments of U.S. courts, and liabilities predicated solely upon the U.S. federal securities laws will be subject to certain requirements provided for in the Mexican Federal Civil Procedure Code and any applicable treaties. Some of the requirements may include personal service of process and that the judgments of U.S. courts are not against Mexican public policy. The Mexican Securities Market Law, which is considered Mexican public policy, provides that in the event of actions derived from any breach of the duty of care and the duty of loyalty against our directors and officers, any remedy would be exclusively for the benefit of the company. Therefore, investors would not be directly entitled to any remedies under such actions.

11

 


 

 

Developments in other countries may adversely affect the market for our securities.

The market value of securities of Mexican companies is, to varying degrees, influenced by economic and securities market conditions in other countries. Although economic conditions are different in each country, investors’ reaction to developments in one country can have effects on the securities of issuers in other countries, including Mexico. We cannot assure you that events elsewhere, will not adversely affect the market value of our securities.

Holders of Series L shares in the United States and holders of ADSs may not be able to participate in any capital offering and as a result may be subject to dilution of their equity interests.

Under applicable Mexican law, if we issue new shares for cash as a part of a capital increase, other than in connection with a public offering of newly issued shares or treasury stock, we are generally required to grant our shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage.  Rights to purchase shares in these circumstances are known as preemptive rights. By law, we may not allow holders of our shares or ADSs who are located in the United States to exercise any preemptive rights in any future capital increases unless (1) we file a registration statement with the United States Securities and Exchange Commission, or SEC, with respect to that future issuance of shares or (2) the offering qualifies for an exemption from the registration requirements of the U.S. Securities Act of 1933, as amended. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, as well as the benefits of preemptive rights to holders of our shares in the form of ADSs in the United States and any other factors that we consider important in determining whether to file a registration statement.

We may decide not to file a registration statement with the SEC to allow holders of our shares or ADSs who are located in the United States to participate in a preemptive rights offering. In addition, under current Mexican law, the sale by the ADS depositary of preemptive rights and the distribution of the proceeds from such sales to the holders of our shares in the form of ADSs is not possible. As a result, the equity interest of holders of our shares in the form of ADSs would be diluted proportionately. See “Item 10. Additional Information—Bylaws—Preemptive Rights.”

Risks Related to Mexico and the Other Countries in Which We Operate

Adverse economic conditions in Mexico may adversely affect our financial condition and results from operations.

We are a Mexican corporation, and our Mexican operations are our single most important geographic territory.  For the year ended December 31, 2011, 35.7% of our total revenues were attributable to Mexico.  The Mexican economy continues to be heavily influenced by the U.S. economy, and therefore, deterioration in economic conditions in the U.S. economy may affect the Mexican economy.  Prolonged periods of weak economic conditions in Mexico may have, and in the past have had, a negative effect on our company and a material adverse effect on our results from operations and financial condition.

Our business may be significantly affected by the general condition of the Mexican economy, or by the rate of inflation and interest rates in Mexico and exchange rates for the Mexican peso.  Decreases in the growth rate of the Mexican economy, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our products, lower real pricing of our products or a shift to lower margin products.  See “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”  In addition, an increase in interest rates in Mexico would increase the cost to us of variable rate, Mexican peso-denominated funding, which constituted approximately 24.5% of our total debt as of December 31, 2011, and have an adverse effect on our financial position.  See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

12

 


 

 

Depreciation of the Mexican peso relative to the U.S. dollar could adversely affect our financial condition and results from operations.

Depreciation of the Mexican peso relative to the U.S. dollar increases the cost to us of some of the raw materials we acquire, the price of which is paid in or determined with reference to U.S. dollars, and of our debt obligations denominated in U.S. dollars and thereby may negatively affect our results from operations, financial position and shareholders’ equity.  Significant fluctuation of the Mexican peso relative to the U.S. dollar occurred in the past, for example, at the end of 2008 and into 2009; and occurred again at the end of 2011, negatively affecting our results.  According to the U.S. Federal Reserve Board, the exchange rate registered a low of Ps. 9.92 to US$ 1.00 at August 5, 2008, and a high of Ps. 15.41 to US$ 1.00 at March 2, 2009 in that period.  At December 31, 2011, the exchange rate was Ps. 13.95 to U.S.$ 1.00.  At April 20, 2012, the exchange rate was Ps. 13.12 to US$ 1.00.  See “Item 3.  Key Information—Exchange Rate Information” and “Item 11.  Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Exchange Rate Risk.”  

We selectively hedge our exposure to the U.S. dollar with respect to the Mexican peso and other currencies, our U.S. dollar-denominated debt obligations, and recently, the purchase of certain U.S. dollar-denominated raw materials.  A severe depreciation of the Mexican peso or any currency of the countries in which we operate, may also result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert Mexican pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our U.S. dollar-denominated indebtedness or obligations in other currencies. While the Mexican government does not currently restrict, and since 1982 has not restricted, the right or ability of Mexican or foreign persons or entities to convert Mexican pesos into U.S. dollars or to transfer other currencies out of Mexico, the Mexican government could institute restrictive exchange rate policies in the future.  Currency fluctuations may have an adverse effect on our results from operations, financial condition and cash flows in future periods.

Political events in Mexico could adversely affect our operations.

Mexican political events may significantly affect our operations.  Mexico’s next president to be elected in July 2012 may implement significant changes in laws, public policy and/or regulations that could affect Mexico’s political and economic situation, which could adversely affect our business.  We cannot assure you that we will continue to operate under the same policies applicable to us after the Mexican federal elections in 2012.

Political events in Mexico, including events related to Mexico’s 2012 federal elections for a new President and Congress, may significantly affect Mexican economic policy and, consequently, our operations.  Political disagreements between the executive and the legislative branches could result in deadlock and prevent the timely implementation of political and economic reforms, which in turn could have a material adverse effect on Mexican economic policy.  The political environment involving Mexico’s 2012 federal elections or otherwise, could have a negative effect on the Mexican economy, which in turn could result in an adverse effect on our business.  We cannot provide any assurances that political developments in Mexico, over which we have no control, will not have an adverse effect on our business, financial condition or results from operations.

Economic and political conditions in the other Latin American countries in which we operate may increasingly adversely affect our business.  

In addition to Mexico, we conduct operations in Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, Brazil and Argentina.  Total revenues and income from our combined non-Mexican operations increased as a percentage of our consolidated total revenues and income from operations from 47.4% and 32.4%, respectively, in 2006, to 64.3% and 62.0%, respectively, in 2011.  As a consequence, our results have been increasingly affected by the economic and political conditions in the countries, other than Mexico, where we conduct operations.

Consumer demand, preferences, real prices and the costs of raw materials are heavily influenced by macroeconomic and political conditions in the other countries in which we operate.  These conditions vary by country and may not be correlated to conditions in our Mexican operations.  In Venezuela we continue to face exchange rate risk as well as scarcity of and restrictions to import raw materials.  Deterioration in economic and political conditions in any of these countries would have an adverse effect on our financial position and results from operations.

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Venezuelan political events may affect our operations.  The political uncertainty involving Venezuela’s October 2012 elections or otherwise could have a negative effect on the Venezuelan economy, which in turn could result in an adverse effect on our business.  We cannot provide any assurances that political developments in Venezuela, over which we have no control, will not have an adverse effect on our business, financial condition or results from operations.

Depreciation of the local currencies of the countries in which we operate against the U.S. dollar may increase our operating costs.  We have also operated under exchange controls in Venezuela since 2003 that limit our ability to remit dividends abroad or make payments other than in local currencies and that may increase the real price paid for raw materials and services purchased in local currency.  In January 2010, the Venezuelan government announced a devaluation of its official exchange rate and the establishment of a multiple exchange rate system which was set at 2.60 bolivars to US$ 1.00 for high priority categories and 4.30 bolivars to US$ 1.00 for non-priority categories, and which recognized the existence of other exchange rates in which the government will intervene. In December 2010, the Venezuelan government announced its decision to implement a new singular fixed exchange rate of 4.30 bolivars to US$ 1.00, which resulted in a devaluation of the bolivar against the U.S. dollar.  For further information, please see Note 3 to our consolidated financial statements.  Future changes in the Venezuelan exchange control regime, and future currency devaluations or the imposition of exchange controls in any of the countries in which we have operations could have an adverse effect on our financial position and results from operations.

In addition, presidential elections were held in November 2011 in each of Guatemala and Nicaragua.   The elections in Guatemala led to the election of a new President and political party (the Patriotic Party (Partido Patriota)).  The elections in Nicaragua led to the reelection of José Daniel Ortega Saavedra, a member of the Sandinista National Liberation Front (Partido Frente Sandinista de Liberación Nacional).  We cannot assure you that the elected presidents will continue to apply the same policies that have been applied to us in the past.

We cannot assure you those political or social developments in any of the countries in which we have operations, over which we have no control, will not have a corresponding adverse effect on the economic situation and on our business, financial condition or results from operations.

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Item 4.  Information on the Company

THE COMPANY

Overview

We are the largest franchise bottler of Coca-Cola trademark beverages in the world.  We operate in territories in the following countries:

·         Mexico – a substantial portion of central Mexico (including Mexico City and the states of Michoacán and Guanajuato) and the southeast and northeast of Mexico (including the Gulf region).

·         Central America – Guatemala (Guatemala City and surrounding areas), Nicaragua (nationwide), Costa Rica (nationwide) and Panama (nationwide).

·         Colombia – most of the country.

·         Venezuela – nationwide.

·         Brazil – the area of greater São Paulo, Campinas, Santos, the state of Mato Grosso do Sul, part of the state of Minas Gerais and part of the state of Goiás.

·         Argentina – Buenos Aires and surrounding areas.

Our company was organized on October 30, 1991 as a sociedad anónima de capital variable (a variable capital stock corporation) under the laws of Mexico with duration of 99 years.  On December 5, 2006, as required by amendments to the Mexican Securities Market Law, we became a sociedad anónima bursátil de capital variable (a listed variable capital stock corporation).  Our legal name is Coca-Cola FEMSA, S.A.B. de C.V.  Our principal executive offices are located at Guillermo González Camarena No. 600, Col. Centro de Ciudad Santa Fe, Delegación Álvaro Obregón, México, D.F., 01210, México.  Our telephone number at this location is (52-55) 5081-5100.  Our website is www.coca-colafemsa.com.

The following is an overview of our operations by reporting segment in 2011.

Operations by Reporting Segment—Overview
Year Ended December 31, 2011
(1)

 

Total
Revenues

Percentage of Total Revenues

Income from Operations

Percentage of Income from Operations

Mexico and Central America(2)

 

52,196

 

41.9%

 

8,906

 

44.2%

South America (excluding Venezuela)(3) 

 

52,408

 

42.0%

 

7,943

 

39.4%

Venezuela

20,111

16.1%

3,303

16.4%

Consolidated

124,715

100.0%

20,152

100.0%

           

(1)       Expressed in millions of Mexican pesos, except for percentages.

(2)      Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama. Includes results of Grupo Tampico from October 2011 and Grupo CIMSA from December 2011.  

(3)      Includes Colombia, Brazil and Argentina

 

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Corporate History

We are a subsidiary of FEMSA, which also owns Oxxo, the largest Mexican convenience store chain, and which formerly owned FEMSA Cerveza, now Cuauhtémoc Moctezuma Holding, S.A. de C.V., a brewer with operations in Mexico and Brazil, currently a wholly-owned subsidiary of the Heineken Group.  On April 30, 2010, the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group closed.

In 1979, a subsidiary of FEMSA acquired certain sparkling beverage bottlers that are now a part of our company.  At that time, the acquired bottlers had 13 Mexican distribution centers operating 701 distribution routes, and their production capacity was 83 million physical cases.  In 1991, FEMSA transferred its ownership in the bottlers to FEMSA Refrescos, S.A. de C.V., the corporate predecessor to Coca-Cola FEMSA, S.A.B. de C.V.

In June 1993, a subsidiary of The Coca-Cola Company subscribed for 30% of our capital stock in the form of Series D shares for US$ 195 million.  In September 1993, FEMSA sold Series L shares that represented 19% of our capital stock to the public, and we listed these shares on the Mexican Stock Exchange and, in the form of ADSs, on the New York Stock Exchange.  In a series of transactions between 1994 and 1997, we acquired territories in Argentina and additional territories in southern Mexico.

In May 2003, we acquired Panamerican Beverages, or Panamco, and began producing and distributing Coca-Cola trademark beverages in additional territories in the central and the gulf regions of Mexico and in Central America (Guatemala, Nicaragua, Costa Rica and Panama), Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories.  As a result of the acquisition, the interest of The Coca-Cola Company in the capital stock of our company increased from 30.0% to 39.6%.

During August 2004, we conducted a rights offering to allow existing holders of our Series L shares and ADSs to acquire newly-issued Series L shares in the form of Series L shares and ADSs, respectively, at the same price per share at which FEMSA and The Coca-Cola Company subscribed in connection with the Panamco acquisition.  In March 2006, our shareholders approved the non-cancellation of the 98,684,857 Series L shares (equivalent to approximately 9.87 million ADSs, or over one-third of the issued Series L shares at the time) that were not subscribed for in the rights offering which were available for subscription at a price of no less than US$ 2.216 per share or its equivalent in Mexican currency.

In November 2006, FEMSA acquired, through a subsidiary, 148,000,000 of our Series D shares from certain subsidiaries of The Coca-Cola Company representing 9.4% of the total outstanding voting shares and 8.0% of the total outstanding equity of Coca-Cola FEMSA, at a price of US$ 2.888 per share for an aggregate amount of US$ 427.4 million.  With this purchase, FEMSA increased its ownership to 53.7% of our capital stock.  Pursuant to our bylaws, the acquired shares were converted from Series D shares to Series A shares.

In November 2007, Administración, S.A.P.I. de C.V., or Administración, a Mexican company owned directly or indirectly by us and The Coca-Cola Company, acquired 100% of the shares of capital stock of Jugos del Valle.  The business of Jugos del Valle in the United States was acquired and sold by The Coca-Cola Company.  Subsequently, we and The Coca-Cola Company and all Mexican and Brazilian Coca-Cola  bottlers entered into a joint business for the Mexican and the Brazilian operations, respectively, of Jugos del Valle, through transactions completed during 2008.  Taking into account the participations held by Grupo Tampico and Grupo CIMSA, we currently hold an interest of 24.0% in the Mexican joint business and approximately 19.7% in the Brazilian joint businesses.  Jugos del Valle sells fruit juice-based beverages and fruit derivatives.

In May 2008, we entered into a transaction with The Coca-Cola Company to acquire its wholly owned bottling franchise Refrigerantes Minas Gerais, Ltda., or REMIL, located in the State of Minas Gerais in Brazil, and we paid a purchase price of US$ 364.1 million in June 2008.  We began to consolidate REMIL in our financial statements as of June 1, 2008.

In December 2007 and May 2008, we sold most of our proprietary brands to The Coca-Cola Company.  The proprietary brands are now being licensed back to us by The Coca-Cola Company pursuant to our bottler agreements.  The December 2007 transaction was valued at US$ 48 million and the May 2008 transaction was valued at US$ 16 million.  We believe that both of these transactions were conducted on an arm’s length basis.  Revenues from the sale of proprietary brands in which we have a significant continuing involvement are deferred and amortized against the related costs of future sales over the estimated sales period.

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In July 2008, we acquired the Agua De Los Angeles jug water business in the Valley of Mexico (Mexico City and surrounding areas) from Grupo Embotellador CIMSA, S.A. de C.V., at the time one of the Coca-Cola  bottling franchises in Mexico, for a purchase price of US$ 18.3 million.  The trademarks remain with The Coca-Cola Company.  We subsequently merged Agua De Los Angeles into our jug water business under the Ciel  brand.

In February 2009, we acquired with The Coca-Cola Company the Brisa bottled water business in Colombia from Bavaria, a subsidiary of SABMiller.  We acquired the production assets and the distribution territory, and The Coca-Cola Company acquired the Brisa  brand.  We and The Coca-Cola Company equally shared in paying the purchase price of US$ 92 million.  Following a transition period, in June 2009, we started to sell and distribute the Brisa  portfolio of products in Colombia.

In May 2009, we entered into an agreement to develop the Crystal  trademark water products in Brazil jointly with The Coca-Cola Company.

In August 2010, we acquired from The Coca-Cola Company along with other Brazilian Coca-Cola  bottlers the business operations of the Matte Leao tea brand.  As of April 20,  2012, we have a 19.4% indirect interest in the Matte Leao business in Brazil.

In March 2011, we acquired with The Coca-Cola Company, through Compañía Panameña de Bebidas S.A.P.I. de C.V., Grupo Industrias Lacteas (also known as Estrella Azul), a Panamanian conglomerate that participates in the dairy and juice-based beverage categories in Panama.  We will continue to develop this business with The Coca-Cola Company.  

 

In October 2011, we closed our merger with Administradora Acciones del Noreste S.A.P.I. de C.V. (“Grupo Tampico”), one of the largest family-owned Coca-Cola bottlers calculated by sales volume in Mexico. This franchise territory operates in the states of Tamaulipas, San Luis Potosí, and Veracruz, as well as in parts of the states of Hidalgo, Puebla and Queretaro and sold 155.7 million unit cases of beverages in 2011. The aggregate enterprise value of this transaction was Ps. 9,300 million and a total of 63.5 million new KOF Series L shares were issued in connection with this transaction. We began to consolidate Grupo Tampico in our financial statements as of October 2011.

