management’s discussion and
analysis
Coca-Cola FEMSA’s underlying financial and operating performance in 2017 as compared to 2016 was affected by the following factors: (1) the ongoing integration of mergers, acquisitions, and divestitures completed in recent years; (2) translation effects from fluctuations in exchange rates; (3) our results in territories that are considered hyperinflationary economies (as of December 31, 2017, our only operation that was considered a hyperinflationary economy is Venezuela); and (4) the results of Coca-Cola FEMSA Philippines, Inc. as it was consolidated in February 2017. To translate the full-year 2017 reported results of Venezuela, we used the exchange rate of 22,793.30 bolivars per U.S. dollar, as compared to 673.76 bolivars per U.S. dollar used to translate our 2016 reported results. In addition, the average depreciation of currencies used in our main operations during 2017, as compared to 2016, was: Argentine Peso 12.1%, Mexican Peso 1.5% and Philippine Peso 6.1%. Moreover, the average appreciation of currencies used in our main operations during 2017, as compared to 2016, was: Colombian Peso 3.4% and Brazilian Real 8.5%.
Total Revenues
Our reported consolidated total revenues increased 14.7% to Ps. 203,780 million in 2017, including the results of the Vonpar acquisition in Brazil and the consolidation of our operation in the Philippines beginning in February 2017. Total revenues were also driven by price increases aligned with or above inflation in key territories, supported by the positive translation effect resulting from the appreciation of the Brazilian Real and the Colombian Peso, despite the depreciation of the Argentine Peso, the Philippine Peso, and the Venezuelan Bolivar; all as compared to the Mexican Peso. On a comparable1 basis, total revenues would have grown 3.6%, driven by growth in our average price per unit case across most of our operations, volume growth in the Philippines, and flat volume performance in Mexico and Central America, which was partially offset by volume declines in South America.
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.
Total reported sales volume increased 16.1% to 3,870.6 million unit cases in 2017 as compared to 2016. On a comparable basis total volume would have declined 1.5% in 2017 as compared to 2016. On the same basis our sparkling beverage portfolio’s volume declined 1.7%, driven by contractions across most of our operations, which was partially offset by growth in the Philippines. Our brand Coca-Cola portfolio’s volume declined 1.4%, while our flavors portfolio declined 2.6%. Our still beverage category’s comparable volume declined 2.6%; growth in Mexico, Argentina, and a flat performance in Central America were offset by contractions in Brazil, Colombia, and the Philippines. Our personal water portfolio’s comparable volume increased 0.9%, driven mainly by growth in Mexico, Central America, and the Philippines, partially offset by contractions in South America. Our bulk water portfolio’s volume, on a comparable basis declined 0.7%; growth in Argentina, Brazil, and the Philippines were offset by a flat volume in Mexico and a decline in Colombia.
Our reported number of transactions increased 30.9% to 25,875.3 million in 2017 as compared to 2016. On a comparable basis, our number of transactions would have declined 1.4% in 2017 as compared to 2016. On the same basis, our sparkling beverage portfolio’s transactions declined 1.5%, driven by contractions across most of our operations, partially offset by growth in Argentina and the Philippines. On a comparable basis, our brand Coca-Cola portfolio’s transactions declined 0.5%; growth in Argentina and the Philippines, coupled with a flat performance in Brazil, was offset by declines in the rest of our operations. Our flavors portfolio’s comparable transactions declined 4.3%, driven by contractions across most of our operations, offset by growth in Argentina and a flat performance in the Philippines. Our still beverage category’s comparable transactions decreased 2.1%; growth in Mexico, Argentina, and the Philippines was mainly offset by a decline in Colombia. Our water transactions in a comparable basis, including bulk water, remained flat, driven by growth in Mexico and the Philippines, offset by declines in the rest of our operations.
Gross Profit
Our reported gross profit increased 15.1% to Ps. 91,686 million in 2017, with a gross margin expansion of 20 basis points to 45.0%. On a comparable basis gross profit would have grown 6.1%. Our pricing initiatives, coupled with our currency and raw material hedging strategies, offset higher sweetener and concentrate prices in Mexico and the depreciation in the average exchange rate of the Mexican Peso, the Argentine Peso, and the Philippine Peso as applied to 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 increased 17% in 2017 as compared to 2016. As a percentage of total revenues, these expenses increased 70 basis points to 31.9% in 2017 as compared to 2016, due mainly to an increase in labor costs, freight, diesel, and gasoline, among other expenses, partially offset by an operative foreign exchange gain. In 2017, we continued investing across our territories to support marketplace execution, increase our cooler coverage, and bolster our returnable presentation base.
During 2017, the other operative expenses recorded an expense of Ps. 503 million, due mainly to the consolidation of Coca-Cola FEMSA Philippines, Inc., and a provision related to a settlement agreement reached in Colombia with the Water and Sewerage Company of Bogotá. These effects were partially offset by an operative foreign exchange gain.
