Héctor Treviño Gutiérrez, our Chief Financial Officer, reflects on our positive performance over a challenging year. He discusses our adaptability to changing market dynamics, key milestones, disciplined approach to capital allocation, and capacity to satisfy consumers’ diverse lifestyles with a variety of beverage choices.

Q) Hi, Héctor. First off, could you briefly review your company’s results for 2017?

A) Yes. We delivered positive comparable¹ top- and bottom-line results in the face of a challenging consumer, macroeconomic, and raw material environment. For the year, our comparable sales volume and transactions reached 3.7 billion unit cases and 25.1 billion transactions, respectively. Our total revenues grew 3.6% to Ps. 190.9 billion. Our operating income rose 6.2% to Ps. 25.2 billion. Our operating cash flow increased 5.9% to Ps. 36.8 billion, and our net controlling interest income increased 34.7%, resulting in earnings per share of Ps. 6.15 (Ps. 61.49 per ADS).

¹ Excluding the effects of: mergers, acquisitions, and divestitures; exchange rate movements; and hyperinflationary economies such as Venezuela; and including the results of Coca-Cola FEMSA Philippines, Inc., as if the consolidation had taken place at the beginning of first-quarter 2016.

As announced, as of December 31, 2017, we changed the accounting method for our Venezuela operation to Fair Value. Coca-Cola FEMSA de Venezuela will continue operating in this country to satisfy our Venezuelan consumers’ beverage needs in the face of an exceptionally challenging environment.

We also made two dividend payments for a total amount of over Ps. 6.9 billion (or Ps. 3.35 per share), underscoring our company’s commitment to shareholder return.

Q) Can you give us a feel for the factors that enabled Coca-Cola FEMSA to produce positive results in the face of a challenging year?

A) Our positive performance highlights our ability to adapt to complex market environments. For example, we promptly rolled out affordability initiatives across our operations, enabling us to gain or maintain market share across key markets. Underscoring our flexibility to adjust to diverse conditions, our Brazilian, Central American, Colombian, Mexican, and Philippine operations were able to bolster their performance thanks to their deployment of our centers of excellence’ (CoEs) commercial, supply chain, and manufacturing transformational initiatives. Already, these initiatives enabled improved point-of-sale execution, better route planning, and operating expense savings, mitigating margin pressures while generating incremental transaction, revenue, and share of sales growth.

Q) Can you walk through your company’s most important milestones in 2017?

A) Looking back, we achieved several important milestones. After a very unfavorable environment over the past few years, our Brazilian operation enjoyed a turnaround—with improving volume growth and profitability driven by our team’s exceptional execution. Indeed, our team is the proud champion of the Brazil Execution Cup 2017, awarded annually for the best overall execution among the country’s Coca-Cola bottling system. Among other key indicators, this award recognizes our effective point-of-sale portfolio, commercial and promotional activity, price compliance, and cooler placement.

Another important milestone is our Brazilian operation’s smooth integration of Vonpar’s franchise territory. Through our team’s efforts, we continue capturing synergies at the EBITDA level over our targeted R$65 million expected for an 18 to 24 month period. Beyond these synergies, we successfully cross-fertilized our talent and best practices. Notably, we capitalized on Vonpar’s route-to-market model and considerably improved Vonpar’s market execution—highlighted by the deployment of our KOFmmercial Digital Platform.

A further milestone is our accelerated transformation from a traditional soft drink company to a multi-category ready-to-drink beverages leader. Together with our partner The Coca-Cola Company, we’re reformulating our beverage portfolio to offer our consumers a wider array of choices—from zero- or low-calorie sparkling beverages to innovative new waters, teas, juices, energy drinks, and dairy products. With the acquisition and integration of AdeS, we’re expanding aggressively into the rapidly growing plant-based nutrition category. As the leading plant-based beverage brand in Latin America, AdeS complements our still beverage portfolio, offering our consumers a broader array of nutritious, delicious choices.

Finally, in Guatemala, we successfully rolled out our pre-sale route-to-market model—an agile, more efficient way to serve the market and capture additional value.

Q) With your consolidation of this operation, could you offer us an update of your turnaround efforts in the Philippines?

A) Beginning in February 2017—the fourth anniversary of the acquisition—we began consolidating the financial results of our Philippines operation. Moreover, since January 25, 2017, we control Coca-Cola FEMSA Philippines with all of the decisions relating to the day-to-day operation and management of our Philippines’s business, including its annual normal operations plan, approved by a majority of its board of directors without requiring the affirmative vote of any director appointed by The Coca-Cola Company.