 

In December 2011, we closed our merger with Corporación de los Angeles, S.A. de C.V. and its shareholders (“Grupo CIMSA”), a Mexican family-owned Coca-Cola bottler with operations mainly in the states of Morelos and Mexico, as well as in parts of the states of Guerrero and Michoacán. This franchise territory sold 154.8 million unit cases of beverages in 2011. The aggregate enterprise value of this transaction was Ps. 11,000 million and a total of 75.4 million new KOF Series L shares were issued in connection with this transaction. We began to consolidate Grupo CIMSA in our financial statements as of December 2011.  As part of our merger with Grupo CIMSA we also acquired a 13.2% equity interest in Promotora Industria Azucarera S.A de C.V. (“Piasa”).

 

17

 


 

 

Recent Mergers and Acquisitions

On December 15, 2011, the Company entered into an agreement to merge the beverage division of Grupo Fomento Queretano S.A.P.I. de C.V. (“Grupo Fomento Queretano”) into the Company. Grupo Fomento Queretano’s beverage division operates mainly in the state of Queretaro, as well as in parts of the states of Mexico, Hidalgo and Guanajuato. The merger agreement was approved by both Coca-Cola FEMSA’s and Grupo Fomento Queretano’s boards of directors and is subject to the approval of the Comisión Federal de Competencia (the Mexican Antitrust Commission or CFC), and the shareholder’s meetings of both companies. The transaction will involve the issuance of approximately 45.1 million of the company’s newly issued series L shares, and in addition the company will assume Ps. 1,221 million in net debt. This transaction is expected to be completed in second quarter of 2012.

In February 2012, we entered into a 12-month exclusivity agreement with The Coca-Cola Company to evaluate the potential acquisition of a controlling ownership stake in the bottling operations owned by The Coca-Cola Company in the Philippines. We remain in the process of evaluating this potential acquisition.

 

Capital Stock

As of April 20, 2012, FEMSA indirectly owned Series A Shares equal to 50.0% of our capital stock (63.0% of our capital stock with full voting rights).  As of April 20, 2012, The Coca-Cola Company indirectly owned Series D shares equal to 29.4% of the capital stock of our company (37.0% of our capital stock with full voting rights).  Series L shares with limited voting rights, which trade on the Mexican Stock Exchange and in the form of ADSs on the New York Stock Exchange, constitute the remaining 20.6% of our capital stock.1   

 

Business Strategy

In August 2011, we restructured our operations under only two new divisions: Mexico & Central America and South America, creating a more flexible structure to execute our strategies and extend our track record of growth.  Previously, we managed our business under three divisions—Mexico, Latincentro, and Mercosur. With this new business structure, we aligned our business strategies more efficiently, ensuring a faster introduction of new products and categories, and a more rapid and effective design and deployment of commercial models. See “Introduction—Business Divisions.”

We operate with a large geographic footprint in Latin America, in two divisions:

·         Mexico and Central America (covering certain territories in Mexico, Guatemala, Nicaragua, Costa Rica and Panama); and

·         South America (covering certain territories in Colombia, Brazil, Venezuela and Argentina).

One of our goals is to maximize growth and profitability to create value for our shareholders.  Our efforts to achieve this goal are based on:  (1) transforming our commercial models to focus on our customers’ value potential and using a value-based segmentation approach to capture the industry’s value potential, (2) implementing multi-segmentation strategies in our major markets to target distinct market clusters divided by consumption occasion, competitive intensity and socioeconomic levels; (3) implementing well-planned product, packaging and pricing strategies through different distribution channels; (4) driving product innovation along our different product categories; (5) developing new businesses and distribution channels, and (6) achieving the full operating potential of our commercial models and processes to drive operational efficiencies throughout our company.  To achieve these goals, we intend to continue to focus our efforts on, among other initiatives, the following:


 

18

 


 

 

·         working with The Coca-Cola Company to develop a business model to continue exploring and participating in new lines of beverages, extending existing product lines and effectively advertising and marketing our products;

·         developing and expanding our still beverage portfolio through innovation, strategic acquisitions and by entering into agreements to acquire companies with The Coca-Cola Company;

·         expanding our bottled water strategy, with The Coca-Cola Company through innovation and selective acquisitions to maximize profitability across our market territories;

·         strengthening our selling capabilities and go-to-market strategies, including pre-sale, conventional selling and hybrid routes, in order to get closer to our clients and help them satisfy the beverage needs of consumers;

·         implementing selective packaging strategies designed to increase consumer demand for our products and to build a strong returnable base for the Coca-Cola  brand;

·         replicating our best practices throughout the value chain;

·         rationalizing and adapting our organizational and asset structure in order to be in a better position to respond to a changing competitive environment;

·         committing to building a multi-cultural collaborative team, from top to bottom; and

·         broadening our geographic footprint through organic growth and strategic joint ventures, mergers and acquisitions.

We seek to increase per capita consumption of our products in the territories in which we operate.  To that end, our marketing teams continuously develop sales strategies tailored to the different characteristics of our various territories and distribution channels.  We continue to develop our product portfolio to better meet market demand and maintain our overall profitability.  To stimulate and respond to consumer demand, we continue to introduce new categories, products and presentations.  See “—Product and Packaging Mix.”  In addition, because we view our relationship with The Coca-Cola Company as integral to our business, we use market information systems and strategies developed with The Coca-Cola Company to improve our business and marketing strategies.  See “Item 4. Information on the Company—The Company—Description of Property, Plant and Equipment.”

We also continuously seek to increase productivity in our facilities through infrastructure and process reengineering for improved asset utilization.  Our capital expenditure program includes investments in production and distribution facilities, bottles, cases, coolers and information systems.  We believe that this program will allow us to maintain our capacity and flexibility to innovate and to respond to consumer demand for our products.

We focus on management quality as a key element of our growth strategy and remain committed to fostering the development of quality management at all levels.  Both FEMSA and The Coca-Cola Company provide us with managerial experience.  To build upon these skills, we also offer management training programs designed to enhance our executives’ abilities and to provide a forum for exchanging experiences, know-how and talent among an increasing number of multinational executives from our new and existing territories.

Sustainable development is an integral part of our strategic framework for business growth.  We base our efforts on five core areas which include: (i) Ethics and Corporate Values, which defines our commitment to acting, defining and organizing ourselves with our corporate values and culture; (ii) Quality of Life in the Company, which encourages the integral development of our employees and their families; (iii) Health and Wellness, to promote an attitude of health, self-care, nutrition and physical activity, both within and outside the company; (iv) Community Engagement, to develop education and learning projects that improve the quality of life in the communities where we operate; and (v) Environmental Care, to establish guidelines that result in actions to minimize the impact that our operations might have on the environment and create a broader awareness of caring for our environment. 

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Our Territories

The following map shows our territories, giving estimates in each case of the population to which we offer products, the number of retailers of our beverages and the per capita consumption of our beverages as of December 31, 2011:

 

20

 


 

 

 

Per capita consumption data for a territory is determined by dividing total beverage sales volume within the territory (in bottles, cans, and fountain containers) by the estimated population within such territory, and is expressed on the basis of the number of eight-ounce servings of our products consumed annually per capita.  In evaluating the development of local volume sales in our territories and to determine product potential, we and The Coca-Cola Company measure, among other factors, the per capita consumption of all our beverages.

Our Products

We produce, market and distribute Coca-Cola  trademark beverages The Coca-Cola  trademark beverages include:  sparkling beverages (colas and flavored sparkling beverages), waters, and still beverages (including juice drinks, coffee, teas and isotonic).  The following table sets forth our main brands as of December 31, 2011:

Colas:

Mexico and Central America(1)

South America(2)

Venezuela

Coca-Cola

a

a

a

Coca-Cola Light

a

a

a

Coca-Cola Zero

a

a

 

 

 

Flavored sparkling beverages:

Mexico and Central America(1)

South America(2)

Venezuela

Chinotto

 

 

a

Crush

 

a

 

Fanta

a

a

 

Fresca

a

 

 

Frescolita

a

 

a

Hit

 

 

a

Kist

a

 

 

Kuat

 

a

 

Lift

a

 

 

Mundet

a

 

 

Quatro

 

a

 

Simba

 

a

 

Sprite

a

a

 

Schweppes

a

a

a

 

Water:

Mexico and Central America(1)

South America(2)

Venezuela

Alpina

a

 

 

Aquarius(3)

 

a

 

Brisa

 

a

 

Ciel

a

 

 

Crystal

 

a

 

Manantial

 

a

 

Nevada

 

 

a

 

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Other Categories:

Mexico and Central America(1)

South America(2)

Venezuela

Cepita

 

a

 

Hi-C(4)

a

a

 

Jugos del Valle(5)

a

a

a

Nestea(6)

a

 

a

Powerade(7)

a

a

a

Matte Leao(8)

 

a

 

Valle Frut(9)

a

a

a

Estrella Azul(10)

a

 

 

Hugo(11)

Del Prado(12)

 

a

a

 

 

 

(1)            Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama

(2)            Includes Colombia, Brazil and Argentina

(3)            Flavored water.  In Brazil, also flavored sparkling beverage

(4)            Juice-based beverage. Includes Hi-C Orangeade in Argentina

(5)            Juice based beverage

(6)            Nestea will no longer be a product licensed by The Coca-Cola Company in our territories as of May 2012 and will be replaced with Fuze Tea.

(7)            Isotonic

(8)            Ready to drink tea

(9)            Orangeade. Includes Fresh in Costa Rica, Nicaragua, Panama, Colombia and Venezuela

(10)          Milk and value-added dairy and juices

(11)          Milk and juice blend

(12)          Juice-based beverages

 

Sales Overview

We measure total sales volume in terms of unit cases.  Unit case refers to 192 ounces of finished beverage product (24 eight-ounce servings) and, when applied to soda fountains, refers to the volume of syrup, powders and concentrate that is required to produce 192 ounces of finished beverage product.  The following table illustrates our historical sales volume for each of our territories.

 

Sales Volume
Year Ended December 31,

 

2011

2010

2009

 

(millions of unit cases)

 

 

 

 

Mexico and Central America

 

 

 

Mexico(1)

1,366.5

1,242.3

1,227.2

Central America(2)

144.3

137.0

135.8

South America (excluding Venezuela)

 

 

 

Colombia(3)

252.1

244.3

232.2

Brazil(4)

485.3

475.6

424.1

Argentina

210.7

189.3

184.1

Venezuela

189.8

211.0

225.2

Combined Volume

2,648.7

2,499.5

2,428.6

 

(1)   Includes results of Grupo Tampico from October 2011 and Grupo CIMSA from December 2011.

(2)   Includes Guatemala, Nicaragua, Costa Rica and Panama.

(3)   As of June 2009, includes sales from the Brisa bottled water business.

(4)   Excludes beer sales volume.  As of the first quarter of 2010, we began to distribute certain ready to drink products under the Matte Leao brand.  

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Product and Packaging Mix

Out of the more than 120 brands and line extensions of beverages that we sell and distribute, our most important brand, Coca-Cola, together with its line extensions, Coca-Cola Light and Coca-Cola Zero, accounted for 61.6% of total sales volume in 2011.  Our next largest brands, Ciel (a water brand from Mexico), Fanta  (and its line extensions), Sprite  (and its line extensions) and ValleFrut  (and its line extensions), accounted for 10.4%, 5.1%, 2.7% and 2.2%, respectively, of total sales volume in 2011.  We use the term line extensions to refer to the different flavors in which we offer our brands.  We produce, market and distribute Coca-Cola  trademark beverages in each of our territories in containers authorized by The Coca‑Cola Company, which consist of a variety of returnable and non-returnable presentations in the form of glass bottles, cans and plastic bottles mainly made of polyethylene terephthalate, which we refer to as PET.

We use the term presentation to refer to the packaging unit in which we sell our products.  Presentation sizes for our Coca-Cola  trademark beverages range from a 6.5-ounce personal size to a 3-liter multiple serving size.  For all of our products excluding water, we consider a multiple serving size as equal to, or larger than, 1.0 liter.   In general, personal sizes have a higher price per unit case as compared to multiple serving sizes.  We offer both returnable and non-returnable presentations, which allow us to offer portfolio alternatives based on convenience and affordability to implement revenue management strategies and to target specific distribution channels and population segments in our territories.  In addition, we sell some Coca-Cola  trademark beverage syrups in containers designed for soda fountain use, which we refer to as fountain.  We also sell bottled water products in bulk sizes, which refer to presentations equal to or larger than 5 liters, which have a much lower average price per unit case than our other beverage products.

The characteristics of our territories are very diverse.  Central Mexico and our territories in Argentina are densely populated and have a large number of competing beverage brands as compared to the rest of our territories.  Our territories in Brazil are densely populated but have lower per capita consumption of beverage products as compared to Mexico.  Portions of southern Mexico, Central America and Colombia are large and mountainous areas with lower population density, lower per capita income and lower per capita consumption of beverages.  In Venezuela, we face operational disruptions from time to time, which may have an effect on our volumes sold, and consequently, may result in lower per capita consumption.

The following discussion analyzes our product and packaging mix by reporting segment.  The volume data presented is for the years 2011, 2010, and 2009.

Mexico and Central America.  Our product portfolio consists of Coca-Cola  trademark beverages.  In 2008, as part of our efforts to strengthen our multi-category beverage portfolio, we incorporated the Jugos del Valle line of juice based beverages in Mexico and subsequently in Central AmericaPer capita consumption of our beverage products in Mexico and Central America was 632 and 179 eight-ounce servings, respectively, in 2011.

The following table highlights historical sales volume and mix in Mexico and Central America for our products: 

 

Year Ended December 31,

 

2011

2010

2009

Total Sales Volume(1)

(millions of unit cases)

Total

1,510.8

1,379.3

1,363.0

% Growth

9.5%

1.2%

6.3%

Unit Case Volume Mix by Category

(in percentages)

Sparkling beverages

74.9%

75.2%

74.7%

Water(2)

19.7

19.4

20.2

Still beverages

5.4

5.4

5.1

Total

100.0%

100.0%

100.0%

 

(1)   Includes results from the operations of Grupo Tampico from October 2011 and from Grupo CIMSA from December 2011.
(2)   Includes bulk water volumes.

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In 2011, multiple serving presentations represented 67.6% of total sparkling beverages sales volume in Mexico, remaining flat as compared to 2010 and 55.7% of total sparkling beverages sales volume in Central America, a 60 basis points decrease compared to 2010.  Our strategy is to foster consumption in single serving presentations while maintaining multiple serving volumes.  In 2011, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 31.7% in Mexico, a 130 basis points increase compared to 2010; and 31.7% in Central America, a 150 basis points decrease compared to 2010. 

In 2011, our sparkling beverages decreased as a percentage of our total sales volume from 75.2% in 2010 to 74.9% in 2011, mainly due to the integration of Grupo Tampico and Grupo CIMSA in Mexico, which have a higher mix of water in their portfolios.

In 2011, our most popular sparkling beverage presentations in Mexico were the 2.5-liter returnable plastic bottle, the 3.0-liter non-returnable plastic bottle and the 0.6-liter non‑returnable plastic bottle (the 20-ounce bottle that is also popular in the United States), which together accounted for 56.8% of total sparkling beverage sales volume in Mexico. 

Total sales volume reached 1,510.8 million unit cases in 2011, an increase of 9.5% compared to 1,379.3 million unit cases in 2010.  The integration of Grupo Tampico and Grupo CIMSA in Mexico contributed 48.9 million unit cases in 2011of which 63.0% were sparkling beverages, 5.2% bottled water, 27.4% bulk water and 4.4% still beverages. Excluding the integration of these territories, volume grew 6.0% to 1,461.8 million unit cases. Organically sparkling beverages sales volume increased 6.0% as compared to 2010, contributing more than 70% of incremental volumes.  The bottled water category, including bulk water, grew 5.6%, accounting for more than 15% of incremental volumes. The still beverage category increased 7.5%, representing the remainder of incremental volumes.

South America (Excluding Venezuela).  Our product portfolio in South America consists mainly of Coca-Cola  trademark beverages and the Kaiser  beer brands in Brazil, which we sell and distribute. In 2008, as part of our efforts to strengthen our multi-category beverage portfolio, we incorporated the Jugos del Valle line of juice-based beverages in Colombia. This line of beverages was relaunched in Brazil in 2009 as well. The acquisition of Brisa in 2009 helped us to become the leader, calculated by sales volume, in the water market in Colombia. In 2010, we incorporated ready to drink beverages under the Matte Leao brand in Brazil.  During 2011, as part of our continuous effort to develop non-carbonated beverages, we launched Cepita  in non-returnable PET bottles and Hi-C, an orangeade, both in Argentina. Since 2009, as part of our efforts to foster sparkling beverage per capita consumption in Brazil, we re-launched a 2.0-liter returnable plastic bottle for the Coca-Cola  brand and introduced two single-serve 0.25-liter presentations. During 2011, these presentations contributed significantly to incremental volumes in Brazil.  Per capita consumption of our beverages in Colombia, Brazil and Argentina was 129, 261 and 395 eight-ounce servings, respectively, in 2011.  The following table highlights historical total sales volume and sales volume mix in South America (excluding Venezuela), not including beer:

 

Year Ended December 31,

 

2011

2010

2009

Total Sales Volume

(millions of unit cases)

Total

948.1

909.2

840.4

% Growth

4.3%

11.2%

8.4%

Unit Case Volume Mix by Category

(in percentages)

Sparkling beverages

85.9%

85.5%

87.2%

Water(1)

9.2

10.1

8.8

Still beverages

4.9

4.4

4.0

Total

100.0%

100.0%

100.0%

 

(1)           Includes bulk water volume.

