Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Coca-Cola FEMSA, S.A.B. De C.V. (NYSE:KOF)

Definitive Agreement to Acquire Companhia Fluminense de Refrigerantes Conference

July 01, 2013 11:00 am ET

Executives

Carlos Vicente Salazar Lomelín - Chief Executive Officer, Director General and Director

Héctor Treviño Gutiérrez - Chief Administrative Officer and Chief Financial Officer

Analysts

Lauren Torres - HSBC, Research Division

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

Fernando Ferreira - BofA Merrill Lynch, Research Division

Operator

Good morning, everyone, and welcome to Coca-Cola FEMSA's conference call. As a reminder, today's conference is being recorded. [Operator Instructions] During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance. At this time, I will now turn the conference over to Mr. Carlos Salazar, Coca-Cola FEMSA's Chief Executive Officer. Please go ahead, Mr. Salazar.

Carlos Vicente Salazar Lomelín

[Spanish] Good morning, everyone. Thank you for joining us today. As a start to the year, we had the opportunity to discuss our fourth merger in the Mexican Coca-Cola bottling system, and we announced the closing of the transaction with our partner, the Coca-Cola Company, to operate in the Philippines. Today, as a testament that we continue to focus on the opportunities that Latin America presents, we moved south of the continent to one of the most attractive economies and exciting beverage markets in the region and in the world, Brazil. We have reached an agreement with the shareholders of Companhia Fluminense de Refrigerantes, to acquire in an all-cash transaction this important franchise, and expand our existing footprint in Brazil.

This acquisition marks our sixth transaction in the Coca-Cola bottling system in the last 24 months. With an aggregate investment of $4 billion, we're enforcing our commitment to look for avenues of profitable growth and value creation for our shareholders. Additionally, this represents an important step in the consolidation of our company's leadership in one of the top 5 markets in terms of volume for the Coca-Cola Company worldwide, reiterating the long-term strategic importance of this market for Coca-Cola FEMSA, and our belief in the attractive domestic consumption prospects and the country's socio-economic dynamics.

Companhia Fluminense serves part of the states of Minas Gerais, Rio de Janeiro, and São Paulo, including the City of São Jose dos Campos, one of the most important industrial and research centers in Latin America.

Our family of employees in Brazil will now be comprised of more than 50,000 members that will passionately serve 50 million consumers to more than 190,000 clients everyday.

Moreover, this franchise creates a perfect link between our Minas Gerais and São Paulo footprints. Providing for the opportunity to multiply the strategic alliances with customers and suppliers to generate even more value through our combined scales and setting the stage for important synergies to recapture from the reconfiguration of the supply chain of our franchisees.

Companhia Fluminense business philosophy and values are aligned with our company's social and environmental commitments. We will combine their initiative with our existing programs to strengthen our community engagement, supporting recycling and environmental care programs and [for us to include to our events] [ph] and physical activity programs in the city of Porto Real and the rest of Companhia Fluminense's territories -- territory.

We are proud to welcome Companhia Fluminense's talented team of professionals to our company. Together, we are certain that our combined efforts will present relevant career opportunities and mobility to every employee, as we balance our portfolio of geographies and sources of cash flow generation to lead the future growth perspective -- prospects of our company.

This year, we are celebrating our 10th annual journey in Brazil. Since we acquired the territories of São Paulo and Mato Grosso, as a result of the Panamco acquisition. Since the year 2003, we have grown the business organically, fostering per capita consumption of our brand, including the profitability of the business, leading the system in the development of returnable packaging alternatives, incorporating the so-called del valle business, and growing our footprint through the acquisition of the Minas Gerais franchise in the year 2008. All of these, while investing towards increasing the capacity and efficiency of our manufacturing and distribution network in the country. What better way to celebrate a decade of commitment to the country and our Brazilian consumers, than announcing these relevant acquisitions, reinforcing our long-term view and commitment to Brazil. We want to thank everyone, who worked hard to make this transaction possible, especially Companhia Fluminense shareholders, for the trust they placed in our management to carry on their legacy in this territory and to foster our commitment to create economic, social and environmental value.

Now, I would like to ask Héctor to discuss the transaction and provide more operational details about this franchise.

Héctor Treviño Gutiérrez

Thank you, Carlos, and good morning, everyone. I would like to walk you through some of the merits that we see in this acquisition, and what is the percent for our company and the Coca-Cola bottling system in Brazil.

