Fomento Economico Mexicano S.A.B. de C.V. (FMX)

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Fomento Económico Mexicano, S.A.B. de C.V. (FMX)

Q4 2009 Earnings Call Transcript

February 12, 2010 12:00 pm ET


Javier Astaburuaga – CFO

Juan Fonseca – IR


Bob Ford – Bank of America/Merrill Lynch

Lauren Torres – HSBC

Alan Alanís – J.P. Morgan

Margaret Kalvar – Harding Loevner

Lore Serra – Morgan Stanley

Sohel Amir – Lucite Research

José Yordán – Deutsche Bank Securities



Good morning, everyone, and welcome to FEMSA's conference call. As a reminder, today's conference is being recorded, and all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation.

During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management expectations and are based upon current available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance.

At this time, I will now turn the conference over to Mr. Javier Astaburuaga, FEMSA's Chief Financial Officer.

Javier Astaburuaga

Thank you very much. Good morning, everyone. Welcome to FEMSA's fourth quarter 2009 earnings conference call. Juan Fonseca and Genaro Estrada joining me today. Let me begin by saying how encouraged we are by our fourth quarter and full year results, as well as the strategic transaction that we are in the process of completing involving FEMSA Cerveza and Heineken. Our people across all areas and all businesses made the best of a very complex year. And we are convinced that there are exciting developments for our company going forward.

In terms of the results, we continued to trend the trends in previous quarters and closed an extremely challenging 2009 on a very solid note. During the fourth quarter, Coca-Cola FEMSA again delivered strong numbers, driven by solid volume growth in sparkling beverages in our Mexican operations and still beverages across our markets. Meanwhile, FEMSA Comercio once more delivered margin expansion at both the gross and operating levels, as we continued to improve our competition position.

At FEMSA Cerveza, we again know the resilient consumer trends in Mexico, as volumes grew slightly in the face of good pricing and a still depressed economic environment. On that front, we continued to see a difference in the performance between the still sluggish manufacturing heavy Northern Mexican markets and the Central Mexican markets. Meanwhile, we successfully continued implementing our expense containment initiatives across our beer operations, and we are reaping the results as operating expenses continued to be well under control.

In terms of FEMSA’s consolidated results, operating income increased 21.5% during the fourth quarter. And below the operating line, we had two big favorable effects. The first being the favorable comparison against the quarter that was greatly impacted by volatility in foreign exchange a year ago. And the second one, the one-time effect of the settlement of certain contingent tax liabilities at FEMSA Cerveza Brazil under the tax amnesty program offered by Brazilian tax authorities late in 2009. As a result, net income increased seven-fold compared to the same period of 2008. Excluding these two non-recurring items, net income grew approximately 25% in the quarter and 12% for 2009 as a full year.

On the balance sheet front, our position continues to strengthen, driven by cash flow generation in all of our operations, particularly in Coca-Cola FEMSA. As of December 31, 2009, our net debt-to-EBITDA ratio stood at 0.7 times, having come down from 1.1 times at the beginning of 2009. 88% of our debt is nominated in local currency, mostly Mexican pesos.

Additionally, I would like to highlight the Coke FEMSA recently plays $500 million of a ten-year bond at the yield of 4.689% [ph], the lowest yield ever for a Latin American issuer and significantly tighter than Mexican sovereign levels, underscoring the significant strength of costs, balance sheet, as well as its cash generation potential.

Now let me elaborate on the results of each operation, starting with FEMSA Cerveza. In terms of consolidated volume during the quarter, they increased by 1% combining a slight growth in Mexico, a contraction in exports, and moderate growth in Brazil. In Mexico, significant economy on an employment-driven headwinds continued putting pressure on our beer business. Yet, we remain encouraged by our resilient volume performance in such an adverse environment.

While northern markets are still underperforming both in Central Mexico and we are still feeling an impact from our competitor’s upsizing strategy, we are already seeing signs that our relative performance is making good progress. Pricing in Mexico was up 30% during the quarter. And at the very end of 2009 and the beginning of 2010, we carried out a national price increase rollout across our markets. And on a segmented basis, which should average close to 7%, what you need to remember that a portion of that is due to the increase in VAT and excise tax on beer in places since January the 1st.

In our exports, volume decreased 9% for the quarter, although a very strong growth of 12% in the fourth quarter of last year and 12% growth in the previous quarter. Clearly, the fourth quarter saw high inventory levels throughout the system, particularly in the US. But for the year, our mid-single digit growth in the US again outperformed the US very important category by double-digit margin. In fact, based on Beer Institute numbers, our branch in the US outperformed the input category by 13 percentage points during 2009. Pricing for our exports was stable in local currency for the quarter.

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