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Total sales volume was 948.1 million unit cases in 2011, an increase of 4.3% compared to 909.2 million unit cases in 2010. Growth in sparkling beverages, mainly driven by sales of the Coca-Cola  brand in both Argentina and Colombia, and the Fanta and Schweppes brands in Brazil, accounted for the majority of the growth during the year. Growth in still beverages, mainly driven by the Jugos del Valle line of products in Brazil and the Cepita  juice brand and Hi-C  orangeade in Argentina, represented the balance of incremental volumes. These increases compensated for a decrease in volume in our water portfolio, including bulk water, mainly driven by the reduction in volume of the Brisa  brand in Colombia.

In 2011, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 39.6% in Colombia, a 240 basis points decrease compared to 2010; 27.8% in Argentina, a decrease of 70 basis points and 15.8% in Brazil, a 100 basis points increase compared to 2010.  In 2011, multiple serving presentations represented 62.1%, 71.3% and 85.0% of total sparkling beverages sales volume in Colombia, Brazil and Argentina, respectively.

We continue to distribute and sell the Kaiser  beer portfolio in our Brazilian territories through the 20-year term, consistent with the arrangements in place with Cervejarias Kaiser, a subsidiary of the Heineken Group, since 2006, prior to the acquisition of Cervejarias Kaiser by Cuauhtémoc Moctezuma Holding, S.A. de C.V., formerly known as FEMSA Cerveza.  Beginning in the second quarter of 2005, we ceased including beer that we distribute in Brazil in our reported sales volumes.  On April 30, 2010, the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group closed. 

Venezuela.  Our product portfolio in Venezuela consists of Coca-Cola  trademark beverages.  Per capita consumption of our beverages in Venezuela during 2011 was 150 eight-ounce servings.

The following table highlights historical total sales volume and sales volume mix in Venezuela:

 

Year Ended December 31,

 

2011

2010

2009

Total Sales Volume

(millions of unit cases)

Total

189.8

211.0

225.2

% Growth

(10.0%)

(6.3%)

9.0%

Unit Case Volume Mix by Category

(in percentages)

Sparkling beverages

91.7%

91.3%

91.7%

Water(1)

5.4

6.5

5.7

Still beverages

2.9

2.2

2.6

Total

100.0%

100.0%

100.0%

 

(1)           Includes bulk water volume.

 

We have implemented a product portfolio rationalization strategy that allows us to minimize the impact of certain operating disruptions that have been recurrent in Venezuela over the last several years.  During 2011, we faced a 26 day strike at one of our Venezuelan production and distribution facilities and a difficult economic environment that prevented us from growing sales volume of our products.  As a result our sparkling beverage volume decreased by 9.6%.

In 2011, multiple serving presentations represented 78.4% of total sparkling beverages sales volume in Venezuela, an 80 basis points increase compared to 2010.  In 2011, returnable presentations represented 8.0% of total sparkling beverages sales volume in Venezuela, a 40 basis points increase compared to 2010. Total sales volume was 189.8 million unit cases in 2011, a decrease of 10.0% compared to 211.0 million unit cases in 2010

 

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Seasonality

Sales of our products are seasonal, as our sales levels generally increase during the summer months of each country and during the Christmas holiday season.  In Mexico, Central America, Colombia and Venezuela, we typically achieve our highest sales during the summer months of April through September as well as during the Christmas holidays in December.  In Brazil and Argentina, our highest sales levels occur during the summer months of October through March and the Christmas holidays in December.

Marketing

Our Company, in conjunction with The Coca-Cola Company, has developed a marketing strategy to promote the sale and consumption of our products.  We rely extensively on advertising, sales promotions and retailer support programs to target the particular preferences of our consumers.  Our consolidated marketing expenses in 2011, net of contributions by The Coca-Cola Company, were Ps. 4,508 million.  The Coca-Cola Company contributed an additional Ps. 2,561 million in 2011, which mainly includes contributions for coolers, bottles and cases.  Through the use of advanced information technology, we have collected customer and consumer information that allow us to tailor our marketing strategies to target different types of customers located in each of our territories and to meet the specific needs of the various markets we serve.

Retailer Support Programs.  Support programs include providing retailers with point-of-sale display materials and consumer sales promotions, such as contests, sweepstakes and the giveaway of product samples.

Coolers.  Cooler distribution among retailers is important for the visibility and consumption of our products and to ensure that they are sold at the proper temperature. 

Advertising.  We advertise in all major communications media.  We focus our advertising efforts on increasing brand recognition by consumers and improving our customer relations.  National advertising campaigns are designed and proposed by The Coca-Cola Company’s local affiliates, with our input at the local or regional level.

Channel Marketing.  In order to provide more dynamic and specialized marketing of our products, our strategy is to classify our markets and develop targeted efforts for each consumer segment or distribution channel.  Our principal channels are small retailers, “on-premise” consumption such as restaurants and bars, supermarkets and third party distributors.  Presence in these channels entails a comprehensive and detailed analysis of the purchasing patterns and preferences of various groups of beverage consumers in each of the different types of locations or distribution channels.  In response to this analysis, we tailor our product, price, packaging and distribution strategies to meet the particular needs of and exploit the potential of each channel.

Multi-Segmentation.  We have been implementing a multi-segmentation strategy in the majority of our markets.  This strategy consists of the implementation of different product/price/package portfolios by market cluster or group.  These clusters are defined based on consumption occasion, competitive intensity and socio-economic levels, rather than solely on the types of distribution channels.

Client Value Management.  We have been transforming our commercial models to focus on our customers’ value potential using a value-based segmentation approach to capture the industry’s potential.  We started the rollout of this new model in our Mexico, Central America, Colombia and Brazil operations in 2009 and have covered close to 90% of our total volumes as of the end of 2011.

We believe that the implementation of these strategies described above also enables us to respond to competitive initiatives with channel-specific responses as opposed to market-wide responses.  In addition, it allows us to be more efficient in the way we go to market and invest our marketing resources in those segments that could provide a higher return.  Our marketing, segmentation and distribution activities are facilitated by our management information systems.  We have invested significantly in creating these systems, including in hand-held computers to support the gathering of product, consumer and delivery information for most of our sales routes throughout our territories.

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Product Sales and Distribution

The following table provides an overview of our distribution centers and the retailers to which we sell our products:

Product Distribution Summary

as of December 31, 2011

 

 

Mexico and Central America(1)

South America(2)

Venezuela

Distribution centers

152

65

32

Retailers (3)

863,409

663,678

209,597

 

(1)     Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama.

(2)     Includes Colombia, Brazil and Argentina.

(3)     Estimated.

We continuously evaluate our distribution model in order to fit with the local dynamics of the marketplace and analyze the way we go to market, recognizing different service needs from our customers, while looking for a more efficient distribution model.  As part of this strategy, we are rolling out a variety of new distribution models throughout our territories looking for improvements in our distribution network.

We use several sales and distribution models depending on market, geographic conditions and the customer’s profile:  (1) the pre-sale system, which separates the sales and delivery functions, permitting trucks to be loaded with the mix of products that retailers have previously ordered, thereby increasing both sales and distribution efficiency, (2) the conventional truck route system, in which the person in charge of the delivery makes immediate sales from inventory available on the truck, (3) a hybrid distribution system, where the same truck carries product available for immediate sale and product previously ordered through the pre-sale system, (4) the telemarketing system, which could be combined with pre-sales visits and (5) sales through third-party wholesalers of our products.

As part of the pre-sale system, sales personnel also provide merchandising services during retailer visits, which we believe enhance the shopper experience at the point of sale.  We believe that an adequate number of service visits to retailers and frequency of deliveries are essential elements in an effective selling and distribution system for our products.

Our distribution centers range from large warehousing facilities and re-loading centers to small deposit centers.  In addition to our fleet of trucks, we distribute our products in certain locations through electric carts and hand-trucks in order to comply with local environmental and traffic regulations.  In some of our territories, we retain third parties to transport our finished products from the bottling plants to the distribution centers.

Mexico.  We contract with a subsidiary of FEMSA for the transportation of finished products to our distribution centers from our Mexican production facilities.  See “Item 7.  Major Shareholders and Related Party Transactions—Related Party Transactions.”  From the distribution centers, we then distribute our finished products to retailers through our own fleet of trucks.

In Mexico, we sell a majority of our beverages at small retail stores to consumers who may take the beverages for consumption at home or elsewhere.  We also sell products through the “on-premise” consumption segment, supermarkets and other locations.  The “on-premise” consumption segment consists of sales through sidewalk stands, restaurants, bars and various types of dispensing machines as well as sales through point-of-sale programs in concert halls, auditoriums and theaters.

Brazil.    In Brazil, we sold 21.1% of our total sales volume through supermarkets in 2011.  Also in Brazil, the delivery of our finished products to customers is completed by a third party, while we maintain control over the selling function.  In designated zones in Brazil, third-party distributors purchase our products at a discount from the wholesale price and resell the products to retailers.

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Territories other than Mexico and Brazil.  We distribute our finished products to retailers through a combination of our own fleet of trucks and third party distributors.  In most of our territories, an important part of our total sales volume is sold through small retailers, with low supermarket penetration. 

Competition

Although we believe that our products enjoy wider recognition and greater consumer loyalty than those of our principal competitors, the markets in the territories in which we operate are highly competitive.  Our principal competitors are local Pepsi  bottlers and other bottlers and distributors of national and regional beverage brands.  We face increased competition in many of our territories from producers of low price beverages, commonly referred to as “B brands.”  A number of our competitors in Central America, Venezuela, Brazil and Argentina offer beer in addition to sparkling beverages, still beverages, and water, which may enable them to achieve distribution efficiencies.

Price discounting and packaging have joined consumer sales promotions, customer service and non-price retailer incentives as the primary means of competition among bottlers.  We compete by seeking to offer products at an attractive price in the different segments in our markets and by building on the value of our brands.  We believe that the introduction of new products and new presentations has been a significant competitive technique that allows us to increase demand for our products, provide different options to consumers and increase new consumption opportunities.  See “—Sales Overview.”

Mexico and Central America.  Our principal competitors in Mexico are bottlers of Pepsi  products, whose territories overlap but are not co-extensive with our own.  We compete with a joint venture recently formed by Grupo Embotelladores Unidos, S.A.B. de C.V., the former Pepsi  bottler in central and southeast Mexico, a subsidiary of PepsiCo, and Empresas Polar, S.A., the leading beer distributor and Pepsi  bottler in Venezuela.  Our main competition in the juice category in Mexico is Grupo Jumex.  In the water category, Bonafont, a water brand owned by Group Danone, is our main competition.  In addition, we compete with Cadbury Schweppes in sparkling beverages and with other national and regional brands in our Mexican territories, as well as low-price producers, such as Big Cola and Consorcio AGA, S.A. de C.V., that offer various presentations of sparkling and still beverages.

In the countries that comprise our Central America region, our main competitors are Pepsi  and Big Cola bottlers.  In Guatemala and Nicaragua, we compete with a joint venture between AmBev and The Central American Bottler Corporation.  In Costa Rica, our principal competitor is Florida Bebidas S.A., subsidiary of Florida Ice and Farm Co..  In Panama, our main competitor is Cervecería Nacional, S.A.  We also face competition from “B brands” offering multiple serving size presentations in some Central American countries.

South America (excluding Venezuela).  Our principal competitor in Colombia is Postobón, a well-established local bottler that sells flavored sparkling beverages, some of which have a wide consumption preference, such as manzana Postobón (apple Postobón), which is the second most popular flavor in the Colombian sparkling beverage industry in terms of total sales volume.  Postobón also sells Pepsi  products.  Postobón is a vertically integrated producer, the owners of which hold other significant commercial interests in Colombia.  We also compete with low-price producers, such as the producers of Big Cola, which principally offer multiple serving size presentations in the sparkling and still beverage industry.

In Brazil, we compete against AmBev, a Brazilian company with a portfolio of brands that includes Pepsi, local brands with flavors such as guaraná, and proprietary beer brands.  We also compete against “B brands” or “Tubainas,” which are small, local producers of low‑cost flavored sparkling beverages in multiple serving presentations that represent a significant portion of the sparkling beverage market. 

In Argentina, our main competitor is Buenos Aires Embotellador S.A. (BAESA), a Pepsi  bottler, which is owned by Argentina’s principal brewery, Quilmes Industrial S.A., and indirectly controlled by AmBev.  In addition, we compete with a number of competitors offering generic, low-priced sparkling beverages as well as many other generic products and private label proprietary supermarket brands.

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Venezuela.  In Venezuela, our main competitor is Pepsi-Cola Venezuela, C.A., a joint venture formed between PepsiCo and Empresas Polar, S.A., the leading beer distributor in the country.  We also compete with the producers of Big Cola in part of the country.  

Raw Materials

Pursuant to our bottler agreements, we are authorized to manufacture, sell and distribute Coca-Cola  trademark beverages within specific geographic areas, and we are required to purchase in some of our territories for all Coca-Cola  trademark beverages concentrate from companies designated by The Coca-Cola Company and artificial sweeteners from companies authorized by The Coca-Cola Company.  Concentrate prices for sparkling beverages are determined as a percentage of the weighted average retail price in local currency net of applicable taxes.  Although The Coca-Cola Company has the right to unilaterally set the price of concentrates, in practice this percentage has historically been set pursuant to periodic negotiations with The Coca-Cola Company.

In 2005, The Coca-Cola Company decided to gradually increase concentrate prices for sparkling beverages in Brazil and Mexico. These increases were fully implemented in Brazil in 2008 and in Mexico in 2009.  As part of the cooperation framework that we reached with The Coca-Cola Company at the end of 2006, The Coca-Cola Company will provide a relevant portion of the funds derived from the concentrate increase for marketing support of our sparkling and still beverages portfolio.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—Cooperation Framework with The Coca-Cola Company.”  

In addition to concentrate, we purchase sweeteners, carbon dioxide, resin and ingots to make plastic bottles, finished plastic and glass bottles, cans, caps and fountain containers, as well as other packaging materials and raw materials. Sweeteners are combined with water to produce basic syrup, which is added to the concentrate as the sweetener for most of our beverages. Our bottler agreements provide that, with respect to Coca-Cola trademark beverages, these materials may be purchased only from suppliers approved by The Coca-Cola Company, including affiliates of FEMSA. Prices for packaging materials and HFCS historically have been determined with reference to the U.S. dollar, although the local currency equivalent in a particular country is subject to price volatility in accordance with changes in exchange rates. Our most significant packaging raw material costs arise from the purchase of resin, plastic ingots to make plastic bottles and finished plastic bottles, which we obtain from international and local producers. The prices of these materials are tied to crude oil prices and global resin supply. In recent years we have experienced volatility in the prices we pay for these materials. Across our territories, our average price for resin in U.S. dollars increased approximately 30% in 2011 as compared to 2010.

Under our agreements with The Coca-Cola Company, we may use raw or refined sugar or HFCS as sweeteners in our products. Sugar prices in all of the countries in which we operate, other than Brazil, are subject to local regulations and other barriers to market entry that cause us to pay in excess of international market prices for sugar in certain countries. In recent years, international sugar prices experienced significant volatility.

None of the materials or supplies that we use is presently in short supply, although the supply of specific materials could be adversely affected by strikes, weather conditions, governmental controls or national emergency situations.

Mexico and Central America.  In Mexico, we purchase our returnable plastic bottles from Graham Packaging México, S.A. de C.V., known as Graham, which is the exclusive supplier of returnable plastic bottles to The Coca-Cola Company and its bottlers in Mexico. We mainly purchase resin from Indorama Ventures Polymers México, S. de R.L. de C.V. (formerly Arteva Specialties, S. de R.L. de C.V.), M. & G. Polímeros México S.A. de C.V. and DAK Resinas Americas Mexico S.A. de C.V., which ALPLA México S.A. de C.V., known as ALPLA, and Envases Innovativos de México S.A. de C.V. manufacture into non-returnable plastic bottles for us.

We purchase all of our cans from Promotora Mexicana de Embotelladoras, S.A. de C.V., known as PROMESA, a cooperative of Coca-Cola  bottlers, in which, as of April 20, 2012, we hold a 25.0% equity interest.  We mainly purchase our glass bottles from Compañía Vidriera, S.A. de C.V., known as VITRO, and Glass & Silice, S.A. de C.V., (formerly Vidriera de Chihuahua, S.A. de C.V., or VICHISA), a wholly-owned subsidiary of  Cuauhtémoc Moctezuma Holding, S.A. de C.V. (formerly FEMSA Cerveza), currently a wholly-owned subsidiary of the Heineken Group. 

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We purchase sugar from, among other suppliers, Piasa and Beta San Miguel, S.A. de C.V., or Beta San Miguel, both sugar cane producers in which, as of April 20, 2012, we hold an approximate 13.2% and 2.5% equity interest, respectively. We purchase HFCS from CP Ingredientes, S.A. de C.V. and Almidones Mexicanos, S.A. de C.V., known as Almex.