Companhia Fluminense sold approximately 57 million unit cases of beverages, including beer, in the last 12 months ended March of 2013. Of this volume, more than 85% is sparkling beverages, close to 8% is beer, 5% are non-carbonated beverages and water, sold mostly in personal presentations. Within the sparkling beverages, close to 80% of the volumes are sold in multi-serve presentations, and slightly more than 20% is single-serve. This franchise has a relatively singular portfolio, that does not have multi-serve returnable PET presentations or the single-serve entry packs that we have in our existing territories, thus providing for opportunities to develop additional packaging alternatives to capture more consumption locations and develop a more competitive portfolio.

The competitive landscape is similar to the rest of our Brazilian franchise territories. Accordingly, we will be implementing revenue management strategies to better serve our customers and consumers.

In non-carbonated beverages, Companhia Fluminense has a leading position in juices, which are called del valle, and in the way to bring tea category [to Real] [ph]. Moreover, PowerAde's got a strong position in the sports drinks, with almost 40% of the market.

As I mentioned, the mix of water in Companhia Fluminense portfolio is relatively small, and we see an important growth opportunity in this category by increasing client coverage and ability -- and availability for our consumers. The cooler coverage that we have identified is going to be below 40%, which compares to our [third coverage] [ph] of close to 60%, presenting an opportunity to increase the coverage in these territories.

Currently, Companhia Fluminense does not have a commercial model that converts to our client value management model. The implementation of our commercial practices should allow us to develop the per capita consumption of this franchise, while increasing our customer's value potential.

Now I would like to disclose how we are structured in this transaction. Prior to this agreement, we've performed a thorough legal, financial and operating mobility analysis. Our Board of Directors has approved the transaction and is still subject to the customary regulatory approval of CADE, the Brazilian antitrust authority. Additionally, we will seek approval of the Coca-Cola Company in this transaction.

In the last 12 months, up to March of this year, Companhia Fluminense generated revenues of approximately $232 million and an estimated pro forma EBITDA of $40 million. The aggregate enterprise value of the transaction is $448 million, and the enterprise value to EBITDA multiple of the transaction was 11.2x.

We would be using excess cash to complete the acquisition, once the authorizations have been obtained and the transactions have been closed. As such, our pro forma net debt-to-EBITDA ratio will be 0.9x, maintaining the healthy financial position that we have enjoyed over the past several years.

As Carlos already noted, the geographic continuity of Companhia Fluminense with our Brazilian operations, connecting our franchisees in Minas Gerais and São Paulo, will allow to integrate this operation quickly and to generate potential synergies of approximately $14 million, which we expect to capture at the EBITDA level within the next 18 to 24 months. We see opportunities to reconfigure the logistics and distribution network, implement revenue management initiatives, launch our successful multi-serve refillable PET presentation and eventually, introduce single-serve entry packs. And also, we implement our commercial model in tandem with increasing cooler coverage. This transaction, which we expect to close in the fourth quarter will allow us to increase our participation in [indiscernible], the leading non-carbonated beverage player in the country, from 19% to 21%, and strengthening our presence in one of the fastest growing categories of the Brazilian beverage industry.

We are confident that our [operators'] [ph] focus to implement local initiatives to respond to changes in consumption trends, their capabilities to conduct our business under difficult circumstances, the geographic diversification of our franchises, and our commitment to deliver on the targets, both organic and inorganic, that we set out for the long term, will continue to open many opportunities into the future, generating value for our shareholders.

Thank you, all, for participating in this conference call and for your continued trust and support. Carlos and I will take any questions that you might have. Please go ahead, operator.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Lauren Torres with HSBC.

Lauren Torres - HSBC, Research Division

A lot of the acquisitions that you've done in the past was more focused on Mexico, and now we're hearing about Brazil. So I was looking for comments, if this is something that's opening up opportunities for you in Brazil, if some of these independents are more prone now to discuss putting themselves up for sale. And I was also wanting to talk about the all-cash transaction. In the past, you've also issued equity to get these deals done, and now we're hearing about an all-cash transaction. So just curious if these independents are now looking to sell out, if it's more of the possibility to do it with cash, and if this 11x multiple is something that we'll see on average occurring in Brazil for you?

Héctor Treviño Gutiérrez

Lauren, yes, I think that, with respect to the first part of your question, I think that, yes, you are right. I mean, I think that after the [Contal Arca] [ph] transaction in Mexico, that opened up the possibility for other transactions, as some of the families were looking at their personal situations, their respective transactions and I guess, doing some wealth management. In the case of Mexico, it was very clear that all of these families, so far, have been very interested in staying in the business and therefore, they were looking for shares as part of the compensation for their franchises. I think that this transaction in Brazil, remember that we have the consolidation of 3 bottlers in the Northeast with their solar refreshments, solar bottling operations. That now we have this transaction, we still have 9 other bottling operations in Brazil. You can argue that is still pretty much fragmented. That's not necessarily the case in Mexico anymore. There are still a few bottlers in Mexico. And the first transaction, the solar transaction was a merger of the 3 bottlers. This time around, was, clearly, the reason for the cash transaction is that the standing shareholders wanted cash as part of the price, as compensation for their franchise. I'm not sure that that will be the case for any future transactions in Brazil, if there are other transactions, we hope that there are. And 11x EBITDA, which is the last part of your question, I think that, in general, I think that it's a good level for Brazil given the [price that is current] [ph], a much lower per capita consumption than Mexico, it has more synergic opportunities and it's important also to remember that Brazil has a tax regulation that allows some tax incentives and other benefits that can be taken into consideration for this, which also want to take into consideration those tax incentives and tax planning, the multiples on an apples-to-apples basis will look much more lower than 11x. But I think that those are the reasons why you would see transaction more on that range.

