Andina Bottling Company, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

A bottler and distributor of Coca-Cola beverages, operating in parts of South America, primarily Chile, Brazil, Argentina, and Paraguay.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Andina Bottling Company, Inc. (AKO-A), also known as Embotelladora Andina S.A., is a significant Coca-Cola bottler and distributor, managing a network across parts of South America including Chile, Brazil, Argentina, and Paraguay. Operating under franchise agreements with The Coca-Cola Company, Andina plays a crucial role in the bottling, sales, and distribution of Coca-Cola beverages within its territories. This franchise relationship gives Andina a strong and unique position in its operating area.

Business Overview

Geographic Reach: AKO-A’s operations are strategically located in key South American markets: Chile, Brazil, Argentina, and Paraguay. These regions, while offering strong growth opportunities, also come with inherent economic and political challenges.
Product Portfolio: The core products handled by the company are Coca-Cola soft drink brands, other soft drinks and still beverages.
Competitive Landscape: The beverage market in Latin America is competitive, with other major players like AB InBev, SABMiller, and PepsiCo. These companies represent competition at the global level and at each local level. They influence prices, market penetration, innovation and ultimately profitability.
Operations: Andina focuses on manufacturing, distribution, and marketing of beverages within its territories. It maintains distribution network and a presence in different markets and channels.
Revenue Distribution:
- The revenues of the company can be segregated by geography, but also by beverage type: Coca-Cola, soft drinks and still beverages. In the latest quarters it’s clear that soft drinks are providing a major chunk of the revenue, which is growing quicker than the other segments, mainly driven by Brazil.
Pricing Power: In general, beverages and especially soft drinks, enjoy a limited level of pricing power since these are not essential products and are subject to competition. Having strong brands helps the company to have a better pricing power than its peers.
Value drivers: The company must focus on its revenue growth rate and returns on invested capital. It needs to leverage its size and scale to generate value through better pricing power, production efficiences and distribution networks.

Financial Analysis

Recent Performance: AKO-A’s recent financial results demonstrate a volatile but improving performance, specifically a recovery after a sharp drop in profits during the Covid crisis. We will be looking into its latest earnings calls in detail.
- Sales Volume: In the most recent quarter, consolidated sales volume reached 441.4 million unit cases a 7% increase vs last year and the company also recorded a net income of CLP 71,459. The revenue growth has been mainly driven by volume growth, but pricing also contributed. The company is projecting further volume growth in upcoming years as they fully recover from the recent crisis.
  - The highest increase was observed in the Argentina segment. Chile was relatively unchanged and Brazil had a slight decrease in sales volume.
- EBITDA: For the most recent quarter the company posted a adjusted EBITDA margin of 18.9%. This was better than the prior quarter of 16.8%, while it was slightly less than 19.9% of the same quarter of last year. The company attributes this increase in the effect of restructuring and pricing increase.
Margins: For the most recent quarter, the gross profit margin was 41.5% and operating margin was 14.8%. These metrics should be analyzed in the context of competitors to determine how sustainable these numbers are.
Cash Flow: From a cash flow perspective, the company is doing pretty well due to high sales volume and good pricing policies that were in place.
Currency Fluctuations: As a company operating in multiple countries in South America, foreign currency fluctuations pose a significant risk to the company’s profits. In the last few quarters the company’s sales have increased in different local currencies and then has been negatively impacted when translating them back to the reporting currency. The Brazilian real has been particularly weak for the company.
Capital Expenditures: A good capital expenditure is required for any bottling company to stay relevant and maintain efficiency and volumes. As such, the company is doing decent in this arena, but still has the need to invest more in manufacturing facilities and the fleet.
Debt: The company maintains a leverage at reasonable levels. However, it still needs to maintain its investments to continue operating.