Imported sugar is subject to import duties, the amount of which is set by the Mexican government. As a result, sugar prices in Mexico are in excess of international market prices for sugar, and in 2011, were 47% higher on average in Mexico. In 2011,  sugar prices increased approximately 29% as compared to 2010. 

In Central America, the majority of our raw materials such as glass and plastic bottles are purchased from several local suppliers. We purchase all of our cans from PROMESA. Sugar is available from suppliers that represent several local producers.  Local sugar prices, in the countries that comprise the region, have increased mainly due to volatility in international prices. In Costa Rica, we acquire plastic non-returnable bottles from ALPLA C.R. S.A., and in Nicaragua we acquire such plastic bottles from ALPLA Nicaragua, S.A.

South America (excluding Venezuela).  In Colombia, we use sugar as a sweetener in most of our products, which we buy from several domestic sources.  During 2011, we started to use HFCS as an alternative sweetener for our products. We purchase HFCS from Archer Daniels Midland Company. We purchase plastic bottles from Amcor and Tapón Corona de Colombia S.A. We purchase all our glass bottles from Peldar O-I and cans from Crown, both suppliers in which Grupo Ardila Lulle, owners of our competitor Postobón, own a minority equity interest.  Glass bottles and cans are available only from these local sources.

Sugar is available in Brazil at local market prices, which historically have been similar to international prices.  Sugar prices in Brazil in recent periods have been volatile, mainly due to the increased demand for sugar cane for production of alternative fuels, and our average acquisition cost for sugar in 2011  increased approximately 30% as compared to 2010.  See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk.”  We purchase glass bottles, plastic bottles and cans from several domestic and international suppliers. 

In Argentina, we mainly use HFCS that we purchase from several different local suppliers as a sweetener in our products instead of sugar.  We purchase glass bottles, plastic cases and other raw materials from several domestic sources.  We purchase pre-formed plastic ingots, as well as returnable plastic bottles, at competitive prices from Embotelladora del Atlántico S.A., a local subsidiary of Embotelladora Andina S.A., a Coca-Cola bottler with operations in Argentina, Chile and Brazil, and other local suppliers.  We also acquire pre-formed plastic ingots from ALPLA Avellaneda S.A. and other suppliers.  We produce our own can presentations, aseptic packaging and hot filled products for distribution of our products to our  customers in Buenos Aires.

Venezuela.  We use sugar as a sweetener in all of our products, which we purchase mainly from the local market.  Since 2003, from time to time, we have experienced a sugar shortage due to lower domestic production and the inability of the predominant sugar importers to obtain permission to import in a timely manner.   While sugar distribution to the food and beverages industry and to retailers is controlled by the government, we did not experience any disruptions during 2011 with respect to acces to sufficient sugar supply. However, we cannot assure you that we will not experience disruptions in our ability to meet our sugar requirements in the future should the Venezuelan government impose restrictive measures in the future. We buy glass bottles from one local supplier, Productos de Vidrio, S.A., but there are alternative suppliers authorized by The Coca-Cola Company. We acquire most of our plastic non-returnable bottles from ALPLA de Venezuela, S.A. and all of our aluminum cans from a local producer, Dominguez Continental, C.A.

Under current regulations promulgated by the Venezuelan authorities, our ability to import some of our raw materials and other supplies used in our production could be limited, and access to the official exchange rate for these items for us and our suppliers, including, among others, resin, aluminum, plastic caps, distribution trucks and vehicles is only achieved by obtaining proper approvals from the relevant authorities.

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REGULATION

We are subject to regulation in each of the territories in which we operate. The adoption of new laws or regulations in the countries in which we operate may increase our operating costs, our liabilities or impose restrictions on our operations which, in turn, may adversely affect our financial condition, business and results from operations. Further changes in current regulations may result in an increase in compliance costs, which may have an adverse effect on our future results from operations or financial condition.

Price Controls

Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which we operate. Currently, there are no price controls on our products in any of the territories in which we have operations, except for (i) Argentina, where authorities directly supervise certain products sold through supermarkets to control inflation; and (ii) Venezuela, where the government has recently imposed price controls on certain products including still bottled water. See “Item 3. Key Information—Risk Factors—Regulatory developments may adversely affect our business.” 

Taxation of Sparkling Beverages

All the countries in which we operate, except for Panama, impose a value-added tax on the sale of sparkling beverages, with a rate of 16% in Mexico, 12% in Guatemala, 15% in Nicaragua, 13% in Costa Rica, 16% in Colombia (applied only to the first sale in the supply chain), 12% in Venezuela, 17% (Mato Grosso do Sul) and 18% (São Paulo and Minas Gerais) in Brazil, and 21% in Argentina.  In addition, several of the countries in which we operate impose the following excise or other taxes:

·         Guatemala imposes an excise tax of 0.18 cents in local currency (Ps. 0.3221 as of December 31, 2011) per liter of sparkling beverage.

·         Costa Rica imposes a specific tax on non-alcoholic bottled beverages based on the combination of packaging and flavor, currently assessed at 15.50 colones (Ps. 0.4180 as of December 31, 2011) per 250 ml, and an excise tax on local brands of 5%, foreign brands of 10% and mixers of 14%. 

·         Nicaragua imposes a 9% tax on consumption, and municipalities impose a 1% tax on our Nicaraguan gross income.

·         Panama imposes a 5% tax based on the cost of goods produced.  Panama also imposes a 10% selective consumption tax on syrups, powders and concentrate.

·         Brazil imposes an average production tax of approximately 4.9% and an average sales tax of approximately 9.6%, both assessed by the federal government.  Most of these taxes are fixed, based on average retail prices in each state where the company operates (VAT) or fixed by the federal government (excise and sales tax).

·         Argentina imposes an excise tax on sparkling beverages containing less than 5% lemon juice or less than 10% fruit juice of 8.7%, and an excise tax on flavored sparkling beverages with 10% or more fruit juice and on sparkling water of 4.2%, although this excise tax is not applicable to certain of our products.

Water Supply Law

In Mexico, we obtain water directly from municipal utility companies and pump water from our own wells pursuant to concessions obtained from the Mexican government on a plant-by-plant basis.  Water use in Mexico is regulated primarily by the Ley de Aguas Nacionales de 1992 (the 1992 Water Law), which was amended in 2004, and regulations issued thereunder, which created the Comisión Nacional del Agua (the National Water Commission).  The National Water Commission is in charge of overseeing the national system of water use.  Under the 1992 Water Law, as amended, concessions for the use of a specific volume of ground or surface water generally run from five to fifty-year terms, depending on the supply of groundwater in each region as projected by the National Water Commission. Concessionaires may request concession terms be extended before the expiration of the same. The Mexican government is authorized to reduce the volume of ground or surface water granted for use by a concession by whatever volume of water is not used by the concessionaire for two consecutive years. However, because the current concessions for each of our plants in Mexico do not match each plant’s projected needs for water in future years, we successfully negotiated with the Mexican government the right to transfer the unused volume under concessions from certain plants to other plants anticipating greater water usage in the future.  Our concessions may be terminated if, among other things, we use more water than permitted or we fail to pay required concession-related fees and do not cure such situations in a timely manner.  Although we have not undertaken independent studies to confirm the sufficiency of the existing or future groundwater supply, we believe that our existing concessions satisfy our current water requirements in Mexico.

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In Argentina, a state water company provides water to our Alcorta plant on a limited basis; however, we believe the authorized amount meets our requirements for this plant.  In our Monte Grande plant in Argentina, we pump water from our own wells, in accordance with Law 25.688.

In Brazil, we buy water directly from municipal utility companies and we also capture water from underground sources, wells, or surface sources (i.e. rivers), pursuant to concessions granted by the Brazilian government for each plant.  According to the Brazilian Constitution, water is considered an asset of common use and can only be exploited for the national interest by Brazilians or companies formed under Brazilian law.  Concessionaires and users have the responsibility for any damage to the environment.  The exploitation and use of water is regulated by the Código de Mineração (Code of Mining, Decree Law No. 227/67), the Código de Águas Minerais (Mineral Water Code, Decree Law No. 7841/45), the National Water Resources Policy (Law No. 9433 / 97) and by regulations issued thereunder.  The companies that exploit water are supervised by the Departamento Nacional de Produção Mineiral – DNPM (National Department of Mineral Production) and the National Water Agency in connection with federal health agencies, as well as state and municipal authorities.  In the Jundiaí and Belo Horizonte plants, we do not exploit mineral water.  In the Mogi das Cruzes and Campo Grande plants, we have all the necessary permits for the exploitation of mineral water.

In Colombia, in addition to natural spring water, we obtain water directly from our own wells and from utility companies.  We are required to have a specific concession to exploit water from natural sources.  Water use in Colombia is regulated by law no. 9 of 1979 and decrees no. 1594 of 1984 and no. 2811 of 1974.  The National Institute of National Resources supervises companies that exploit water. 

In Nicaragua, the use of water is regulated by the Ley General de Aguas Nacionales (National Water Law), and we obtain water directly from our own wells.  In Costa Rica, the use of water is regulated by the Ley de Aguas (Water Law).  In both of these countries, we own and exploit our own water wells granted to us through governmental concessions.  In Guatemala, no license or permits are required to exploit water from the private wells in our own plants.  In Panama, we acquire water from a state water company, and the use of water is regulated by the Reglamento de Uso de Aguas de Panamá (Panama Use of Water Regulation).  In Venezuela, we use private wells in addition to water provided by the municipalities, and we have taken the appropriate actions, including actions to comply with water regulations, to have water supply available from these sources, regulated by the Ley de Aguas (Water Law).

We cannot assure you that water will be available in sufficient quantities to meet our future production needs, that we will be able to maintain our current concessions or that additional regulations relating to water use will not be adopted in the future in our territories.  We believe we are in material compliance with the terms of our existing water concessions and that we are in compliance with all relevant water regulations.

Environmental Matters

In all of our territories, our operations are subject to federal and state laws and regulations relating to the protection of the environment. In Mexico, the principal legislation is the Ley General de Equilibrio Ecológico y Protección al Ambiente (the Federal General Law for Ecological Equilibrium and Environmental Protection) or the Mexican Environmental Law and the Ley General para la Prevención y Gestión Integral de los Residuos (the General Law for the Prevention and Integral Management of Waste) which are enforced by the Secretaría del Medio Ambiente y Recursos Naturales (the Ministry of the Environment and Natural Resources, or SEMARNAT).  SEMARNAT can bring administrative and criminal proceedings against companies that violate environmental laws, and it also has the power to close non-complying facilities.  Under the Mexican Environmental Law, rules have been promulgated concerning water, air and noise pollution and hazardous substances.  In particular, Mexican environmental laws and regulations require that we file periodic reports with respect to air and water emissions and hazardous wastes and set forth standards for waste water discharge that apply to our operations. We are also subject to certain minimal restrictions on the operation of delivery trucks in Mexico City. We have implemented several programs designed to facilitate compliance with air, waste, noise and energy standards established by current Mexican federal and state environmental laws, including a program that installs catalytic converters and liquid petroleum gas in delivery trucks for our operations in Mexico City. See “—The Company—Total Sales Distribution.”

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In addition, we are subject to the 1992 Water Law, as amended, enforced by the Mexican National Water Commission. The 1992 Water Law, as amended, provides that plants located in Mexico that use deep water wells to supply their water requirements must pay a fee to the local governments for the discharge of residual waste water to drainage. Pursuant to this law, certain local authorities test the quality of the waste water discharge and charge plants an additional fee for measurements that exceed certain standards published by the Mexican National Water Commission; in case of non-compliance with the law, penalties may be imposed, including closures. All of our bottler plants located in Mexico have met these standards. In addition, our plants in Apizaco and San Cristóbal are certified with ISO 14001. See “—Description of Property, Plant and Equipment.”

In our Mexican operations, we established a partnership with The Coca-Cola Company and ALPLA, a supplier of plastic bottles to us in Mexico, to create Industria Mexicana de Reciclaje (IMER), a PET recycling facility located in Toluca, Mexico.  This facility started operations in 2005 and has a recycling capacity of approximately 25,000 metric tons per year from which 15,000 metric tons can be re-used in PET bottles for food packaging purposes.  We have also continued contributing funds to a nationwide recycling company, ECOCE, or Ecología y Compromiso Empresarial (Environmentally Committed Companies).  In addition, our plants located in Toluca, Reyes, Cuautitlán, Apizaco, San Cristobal, Morelia, Ixtacomitan, Coatepec, Poza Rica and Cuernavaca have received a Certificado de Industria Limpia (Certificate of Clean Industry)

As part of our environmental protection and sustainability strategies, in December 2009, we, jointly with strategic partners, entered into a wind energy supply agreement with a Mexican subsidiary of the Spanish wind farm developer, GAMESA Energía, S.A., or GAMESA, to supply green energy to our bottling facility in Toluca, Mexico, owned by our subsidiary, Propimex, S. de R.L. de C.V., or Propimex, and to some of our suppliers of PET bottles.  The wind farm, which is located in La Ventosa, Oaxaca, is expected to generate approximately 100 thousand megawatt hours annually.  The energy supply services began in April 2010 and, during 2010, provided us with approximately 45 thousand megawatt hours.  In 2010, GAMESA sold its interest in the Mexican subsidiary that owned the above mentioned wind farm to Iberdrola Renovables México, S.A. de C.V.

 

Additionally, several of our subsidiaries have entered into 20-year wind power supply agreements with Energía Alterna Istmeña, S. de R.L. de C.V. and Energía Eólica Mareña, S.A. de C.V. (together, the Mareña Renovables Wind Power Farm) to receive electrical energy for use at our production and distribution facilities throughout Mexico.    The Mareña Renovables Wind Farm will be located in the state of Oaxaca and we expect that  it will begin operations in 2013.

 

Our Central American operations are subject to several federal and state laws and regulations relating to the protection of the environment, which have been enacted in the last ten years, as awareness has increased in this region about the protection of the environment and the disposal of hazardous and toxic materials, as well as water usage.  In some countries in Central America we are in the process of bringing our operations into compliance with new environmental laws on the timeline established by the relevant regulatory authorities.  Our Costa Rica and Panama operations have participated in a joint effort along with the local division of The Coca-Cola Company, Misión Planeta (Mission Planet), for the collection and recycling of non-returnable plastic bottles.

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Our Colombian operations are subject to several Colombian federal, state and municipal laws and regulations related to the protection of the environment and the disposal of treated water and toxic and hazardous materials.  These laws include the control of atmospheric emissions, noise emissions, disposal of treated water and strict limitations on the use of chlorofluorocarbons.  For our plants in Colombia, we have obtained the Certificación Ambiental Fase IV (Phase IV Environmental Certificate) demonstrating our compliance at the highest level with relevant Colombian regulations. We are also engaged in nationwide campaigns for the collection and recycling of glass and plastic bottles as well as reforestation programs.  In 2011, jointly with the FEMSA Foundation, we were awarded with the “Western Hemisphere Corporate Citizenship Award” for the social responsibility programs we carried out to respond to the extreme weather experienced in Colombia in 2010 and 2011, known locally as the “winter emergency.” In addition, we also obtained the ISO 9001, ISO-22000 and PAS 220 for our plants located in Medellin, Cali, Bogota, Barranquilla, Bucaramanga and La Calera, as recognition for the highest quality in our production processes.

Our Venezuelan operations are subject to several Venezuelan federal, state and municipal laws and regulations related to the protection of the environment.  The most relevant of these laws are the Ley Orgánica del Ambiente (the Organic Environmental Law), the Ley Sobre Sustancias, Materiales y Desechos Peligrosos (the Substance, Material and Dangerous Waste Law), the Ley Penal del Ambiente (the Criminal Environmental Law) and the Ley de Aguas (the Water Law).  Since the enactment of the Organic Environmental Law in 1995, our Venezuelan subsidiary has presented the proper authorities with plans to bring our production facilities and distribution centers into compliance with applicable laws, which mainly consist of building or expanding the capacity of water treatment plants in our bottling facilities.  Even though we have had to adjust some of the originally proposed timelines due to construction delays, in 2009, we completed the construction and received all the required permits to operate a new water treatment plant in our bottling facility located in the city of Barcelona.  At the end of 2011, we concluded the construction of a new water treatment plant in our bottling plant in the city of Valencia, which will start operations in February 2012.   During 2011, we also commenced construction of a new water treatment plant in our Antimano bottling plant in Caracas, which construction is expected to conclude during the second quarter of 2012. We are also concluding the process of obtaining the necessary authorizations and licenses before we can begin the construction and expansion of our current water treatment plant in our bottling facility in Maracaibo.  In December 2011 we obtained ISO 14000 certification for all of our plants in Venezuela.

In addition, in December 2010, the Venezuelan government approved the Ley Integral de Gestión de la Basura (Comprehensive Waste Management Law), which will regulate solid waste management and which may be applicable to manufacturers of products for mass consumption.  The full scope of this law has not yet been established.

Our Brazilian operations are subject to several federal, state and municipal laws and regulations related to the protection of the environment.  Among the most relevant laws and regulations are those dealing with the emission of toxic and hazardous gases and disposal of wastewater and solid waste, soil contamination by hazardous chemicals, which impose penalties, such as fines, facility closures or criminal charges depending upon the level of non-compliance.

