Mexico's Coke Femsa Sees Cost Pressures Continuing Into 2012
October 27 2011 - 1:46PM
Dow Jones News
Soft-drink bottler Coca-Cola Femsa SAB (KOF, KOF.MX) said
Thursday it anticipates additional pressures on profit from
sweetener, marketing and labor expenses going into 2012.
Hector Trevino, chief financial officer of Latin America's
biggest bottler of Coca-Cola Co. (KO) products, told analysts on a
conference call that the company has been able to increase its
prices significantly in each of the nine countries where it
operates to offset the higher costs.
"We see competitors also increasing prices because they are
experiencing the same pressures," Trevino added.
Higher prices for sweeteners and PET plastic sliced about $50
million from the company's profitability in the July-September
period, in which Coke Femsa showed controlling interest net income
of 2.28 billion pesos ($170 million), 7.1% more than in the
year-ago quarter.
Trevino explained that a difficult comparison quarterly
comparison exacerbated the rise in raw material expenses in the
third quarter as the company had secured a sweetener hedge in
Brazil for 2010 at "a very good price."
The company has already negotiated with suppliers of
high-fructose corn syrup for its Mexican bottling facilities next
year, he added, with the expectation that fructose will fulfill
more than 60% of its sweetener needs here and that sugar will cover
the rest.
The price negotiated for high-fructose corn syrup next year in
Mexico is 5%-6% higher than the average price the bottler has paid
for the sweetener in 2011, Trevino said.
The executive is more optimistic about PET plastic prices going
forward, saying that the company expects flat PET expenses, or even
a modest improvement, in 2012.
Trevino remarked that while PET prices can be volatile, the
bottler has noticed reductions in PET prices over the last two
weeks.
Wages have also pressured profitability, as workers in Argentina
and Venezuela recently secured salary increases above local rates
of inflation and low unemployment in Brazil has made it challenging
to recruit skilled workers there.
Trevino said Coke Femsa has had to offer new hires in Brazil
bigger salaries than in the past, while simultaneously having to
recruit from other industries and thus dedicate more time and money
to staff training.
The company is also shifting greater financial resources to
marketing in several markets, notably trying to boost its
competitive position in Mexico in anticipation of fiercer
competition from a unified PepsiCo Inc. (PEP) bottler here.
Pepsi announced plans in July to form a nationwide beverage
company in Mexico via a joint venture with local bottler Grupo
Embotelladoras Unidas SAB (GEUPEC.MX) and Venezuelan food and drink
producer Empresas Polar.
Trevino said Coke Femsa is trying to capture new points of sale
and secure optimal positioning in stores amid expectations of
more-focused efforts from Pepsi.
The executive highlighted Coke Femsa's significant cash flow
generation as a source of flexibility to invest in the business
both organically and via mergers and acquisitions amid accelerated
consolidation in the bottling industry.
Mexican Coke bottlers Arca and Continental merged during the
second quarter of this year to create Arca Continental SAB (AC.MX,
EMBVF), the second-biggest Coke bottler in Latin America.
Coca-Cola Femsa followed that move by announcing the purchase of
two regional Coke bottlers in Mexico.
There are nine additional independent bottlers in the Mexican
Coke system.
Coke Femsa reported earlier Thursday that its cash flow as
measured by earnings before interest, taxes, depreciation and
amortization grew 12.3% on the year in the third quarter to MXN5.89
billion. At end-September the company showed cash, cash equivalents
and marketable securities of MXN18.65 billion.
By Amy Guthrie, Dow Jones Newswires; (5255) 5980-5177,
amy.guthrie@dowjones.com