MANAGEMENT DISCUSSION & ANALYSIS

Results for the Year Ended December 31, 2021
Compared to the Year Ended December 31, 2020

Consolidated Results

The comparability of our financial and operating performance in 2021 as compared to 2020 was affected by the following factors: (1) translation effects from fluctuations in exchange rates; and (2) our results in Argentina, whose economy satisfied the conditions to be considered a hyperinflationary economy. For the convenience of the reader, we have included a discussion of the financial information below on a comparable basis, excluding the translation effects from fluctuations in exchange rates. To translate the full-year results of Argentina for the years ended December 31, 2021 and 2020, we used the exchange rate at December 31, 2021 of 102.72 Argentine pesos per U.S. dollar and the exchange rate at December 31, 2020 of 84.15 Argentine pesos per U.S. dollar. The depreciation of the exchange rate of the Argentine peso at December 31, 2021, as compared to the exchange rate at December 31, 2020, was 22.1%. In addition, the average depreciation of currencies used in our main operations relative to the U.S. dollar in 2021, as compared to 2020, were 4.6% for the Brazilian real and 1.3% for the Colombian peso, and an appreciation of 5.6% for the Mexican peso relative to the U.S. dollar.

Total Revenues. Our consolidated total revenues increased by 6.1% to Ps. 194,804 million in 2021 as compared to 2020, mainly as a result of our pricing initiatives, coupled with favorable price-mix effects and volume growth. These effects were partially offset by unfavorable currency translation effects from some of our operating currencies into Mexican pesos and a decline in beer revenues related to the partial transition of the beer portfolio in Brazil. In addition, this figure includes other operating revenues related to entitlements to reclaim Ps. 254 million in tax payments in Brazil in 2021. See Note 23.2.1 to our consolidated financial statements. On a comparable basis, total revenues would have increased by 11.1% in 2021 as compared to 2020.

Total sales volume increased by 5.3% to 3,457.9 million unit cases in 2021 as compared to 2020, driven mainly by volume growth in Mexico, Central America, Colombia, Argentina, and Uruguay. This increase was partially offset by a slight volume decline in Brazil.

  • In 2021, sales volume of our sparkling beverage portfolio increased by 4.2%, sales volume of our colas portfolio increased by 3.1%, and sales volume of our flavored sparkling beverage portfolio increased by 8.9%, in each case as compared to 2020.
  • Sales volume of our still beverage portfolio increased by 18.9% in 2021 as compared to 2020.
  • Sales volume of our bottled water category, excluding bulk water, increased by 18.3% in 2021 as compared to 2020.
  • Sales volume of our bulk water category decreased by 1.3% in 2021 as compared to 2020.

Consolidated average price per unit case increased by 7.4% to Ps. 53.0 in 2021, as compared to Ps. 50.6 in 2020, mainly as a result of favorable price-mix effects and price increases aligned with or above inflation. This was partially offset by the negative translation effect resulting from the depreciation of all of our operating currencies relative to the Mexican peso. On a comparable basis, average price per unit case would have increased 9.0% in 2021 as compared to 2020, driven by our revenue management and pricing initiatives.

Gross Profit. Our gross profit increased by 7.0% to Ps. 88,598 million in 2021 as compared to 2020, with a gross margin increase of 40 basis points as compared to 2020 to reach 45.5% in 2021. This gross margin increase was driven mainly by favorable price-mix effects, our raw material hedging strategies, and the positive effect of the resumption of tax credits on concentrate purchased from the Manaus Free Trade Zone in Brazil, partially offset by higher raw material prices, higher concentrate costs in Mexico, and the depreciation in the average exchange rate of most of our operating currencies as applied to our U.S. dollar-denominated raw material costs. On a comparable basis, our gross profit would have increased by 11.3% in 2021 as compared to 2020.

The components of cost of goods sold include raw materials (principally concentrate, sweeteners, and packaging materials), depreciation costs attributable to our production facilities, wages and other labor costs associated with labor force employed at our production facilities, and certain overhead costs. Concentrate prices are determined as a percentage of the retail price of our products in local currency, net of applicable taxes. Packaging materials, mainly PET resin and aluminum, and HFCS, used as a sweetener in some countries, are denominated in U.S. dollars.

Administrative and Selling Expenses. Our administrative and selling expenses increased by 7.6% to Ps. 60,720 million in 2021 as compared to 2020. Our administrative and selling expenses as a percentage of total revenues increased by 50 basis points to 31.2% in 2021 as compared to 2020, mainly as a result of the normalization in labor, maintenance, and marketing expenses. In 2021, we continued investing across our territories to support marketplace execution, increase our cooler coverage, and bolster our returnable presentation base.

Other Expenses Net. We recorded other expenses net of Ps. 807 million in 2021 as compared to Ps. 3,611 million in 2020, which decrease was mainly as a result of certain extraordinary other operating expenses related to impairments in Estrella Azul in Panama and in Leão Alimentos, our non-carbonated beverage associate in Brazil during 2020. For more information, see Notes 8 and 18 to our consolidated financial statements.