Our production plant located in Jundiaí has been recognized by the Brazilian authorities for its compliance with environmental regulations and for having standards well above those imposed by the law.  The plant has been certified for (i) ISO 9001 since 1993; (ii) ISO 14001 since March 1997; (iii) norm OHSAS 18001 since 2005; (iv) ISO 22000 since 2007; and (v) PAS: 96 since 2010.  In Brazil it is also necessary to obtain concessions from the government to cast drainage.  Our plants in Brazil have been granted this concession, except Mogi das Cruzes, where we have timely begun the process of obtaining one.  In December, 2010 we increased the capacity of the water treatment plant in our Jundiaí facility.

In Brazil, a municipal regulation of the City of São Paulo, implemented pursuant to Law 13.316/2002, came into effect in May 2008.  This regulation requires us to collect for recycling a specified annual percentage of plastic bottles made from PET sold in the City of São Paulo; such percentage increases each year.  As of May 2009, we were required to collect for recycling 50% of the PET bottles sold in the City of São Paulo, as of May 2010, we were required to collect 75%, and as of May 2011, we were required to collect 90%.  Currently, we are not able to collect the entire required volume of PET bottles we sell in the City of São Paulo for recycling.  If we do not meet the requirements of this regulation, which we believe to be more onerous than those imposed by the countries with the highest recycling standards, we could be fined and be subject to other sanctions, such as the suspension of operations in any of our plants and/or distribution centers located in the City of São Paulo.  In May 2008, we and other bottlers in the City of São Paulo, through the Associação Brasileira das Indústrias de Refrigerantes e de Bebidas Não-alcoólicas (Brazilian Soft Drink and Non-Alcoholic Beverage Association, or ABIR), filed a motion requesting a court to overturn this regulation due to the impossibility of compliance.  In addition, in November 2009, in response to a municipal authority request for us to demonstrate the destination of the PET bottles sold in São Paulo, we filed a motion presenting all of our recycling programs and requesting a more practical timeline to comply with the requirements of the law.  In October 2010 the municipal authority of São Paulo levied a fine on our Brazilian operating subsidiary of 250,000 Brazilian reais (approximately Ps. 1,750,000 as of December 31, 2010) on the grounds that the report submitted by our Brazilian operating subsidiary did not comply with the 75% proper disposal requirement for the period from May 2008 to May 2010.  We filed an appeal against this fine. We are currently awaiting resolution of both matters.

 

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In August 2010, Law No. 12.305/2010 established the Brazilian National Solid Waste Policy.  This policy is based on the principle of shared responsibility between the government, companies and the public, and provides for the post-consumption return of products to companies and requires public authorities to implement waste management programs.  This law is regulated by Federal Decree No. 7.404/2010, and was published in December 2010.  We are currently discussing with the relevant authorities the impact this law may have on Brazilian companies in complying with the regulation in effect in the City of São Paulo.

 

Our Argentine operations are subject to federal and municipal laws and regulations relating to the protection of the environment.  The most significant of these are regulations concerning waste water discharge, which are enforced by the Secretaría de Ambiente y Desarrollo Sustentable (the Ministry of Natural Resources and Sustainable Development) and the Organismo Provincial para el Desarrollo Sostenible (the Provincial Organization for Sustainable Development) for the province of Buenos Aires.  Our Alcorta plant is in compliance with environmental standards and we have been certified for ISO 14001:2004 for the plants and operative units in Buenos Aires.

For all of our plant operations, we employ an environmental management system:  Sistema de Administración Ambiental (Environmental Administration System, or EKOSYSTEM) that is contained within the Sistema Integral de Calidad (Integral Quality System or SICKOF).

We have expended, and may be required to expend in the future, funds for compliance with and remediation under local environmental laws and regulations.  Currently, we do not believe that such costs will have a material adverse effect on our results from operations or financial condition.  However, since environmental laws and regulations and their enforcement are becoming increasingly stringent in our territories, and there is increased recognition by local authorities of the need for higher environmental standards in the countries where we operate, changes in current regulations may result in an increase in costs, which may have an adverse effect on our future results from operations or financial condition.  Management is not aware of any significant pending regulatory changes that would require a significant amount of additional remedial capital expenditures.

We do not believe that our business activities pose a material risk to the environment, and we believe that we are in material compliance with all applicable environmental laws and regulations.

Other regulations

 In December 2009, the Venezuelan government issued a decree requiring a reduction in energy consumption by at least 20% for industrial companies whose consumption is greater than two megawatts per hour and to submit an energy-usage reduction plan.  Some of our bottling operations in Venezuela outside of Caracas met this threshold and we submitted a plan, which included the purchase of generators for our plants.  In January 2010, the Venezuelan government subsequently implemented power cuts and other measures for all industries in Caracas whose consumption was above 35 kilowatts per hour.

In January 2010, the Venezuelan government amended the Ley para la Defensa y Acceso a las Personas a los Bienes y Servicios (Access to Goods and Services Defense Law).  Any violation by a company that produces, distributes and sells goods and services could lead to fines, penalties or the confiscation of the assets used to produce, distribute and sell these goods without compensation.  Although we believe we are in compliance with this law, consumer protection laws in Venezuela are subject to continuing review and changes, and any such changes could lead to an adverse impact on us.

 

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In July 2011 the Venezuelan government passed the Ley de Costos y Precios Justos (Fair Costs and Prices Law). The purpose of this law is to establish the regulations and administrative processes necessary to maintain the price stability of, and equal access to, goods and services. The law also creates the National Ministry of Costs and Prices, whose main role is to oversee price controls and set maximum retail prices on certain consumer goods and services. Of our products, only certain of our still water beverages were affected by these regulations, which mandated to lower our sale prices as of April 2012.  Any failure to comply with this law would result in fines, temporary suspension or the closure of operations. While we are currently in compliance with this law, we cannot assure you that the Venezuelan government’s future regulation of goods and services will not result in a forced reduction of prices in other of our products, which could have a negative effect on our results of operations.

 

In January 2012, the Costa Rican government approved a decree which regulates the sale of food and beverages in schools. The decree came into effect in 2012.  Enforcement of this law will be gradual, from 2012 to 2014, depending on the specific characteristics of the food and beverage in question. According to the decree, the sale of specific sparkling beverages and still beverages that contain sugar, syrup or HFCS in any type of presentation in schools is prohibited. We will still be allowed to sell water and certain still beverages in schools. We cannot assure you that the Costa Rican government will not further restrict sales of other of our products in schools in the future; any such further restrictions could lead to an adverse impact on our results of operations.

 

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BOTTLER AGREEMENTS

Coca-Cola Bottler Agreements

Bottler agreements are the standard agreements for each territory that The Coca-Cola Company enters into with bottlers outside the United States.  Pursuant to our bottler agreements, we are authorized to manufacture, sell and distribute Coca-Cola  trademark beverages within specific geographic areas, and we are required to purchase in some of our territories for all Coca-Cola  trademark beverages concentrate from companies designated by The Coca-Cola Company and artificial sweeteners from companies authorized by The Coca-Cola Company. 

These bottler agreements also provide that we will purchase our entire requirement of concentrate for Coca-Cola  trademark beverages from The Coca-Cola Company and other authorized suppliers at prices, terms of payment and on other terms and conditions of supply as determined from time to time by The Coca-Cola Company at its sole discretion.  Concentrate prices for sparkling beverages are determined as a percentage of the weighted average retail price in local currency, net of applicable taxes.  Although the price multipliers used to calculate the cost of concentrate and the currency of payment, among other terms, are set by The Coca-Cola Company at its sole discretion, we set the price of products sold to customers at our discretion, subject to the applicability of price restraints.  We have the exclusive right to distribute Coca-Cola trademark beverages for sale in our territories in authorized containers of the nature prescribed by the bottler agreements and currently used by our company.  These containers include various configurations of cans and returnable and non-returnable bottles made of glass and plastic and fountain containers.

The bottler agreements include an acknowledgment by us that The Coca-Cola Company is the sole owner of the trademarks that identify the Coca-Cola trademark beverages and of the secret formulas with which The Coca-Cola Company’s concentrates are made.  Subject to our exclusive right to distribute Coca-Cola trademark beverages in our territories, The Coca-Cola Company reserves the right to import and export Coca-Cola trademark beverages to and from each of our territories.  Our bottler agreements do not contain restrictions on The Coca-Cola Company’s ability to set the price of concentrates charged to our subsidiaries and do not impose minimum marketing obligations on The Coca-Cola Company.  The prices at which we purchase concentrates under the bottler agreements may vary materially from the prices we have historically paid.  However, under our bylaws and the shareholders agreement among certain subsidiaries of The Coca-Cola Company and certain subsidiaries of FEMSA, an adverse action by The Coca-Cola Company under any of the bottler agreements may result in a suspension of certain voting rights of the directors appointed by The Coca-Cola Company.  This provides us with limited protection against The Coca-Cola Company’s ability to raise concentrate prices to the extent that such increase is deemed detrimental to us pursuant to such shareholder agreement and our bylaws.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement.”

The Coca-Cola Company has the ability, at its sole discretion, to reformulate any of the Coca-Cola trademark beverages and to discontinue any of the Coca-Cola trademark beverages, subject to certain limitations, so long as all Coca-Cola trademark beverages are not discontinued.  The Coca-Cola Company may also introduce new beverages in our territories in which case we have a right of first refusal with respect to the manufacturing, packaging, distribution and sale of such new beverages subject to the same obligations as then exist with respect to the Coca-Cola trademark beverages under the bottler agreements.  The bottler agreements prohibit us from producing, bottling or handling beverages other than Coca-Cola trademark beverages, or other products or packages that would imitate, infringe upon, or cause confusion with the products, trade dress, containers or trademarks of The Coca-Cola Company, except under the authority of, or with the consent of, The Coca-Cola Company. The bottler agreements also prohibit us from acquiring or holding an interest in a party that engages in such restricted activities.  The bottler agreements impose restrictions concerning the use of certain trademarks, authorized containers, packaging and labeling of The Coca-Cola Company so as to conform to policies prescribed by The Coca-Cola Company.  In particular, we are obligated to:

·         maintain plant and equipment, staff and distribution facilities capable of manufacturing, packaging and distributing the Coca-Cola trademark beverages in authorized containers in accordance with our bottler agreements and in sufficient quantities to satisfy fully the demand in our territories;

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·         undertake adequate quality control measures prescribed by The Coca-Cola Company;

·         develop, stimulate and satisfy fully the demand for Coca-Cola trademark beverages using all approved means, which includes the investment in advertising and marketing plans;

·         maintain a sound financial capacity as may be reasonably necessary to assure performance by us and our affiliates of our obligations to The Coca-Cola Company; and

·         submit annually to The Coca-Cola Company our marketing, management, promotional and advertising plans for the ensuing year.

The Coca-Cola Company contributed a significant portion of our total marketing expenses in our territories during 2011and has reiterated its intention to continue providing such support as part of our cooperation framework.  Although we believe that The Coca-Cola Company will continue to provide funds for advertising and marketing, it is not obligated to do so.  Consequently, future levels of advertising and marketing support provided by The Coca-Cola Company may vary materially from the levels historically provided.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement” and “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—Cooperation Framework with The Coca-Cola Company.”

We have separate bottler agreements with The Coca-Cola Company for each of the territories in which we operate, on substantially the same terms and conditions.  These bottler agreements are automatically renewable for ten-year terms, subject to the right of either party to give prior notice that it does not wish to renew a specific agreement.

As of December 31, 2011, we had seven bottler agreements in Mexico, with each one corresponding to a different territory: (i) the agreements for Mexico´s Valley territory expires in June 2013 andApril 2016, (ii) the agreements for the Central territory expires in May 2015 and July 2016, (iii) the agreement for the Northeast territory expires in September 2014, (iv) the agreement for the Bajio territory expires in May 2015, and (v) the agreement for the Southeast territory expires in June 2013. Our bottler agreements with The Coca-Cola Company will expire for our territories in other countries as follows:  Argentina in September 2014; Brazil in April 2014; Colombia in June 2014; Venezuela in August 2016; Guatemala in March 2015; Costa Rica in September 2017; Nicaragua in May 2016; and Panama in November 2014. 

The bottler agreements are subject to termination by The Coca-Cola Company in the event of default by us.  The default provisions include limitations on the change in ownership or control of our company and the assignment or transfer of the bottler agreements and are designed to preclude any person not acceptable to The Coca-Cola Company from obtaining an assignment of a bottler agreement or from acquiring our company independently of other rights set forth in the shareholders’ agreement.  These provisions may prevent changes in our principal shareholders, including mergers or acquisitions involving sales or dispositions of our capital stock, which will involve an effective change of control, without the consent of The Coca-Cola Company.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement.”

We have also entered into tradename license agreements with The Coca-Cola Company pursuant to which we are authorized to use certain trademark names of The Coca-Cola Company with our corporate name.  These agreements have a ten-year term, but are terminated if we cease to manufacture, market, sell and distribute Coca-Cola trademark products pursuant to the bottler agreements or if the shareholders agreement is terminated.  The Coca-Cola Company also has the right to terminate a license agreement if we use its trademark names in a manner not authorized by the bottler agreements.

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DESCRIPTION OF PROPERTY, PLANT AND EQUIPMENT

Over the past several years, we made significant capital investments to modernize our facilities and improve operating efficiency and productivity, including:

·         increasing the annual capacity of our bottling plants by installing new production lines;

·         installing clarification facilities to process different types of sweeteners;

·         installing plastic bottle-blowing equipment;

·         modifying equipment to increase flexibility to produce different presentations, including faster sanitation and changeover times on production lines; and

·         closing obsolete production facilities.

See “Item 5.  Operating and Financial Review and Prospects—Capital Expenditures.”

As of December 31, 2011, we owned 35 bottling plants company-wide.  By country, we have fourteen bottling facilities in Mexico, five in Central America, six in Colombia, four in Venezuela, four in Brazil and two in Argentina.

As of December 31, 2011, we operated 249 distribution centers, approximately 51% of which were in our Mexican territories.  We own more than 86% of these distribution centers and lease the remainder.  See “—The Company—Product Sales and Distribution.”

We maintain an “all risk” insurance policy covering our properties (owned and leased), machinery and equipment and inventories as well as losses due to business interruptions.  The policy covers damages caused by natural disaster, including hurricane, hail, earthquake and damages caused by human acts, including explosion, fire, vandalism, riot and losses incurred in connection with goods in transit.  In addition, we maintain an “all risk” liability insurance policy that covers product liability.  We purchase our insurance coverage through an insurance broker.  In most cases the policies are issued by Allianz México, S.A., Compañía de Seguros, and the coverage is partially reinsured in the international reinsurance market.

The table below summarizes by country principal use, installed capacity and percentage utilization of our production facilities:

Country

Bottling Facility Summary
As of December 31, 2011

 

Installed Capacity (thousands of unit cases)

% Utilization(1)

Mexico

1,897,760

70%

Guatemala

34,544

80%

Nicaragua

65,475

58%

Costa Rica

84,238

54%

Panama

40,754

64%

Colombia

531,046

47%

Venezuela

296,052

63%

Brazil

650,356

68%

Argentina

316,040

66%

 

(1)     Annualized rate.

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The table below summarizes by country plant location and facility area of our production facilities:

Bottling Facility by Location
As of December 31, 2011

Country

Plant

Facility Area
(thousands of sq.
meters) 

Mexico

San Cristóbal de las Casas, Chiapas

45

 

Cuautitlán, Estado de México

35

 

Los Reyes la Paz, Estado de México

50

 

Toluca, Estado de México

242

 

León, Guanajuato

124

 

Morelia, Michoacán

50

 

Ixtacomitán, Tabasco

117

 

Apizaco, Tlaxcala

80

 

Coatepec, Veracruz  

142

 

La Pureza Altamira, Tamaulipas

300

 

Poza Rica, Veracruz

42

 

Pacífico, Estado de México

89

 

Cuernavaca, Morelos

37

 

Toluca, Estado de México

41

Guatemala

Guatemala City

47

Nicaragua

Managua

54

Costa Rica

Calle Blancos (San José)

52

 

Coronado (San José)

14

Panama

Panama City

29

Colombia

Barranquilla

37

 

Bogotá

105

 

Bucaramanga

26

 

Cali

76

 

Manantial

67

 

Medellín

47

Venezuela

Antímano

15

 

Barcelona

141

 

Maracaibo

68

 

Valencia

100

Brazil

Campo Grande

36

 

Jundiaí

191

 

Mogi das Cruzes

119

 

Belo Horizonte

73

Argentina

Alcorta

73

 

Monte Grande (Buenos Aires)

32

 

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SIGNIFICANT SUBSIDIARIES

The table below sets forth all of our direct and indirect significant subsidiaries and the percentage of equity of each subsidiary we owned directly or indirectly as of December 31, 2011:

Name of Company

Jurisdiction of Incorporation

Percentage Owned

Description

Propimex, S. de R.L. de C.V.(1)

Mexico

100.0%

Manufacturer of bottles and distributor of bottled beverages.

Controladora Interamericana de Bebidas, S.A. de C.V.

 

 

 

Mexico

 

100.0%



Holding company of manufacturers and distributors of beverages.

Spal Industria Brasileira de Bebidas, S.A.

 

Brazil

97.9%


Manufacturer of cans and related products for bottling beverages and distributor of bottled beverages.

Coca-Cola FEMSA de Venezuela S.A. (formerly, Panamco Venezuela, S.A. de C.V.)

 

Venezuela

 

100.0%


Manufacturer of bottles and related products for bottling beverages and distributor of bottled beverages.

 

 

 

 

 

(1)     On March 2, 2012, Propimex, S.A. de C.V. was converted into Propimex, S. de R.L. de C.V. (a limited liability company).