Moat Analysis: 3/5

Franchise Agreements: Andina’s primary economic moat stems from its franchise agreements with The Coca-Cola Company. This grants them exclusive rights to bottle and distribute Coca-Cola products in their specific territories. This offers a strong and reliable competitive advantage that isn’t easy to replicate. The franchise contract acts as a barrier for new entrants and can allow the company to charge more for its products because its the only one selling them in that region.
Brand Strength: The Coca-Cola brand itself represents a formidable intangible asset. The brand is easily recognized and loved around the world and has a high loyalty amongst its customers. It allows Andina to extract value from consumers with a strong brand and repeat customers. The Coca-Cola brand is so strong it can help create pricing power for Andina which is a clear advantage. However, this is a moat that does not directly belong to Andina but indirectly and they benefit from it.
Distribution Network: Andina’s distribution system in place in each region it is operating is a difficult asset to replicate. This also ensures that new competitors face a big entry barrier when trying to gain some market share. There are a lot of small-scale, localized approvals that are in place with the company that are difficult to copy and replace. This gives it a solid base with the consumers and also in its operational costs.
Limited Switching Costs: Switching costs for customers are quite low, as it is easy to purchase a competitor product. As such, customers are not really forced to stay with the brands that Andina offers because of lock-in, however, the strong distribution channels that allow them to reach consumers may play an important role.
Overall: While Andina benefits from a strong franchise, a globally loved brand, and distribution infrastructure, some parts of its moat is not solely dependent on Andina and therefore is not as strong as it seems. Therefore, the company has a relatively solid moat, but not a wide moat.

Moat Risk Factors

Expiration of Franchise: The primary risk to the company’s moat is expiration or nonrenewal of franchise contracts. If The Coca-Cola Company decided to not renew the contracts or not renew them under the same terms, this would be devastating for the company.
Competitive Pressure: The soft drinks industry is very competitive, and a well-financed competitor could take away market share even with a solid brand like Coca-Cola. This can be done by lowering prices or offering more perks to retailers.
Government Regulations: Governments can introduce new rules and regulations that may impede the company’s profits. Examples include taxes, limitations on pricing and more.
Economic Downturns: Economic recessions, or slow growth, may lead to reduced consumption which will directly lead to lower profitability.
Currency Fluctuations: As mentioned earlier currency fluctuations may dramatically decrease profits even with high volumes. This risk is a significant threat to the company.
Customer preferences: There has been a growing trend among customers toward healthier drinks that have lower levels of sugar, salt, fat etc. The company is working on this and expanding its product offerings with new variations on its existing products, but this may hurt the profits of the existing, well known drinks.
Technology disruption: While the physical bottle and distribution remains important, future disruptions related to internet sales or alternative forms of delivery, could hurt the core business.

Understandability: 3/5

While the nature of Andina’s business is relatively easy to grasp—bottling and distributing beverages—understanding the intricacies of its franchise model, financial nuances, especially in multi-currency transactions and the potential challenges it faces in different markets, makes it difficult to fully understand. Some parts of its operations can be hard to discern from the publicly available information which may further complicate the understanding. However, the company generally operates in a well-understood industry where everyone knows the underlying product, and how it reaches consumers. Therefore, while not completely easy, the company is still quite easily understood.

Balance Sheet Health: 4 / 5

The latest balance sheets of the company showcase a healthy capital structure. While it does carry a debt, its level is manageable and the financial metrics point to a company that is able to sustain its ongoing operations. Therefore the company has a reasonably healthy financial position for long-term success.

Current Ratio: The company’s current ratio for the past quarter is 1.4 which implies it can easily meet its short-term obligations with current assets.
Debt to Equity: The company has debt and equity levels at reasonable levels, with a debt-to-equity ration of about 0.6 which demonstrates prudent management of its financial health.
Tangible Book Value: The book value of the company at the moment is roughly 50% of its total assets, showing its physical assets to value proportion.

Recent Concerns, Controversies and Problems

Fluctuations in Brazil: The Brazilian segment, although a significant revenue driver, has shown some decline in volume and margin during the last quarters, partially due to macroeconomic headwinds. Inflation in Brazil was also a cause for concern which directly affected the cost structure and the profit. However, the company seems to be doing a good job to counter these by having better prices and also restructuring parts of the business to maintain profitability.
Currency Fluctuations: Fluctuations in the local currencies, has a large impact on profitability and it is one of the biggest risks that the company faces. For all its different segments it is exposed to the currency markets of Argentina, Brazil, Chile, and Paraguay. And if the currency of these countries depreciate against the USD they may lose out when converting these sales back to the reporting currency.
Unfavorable Contract Terms: With new contracts coming in the future with the Coca Cola Company the company may experience harsher conditions. For example, a higher fee charged to carry on the operations, or a lower profit share in the overall business.
Chilean Regulations: Due to a new legal framework in Chile, the company will have to increase provisions, mainly in the areas of environment and compliance. These may have a negative impact in the short term profitability. The new laws may also force higher prices and increased operational costs. However the company is actively taking steps to ensure that the provisions are implemented without any financial disruptions.

The management is trying to proactively address these and other issues to reduce any negative impact and also capitalize on any new positive opportunities. They plan to improve performance by better operating efficiencies, increased focus on marketing, new products and by focusing on the high-growth segments in its portfolio.