Comprehensive Financing Result. The term “comprehensive financing result” refers to the combined financial effects of net interest expenses, net financial foreign exchange gains or losses, net gains or losses on the monetary position of hyperinflationary countries where we operate, and market value gain (loss) on financial instruments. Net financial foreign exchange gains or losses represent the impact of changes in foreign exchange rates on financial assets or liabilities denominated in currencies other than local currencies, and certain gains or losses resulting from derivative financial instruments. A financial foreign exchange loss arises if a liability is denominated in a foreign currency that appreciates relative to the local currency between the date the liability is incurred and the date it is repaid, as the appreciation of the foreign currency results in an increase in the amount of local currency, which must be exchanged to repay the specified amount of the foreign currency liability.

Comprehensive financing result in 2021 recorded an expense of Ps. 4,219 million as compared to an expense of Ps. 6,679 million in 2020. This 36.8% decrease was driven mainly by a one-time interest expense related to the repurchase and redemption in full of our 3.875% senior notes due 2023, recorded during 2020. In addition, in 2021 we recorded an increase in our foreign exchange gain and a gain in financial instruments.

Income Taxes. In 2021, our effective income tax rate decreased to 28.9%, as compared to our effective income tax rate of 33.8% in 2020, mainly as a result of a favorable deferred tax credit in Brazil recognized in 2021, and deferred tax adjustments in Mexico that were recognized during 2020. For more information, see Note 25 to our consolidated financial statements.

Share in the Profit of Equity Accounted Investees, Net of Taxes. In 2021, we recorded a gain of Ps. 88 million in the share in the profit of equity accounted investees, net of taxes, mainly due to the results of Jugos del Valle, our associate in Mexico.

Net Income (Equity holders of the parent). We reported a net controlling interest income of Ps. 15,708 million in 2021, as compared to Ps. 10,307 million in 2020. This 52.4% increase was driven mainly by solid operating results, coupled with a decrease in our comprehensive financial result.

Results by Consolidated Reporting Segment Mexico and Central America

Total Revenues. Total revenues in our Mexico and Central America consolidated reporting segment increased by 8.4% to Ps. 115,794 million in 2021 as compared to 2020, mainly as a result of a volume increase in all of our territories, coupled with favorable price-mix effects and pricing initiatives.

Total sales volume in our Mexico and Central America consolidated reporting segment increased by 3.3% to 2,057.9 million unit cases in 2021 as compared to 2020, as a result of increases in mobility and gradual recoveries across our territories.

  • Sales volume of our sparkling beverage portfolio increased by 2.4% in 2021 as compared to 2020, driven mainly by a 2.0% increase in our colas portfolio.
  • Sales volume of our still beverage portfolio increased by 13.2% in 2021 as compared to 2020, due to a solid performance in Mexico and double-digit increases in Central America.
  • Sales volume of bottled water, excluding bulk water, increased by 17.7% in 2021 as compared to 2020, due to double-digit increases in both Mexico and Central America.
  • Sales volume of our bulk water portfolio remained flat in 2021 as compared to 2020.

Sales volume in Mexico increased by 1.8% to 1,790.0 million unit cases in 2021, as compared to 1,759.2 million unit cases in 2020, mainly as a result of gradual recoveries and increases in mobility.

  • Sales volume of our sparkling beverage portfolio increased 0.6% in 2021 as compared to 2020, driven by a 0.6% increase in our colas portfolio and a 1.0% increase in our flavored sparkling beverage portfolio.
  • Sales volume of our still beverage portfolio increased by 9.5% in 2021 as compared to 2020.
  • Sales volume of bottled water, excluding bulk water, increased by 17.3% in 2021 as compared to 2020.
  • Sales volume of our bulk water portfolio remained flat in 2021 as compared to 2020.

Sales volume in Central America increased by 15.2% to 267.8 million unit cases in 2021, as compared to 232.4 million unit cases in 2020, mainly as a result of solid execution, increases in mobility, and recoveries across all of our territories in the region.

  • Sales volume of our sparkling beverage portfolio increased by 13.2% in 2021 as compared to 2020, driven by a 11.0% increase in colas and 23.9% increase in our flavored sparkling beverage portfolio.
  • Sales volume of our still beverage portfolio increased by 37.5% in 2021 as compared to 2020.
  • Sales volume of bottled water, excluding bulk water, increased by 21.2% in 2021 as compared to 2020.
  • Sales volume of our bulk water portfolio increased by 7.1% in 2021 as compared to 2020.

Gross Profit. Our gross profit in this consolidated reporting segment increased by 8.4% to Ps. 57,366 million in 2021 as compared to 2020, and gross profit margin remained flat as compared to 2020. Gross profit increased mainly as a result of our pricing initiatives, favorable price-mix effects, and our raw material hedging strategies. These factors were partially offset by higher raw material prices, higher concentrate costs in Mexico, and the depreciation in the average exchange rate of most of our operating currencies as applied to our U.S. dollar-denominated raw material costs.