 

 

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Item 4A.  Unresolved Staff Comments 

None.

Item 5.  Operating and Financial Review and Prospects

General

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements including the notes thereto.  Our consolidated financial statements were prepared in accordance with Mexican Financial Reporting Standards, which differ in certain respects from U.S. GAAP.  Notes 26 and 27 to our consolidated financial statements provide a description of the principal differences between Mexican Financial Reporting Standards and U.S. GAAP as they relate to us, together with reconciliation to U.S. GAAP of net income and equity.

Average Price Per Unit Case.  We use average price per unit case to analyze average pricing trends in the different territories in which we operate.  We calculate average price per unit case by dividing net sales by total sales volume.  Sales of beer in Brazil, which are not included in our sales volumes, are excluded from this calculation.

Effects of Changes in Economic Conditions.  Our results from operations are affected by changes in economic conditions in Mexico and in the other countries in which we operate.  For the years ended December 31, 2011, 2010, and 2009, 35.7%, 37.5%, and 35.8%, respectively, of our total revenues were attributable to Mexico.  In addition to Mexico, we also conduct operations in Central America, Colombia, Venezuela, Brazil and Argentina. 

Our future results may be significantly affected by the general economic and financial conditions in the countries where we operate.  Decreases in economic growth rates, periods of negative growth, devaluation of local currencies, increases in inflation or interest rates and political developments may result in lower demand for our products, lower real pricing or a shift to lower margin products or lower margin presentations. 

The Mexican economy continues to be heavily influenced by the U.S. economy, and therefore, further deterioration in economic conditions in, or delays in recovery of, the U.S. economy may hinder any recovery in Mexico.  In addition, an increase in interest rates in Mexico would increase our cost of Mexican peso-denominated variable interest rate indebtedness and would have an adverse effect on our financial condition.  Depreciation of the Mexican peso relative to the U.S. dollar increases the cost to us of a portion of the raw materials we acquire, the price of which is paid in or determined with reference to U.S. dollars, and of our debt obligations denominated in U.S. dollars and thereby may negatively affect our financial condition. 

Recent Developments

As previously announced by the CNBV, commencing in 2012, all Mexican public companies must report their financial information in accordance with IFRS.  Since 2006, the Consejo Mexicano para la Investigación y Desarollo de Normas de Información Financiera (Mexican Board of Research and Development of Financial Reporting Standards) has been modifying Mexican FRS in order to ensure their convergeance with IFRS.  As required, starting on January 1, 2012, we are reporting our financial information in accordance with IFRS on a comparable basis. 

On December 15, 2011, the Company entered into an agreement to merge the beverage division of Grupo Fomento Queretano into the Company. Grupo Fomento Queretano’s beverage division operates mainly in the state of Queretaro, as well as in parts of the states of Mexico, Hidalgo and Guanajuato. The merger agreement was approved by both Coca-Cola FEMSA’s and Grupo Fomento Queretano’s boards of directors and is subject to the approval of the Mexican Antitrust Commission, and the shareholder’s meetings of both companies. The transaction will involve the issuance of approximately 45.1 million of the company’s newly issued series L shares, and in addition the company will assume Ps. 1,221 in net debt. This transaction is expected to be completed in second quarter of 2012.

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In February 2012, our Board of Directors proposed an ordinary dividend of Ps. 2.77 per share outstanding on the payment date, which, at the time of filing, is ancipated to be May 30, 2012. This dividend was approved at the Annual Shareholders’ meeting on March 20, 2012.

In February 2012, we entered into a 12-month exclusivity agreement with The Coca-Cola Company to evaluate the potential acquisition of a controlling ownership stake in the bottling operations owned by The Coca-Cola Company in the Philippines. We remain in the process of evaluating this potential acquisition.

On March 29, 2012, we issued a press release containing Non-Audit Financial Results for the year 2011 prepared in accordance with Mexican FRS and translated to IFRS for comparison purposes.

 

Critical Accounting Estimates

 

                The preparation of our consolidated financial statements requires that we make estimates and assumptions that affect (1) the recorded amounts of our assets and liabilities, (2) the disclosure of our estimates of assets and contingent liabilities as of the date of the financial statements and (3) the recorded amounts of revenues and expenses during the reporting period.  We base our estimates and judgments on our historical experience and on various other reasonable factors, which together form the basis for making judgments about the carrying values of our assets and liabilities.  Our actual conclusions may differ from these estimates under different assumptions or conditions.  We evaluate our estimates and judgments on an on‑going basis.  Our significant accounting policies are described in Note 4 to our consolidated financial statements.  We believe our most critical accounting policies that imply the application of estimates and/or judgments are:

 

Allowance for Doubtful Accounts.  We determine our allowance for doubtful accounts based on an evaluation of the aging of our receivables portfolio.  The amount of the allowance is based on an analysis of recoverability of each balance.  Most of our sales, however, are realized on a cash basis and consequently do not give rise to doubtful accounts.

 

Returnable and Non-Returnable Bottles and Cases  The Company has two types of bottles; returnable and non-returnable.

 

          Non returnable: Are recorded in the results of operations at the time of product sale; and

 

          Returnable: Are classified as long-lived assets as a component of property, plant and equipment.

 

Returnable bottles are recorded at acquisition cost for countries with inflationary economy then restated applying inflation factors as of the balance sheet date, according to NIF B-10. There are two types of returnable bottles:

 

          Those that are in the Company’s control within its facilities, plants and distribution centers; and

 

          Those that have been placed in the hands of customers, but still belong to the Company.

 

Depreciation of returnable bottles is computed using the straight-line method over acquisition cost. The Company estimates depreciation rates considering their estimated useful lives.

 

Returnable bottles that have been placed in the hands of customers are subject to an agreement with a retailer pursuant to which the Company retains ownership. These bottles are monitored by sales personnel during periodic visits to retailers and the Company has the right to charge any breakage identified to the retailer. Bottles that are not subject to such agreements are expensed when placed in the hands of retailers.

 

The Company’s returnable bottles in the market and for which a deposit from customers has been received are presented net of such deposits, and the difference between the cost of these assets and the deposits received is depreciated according to their useful lives.

 

Property, Plant and Equipment and Other Assets.  We depreciate property, plant and equipment and other assets over their useful lives.  The estimated useful lives represent the period we expect the assets to remain in service and to generate revenues. Where an item of Property Plant and Equipment comprises major components having different useful lives, they are accounted and depreciated for as a separate item (major components) of Property Plant and Equipment.We base our estimates on the experience of our technical personnel.  Depreciation is computed using the straight-line method. 

 

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Valuation of Intangible Assets.  Our intangible assets mainly consist of rights to produce and distribute Coca-Cola  trademark products in our territories, recognized at their fair value at the date of acquisition, in accordance with Mexican FRS.  Intangible assets with indefinite life also includes good will. We separate intangible assets between those with a finite useful life and those with an indefinite useful life, in accordance with the period over which we expect to receive the benefits. 

 

We value at fair value all assets and liabilities as of the date of acquisition and we conduct an analysis of the excess purchase price over the fair value of the net assets.  This analysis results in the recognition of an intangible asset with indefinite life for the right to produce and distribute Coca‑Cola trademark beverages, which are subject to annual impairment tests under Mexican Financial Reporting Standards.  Intangible assets are recorded in the functional currency of the subsidiary in which the investment was made and are subsequently translated into Mexican pesos applying the closing exchange rate of each period.  Beginning in 2008, for operations in an inflationary economic environment the intangible assets are restated by applying inflation factors of the country of origin and are translated into Mexican pesos at the year-end exchange rate.  Through 2007, the intangible assets with indefinite lives were restated by applying inflation factors of the country of origin, regardless of the economic environment, and were translated at the year-end exchange rate.

 

Intangible assets with indefinite life are no longer subject to amortization, but instead are subject to an initial impairment review and subsequent impairment test. 

 

Historically, our bottler agreements have been automatically renewed, and we have not experienced any termination of our bottler agreements. All of our bottler agreements provide for automatic renewal at no cost and without any change in their terms and conditions. We also do not believe that any law or regulation could oppose or otherwise adversely affect the renewal of such agreements.

 

Impairment of Intangible Assets (with indefinite and definitive lives) and Long-Lived Assets.  We continually review the carrying value of our intangible assets and long-lived assets for accuracy.  We review for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on our projections of anticipated future cash flows. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations.  This test is performed annually or more frequently if deemed necessary.

 

Our evaluations indicate that no significant impairment of intangible assets or long-lived assets has been required.  We can give no assurance that our expectations will not change as a result of new information or developments.  Changes in economic or political conditions in all the countries in which we operate or in the industries in which we participate, however, may cause us to change our current assessment.

 

Labor Liabilities. Our labor liabilities include obligations for pension and retirement plans, seniority premiums and severance payments from causes other than restructuring.  Labor liabilities are determined using long-term assumptions. 

 

We evaluate our assumptions at least annually.  Those assumptions include the discount rate, expected long-term rate of return on plan assets, rates of increase in compensation costs and certain employee-related factors, such as turnover, retirement age and mortality rate.  The assumptions include the economic risks existing in the countries in which our business operates.

 

In accordance with Mexican FRS, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expenses and recorded obligations in such future periods.  While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our labor obligations and our future expense.

 

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The following table is a summary of the three key assumptions used in determining 2011 annual labor cost, along with the impact on pension cost of a 1% change in each assumed rate: 

Assumption

 

2011 real rates for inflationary countries(1)

 

2011 nominal rates for noninflationary countries(1)

 

Impact of 1% change
(millions)(2)

Annual discount rate

1.5% - 2.2%

5.5% - 9.7%

+ Ps. (208)

 

 

 

- Ps. 304

Salary increase

1.0% - 1.5%

4.0% - 6.5%

+ Ps. 217

 

 

 

- Ps. 144

Estimated return on plan assets

0.5%(3)

7.0% - 9.7%(3)

+ Ps. 30

                 

(1)     Calculated using a measurement date of December 2011.

(2)     “+” indicates an increase of 1%; “-” indicates a decrease of 1%.

(3)     Not applicable for Colombia and Guatemala.

  

The total period cost related to the pension plan is recorded as an operating expense.

Deferred Income Taxes – Valuation Allowance.  We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities.  We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences.  If these estimates and related assumptions change in the future, we may be required to adjust valuation allowances. 

Tax, Legal and Labor Contingencies.  We are subject to various claims and contingencies related to tax, labor and other legal proceedings.  Due to their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental actions.  Management periodically assesses the probability of loss for such contingencies and accrues a liability and/or discloses the applicable relevant circumstances, as appropriate.  We accrue a liability for the estimated loss in accordance with accounting rules.

New Accounting Pronouncements

Presented below is a summary of recently issued accounting pronouncements.

Mexican Financial Reporting Standards

      a) NIF B-5 “Financial Information by Segment”

 

In 2011, the Company adopted NIF B-5 “Financial Information by Segment”, which superseded Bulletin B-5. NIF B-5 establishes that an operating segment shall meet the following criteria: i) the segment engages in business activities from which it earns, or is in the process of obtaining revenues, and incurs related costs and expenses; ii) the operating results are reviewed regularly by the entity’s primary decision maker; and iii) specific financial information is available. NIF B-5 also requires disclosure of operating segments subject to reporting, including details of earnings, assets and liabilities, reconciliations, information about products and services, and geographical areas. This pronouncement was applied retrospectively for comparative purposes, although it had no impact, on the key segment indicators already disclosed in Note 25.

      b)    NIF B-9 “Interim Financial Reporting”

       

The Company adopted NIF B-9 “Interim Financial Reporting”, which prescribes the content to be included in a complete or condensed set of financial statements for an interim period. The adoption of NIF B-9 did not impact the Company’s annual financial statements.

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      c) NIF C-4 “Inventories”

 

                In 2011, the Company adopted NIF C-4 “Inventories”, which replaces Mexican accounting Bulletin C-4, Inventories. NIF C-4 does not allow the use of direct costs as the inventory valuation method nor does it allow the use of the LIFO cost method. NIF C-4 establishes that inventories must be valued at the lower of acquisition cost or net realizable value. This standard also establishes that advances to suppliers for the acquisition of merchandise must be classified as inventories provided the risks and benefits of the inventories are transferred to the Company. The application  of this standard did not impact the actual inventory valuation of the Company. NIF C-4 was applied retrospectively causing a reclassification between “advances to suppliers” and “inventory balances” reported as of December 31, 2010 of Ps. 123 million. Similar reclassifications were made in the 2010 and 2009 consolidated statement of cash flows.

   

      d) NIF C-5 “Prepaid Expenses”

 

                In 2011, the Company adopted NIF C-5 “Prepaid Expenses”, which replaced Mexican accounting Bulletin C-5, Prepaid Expenses. This standard establishes that the main characteristic of prepaid expenses is that they do not result in the transfer to the entity of the benefits and risks inherent to the goods or services to be received. Consequently, prepaid expenses must be recognized in the balance sheet as either current or non-current assets, depending on the item´s classification in the statement of financial position. Moreover, NIF C-5 establishes that prepaid expenses made for goods or services whose inherent benefits and risks have already been transferred to the entity must be carried to the appropriate caption. The accounting changes resulting from the adoption of this standard were recognized retrospectively, causing a reclassification between “other current assets” (see Note 8) and “other assets” (see Note 12). This standard also resulted in reclassifications to prepaid expenses of Ps. 349 million which were reclassified from “inventories” of Ps. 123 million, and property, plant, and equipment of Ps. 226 million, as of December 31, 2010. Similar reclassifications were made in the 2010 and 2009 consolidated statement of cash flows.

 

      e) NIF C-6, “Property, Plant and Equipment”

 

In 2011, the Company adopted NIF C-6 “Property, Plant and Equipment”, which replaced Mexican accounting Bulletin C-6, Property, Machinery and Equipment. This new standard was effective for fiscal years beginning on or after January 1, 2011. The component of the new standard related to the segregation of property, plant and equipment into separate components for those assets with different useful lives could optionally have been deferred until 2012, although this requirement has been applied by the Company since prior years and will not impact the consolidated financial statements.

In the case of asset exchanges, NIF C-6 requires entities to determine the commercial substance of the transaction, and the depreciation of all assets must be applied against the components of the assets, and the amount to be depreciated is the cost of acquisition less the asset’s residual value. Moreover, NIF C-6 clarifies that regardless of whether the use or non-use of the asset is temporary or indefinite, it should not cease the depreciation charge. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized. There are also specific disclosures for public entities such as: additions, disposals, depreciation, impairments, among others. This standard was adopted and did not impact the Company´s financial statements, except for reclassification to property, plant and equipment as of December 31, 2010 as a result of the presentation of prepaid expenses (see Note 2 d) and additional disclosures, and the incremental disclosures presented in Note 10.

f) NIF C-18, “Obligations related to retirement of property, plant and equipment”

 

On January 1, 2011, the Company adopted NIF C-18, which establishes the accounting treatment for the initial and subsequent recognition of a liability for legal obligations related to the retirement of property, plant and equipment recognized as a result of the acquisition, construction, development and/or normal operation of such components.

This standard also establishes that an entity must initially recognize a provision for obligations related to retirement of property, plant and equipment based on its best estimate of the disbursements required to settle the present obligation at the time it is assumed, provided a reliable estimate can be made of the amount of the obligation. The best estimate of a provision for an obligation associated with the retirement of property, plant and equipment components should be determined using the expected present value method. The adoption of NIF C-18 did not impact the Company’s financial statements.

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U.S. GAAP.   

There are no significant new accounting standards effective in year 2011 impacting the Company.

Implementation of IFRS.   

As described in Note 28 to our audited consolidated financial statements, we have adopted IFRS for the preparation of our financial information beginning in 2012.  Pursuant to current SEC reporting requirements, foreign private issuers may provide in their SEC filings financial statements prepared in accordance with IFRS, without a reconciliation to U.S. GAAP. 

The consolidated financial statements that we issue for the year ending December 31, 2012 will be our first annual financial statements prepared in accordance with IFRS.  Our IFRS transition date is January 1, 2011, and accordingly, the year ended December 31, 2011 will constitute part of the comparative period covered by IFRS 1, “First-Time Adoption of International Financial Reporting Standards” (which we refer to as IFRS 1).  We have therefore applied all mandatory exemptions and certain optional exemptions from the retrospective application of IFRS provided by IFRS 1. 

We have applied the following mandatory exemptions from retrospective application of IFRS, effective as of our IFRS transition date:

Estimates

The estimates conducted by the Company under IFRS 1 as of the Transition Date are consistent with the estimates previously recorded under Mexican FRS at that same date.

Derecognition of financial assets and liabilities

At the Transition Date, the Company was required to apply the rules under IAS 39, Financial Instruments: Recognition and Measurement, and derecognize financial assets and liabilities that occurred at such date which do not comply with the classification criteria under IAS 39. However, there was no impact related to the application of this exception.

Hedge accounting

As of the transition date, the Company measured at fair value all derivative financial instruments and hedging relationships designated and documented effectively as accounting hedges as required by IAS 39, which is consistent with the treatment under Mexican FRS. As a result, there was no impact in the Company’s consolidated financial statements due to the application of this exception.

Non-controlling interest

The Company applied the requirements under IAS 27, Consolidated and Separate Financial Statements, related to non-controlling interest equity prospectively beginning on the Transition Date. There was no impact related to the application of this exception.