The reported share of the profits of associates and joint ventures line recorded a loss of Ps. 98 million in 2017, compared to a gain of Ps. 43 million recorded in 2016. This is due to (i) the consolidation of Coca-Cola FEMSA Philippines, Inc., which is no longer included in the equity method as of February 2017; (ii) a loss in our dairy joint venture in Panama and a loss in our joint venture of Jugos del Valle; and (iii) 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 2017 recorded an expense of Ps. 5,276 million compared to an expense of Ps. 6,080 million in 2016.
During 2017, we recorded an interest expense of Ps. 8,809 million compared to Ps. 7,471 million in 2016. This increase was driven by: (i) the interest rate increase from swapping U.S. dollar-denominated debt to Brazilian Real and Mexican Peso-denominated debt, as part of our strategy to eliminate our U.S. dollar net debt exposure; (ii) additional debt related to the acquisition of Vonpar; (iii) the average exchange rate appreciation of the Brazilian Real compared to the Mexican Peso as applied to our existing Brazilian Real-denominated interest expense; and (iv) the interest rate increase in Mexico. These effects were partially offset by the decrease of interest rates in Brazil and the reduction of debt in Argentina.
In addition, in 2017, we recorded a foreign exchange gain of Ps. 810 million as compared to a loss of Ps. 1,792 million in 2016, which resulted from the depreciation of the Mexican peso as applied to our U.S. dollar-denominated net debt position.
During 2017, we recorded a gain on monetary position in inflationary subsidiaries of Ps. 1,591 million as compared to Ps. 2,417 million during 2016 related to our operation in Venezuela.
Market value on financial instruments recorded a gain of Ps. 246 million due to the annual decrease of long-term interest rates in Brazil as applied to our floating rate cross-currency swaps.
Income Taxes
During 2017, reported income tax was Ps. 4,554 million as compared to Ps. 3,928 million in 2016.
Controlling Interest Net Income
We reported a consolidated controlling interest loss of Ps. 12,802 million in 2017 as compared to net income of Ps. 10,070 million in 2016. This loss resulted from the change in the accounting method for our Venezuela operation, which resulted in the reclassification of an accumulated non-cash equity item as a one-time charge to the other non-operative expenses line of the Income Statement in accordance with IFRS standards. On a comparable basis, net income grew 34.7% to Ps. 12,859 million during 2017, resulting in comparable earnings per share (EPS) of Ps. 6.15 (Ps. 61.49 per ADS).
Mexico and Central America
Total Revenues
Total revenues from our Mexico and Central America division increased 5.8% to Ps. 92,643 million in 2017. Excluding the effect of currency fluctuations, total revenues from our Mexico and Central America division would have increased 5.8%, driven by flat volume performance in the division and average price increases in Mexico.
Total sales volume decreased 0.4% to 2,017.9 million unit cases in 2017 as compared to 2016. Our sparkling beverage category’s volume declined 0.9%, driven by a 1.4% decline in brand Coca-Cola, partially offset by positive performance in flavors. Our performance in brand Coca-Cola was driven mainly by a 1.3% decline in Mexico, while our positive performance in flavors was driven by Mexico. Our still beverage category’s volume grew 3.8%, driven by growth in Mexico and Central America. Our personal water portfolio’s volume increased 2.6%, as Mexico and Central America enjoyed a positive performance. Our bulk water portfolio’s volume declined 0.7% with contraction for the division.
Total transactions in the division declined 1.3% to 11,231.7 million in 2017 as compared to 2016. Our sparkling beverage portfolio’s transactions contracted 1.6%, driven mainly by a 1.9% decline in brand Coca-Cola in the division. In flavors, our division’s flat performance was driven by even performance in Mexico, partially offset by a decline in Central America. Our still beverage category’s transactions remained flat for the division, driven by growth in Mexico, offset by a decline in Central America. Our water transactions, including bulk water, increased 0.3%, driven mainly by flat performance in the division.
Gross Profit
Our gross profit increased 3.5% to Ps. 45,106 million in 2017 as compared to 2016, and reported gross margin contracted 110 basis points to 48.7% in 2017. Excluding the effect of currency fluctuations, gross profit would have grown 3.5% in 2017. Lower PET prices in the division were offset by higher prices of concentrate and sugar, combined with our currency hedging strategy and the depreciation of the average exchange rate of the Mexican peso 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 increased 60 basis points to 33.2% in 2017 as compared with the same period in 2016. Reported administrative and selling expenses in absolute terms increased 7.6% as compared to 2016.
