Results from our operations for the year ended December 31, 2018 compared to the year ended December 31, 2017.
Coca-Cola FEMSA’s underlying financial and operating performance in 2018 as compared to 2017 was affected by the following factors: (1) the ongoing integration of mergers, acquisitions, and divestitures: acquisitions made in Guatemala and Uruguay as of May and July 2018, respectively; (2) translation effects from fluctuations in exchange rates; (3) our results in territories that are considered hyperinflationary economies (as of December 31, 2018, Argentina and Venezuela are considered hyperinflationary economies); (4) the deconsolidation of Venezuela, as of December 31, 2017 and (5) the presentation of Coca-Cola FEMSA Philippines, Inc. as a discontinued operation as of January 1, 2018 and the re-presentation of the financial statements as if said operation was discontinued from February 2017. To translate the full year 2018 reported results of Argentina, we used the exchange rate of 37.70 Argentine Pesos, per U.S. dollar. In addition, the average depreciation of currencies used in our main operations during 2018, as compared to 2017, was: Brazilian Real 14.5%, Colombian Peso 0.2%, Mexican Peso 1.6% and Uruguayan Peso 7.2%.
Consolidated Results
Total Revenues
Our reported consolidated total revenues decreased 0.5% to Ps. 182,342 million in 2018, including the results of our acquisitions in Guatemala and Uruguay. Total revenues were also driven by price increases aligned with or above inflation in key territories, despite the depreciation of the Argentine Peso, the Brazilian Real, and the Colombian Peso, all as compared to the Mexican Peso; the deconsolidation of Coca‑Cola FEMSA de Venezuela as of December 31, 2017 and the reporting of Argentina as a hyperinflationary subsidiary. On a comparable1 basis, total revenues would have grown 5.9%, driven by growth in our average price per unit case in most of our operations, volume growth in Brazil, Central America and Colombia and flat volume performance in Mexico.
| 1 | Excluding the effects of: mergers, acquisitions, and divestitures; exchange rate movements; and hyperinflationary economies such as Argentina and Venezuela; and presenting Coca-Cola FEMSA Philippines, Inc., as a discontinued operation as of January 1, 2018, and the consolidated income statements presented are re-presented as if the Philippines had been discontinued from February 2017, date of the consolidation of said operation. As a result, the Asia Division is no longer reported. |
Total reported sales volume remained flat at 3,321.8 million unit cases in 2018 as compared to 2017. On a comparable basis total volume would have increased 1.3% in 2018 as compared to 2017. On the same basis our sparkling beverage portfolio’s volume increased 1.0%, driven by growth across all of our operations. Our brand Coca-Cola portfolio’s volume increased 2.8%, while our flavors portfolio declined 5.6%. Our still beverage category’s comparable volume increased 5.8%; driven by growth in Brazil, Central America, and Mexico partially offset by a contraction in Colombia. Our personal water portfolio’s comparable volume increased 7.2%, driven by growth in Brazil, Colombia, and Mexico, partially offset by a contraction in Central America. Our bulk water portfolio’s volume, on a comparable basis declined 2.6%; growth in Brazil, Central America, and Colombia was offset by a decline in Mexico.
Our reported number of transactions increased 0.7% to 19,725.7 million in 2018 as compared to 2017. On a comparable basis, our number of transactions would have increased 1.4% in 2018 as compared to 2017. On the same basis, our sparkling beverage portfolio’s transactions remained flat, driven by a contraction in Mexico, partially offset by flat performance in Colombia and growth in Brazil and Central America. On a comparable basis, our brand Coca-Cola portfolio’s transactions increased 1.9%; growth in Brazil, Central America and Colombia, was partially offset by a decline in Mexico. Our flavors portfolio’s comparable transactions declined 5.3%, driven by contractions across our operations. Our still beverage category’s comparable transactions increased 4.0%; growth in Brazil, and Mexico was partially offset by a decline in Central America and in Colombia. Our water transactions in a comparable basis, including bulk water, increased 8.2%, driven by growth in Brazil, Colombia, and Mexico, partially offset by a decline in Central America.
Gross Profit
Our reported gross profit increased 0.5% to Ps. 83,938 million in 2018, with a gross margin expansion of 40 basis points to 46.0%. On a comparable basis gross profit would have grown 5.5%. Our pricing initiatives, coupled with lower sweetener prices in most of our operations, were offset by higher PET costs across most of our operations, higher concentrate costs in Mexico, and the depreciation in the average exchange rate of all our operating currencies as applied to our U.S. dollar-denominated raw material costs.