As I noted last year, our successful turnaround in the Philippines is based on three pillars: portfolio, route to market, and supply chain. Consistent with our two-part portfolio strategy, in 2017, we continued to expand our popular single-serve PET presentations, launching our 200-ml presentation at the magic price point of PHP8 to develop our product mix in the Visayas and Mindanao regions. We also strengthened our competitive position in returnable glass bottles through our rollout of an 8-ounce entry pack at the magic price point of PHP7 in Cebu, General Santos, and Cotabato. Through our portfolio strategy, brand Coca-Cola’s volume grew 6% for the year.

We continued to adapt our route to market to better serve our customers and consumers. Offering a balanced approach to the market, we directly serve our larger customers through our pre-sale distribution platform, while deploying a dedicated sales force for our wholesalers to capture greater value from this important channel. Furthermore, we continually strengthen our supply chain by transferring best practices from our worldwide operations. Through our enhanced supply-chain capabilities, we achieved savings of US$15 million in 2017.

As a result of our efforts, we generated compound annual volume growth of 6% over the past three years. Additionally, we delivered the highest operating cash flow in a 10-year period.

Q) Héctor, could you update us on the steps you’re taking to strengthen your capital structure and financial flexibility?

A) In 2017, we took proactive steps to strengthen our capital structure and foster our financial flexibility. Consistent with our mandate to deleverage our company’s balance sheet, we early redeemed and partially refinanced 55.5% of our outstanding US$1.0 billion in U.S. dollar-denominated 2.375% senior notes due November 2018, using the proceeds from our issuance of two tranches of five- and 10-year Mexican peso-denominated bonds in the Mexican market. Hence, we’re well positioned to redeem the remaining 45.5% of our U.S. dollar-denominated notes without the necessity of accessing the Mexican capital market in an election year.

Moreover, consistent with our commitment to minimize our exposure to foreign currency denominated debt, we swapped U.S. dollar-denominated bonds into Brazilian real-denominated debt to finance our Vonpar acquisition. Thanks to our actions, we bolstered our balance sheet, improved our debt maturity profile, and enhanced our financial flexibility.

Q) Could you also talk a bit about your approach to capital allocation?

A) We maintain a disciplined approach to capital allocation, optimizing our maintenance, growth, and strategic capital expenditures (CAPEX) to maximize our return on invested capital and deliver sustainable profitable growth for our shareholders. Accordingly, our mergers and acquisitions strategy employs a thorough valuation process to ensure potential opportunities produce a significant return for our shareholders.

Similarly, when it comes to CAPEX and working capital, we ensure that each new truck, cooler or bottling line offers an attractive return on invested capital for our shareholders. Importantly, our CoEs offer opportunities to operate with a leaner cost structure through better asset management. As a result of our manufacturing initiatives, we increased overall plant efficiency by more than six percent over the past three years—equal to approximately US$250 million of production capacity or avoided CAPEX.

Q) Looking forward, how well are you prepared to cope with the challenges that you anticipate for the upcoming year?

A) After a challenging year, we’re well positioned to navigate the headwinds we will face over the coming year—from political events and currency volatility to ever-changing consumer trends. To counter uncertainty, our company enjoys the proven ability to adapt to complex consumer environments—highlighted by our capacity to rollout affordable entry packs or returnable presentations at the right price for our consumers in markets such as Argentina, Brazil, and Colombia. Moreover, our innovation enables us to continue building a winning multi-category portfolio, including an expanding array of non-caloric and caloric sparkling beverages, juices, teas, waters, dairy, and plant-based products to satisfy consumers’ diverse choices and lifestyles.

Through our CoEs, we’re creating a sustainable competitive advantage—underscored by our cost leadership. By developing our critical commercial, supply chain, and manufacturing capabilities, they generate operating efficiencies and savings, drive innovation, and foster talent development across our organization. Our powerful analytics platform is only beginning to capture new market opportunities through our advanced understanding of consumer behavior.

Looking ahead, our financial and operating discipline, passionate team of professionals, transformational initiatives, and adaptability to changing market dynamics will enable us to capture long-term growth opportunities in the non-alcoholic, ready-to-drink beverage industry, while creating sustainable value for our shareholders.