Administrative and Selling Expenses. Administrative and selling expenses as a percentage of total revenues in this consolidated reporting segment increased by 50 basis points to 32.9% in 2021 as compared to the same period in 2020. Administrative and selling expenses, in absolute terms, increased by 9.9% in 2021 as compared to 2020, driven mainly by the normalization of certain operating expenses primarily in labor and maintenance.

South America

Total Revenues. Total revenues in our South America consolidated reporting segment increased by 2.8% to Ps. 79,010 million in 2021 as compared to 2020, mainly as a result of favorable price-mix effects and our pricing initiatives. These factors were partially offset by unfavorable currency translation effects resulting from the depreciation of all of our operating currencies as compared to the Mexican peso. In addition, this figure includes other operating revenues related to entitlements to reclaim Ps. 254 million in tax payments in Brazil in 2021. See Note 23.2.1 to our consolidated financial statements. Total revenues for beer amounted to Ps. 10,677.2 million in 2021. On a comparable basis, total revenues would have increased by 13.1% in 2021 as compared to 2020.

Total sales volume in our South America consolidated reporting segment increased by 8.3% to 1,400.0 million unit cases in 2021 as compared to 2020, mainly as a result of double-digit volume growth in Colombia and Argentina, coupled with volume growth in Brazil and Uruguay.

  • Sales volume of our sparkling beverage portfolio increased by 6.8% in 2021 as compared to 2020.
  • Sales volume of our still beverage portfolio increased by 28.6% in 2021 as compared to 2020.
  • Sales volume of our bottled water category, excluding bulk water, increased by 18.9% in 2021 as compared to 2020.
  • Sales volume of our bulk water portfolio decreased by 11.4% in 2021 as compared to 2020.

Sales volume in Brazil increased by 4.7% to 903.3 million unit cases in 2021, as compared to 862.9 million unit cases in 2020.

  • Sales volume of our sparkling beverage portfolio increased by 4.1% in 2021 as compared to 2020, as a result of an increase of 1.9% in our colas portfolio and an increase of 10.8% in our flavored sparkling beverage portfolio.
  • Sales volume of our still beverage portfolio increased by 18.9% in 2021 as compared to 2020.
  • Sales volume of our bottled water, excluding bulk water, increased by 3.5% in 2021 as compared to 2020.
  • Sales volume of our bulk water portfolio decreased by 18.3% in 2021 as compared to 2020.

Sales volume in Colombia increased by 16.9% to 298.0 million unit cases in 2021, as compared to 254.8 million unit cases in 2020.

  • Sales volume of our sparkling beverage portfolio increased by 12.6% in 2021 as compared to 2020, driven mainly by a 8.0% growth in colas and 44.1% volume growth in our flavored sparkling beverage portfolio.
  • Sales volume of our still beverage portfolio increased by 63.3% in 2021 as compared to 2020.
  • Sales volume of bottled water, excluding bulk water, increased by 59.6% in 2021 as compared to 2020.
  • Sales volume of our bulk water portfolio decreased by 8.9% in 2021 as compared to 2020.

Sales volume in Argentina increased by 16.2% to 155.5 million unit cases in 2021, as compared to 133.8 million unit cases in 2020.

  • Sales volume of our sparkling beverage portfolio increased by 15.6% in 2021 as compared to 2020, impacted mainly by a 15.7% increase in colas and 15.4% increase in our flavored sparkling beverage portfolio.
  • Sales volume of our still beverage portfolio increased by 30.5% in 2021 as compared to 2020.
  • Sales volume of bottled water, excluding bulk water, increased by 22.1% in 2021 as compared to 2020.
  • Sales volume of our bulk water portfolio decreased by 7.2% in 2021 as compared to 2020.

Sales volume in Uruguay increased by 5.2% to 43.4 million unit cases in 2021, as compared to 41.2 million unit cases in 2020.

  • Sales volume of our sparkling beverage portfolio increased by 2.6% in 2021 as compared to 2020.
  • Sales volume of our still beverage portfolio increased by 68.9% in 2021 as compared to 2020.
  • Sales volume of bottled water increased by 20.9% in 2021 as compared to 2020.

Gross Profit. Gross profit in this consolidated reporting segment amounted to Ps. 31,232 million, an increase of 4.4% in 2021 as compared to 2020, with a 60 basis point margin expansion to 39.5%. This increase in gross profit was driven mainly by a favorable price-mix effect, our raw material hedging strategies, and lower concentrate costs in Brazil related to the resumption of tax credits on concentrate purchased from the Manaus Free Trade Zone. These factors were partially offset by the depreciation of the average exchange rate of all of our operating currencies in the consolidated reporting segment as applied to our U.S. dollar-denominated raw material costs.

Administrative and Selling Expenses. Administrative and selling expenses as a percentage of total revenues in this consolidated reporting segment increased by 30 basis points to 28.7% in 2021 as compared to 2020, driven mainly by the normalization of our operating expenses in the region. Administrative and selling expenses, in absolute terms, increased by 3.9% in 2021 as compared to 2020.