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 employment costs associated with the 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 currencies, net of applicable taxes. Packaging materials, mainly PET and aluminum, and HFCS, used as a sweetener in some countries, are denominated in U.S. dollars.
Administrative and Selling Expenses
Administrative and selling expenses in absolute terms remained flat in 2018 as compared to 2017. As a percentage of total revenues, these expenses increased 10 basis points to 31.8% in 2018 as compared to 2017, due mainly to an increase in labor costs and freight, among other expenses, partially offset by an operative foreign exchange gain. In 2018, we continued investing across our territories to support marketplace execution, increase our cooler coverage, and bolster our returnable presentation base.
During 2018, the other expenses, net, recorded an expense of Ps. 1,881 million, due mainly to provisions related to contingencies in Brazil and Colombia, coupled with an impairment to the investment in our dairy joint venture Estrella Azul, in Panama. This is compared to an expense of Ps. 31,357 during 2017, driven mainly by a one-time non-cash charge related to the deconsolidation of Venezuela.
The reported share of the profits of associates and joint ventures line recorded a loss of Ps. 226 million in 2018, compared to a gain of Ps. 60 million recorded in 2017. This is due to a loss in our dairy joint venture in Panama and a loss in our joint venture of Jugos del Valle partially offset by gains in our joint ventures in Brazil.
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, and net gains or losses on monetary position from the hyperinflationary countries in which we operate. 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 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 or the beginning of the period, whichever comes first, and the date it is repaid or the end of the period, whichever comes first, 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.
Our reported comprehensive financing result in 2018 recorded an expense of Ps. 6,943 million compared to an expense of Ps. 5,362 million in 2017.
During 2018, we recorded an interest expense, net, of Ps. 6,564 million compared to Ps. 7,987 million in 2017. This decrease was driven by the decline of short-term interest rates in Brazil; the average exchange rate depreciation of the Brazilian Real compared to the Mexican Peso as applied to existing Brazilian Real-denominated interest expense; and the reduction of debt in Argentina, Brazil, and Colombia. However, these factors were partially offset by: (i) financing of Ps. 10,100 million for the acquisition of our new territories in Guatemala and Uruguay; and (ii) an interest rate increase in Mexico.
In addition, in 2018, we recorded a foreign exchange loss of Ps. 277 million as compared to a gain of Ps. 788 million in 2017, which resulted from the depreciation of the Mexican Peso as applied to our U.S. dollar-denominated cash position that included the income of US$ 715 million related to the sale of our stake in Coca-Cola FEMSA Philippines, Inc.
Due to the deconsolidation of Coca-Cola FEMSA de Venezuela, no monetary position in hyperinflationary subsidiaries was recorded in the first six months of 2018. Nevertheless, with the reporting of Argentina as of July 1, 2018, a gain of Ps. 212 million was recorded in monetary position in hyperinflationary subsidiaries for the second semester of 2018, compared to a gain of Ps. 1,591 million related to Venezuela in the full year 2017.
Market value on financial instruments recorded a loss of Ps. 314 million, compared to a gain of Ps. 246 million in 2017, due to the decrease in long-term interest rates in Brazil as applied to our fixed rate cross-currency swaps, during the period.
Income Taxes
During 2018, reported income tax as a percentage of income before taxes was 31.0%.
Controlling Interest Net Income
We reported a net controlling interest income of Ps. 13,910 million in 2018 as compared to net loss of Ps. 12,802 million in 2017, which included a one-time non-cash charge related to the deconsolidation of Venezuela. Our net controlling interest income from continued operations was Ps. 10,936 million in 2018.
Consolidated Results from Operations by Reporting Segment
Mexico and Central America
Total Revenues
Total revenues from our Mexico and Central America division increased 8.1% to Ps. 100,162 million in 2018. On a comparable basis1, total revenues from our Mexico & Central America division would have increased 5.2%, driven by flat volume performance in the division and average price increases in Mexico.
Total sales volume increased 2.3% to 2,065.0 million unit cases in 2018 as compared to 2017. On a comparable basis sales volumes increased 0.5%. On the same basis, our sparkling beverage category’s volume increased 0.5%, driven by growth in brand Coca-Cola and its extensions, partially offset by a decline in flavors. Our performance in brand Coca-Cola and its extensions was driven mainly by flat performance in Mexico, while our negative performance in flavors was driven by Central America. Our still beverage category’s volume grew 6.9%, driven by growth in Mexico and Central America. Our personal water portfolio’s volume increased 3.9%, driven by positive performance in Mexico. Our bulk water portfolio’s volume declined 3.5% driven by Mexico.