South America (excluding Venezuela)
Total Revenues
Total revenues from our South America division, excluding Venezuela, increased 15.6% to Ps. 86,608 million in 2017 as compared to 2016, driven mainly by average price per unit case growth across our territories, the consolidation of Vonpar in Brazil, and positive translation effects due to the appreciation of the Brazilian Real and the Colombian Peso as referenced to the Mexican Peso. Revenues of beer accounted for Ps. 12,608 million. On a comparable basis, total revenues would have increased 1.5%, driven by average price per unit case increases in local currencies in each of our operations.
Total sales volume in our South America division, excluding Venezuela, increased 6.1% to 1,236 million unit cases in 2017 as compared to 2016, resulting from a volume contraction in all of our South American operations and the inclusion of Vonpar. On a comparable basis, sales volume decreased 6.1% in 2017 as compared to 2016, resulting from a volume contraction in all of our South American operations. On the same basis, our sparkling beverage category’s volume declined 5.3%, driven by a 3.7% contraction in brand Coca-Cola and its extensions and a 10.2% decline in flavors. Brand Coca-Cola and its extensions underperformed in Argentina, Brazil, and Colombia, while our decline in flavors was driven mainly by Colombia. On the same basis, our still beverage category’s volume declined 10.4%, with contractions in Argentina, Brazil, and Colombia. Our personal water category’s comparable volume decreased 7.7%, with contractions in Argentina, Brazil, and Colombia. Our bulk water’s comparable volume declined 11.1%, driven by a decline in Colombia, partially offset by growth in Argentina and Brazil.
The total number of transactions for the South America division, excluding Venezuela, increased 4.0% to 7,924.1 million. On a comparable basis, total transactions decreased 6.2%. On the same basis, our sparkling beverage portfolio’s transactions decreased 4.6%, driven by a 1.2% contraction in brand Coca-Cola and its extensions and a 14.3% decline in flavors. Our performance in brand Coca-Cola was driven by growth in Argentina and Brazil offset by a contraction in Colombia. However, flavors’ negative performance was driven by declines in Brazil and Colombia, partially offset by growth in Argentina. On the same basis, our still beverage category’s transactions decreased 13.7%; growth in Argentina was offset by a decline in Colombia and flat performance in Brazil. Our water comparable transactions, including bulk water, decreased 10.8%, driven by a contraction in the division.
Gross Profit
Gross profit, excluding Venezuela, reached Ps. 37,756 million, an increase of 23.5% in 2017 as compared to 2016, with a 280 basis point margin expansion to 43.6%, including the consolidation of Vonpar in Brazil. On a comparable basis, gross profit would have grown 9.2% during the year. This figure is explained by lower PET and sweetener prices and the appreciation of the Brazilian Real and the Colombian Peso as applied to U.S. dollar-denominated raw material costs, which offset higher aluminum prices and the depreciation of the average exchange rate of the Argentine Peso as applied to U.S. dollar-denominated raw material costs.
Administrative and Selling Expenses
Administrative and selling expenses, excluding Venezuela, as a percentage of total revenues decreased 10 basis points to 29.4% in 2017 as compared to 2016. Excluding Venezuela, administrative and selling expenses, in absolute terms increased 15.1% as compared to 2016, driven mainly by the consolidation of Vonpar in Brazil.
Venezuela
Total Revenues
Total revenues in Venezuela decreased 78.8% to Ps. 4,005 million in 2017 as compared to 2016, driven by a volume decline and the negative translation effect resulting from the devaluation of the Venezuelan Bolivar as compared to the Mexican Peso. These effects were partially offset by average price per unit case increase.
Total sales volume decreased 55.1% to 64.2 million unit cases in 2017 as compared to 143.1 million unit cases in 2016.
The total number of transactions for our Venezuela operation decreased 42.9% to 441.0 million.
Gross Profit
Gross profit in Venezuela was Ps. 645 million in 2017, a decrease of 90.6% as compared to 2016.
Administrative and Selling Expenses
Administrative and selling expenses as a percentage of total revenues were 47.2% in 2017 as compared to 2016. Reported administrative and selling expenses in absolute terms decreased 67.7% as compared to 2016.
Asia (The Philippines)
The consolidation of our operation in the Philippines began in February 2017. Thus, we reported results for 11 months in 2017 for this operation.
Total Revenues
Total revenues for the Philippines were Ps. 20,524 million in 2017.
Total sales volume was 552.4 million unit cases in 2017. Our sparkling beverage category represented 79% of our volume, with brand Coca-Cola and its extensions representing 50% and flavors 29%. Our still beverage category represented 10% of our volume. Our water portfolio’s volume represented 11%, with 4.5% in personal water and 6.2% in bulk water.
Total transactions were 6,278.5 million in 2017. Our sparkling beverage category represented 88% of our transactions. Our still beverage and water categories represented 7% and 5% of our transactions, respectively.
Gross Profit
Our gross profit was Ps. 8,178 million in 2017, and reported gross margin reached 39.8%. This figure reflected lower sweetener and PET prices and the depreciation of the Philippine Peso 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 were 33.4% in 2017.