Lauren Torres - HSBC, Research Division

Okay, if I could ask one other question. I know you're now just looking for approval from antitrust authorities in Brazil and from the Coca-Cola Company. Any quick comments on if you think there will be any hurdles there, which will be relatively straightforward to clear that -- to clear and get that approval?

Héctor Treviño Gutiérrez

We think that is going to be very straightforward and...

Carlos Vicente Salazar Lomelín

Yes, and we are not seeing any problem in this particular matter. And we are integrating a territory -- additional territories, exactly the same situation that we face in Mexico, in which we don't have any competitive reason to avoid the integration of these territories. We don't prevent any hurdles in this particular situation with the antitrust commission. Let me just add one comment to your first question, Lauren. This process of integration that now is seen in Brazil. I think it will be most important to me that I show to the investors that the Coca-Cola FEMSA always just wants to be very flexible. And that we can structure different transactions, with different kinds of structures, with shares or with cash. And it all depends on the situation of the families, situation of the owners and the role that they want to play in the future. In the case of Mexico, obviously, the original loaners of the franchisees want to participate in some work, with some role in the organization through the boards of directors and the board that we have now for the Mexican families, the Consultative Boards for the Mexican families. In the case of this particular family, the family Monteiro [ph] in Brazil, they want to exit of the business. And -- but they are very, very valuable and we want to have always the advice of Lula Monteiro [ph] that is a man that knows very well the system and knows very well the distribution problems that we can face now and in the future. For that reason, we want to maintain at least, at the advice of Lula Monteiro [ph], not in a formal board, because we are not thinking in that in this time, but always with the flexible view of the consolidation of the Brazilian franchisees.

Operator

We'll take our next question from Luca Cipiccia from Goldman Sachs.

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

Thanks for taking my questions. The first is expanding a bit on the previous one. If you could give us a sense on how competitive was the bidding for this asset, meaning, even looking forward at the other potential assets that are in Brazil, how much do you think will incrementally become competitive between you and the other, well, [Andina] [ph] and the bottles in the Northeast to go after their outstanding operators? And specifically, on this transaction, were you their only counterpart, or was there an option? Just to understand the sensitivity that this may cause for future multiples. And the second question is more on trying to reconcile the long-term opportunity and the short-term dynamics in Brazil. If you could give us an update on what you're seeing now in terms of consumption after the recent event, after the numbers that we saw coming out in the first quarter. And also the synergies that you gave, how much do they factor in the [stabilization and] [ph] consumption? What is the type of outlook that you're working on, looking at demand levels on an organic basis going forward?

Héctor Treviño Gutiérrez

Luca, as far as we know, with respect to the first part of the question -- your question, I'm sure that the families look at alternatives, but once we started to have a conversation with them, we enter into an exclusivity agreement and that there was no -- that as far we know, there was not a beauty contest in where we were competing with other bottlers in their, as I mentioned broadly. they check all the reference and maybe they got some conversations before entering into these exclusivity agreements. But we're not pressured by any auction process in this time. In terms of the opportunities going forward, I think that, as I mentioned some points here in the introductory comments, we'll see, close $14 billion -- excuse me, $14 million in synergies. That has to do, we believe, with the greater sale that we have had with the 2 liters returnable PET bottles in our territories, it's a presentation that is not there. We think that there is an opportunity where the single-serve packages, entry packages as we call it, at very competitive prices, at BRL 1, BRL 2 and BRL 3. But most importantly is the fact that these territories, of the link between the state of Minas Gerais and São Paulo. We think that the fact that this territory is in the middle of our territories, will help us capture synergies also to lower the value chain in manufacturing, especially in distribution and the way to market. And also, which is a little bit more, probably not as a hard to -- is a hard number, is this idea of introducing our commercial model that have had very good success in our territories in terms of increasing the consumption of our products. If what you are saying is correct, we are seeing, this year, a very tough environment in Brazil in terms of volumes. We are expecting that even for our territories, that as we introduce new presentations and new packages, and as we have these entry packages with a good pricing formula, that we will revert those strengths. We are confident that our management over there will do a good job there. And I'd like to ask Carlos to share some of his insights also here in this part of the question.