We have applied the following optional exemptions from retrospective application of IFRS:

Business Combinations

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According to IFRS 1, an entity may elect not to apply IFRS 3 “Business Combinations” retrospectively to business combinations made prior of the transition date to IFRS. The Company adopted this exemption and did not amend its business combination accounting prior of the Transition Date. Accordingly, it did not re-measure the values determined at the previous acquisition dates, including the amount of distribution rights previously recorded. 

Deemed Cost

An entity may elect to measure an item or all of property, plant and equipment at the Transition Date at its fair value and use that fair value as its deemed cost at that date. In addition, a first-time adopter may elect to use a previous GAAP’s revaluation of an item of property, plant and equipment at, or before, of the Transition Date as deemed cost at the date of the revaluation, if the revaluation was, at the date of the revaluation, broadly comparable to: (i) fair value; or (ii) cost or depreciated cost in accordance with IFRS, adjusted to reflect changes in a general or specific price index.

The Company has presented both its property, plant, and equipment and its intangible assets at IFRS historical cost in all countries. In Venezuela, this IFRS historical cost represents actual historical cost in the year of acquisition, indexed for inflation in a hyper-inflationary economy based on the provisions of IAS 29.

Cumulative Translation Effect

A first-time adopter is neither required to recognize translation differences in other comprehensive income and accumulate these in a separate component of equity, nor on disposal of a foreign operation, to reclassify the cumulative translation difference for that foreign operation from equity to profit or loss as part of the gain or loss on disposal.

The Company applied this exemption and consequently it reclassified the accumulated translation effect recorded under Mexican FRS to retained earnings and beginning January 1, 2011, it will calculate the translation effect prospectively according to International Accounting Standard (“IAS”) 21, The Effects of Changes in Foreign Exchange Rates

Borrowing Costs

A first-time adopter may apply the transitional provisions set out in IAS 23 related to the effective date which shall be interpreted as January 1, 2009 or of the transition date to IFRS, whichever is later.

The Company applied the exemption set out for borrowing costs maintaining the qualifiable assets existing at the transition date and beginning January 1, 2011 it will capitalize its interest costs in accordance with IAS 23, Borrowing Costs

Recording Effects of the Transition from Mexican FRS to IFRS

The following disclosures provide a qualitative description of the most significant expected effects of the transition to IFRS determined as of the date of the issuance of these consolidated financial statements:

Inflation Effects

For the purposes of Mexican FRS B-10, the effects of inflation on financial information must be recognized when the economic environment of the entity is inflationary, that is, when cumulative inflation of the three preceding years is equal to or larger than the 26%. On the other hand, IAS 29 considers an economy as hyper-inflationary when the cumulative inflation over three years approaches or exceeds 100% among other indicators. The last hyperinflationary period for Mexico was 1997, for Brazil was in 1997 prior to the Company’s acquisition of its Brazilian operations, and for Argentina was 1994. Accordingly, the Company has eliminated previously recorded inflationary effects in Mexico for the period 1998 through 2007. For foreign subsidiaries, the accumulated inflation from the acquisition date was eliminated (except in the case of Venezuela, which was deemed a hyperinflationary economy) from the date the Company began to consolidate them.

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Employee Benefits

According to Mexican FRS D-3, a severance provision and the corresponding expenditure must be recognized as the entity intends to terminate the employment relationship before the retirement date, or intends to pay benefits as a result of an offer made to employees to encourage a voluntary termination. For IFRS purposes, this provision is recorded pursuant to IAS 19 (revised), Employee Benefits, when the actions of the Company has demonstrated commitment to end the relationship with the employee or a bid to encourage voluntary retirement. This action is shown with a formal plan that describes the characteristics of the termination of employment. Accordingly, at the Transition Date, the Company eliminated its severance indemnity liability against retained earnings.

The Company has also anticipated the application of IAS 19 (revised), which eliminates the use of the fluctuation band (i.e. corridor method), which tends to defer the actuarial gains/losses, and requires recording them in other comprehensive income. IAS 19 (revised) also eliminates the possibility of deferring the recognition of past services and requires recording them in operations. This resulted in the Company increasing in its liability for employee benefits against retained earnings at the Transition Date.

Bonus Program

Under Mexican FRS the Company recognizes its bonus program plan offered to certain key executives as a defined contribution plan, according to Mexican FRS D-3, Employee benefits. Meanwhile IFRS considers this bonus program plan, shall be recorded under the principles set forth IFRS 2, Sharebased  Payments. 

The Company recorded its bonus program plan according to IFRS 2 Share-based Payment. The most significant difference for changing the accounting treatment is related to the period during which a compensation expense is recognized, under Mexican FRS D-3 the total amount of the share is recorded in the period in which it was granted, while in IFRS 2 it shall be recognized in the gains or losses during the period the employee vests rights related to such awards. In recording the adoption of IFRS 2, the Company applied transitional provisions whereby it did not record vested amounts prior to the Transition Date.

Deferred income Tax

The IFRS adjustments recognized by the Company had an impact on the calculation of deferred income taxes according to the requirements established by IAS 12, Income Taxes

Retained Earnings

All the adjustments arising from the Company’s conversion to IFRS as of the Transition Date were recorded in retained earnings.

Other differences in presentation and disclosures in the financial statements

Generally, IFRS disclosure requirements are more extensive than those of NIF, which will result in increased disclosures about accounting policies, significant judgments and estimates, financial instruments and management risks, among others. In addition, there may be differences in presentation.

There are other differences between Mexican FRS and IFRS, however, the Company considers differences mentioned above describe the significant effects identified as of the Transition Date.

 

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The effects of the foregoing are as follows, as of the January 2011 Transition Date:

 

Mexican FRS

IFRS Transition Effects

Preliminary IFRS

Current assets

 Ps.

 26,436

 Ps.

(38)

 Ps.

26,398

Non-current assets

 

87,625

 

(10,523)

 

77,102

Total assets

 Ps.

 114,061

 

(10,561)

 

103,500

 

 

 

 

 

 

 

Current liabilities

Ps.

17,646

 Ps.

6

 Ps.

17,652

Non-current liabilities

 

22,534

 

(1,871)

 

20,663

Total liabilities

 

40,180

 

(1,865)

 

38,315

Total equity

 Ps.

73,881

 Ps.

(8,696)

 Ps.

 65,185

 

The above IFRS figures should be construed as “preliminary IFRS” as the Company will be adopting IFRS as of December 31, 2012 based on the IFRS that are outstanding and in-force as of that date. The information presented above has been prepared based on the IFRS that the Company believes will be effective at December 31, 2012, or issued and early adopted by the Company at the date of preparation of these consolidated financial statements. The standards and interpretations that will actually be applicable to December 31, 2012, including those that will be applicable on an optional basis, are not known with certainty at the time of preparing the consolidated financial statements. Additionally, the accounting policies selected by the Company may change as a result of changes in the economic or industry trends that are observable after the issuance of these consolidated financial statements. Accordingly, the above disclosed information is subject to change.

The information presented above, does not intend to comply with IFRS, in that under IFRS, only one set of financial statements comprising the balance sheet, comprehensive income statement, statement of changes in equity and cash flow, together with comparative information and explanatory notes, can provide a fair presentation of the financial position of the Company, the results of its operations and cash flows. Not all such information is presented above.

50

 


 

 

Results from Operations

The following table sets forth our consolidated income statement for the years ended December 31, 2011, 2010 and 2009. 

 

Year Ended December 31,

 

2011

 

2010

 

2009

 

(2011, 2010 and 2009 in millions of Mexican pesos or millions of
U.S. dollars except share and per share data)

Revenues:

 

 

   

 

   

 

 

Net sales

 US$

8,893

   Ps.

124,066

   Ps.

102,988

Ps.

102,229

Other operating revenues

 

47

   

649

   

468

538

Total revenues

 

8,940

   

124,715

   

103,456

102,767

Cost of goods sold

 

4,838

   

67,488

   

55,534

54,952

Gross profit

 

4,102

   

57,227

   

47,922

47,815

Operating expenses:

 

 

   

 

   

 

 

Administrative

 

372

   

5,184

   

4,449

5,308

Selling

 

2,285

   

31,891

   

26,394

26,672

 

 

2,657

   

37,075

   

30,843

31,980

Income from operations

 

1,445

   

20,152

   

17,079

15,835

Other expenses, net

 

167

   

2,326

   

1,292

1,449

Comprehensive financing result:

 

 

   

 

   

 

 

Interest expense

 

124

   

1,736

   

1,748

1,895

Interest income

 

(43)

   

(601)

   

(285)

(286)

Foreign exchange loss

 

(4)

   

(62)

   

423

370

Gain on monetary position in inflationary subsidiaries

 

(11)

   

(155)

   

(414)

(488)

Market value loss (gain) on ineffective portion of derivative financial instruments

 

10

   

140

   

(244)

(118)

 

 

76

   

1,058

   

1,228

1,373

Income before income taxes.

 

1,202

   

16,768

   

14,559

13,013

Income taxes

 

401

   

5,599

   

4,260

4,043

Consolidated net income

 US$

801

   Ps.

 11,169

   Ps.

 10,299

Ps.

 8,970

Controlling interest net income

 

761

   

10,615

   

9,800

8,523

Non-controlling interest net income

 

40

   

554

   

499

447

Consolidated net income

 US$

801

   Ps.

11,169

   Ps.

 10,299

Ps.

8,970

 

 

 

   

 

   

 

 

Net controlling income (U.S. dollars and Mexican pesos):

 

 

   

 

   

 

 

Data per share

 US$

0.41

   Ps.

5.69

   Ps.

5.31

Ps

4.62

 

(1)        Translation to U.S. dollar amounts at an exchange rate of Ps. 13.95 per US$ 1.00 solely for the convenience of the reader.

 

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Operations by Reportable Segment

The following table sets forth certain financial information for each of our reportable segments for the years ended December 31, 2011, 2010 and 2009.  See Note 25 to our consolidated financial statements for additional information by reporting segment.

 

Year Ended December 31,

 

2011

2010

2009

 

(2011, 2010 and 2009 in millions of Mexican pesos)

Total revenues

 

 

 

Mexico and Central America(1)

Ps. 52,196

Ps.  45,213

Ps. 43,034

South America (excluding Venezuela)(2)

 

52,408

 

44,210

 

37,303

Venezuela

20,111

14,033

22,430

Gross profit

 

 

 

Mexico and Central America(1)

Ps. 24,775 

Ps.   22,035

Ps. 21,286

South America (excluding Venezuela)(2)

 

22,498

19,415

 

16,579

Venezuela

9,954

6,472

9,950

Income from operations

 

 

 

Mexico and Central America(1)

Ps. 8,906

Ps.  7,714

Ps. 7,998

South America (excluding Venezuela)(2)

 

7,943

 

6,921

 

6,022

Venezuela

3,303

 2,444

1,815

 

(1)     Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama. Includes results of Grupo Tampico from October 2011 and Grupo CIMSA from December 2011.

(2)     Includes Colombia, Brazil and Argentina

 

Results from Operations for the Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

Consolidated Results from Operations

 

Total Revenues.   Consolidated total revenues increased 20.5% to Ps. 124,715 million in 2011, as compared to 2010, driven by double-digit total revenue growth in our South America division, including Venezuela, and the Mexico & Central America division, including the integration of Grupo Tampico and Grupo CIMSA into our Mexican operations during the fourth quarter of 2011. Excluding the integration of the newly merged territories into our Mexican operations, total revenues grew approximately 19%. On a currency neutral basis and excluding the territories of Grupo Tampico and Grupo CIMSA in Mexico, total revenues increased approximately 16%.

 

Total sales volume increased 6.0% to 2,648.6 million unit cases in 2011, as compared to 2010. The integration of Grupo Tampico and Grupo CIMSA into our Mexico operations in the fourth quarter of 2011 accounted for 48.9 million unit cases, of which sparkling beverages represented 63.0%, water 5.2%, bulk water 27.4% and still beverages 4.4%. Excluding this non-comparable effect, total sales volumes grew 4.0% to 2,599.7 million unit cases. The sparkling beverage category organically grew 4.0%, mainly driven by the Coca-Cola brand, which accounted for approximately 80% of incremental volumes. The still beverage category grew 10.8%, mainly driven by the performance of the Jugos del Valle line of business in Mexico, Brazil and Venezuela, and the Hi-C  orangeade and the Cepita  juice brand in Argentina, representing close to 15% of incremental volumes. Our bottled water portfolio, including bulk water, grew 1.9%, and contributed the balance.

 

Consolidated average price per unit case incremented 13.8%, reaching Ps. 45.38 in 2011, as compared to Ps. 39.89 in 2010. In local currency, average price per unit case increased in all of our territories mainly driven by price increases implemented during the year and higher volumes of sparkling beverages, which carry higher average price per unit case.

 

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Gross Profit.  Our gross profit increased 19.4% to Ps. 57,227 million in 2011, as compared to 2010. Cost of goods sold increased 21.5% mainly as a result of higher sweetener and PET costs across our operations, which were partially offset by the appreciation of the average exchange rate of the Brazilian real, the Colombian peso and the Mexican peso as applied to our U.S. dollar-denominated raw material costs. Gross margin reached 45.9% in 2011 as compared to 46.3% in 2010.

 

The components of cost of goods sold include raw materials (principally soft drink concentrate and sweeteners), packaging materials, depreciation costs attributable to our production facilities, wages and other employment costs associated with the labor force employed at our production facilities and certain overhead costs. Concentrate prices are determined as a percentage of the retail price of our products in local currency net of applicable taxes. Packaging materials, mainly PET and aluminum, and HFCS, used as a sweetener in some countries, are denominated in U.S. dollars.

 

Operating Expenses.   Consolidated operating expenses as a percentage of total revenues remained flat at 29.7% in 2011 as compared to 29.8% in 2010. Operating expenses in absolute terms increased 20.2%, mainly as a result of higher labor costs in Venezuela, higher labor and freight costs in Argentina and continued marketing investments designed to reinforce our presence in the marketplace, widen our cooler coverage and broaden our availability of returnable-base packaging.

 

Income from Operations.   Our consolidated operating income increased 18.0% to Ps. 20,152 million in 2011, as compared to 2010. Our South America division, including Venezuela, accounted for more than 60% of this growth. Our operating margin was 16.2% in 2011, as compared to 16.5% in 2010.

 

Other Expenses, Net.   During 2011, we recorded Ps. 2,326 million in other expenses, net. These expenses were mainly composed of employee profit sharing, the loss on sale of fixed assets and the write-off of certain non-productive assets.

 

Comprehensive Financing Result.    The term “comprehensive financing result” refers to the combined financial effects of net interest expense, net foreign exchange gains or losses, and net gains or losses on monetary position from our countries which qualify as inflationary economies.  Net foreign exchange gains or losses represent the impact of changes in foreign-exchange rates on assets or liabilities denominated in currencies other than local currencies and gains or losses resulting from derivative financial instruments.  A foreign exchange loss arises if a liability is denominated in a foreign currency that appreciates relative to the local currency between the date the liability is incurred or the beginning of the period, whichever comes first, and the date it is repaid or the end of the period, whichever comes first, as the appreciation of the foreign currency results in an increase in the amount of local currency, which must be exchanged to repay the specified amount of the foreign currency liability.

 

Comprehensive financing results in 2011 recorded an expense of Ps. 1,058 million, as compared to an expense of Ps. 1,228 million in 2010, mainly due to lower net interest cost.

 

Income Taxes  Income taxes increased to Ps. 5,599 million in 2011 from Ps. 4,260 million in 2010. During 2011, taxes as a percentage of income before taxes were 33.4% as compared to 29.3% in the previous year.

 

Controlling Interest Net Income.  Our consolidated net controlling interest income increased 8.3% to Ps. 10,615 million in 2011 as compared to 2010. Earnings per share (EPS) in 2011 were Ps. 5.69 (Ps. 56.91 per ADS) computed on the basis of 1,865.3 million shares outstanding as of December 31, 2011 (each ADS represents 10 local shares).

 

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Consolidated Results from Operations by Reporting Segment

 

Mexico and Central America

 

Total Revenues.  Total revenues from our Mexico and Central America division increased 15.4% to Ps. 52,196 million in 2011, as compared to 2010; such growth was supported by the integration of Grupo Tampico and Grupo CIMSA in our Mexican operations during the fourth quarter of 2011. Higher volumes, including the recently integrated franchises into our Mexican operations, accounted for approximately 65% of incremental revenues during the year, and increased average price per unit case represented the balance. Average price per unit case reached Ps. 34.39, an increase of 5.2%, as compared to 2010, mainly reflecting selective price increases across our product portfolio implemented in Mexico and Central America over the year. Excluding the integration of Grupo Tampico and Grupo CIMSA in Mexico, total revenues grew approximately 12%. On a currency neutral basis and excluding the recently integrated territories into our Mexican territories, total revenues increased approximately 11%.

 

Total sales volume increased 9.5% to 1,510.8 million unit cases in 2011, as compared to 2010. Excluding the integration of Grupo Tampico and Grupo CIMSA in Mexico, volumes grew 6.0% to 1,461.8 million unit cases. Sparkling beverage volume organically increased 6.0%, driven by a 7% growth of the Coca-Cola  brand and a 3% increase in flavored sparkling beverages, accounting for 75% of incremental volumes. Our bottled water portfolio, including bulk water, grew 5.6%, representing more than 15% of incremental volumes. Still beverages grew 7.5% mainly driven by the Jugos del Valle line of products, Nestea  and PowerAde, contributing the balance.