Total transactions in the division increased 2.5% to 11,507.5 million in 2018 as compared to 2017. On a comparable basis transactions remained flat for the division. On the same basis, our sparkling beverage portfolio’s transactions contracted 1.1%, driven by a 0.8% decline in brand Coca‑Cola and its extensions and a 2.0% decline in flavors. Our still beverage category’s transactions increased 3.2% for the division, driven by growth in Mexico, offset by a decline in Central America. Our water transactions, including bulk water, increased 3.1% for the division.
Gross Profit
Our reported gross profit increased 6.8% to Ps. 48,162 million in 2018 as compared to 2017. On a comparable basis, gross profit would have grown 4.0% in 2018. Our pricing initiatives, a favorable currency hedging position and declining sweetener costs were offset by higher PET prices, higher concentrate costs in Mexico, and the depreciation of the average exchange rates of the Mexican Peso, the Guatemalan Quetzal, the Costa Rican Colon, and the Nicaraguan Cordoba as applied to U.S. dollar-denominated raw material costs.
Administrative and Selling Expenses
Reported administrative and selling expenses as a percentage of total revenues increased 50 basis points to 33.7% in 2018 as compared with the same period in 2017, driven mainly by higher freight and labor costs in Mexico.
South America
Total Revenues
Total revenues from our South America division, decreased 9.3% to Ps. 82,180 million in 2018 as compared to 2017, driven mainly by negative translation effects due to the depreciation of the Argentine Peso, the Brazilian Real and the Colombian Peso as referenced to the Mexican Peso, and the deconsolidation of Venezuela. These effects were partially offset by volume growth in Brazil and Colombia coupled with average price per unit case growth across our territories and the consolidation of our new acquisition in Uruguay. Revenues of beer accounted for Ps. 13,849 million. On a comparable basis, total revenues would have increased 6.9%, driven by volume growth and average price per unit case increases in local currencies across our territories.
Reported total sales volume in our South America division, decreased 3.3% to 1,256.8 million unit cases in 2018 as compared to 2017, resulting from growth in Brazil and Colombia and the consolidation of our acquisition in Uruguay, offset by volume contraction in Argentina and the deconsolidation of Venezuela. On a comparable basis, sales volume increased 2.8% in 2018 as compared to 2017, resulting from volume growth in Brazil and Colombia. On the same basis, our sparkling beverage category’s volume increased 1.9%, driven by 6.3% growth in brand Coca‑Cola and its extensions partially offset by a 12.0% decline in flavors. Brand Coca-Cola and its extensions grew in Brazil and Colombia. On the same basis, our still beverage category’s volume increased 3.4%, with expansion in Brazil partially offset by Colombia. Our personal water category’s comparable volume increased 12.8%, with growth in Brazil and Colombia. Our bulk water’s comparable volume increased 8.3%, driven by growth in Brazil and Colombia.
The reported total number of transactions for the South America division decreased 1.8% to 8,218.2 million. On a comparable basis, total transactions increased 4.1%. On the same basis, our sparkling beverage portfolio’s transactions increased 2.7%, driven by 6.5% growth in brand Coca-Cola and its extensions partially offset by a decline in flavors.
Our performance in brand Coca-Cola was driven by growth in Brazil and Colombia. On the same basis, our still beverage category’s transactions increased 5.4%; driven mainly by growth in Brazil. Our water comparable transactions, including bulk water, increased 14.3%, driven by an expansion in the division.
Gross Profit
Reported gross profit reached Ps. 35,775 million, a decrease of 6.8% in 2018 as compared to 2017, with a 110 basis point margin expansion to 43.5%, including the consolidation of Uruguay. On a comparable basis, gross profit would have grown 8.0% during the year. This figure is explained by lower sweetener prices, a favorable currency hedging position in the division, and our pricing initiatives. These factors were partially offset by higher PET prices, an unfavorable raw material hedging position in Brazil, and the depreciation of the average exchange rate of the Brazilian Real and the Colombian Peso as applied to our U.S. dollar-denominated raw material costs.
Administrative and Selling Expenses
Reported administrative and selling expenses, as a percentage of total revenues decreased 60 basis points to 29.5% in 2018 as compared to 2017, driven mainly by operating expense efficiencies in Brazil.