Carlos Vicente Salazar Lomelín

Okay, Luca, your question lend me the opportunity to comment with our friends. Some of the strategies that we are implementing to face each tough situation that we are seeing in Brazil, for all the different industries. With the experience that we have in corporate affairs, immediately we react, trying to invest more in the non-returnable multi-serve presentation. The implementation of our PET, 2 liters, has been a very important success. You can see the growth that we have had with this particular presentation in the different areas of São Paulo, in which we start making the distribution. Now, we're, obviously, we are beginning to increase the bottles, the returnable borrows, to have more participation of that particular SKU. If we reach exactly the same mix of returnables what we have in Mexico, we'll want to have a very, very important opportunity to growth for the following months. At the same time, we introduced a new strategy to try to adapt more consumers in our single-serve presentation. Very interesting proposition of our people in Brazil, in which they launched an initiative that we call 1 2 3. That means that we offer 1 representation, for BRL 1, 2 -- or another presentation for BRL 2, and another presentation for BRL 3. Exactly the same thing that we are trying to implement all within Mexico, in which we have one SKU for the money that you have in your pocket to spend in beverage and in this case, in Coca-Cola. These 2 alternatives have been very, very interesting. I've been in Brazil, very often, in the past couple of months and I personally saw what happened with these initiatives now in the market. Another comment that I would like to do with your question is that remember, that we are building a new beautiful -- and I expect that we're going to want to invite you to visit the inauguration of our new facility in the state of Minas Gerais, very close to [indiscernible] in the city, small city that [indiscernible], in which we are building this new facility that we expect to finish at the middle of next year. All with the capacity that we'll want to have in this new facility, can supply this new territory. For the reason, this is another of the reasons, the strategic reasons for us to acquire these territories, because we want to expand the possibility to produce and to use the capacity that we are incoming in the [indiscernible] plant. With all the fiscal initiatives that we have, remember that 25 of the territory of Fluminense is in the state of Minas Gerais. That means that with the production of our [indiscernible] new plants, we'll want to have the possibility to catch these 25% of the territory that Fluminense has in [indiscernible] with some incentives -- fiscal incentives.

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

If I could just quickly, a follow-up question on this. I don't know if you have any comment on how severe the impact has been of the recent sort of events on traffic in Brazil? I don't know if you can share something with us already on this.

Héctor Treviño Gutiérrez

Yes, it has -- certainly, all the -- you're referring to all the...

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

The demonstrations...

Héctor Treviño Gutiérrez

That has created, certainly, a lot of traffic problems and problems with the logistics. I think that this is a temporary issue that will certainly affect the month of June for our operations, especially in São Paulo, being a large city and a very complex traffic environment. But we don't see a permanent in this, it's just a -- it's normal disruptions that you see when there is -- there's an amount of demonstrators in the street.

Operator

And we'll take our next question from Fernando Ferreira with Bank of America Merrill Lynch.

Fernando Ferreira - BofA Merrill Lynch, Research Division

I just had a quick follow-up on the financing side. I mean, how hard it is when you talk to shareholders outside of Mexico to try to use your shares for financing those acquisitions? And if you think that this is a possible impediment for buying or merging with those bottlers with using your shares, do you plan or do you think it's a possibility that you might list your shares in other markets, let's say in Brazil or somewhere else, in order to make it easier to use your shares for future acquisitions or that's not the case?

Héctor Treviño Gutiérrez

Fernando, honestly, the fact that we have the ADR program, it looks like it's a very good vehicle for shareholders all over the world to participate. We have looked at this alternative of listing in other territories. So far, it's something that is not in the front burner of our strategies, but we might look at that in the future. But in what we have discussed with our, let's say in social conversations that we have had with other bottlers and including Fluminense, it looks like the fact that it's not listed Brazil was not an impediment for them to look at our shares as a currency. In this case, it was more the preference of the sellers to receive cash, and as Carlo was saying, to exit the business. And they have other businesses, and it probably means, they probably wanted to focus on the other businesses and contemplate their resources there.

Operator

And this does conclude our question-and-answer session today. I would now like to turn the call back over to Mr. Héctor Treviño, for any additional or closing remarks.

Héctor Treviño Gutiérrez

Thank you for your interest in our company. As always, Jose and Roland will be available for any other questions. Thank you so much.

Operator

This does conclude today's conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Coca-Cola FEMSA's CEO Hosts Definitive Agreement to Acquire Companhia Fluminense de Refrigerantes Conference (Transcript)
This Transcript
All Transcripts