 

Operating Income.  Gross profit increased 12.4% to Ps. 24,775 million in 2011, as compared to 2010. Cost of goods sold increased 18.3% mainly as a result of higher sweetener and PET costs, which were partially offset by the appreciation of the average exchange rate of the Mexican peso as applied to our U.S. dollar-denominated raw material costs. Gross margin decreased from 48.7% in 2010 to 47.5% in 2011.  

 

Operating income increased 15.5% to 8,906 million in 2011, compared to Ps. 7,714 million in 2010. Operating expenses grew 10.8%. Operating leverage achieved through higher revenues, in combination with controlled operating expenses in Mexico, resulted in an operating margin of 17.1% in 2011, the same margin achieved in 2010.

 

South America (excluding Venezuela)  

 

Total Revenues.   Total revenues were Ps. 52,408 million in 2011, an increase of 18.5% as compared to 2010 as a result of double-digit total revenue growth in every territory. Excluding beer, which accounted for Ps. 3,868 million during the year, revenues increased 18.6% to Ps. 48,540 million. Excluding beer, higher average prices per unit case across our operations accounted for close to 75% of incremental revenues and volume growth in every territory contributed the balance. On a currency neutral basis, total revenues increased approximately 15%.

 

Total sales volume in our South America division, excluding Venezuela, increased 4.3% to 948.1 million unit cases in 2011 as compared to 2010, as a result of growth in every operation. Our sparkling beverage portfolio grew 4.7%, driven by the strong performance of the Coca-Cola  brand in Argentina and Colombia, which grew 11% and 9%, respectively and a 6% growth in flavored sparkling beverages. The still beverage category grew 16.4%, mainly driven by the Jugos del Valle line of business and the Matte Leao brand in Brazil and the Cepita  juice brand and Hi-C  orangeade in Argentina. These increases compensated for a 4.8% decline in the bottled water portfolio, including bulk water.

 

                Operating Income.  Gross profit reached Ps. 22,498 million, an increase of 15.9% in 2011, as compared to 2010. Cost of goods sold increased 20.6% mainly driven by higher year-over-year sweetener and PET costs across these territories, which were partially compensated by the appreciation of the average exchange rate of the Brazilian real and the Colombian peso as applied to our U.S. dollar-denominated raw material costs. Gross profit reached 42.9% in 2011, as compared to 43.9% in 2010.

Our operating income increased 14.8% to Ps. 7,943 million in 2011, compared to 2010. Operating expenses increased 16.5%, mainly as a result of higher labor and freight costs in Argentina in combination with normalized marketing expenses in Colombia. Our operating margin was 15.2% in 2011, a decline of 50 basis points as compared to the same period of 2010, due to gross margin pressures.

 

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Venezuela

 

Total Revenues.  Total revenues in Venezuela reached Ps. 20,111 million in 2011, an increase of 43.3% as compared to 2010, due to increased average price per unit case.  Average price per unit case was Ps. 105.84 in 2011, representing an increase of 59.4% as compared to 2010. In local currency, higher average price per unit case accounted for incremental revenues during the year.  On a currency neutral basis, our revenues in Venezuela increased by approximately 41%.

 

Total sales volume decreased 10.0% to 189.8 million unit cases in 2011, as compared to 211.0 million unit cases in 2010.  The sales volume in the sparkling beverage category declined 9.6%, while the bottled water category, including bulk water, declined 24.8%. Sales volume in the still beverage category increased 14.9%, due to the introduction of the del Valle Fresh  orangeade and Kapo, and partially compensated for the volume decline.

 

Operating Income.   Gross profit was Ps. 9,954 million in 2011, an increase of 53.8% compared to 2010. Cost of goods sold increased 34.3% mainly due to higher sweetener costs. Gross margin expanded 340 basis points to 49.5% in 2011, as compared to 46.1% in 2010.  

 

Operating income increased 35.1% to Ps. 3,303 million in 2011 compared to the previous year. Operating expenses incremented 65.1%, principally due to higher labor costs and increased marketing and administrative expenses.  Operating margin was 16.4% in 2011, as compared to 17.4% in 2010.

Results from Operations for the Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

Consolidated Results from Operations

 

Total Revenues.   Consolidated total revenues increased 0.7% to Ps. 103,456 million in 2010, as compared to 2009, as a result of revenue growth in every operation except Venezuela, a country in which we experienced a revenue decline as a consequence of the devaluation of the Venezuelan bolivar. On a currency neutral basis and excluding the acquisition of Brisa in Colombia, our consolidated revenues for 2010 increased by approximately 15%.

 

Total sales volume increased 2.9% to 2,499.5 million unit cases in 2010, as compared to 2009.  The sparkling beverage category, driven by a 4% growth of the Coca-Cola brand, grew 2.6% and contributed more than 70% of incremental volumes. The still beverage category, mainly driven by the performance of the Jugos del Valle line of business across our territories, grew 11.1% and accounted for approximately 20% of incremental volumes. The consolidation of the Brisa water brand in Colombia drove a 1.6% growth in our bottled water portfolio and represented the balance. Excluding the non-comparable effect of Brisa, total sales volume increased 1.6% to reach 2,479.6 million unit cases.

 

Consolidated average price per unit case declined 2.6%, reaching Ps. 39.89 in 2010, as compared to Ps. 40.95 in 2009 as a consequence of the devaluation of the Venezuelan bolivar. In local currency, average price per unit case increased in all of our territories mainly driven by price increases implemented during the year and higher volumes of sparkling beverages, which carry higher average price per unit case. 

 

Gross Profit.  Gross profit increased 0.2% to Ps. 47,922 million in 2010, as compared to 2009, despite the devaluation of the Venezuelan bolivar. Cost of goods sold increased 1.1% as a result of increases in the cost of sweetener across our operations, which were partially offset by the appreciation of the Brazilian real, the Colombian peso and the Mexican peso as applied to our U.S. dollar-denominated raw material costs.  Gross margin reached 46.3% for 2010, a decrease of 20 basis points as compared to 2009.

 

Operating Expenses.   Consolidated operating expenses as a percentage of total revenues decreased to 29.8% in 2010 from 31.1% in 2009. Operating expenses in absolute terms decreased 3.6%, mainly as a result of the devaluation of the Venezuelan bolivar.  In local currency, operating expenses increased mainly as a result of (i) continued marketing investment in our Mexico division to support our execution in the marketplace, widen our cooler coverage and broaden our returnable base availability, (ii) higher labor and freight costs in Argentina, and (iii) higher labor costs in Venezuela.

 

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Income from Operations.   Our consolidated operating income increased 7.9% to Ps. 17,079 million in 2010, as compared to 2009. Our South America division, including Venezuela, accounted for 19.2% incremental operating income in 2010. These increases compensated for an operating income decline in our Mexico and Central America division. Our operating margin was 16.5% in 2010, an expansion of 110 basis points as compared to 2009.

 

Other Expenses, Net.   During 2010, we recorded Ps. 1,292 million in other expenses, net. These expenses were mainly composed of employee profit sharing and the loss on sale of certain fixed assets.

 

Comprehensive Financing ResultComprehensive financing results in 2010 recorded an expense of Ps. 1,228 million, as compared to an expense of Ps. 1,373 million in 2009, mainly due to lower net interest cost.

 

Income Taxes  Income taxes increased to Ps. 4,260 million in 2010 from Ps. 4,043 million in 2009. During 2010, taxes as a percentage of income before taxes were 29.3% as compared to 31.1% in the previous year.

 

Controlling Interest Net Income.  Consolidated controlling interest net income increased 15.0% to Ps. 9,800 million in 2010 as compared to 2009, mainly as a result of higher operating income. Earnings per share (EPS) in 2010 was Ps. 5.31 (Ps. 53.07 per ADS) computed on the basis of 1,846.5 million shares outstanding as of December 31, 2010 (each ADS represents 10 local shares).

 

Consolidated Results from Operations by Reporting Segment

 

Mexico and Central America

 

Total Revenues.  Total revenues from our Mexico and Central America division increased 5.1% to Ps. 45,213 million in 2010, as compared to 2009. Higher average price per unit case accounted for more than 75% of the incremental revenues during this period. Average price per unit case increased to Ps. 32.69, a 3.9% increase, as compared to 2009, mainly reflecting selective price increases implemented during the year, higher volumes from the Coca-Cola brand, which carries higher average prices per unit case and, to a lesser extent, higher average prices per unit case from our growing still beverage portfolio.

 

Total sales volume increased 1.2% to 1,379.3 million unit cases in 2010, as compared to 1,363.0 million unit cases in 2009, resulting from (i) incremental volume of the Coca-Cola brand, that grew more than 2%, (ii) an increase of  5.6% in the still beverage category, mainly driven by the Jugos del Valle product line and Nestea, our ready-to-drink tea line and (iii) a 1.8% increase in the bottled water portfolio, excluding bulk water.  These increases more than compensated for a 4.2% decline in the bulk water category.

 

Operating Income.  Gross profit increased 3.5% to Ps. 22,035 million in 2010, as compared to 2009. Cost of goods sold increased 6.6% mainly as a result of higher sweetener and PET costs, which were partially offset by the appreciation of the Mexican peso as applied to our U.S. dollar-denominated raw material costs. Gross margin decreased from 49.5% in 2009 to 48.7% in 2010.  

 

Operating income decreased 3.6% to Ps. 7,714 million in 2010, compared to Ps. 7,998 million in 2009. Operating expenses grew 7.8% mainly due to continued marketing investment to support our execution in the marketplace, widen our cooler coverage and broaden our returnable base availability. Our operating margin was 17.1% in 2010, a decrease of 150 basis points as compared to 2009.

 

South America (excluding Venezuela)

 

Total Revenues.   Total revenues increased 18.5% to Ps. 44,210 million in 2010, as compared to 2009. Excluding beer sales, which accounted for Ps. 3,285 million during 2010, total revenues increased 18.6% to Ps. 40,925 million compared to 2009. Higher average price per unit case accounted for approximately 55% of incremental revenues, excluding beer. On a currency neutral basis and excluding the integration of Brisa in Colombia, revenues for 2010 increased by approximately 16%.

 

 

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Sales volume, excluding beer, increased 8.2% to 909.2 million unit cases in 2010, as compared to 2009. The sparkling beverage category grew 6.2%, mainly driven by a 7% increase in the Coca-Cola brand, accounting for more than 65% of incremental volumes. The bottled water category grew 20.4%, mainly driven by to the integration of Brisa in Colombia and volumes of Aquarius our flavored water brand in Argentina, contributing more than 25% of incremental volumes. The still beverage category grew 23.5%, mainly driven by the Jugos del Valle line of products in Brazil and Colombia, representing the balance.

 

Operating Income.  In 2010, gross profit increased 17.1% to Ps. 19,415 million, as compared to the previous year. Cost of goods sold increased 19.6%, mainly due to higher cost of sweetener in the division and higher cost of PET in Argentina, which was partially offset by the appreciation of the average exchange rate of the Brazilian real and the Colombian peso as applied to our U.S. dollar-denominated raw material cost. Gross margin reached 43.9% in 2010 as compared to 44.4% in 2009.

 

Operating income increased 14.9% to Ps. 6,921 million in 2010, as compared to Ps. 6,022 million in 2009. Operating expenses grew 18.3% mainly due to higher labor and freight costs in Argentina and the integration of the Brisa portfolio and the continued expansion of the Jugos del Valle line of business in Colombia. Operating margin was 15.7% in 2010, a decrease of 40 basis points as compared to 2009.

 

Venezuela

 

Total Revenues.  Total revenues in Venezuela reached Ps. 14,033 million in 2010, a decline of 37.4% as compared to 2009, due principally to the devaluation of the Venezuelan bolivar.  Average price per unit case was Ps. 66.41 in 2010, representing a decrease of 33.2% as compared to 2009.  In local currency, higher average price per unit case accounted for incremental revenues during the year.  On a currency neutral basis, our revenues in Venezuela increased by approximately 32%.

 

Total sales volume decreased 6.3% to 211.0 million unit cases in 2010, as compared to 225.2 million unit cases in 2009.  The sales volume in the sparkling beverages and still beverages categories declined 6.8% and 2.7%, respectively, while sales volume in the bottled water category, including bulk water, remained flat.

 

Operating Income.   Gross profit was Ps. 6,472 million in 2010, a decrease of 35.0% compared to 2009, principally due to the devaluation of the Venezuelan bolivar. Cost of goods sold decreased 39.4%.  In local currency, cost of goods sold increased mainly due to higher sweetener costs. Gross margin increased from 44.4% in 2009 to 46.1% in 2010, an expansion of 170 basis points.  

 

Operating income increased 34.7% to Ps. 2,444 million in 2010 compared to the previous year. Operating expenses declined 50.5%, principally due to the devaluation of the Venezuelan bolivar.   In local currency, higher labor costs were partially offset by lower marketing and administrative expenses.  Operating margin was 17.4% in 2010, as compared to 8.1% in 2009.

 

 

Liquidity and Capital Resources

Liquidity.  The principal source of our liquidity is cash generated from operations.  A significant majority of our sales are on a cash basis with the remainder on a short-term credit basis.  We have traditionally been able to rely on cash generated from operations to fund our working capital requirements and our capital expenditures.  Our working capital benefits from the fact that most of our sales are made on a cash basis, while we generally pay our suppliers on credit.  In recent periods, we have mainly used cash generated from operations to fund acquisitions.  We have also used a combination of borrowings from Mexican and international banks and issuances in the Mexican and international capital markets.

Our total indebtedness was Ps. 22,574 million as of December 31, 2011, as compared to Ps. 17,351 million as of December 31, 2010.  Short-term debt and long-term debt were Ps. 5,540 million and Ps. 17,034 million, respectively, as of December 31, 2011, as compared to Ps. 1,840 million and Ps. 15,511 million, respectively, as of December 31, 2010.  Total debt increased Ps. 5,223 million in 2011, compared to year end 2010. In April 2011, we issued two Mexican peso-denominated bonds, in 5-year floating rate and 10-year fixed rate tranches of Ps. 2,500 million each, priced at TIIE + 0.13% and 8.27%, respectively.  Proceeds from such issuances were used for general corporate purposes, as well as to pay down existing debt.  Net debt increased Ps. 5,096 million in 2011 mainly as a result of the assumption of debt resulting from recent mergers and dividend payments made during the year.  As of December 31, 2011, cash and cash equivalents, were Ps. 12,331 million, as compared to Ps. 12,534 million as of December 31, 2010.  As of December 31, 2011, our cash and cash equivalents were comprised of 47.0% U.S. dollars, 23.2% Mexican pesos, 13.4% Brazilian reais, 13.1% Venezuelan bolivars, 1.6% Colombian pesos and 1.0% Argentinean pesos. As of March 31, 2012, our cash and cash equivalents balance was Ps.10,993 million, including US$ 296 million denominated in U.S. dollars.  These funds, in addition to the cash generated by our operations, are sufficient to meet our operating requirements.

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In January 2010, the Venezuelan government announced a devaluation of its official exchange rate and the establishment of a multiple exchange rate system which was set at 2.60 bolivars to US$ 1.00 for high priority categories and 4.30 bolivars to US$ 1.00 for non-priority categories, and which recognized the existence of other exchange rates in which the government will intervene. In December 2010, the Venezuelan government announced its decision to implement a new singular fixed exchange rate of 4.30 bolivars to US$ 1.00, which resulted in a devaluation of the bolivar against the U.S. dollar.  For further information, please see Note 3 to our consolidated financial statements.  Future changes in the Venezuelan exchange control regime, and future currency devaluations or the imposition of exchange controls in any of the countries in which we have operations could have an adverse effect on our financial position and results from operations.

As part of our financing policy, we expect to continue to finance our liquidity needs with cash from operations.  Nonetheless, as a result of regulations in certain countries in which we operate, it may not be beneficial or, as in the case of exchange controls in Venezuela, practicable for us to remit cash generated in local operations to fund cash requirements in other countries.  Exchange controls like those in Venezuela may also increase the real price of remitting cash from operations to fund debt requirements in other countries.  In the event that cash from operations in these countries is not sufficient to fund future working capital requirements and capital expenditures, we may decide, or be required, to fund cash requirements in these countries through local borrowings rather than remitting funds from another country.  In addition, our liquidity in Venezuela could be affected by changes in the rules applicable to exchange rates as well as other regulations, such as exchange controls.  In the future we may finance our working capital and capital expenditure needs with short-term or other borrowings.

We continuously evaluate opportunities to pursue acquisitions or engage in strategic transactions.  We would expect to finance any significant future transactions with a combination of any of cash from operations, long-term indebtedness and the issuance of shares of our Company.

Sources and Uses of Cash.  The following table summarizes the sources and uses of cash for the years in the periods ended December 31, 2011, 2010 and 2009, from our consolidated statements of cash flows:

 

Principal Sources and Uses of Cash

Years ended December 31, 2011, 2010 and 2009

(in millions of Mexican pesos)

 

 

 

 

 

2011

 

2010

 

2009

Net cash flows from operating activities

Ps.

 15,307

Ps.

 14,350

Ps.

 16,663

Net cash flows used in investing activities(1)

(14,140)

(6,845)

(8,900)

Net cash flows used in financing activities(2)

(2,206)

(2,011)

(6,029)

Dividends declared and paid

(4,366)

(2,612)

(1,344