Fitch Ratings has affirmed Coca-Cola FEMSA, S.A.B. de C.V.'s (KOF) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A' and senior unsecured debt at 'A'.

The Rating Outlook on the IDRs is Negative. Fitch has also affirmed KOF's Long- and Short-Term National Scale rating at 'AAA(mex)' and 'F1+(mex)', respectively, and the local bond issuances at 'AAA(mex)'. The Outlook on the National Scale is Stable.

Coca-Cola FEMSA, S.A.B. de C.V.'s (KOF) ratings reflect its strong business position as the world's largest franchise bottler of Coca-Cola products by sales volume, with operations across Latin America, plus its solid financial position across the rating horizon. The company has a Standalone Credit Profile (SCP) of 'a-'; based on Fitch's Parent and Subsidiary Rating Linkage Criteria its ratings are equalized with those of its stronger parent company, Fomento Economico Mexicano, S.A.B. de C.V. (FEMSA, A/Negative).

The Negative Outlook reflects the direct linkage of KOF's ratings with those of FEMSA.

Key Rating Drivers

Solid Business Position: KOF's strong market share position is supported by an extensive and well-developed distribution network, the solid brand equity of Coca-Cola products, a diversified product portfolio and solid execution at the point of sale. Fitch believes these factors provide a competitive advantage and allow it to maintains its leading market positions in the long term.

KOF also is expected to strengthen its business position by focusing on its strategic priorities related to growing the core business, expanding the commercial platform, incorporating value-added acquisitions, increasing its infrastructure, spreading a customer-centric culture, and meeting sustainability targets.

Parent and Subsidiary Linkage: KOF's ratings are equalized with FEMSA's. Fitch follows the stronger parent path of our Parent and Subsidiary Linkage criteria and determined that there is a low legal incentive, a high strategic incentive, and a medium operational incentive for FEMSA to support KOF. This results in a top down minus one notch rating approach from FEMSA's credit profile to determine KOF's ratings. However, since Fitch views KOF's standalone credit profile as one notch lower than FEMSA's, the criteria states that the rating of the subsidiary will be equalized with the parent's rating.

Improved Operating Performance: KOF's ratings incorporate an improvement in its results amid a weak consumer environment in Argentina and Colombia and challenging weather conditions in Mexico. Fitch expects the company's revenue to grow around 8% in 2024 and 6% in 2025-2026, driven by volume growth and higher average sales prices. In addition, Fitch projects that KOF's profitability will continue to benefit from a stable cost environment of key raw materials that, combined with revenue growth management initiatives and hedging strategies will sustain an EBITDA margin of around 18% in 2024-2026.

Sound FCF: KOF has historically generated robust annual FCF after capex and dividends and Fitch forecasts it will remain strong in 2024-2026. Fitch projects the company's annual FCF will be close to MXN4 billion in the next two years, assuming capex and dividends at annual levels of around MXN22.7 billion and MXN13 billion, respectively. Capex will be mainly oriented towards increasing production capacity and warehouse space, as well as to maintain consistent investments in returnable bottles, coolers and technology.

Low Leverage Metrics: KOF maintains strong leverage metrics and we expect that EBITDA leverage and EBITDA net leverage will be around 1.5x and 1.0x, respectively, in 2024-2026. The company's total debt is projected to be close to MXN70 billion with an EBITDA, as calculated by Fitch, of approximately MXN50 billion. Fitch considers that potential small to mid-size debt financed acquisitions are manageable for KOF's credit quality.

Rating Above Mexico's Country Ceiling: KOF's SCP is one notch higher than Mexico's Country Ceiling of 'BBB+', mainly due to its U.S. dollar-denominated cash position held offshore and to a lesser extent by the EBITDA generation from countries with investment grade country ceilings such as Panama (A+), Uruguay (A-) and Colombia (BBB-). Both factors contribute to cover the company's hard currency debt service over the next 24 months at more than 3.0x.

Derivation Summary

KOF's ratings are equalized to FEMSA's at 'A', given a high strategic, medium operational and low legal incentives for FEMSA to support KOF. KOF's SCP of 'a-' is higher than the rating of peer Embotelladora Andina S.A. (BBB+/Stable), given its larger size and scale and higher EBITDA generation from investment-grade countries.

KOF compares well with Arca Continental, S.A.B. de C.V. (A/Stable), but it has greater exposure in its EBITDA generation to countries in the 'B' or 'BB' category and has maintained relatively higher leverage metrics throughout the rating horizon. When compared with Coca-Cola Europacific Partners plc (BBB+/Stable), KOF's ratings benefit from lower leverage and higher EBITDA margins.

Key Assumptions

Revenue is projected to increase around 8% in 2024 and 6% in 2025-2027;

EBITDA margin around 18% in 2024 and 18% to 19% in 2025-2027;

Capex averaging around MXN22 billion in 2024-2027;

Dividends at MXN12.7 billion in 2024 and close to MXN14 billion in 2025-2027;

FCF margin close to 2% of revenues over 2024-2027.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

The Outlook on KOF's IDRs would be revised to Stable if FEMSA's Outlook is revised to Stable from Negative.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A significant decline in KOF's revenue or profitability;

Negative FCF through the rating horizon;

Net leverage sustained above 2.5x;

A downgrade of FEMSA's IDRs;

A downgrade of Mexico's sovereign rating or Country Ceiling.

Liquidity and Debt Structure

Strong Liquidity: KOF had MXN41.5 billion of cash and marketable securities and MXN2.6 billion of short-term obligations as of Sept. 30, 2024. The company has ample financial flexibility and access to loan facilities and capital markets. Its next significant debt amortizations are MXN2.9 billion (USD150 million) in 2026, MXN8.5 billion (USD433 million) in 2027, MXN10 billion (USD508 million) in 2028 and MXN42.3 billion (USD2.2 billion) in 2029 and afterwards.

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Issuer Profile

Coca-Cola FEMSA, S.A.B. de C.V. is the world's largest franchise bottler for The Coca-Cola Company in terms of sales volume with operations in Mexico, Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Brazil, Argentina, Uruguay and through its investment in shares in KOF Venezuela since Dec. 31, 2017 as a non-consolidated operation.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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