Audited Financial Results for the twelve months ended December 31, 2018 Compared to the twelve months ended December 31, 2017.
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES
MONTERREY, N.L., MEXICO
Fomento Económico Mexicano, S.A.B. de C.V. (“FEMSA”) is a Mexican holding company. Set forth below is certain audited financial information for FEMSA and its subsidiaries (the “Company” or “FEMSA Consolidated”) (NYSE: FMX; BMV: FEMSA UBD, FEMSA BD). The principal activities of the Company are grouped mainly under the following subholding companies (the “Subholding Companies”): Coca-Cola FEMSA, S.A.B de C.V. (“Coca-Cola FEMSA” or “KOF”), (NYSE: KOF, BMV: KOFL) which engages in the production, distribution and marketing of beverages, and FEMSA Comercio, S.A. de C.V. (“FEMSA Comercio”), including its Proximity Division operating OXXO, a small-format store chain, a Health Division, which includes all drugstores and related operations, and a Fuel Division, which operates the OXXO GAS chain of retail service stations. Additionally, through its Strategic Businesses unit, it provides logistics, point-of-sale refrigeration solutions and plastics solutions to FEMSA’s business units and third-party clients.
The consolidated financial information included in this annual report was prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
During 2018, we made a change to the disclosure related to our businesses formerly named as FEMSA Comercio’s “Retail Division”: We have removed those operations that are not directly related to our proximity store business, namely our restaurant and discount retail units, from this segment. The segment is now named the “Proximity Division”, and it only includes proximity and proximity-related operations, most of which operate today under the OXXO brand across markets. 2017 figures have been restated to reflect such changes.
The 2018 and 2017 results are stated in nominal Mexican pesos (“pesos” or “Ps.”). Translations of pesos into US dollars (“US$”) are included solely for the convenience of the reader and are determined using the noon buying rate for pesos as published by the U.S. Federal Reserve Board in its H.10 Weekly Release of Foreign Exchange Rates as of December 31, 2018, which was 19.6350 pesos per US dollar.
This report may contain certain forward-looking statements concerning Company’s future performance that should be considered good faith estimates made by the Company. These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which could materially impact the Company’s actual performance.
FEMSA Consolidated
2018 amounts in millions of Mexican pesos
| total revenues | % growth vs’17 | gross profit | % growth vs’17 | |
|---|---|---|---|---|
| FEMSA Consolidated | 469,744 | 6.8% | 175,170 | 8.1% |
| Coca-Cola FEMSA | 182,342 | (0.5%) | 83,938 | 0.5% |
| FEMSA Comercio – Proximity Division | 167,458 | 11.8% | 65,529 | 16.8% |
| FEMSA Comercio – Health Division | 51,739 | 9.1% | 15,865 | 11.6% |
| FEMSA Comercio – Fuel Division | 46,936 | 22.3% | 4,231 | 52.9% |
FEMSA’s consolidated total revenues increased 6.8% to Ps. 469,744 million in 2018 compared to Ps. 439,932 million in 2017. Coca-Cola FEMSA’s total revenues decreased 0.5% to Ps. 182,342 million, as the consolidation of recently acquired territories in Guatemala and Uruguay, volume growth in Brazil, Central America and Colombia, flat volumes in Mexico, and price increases above inflation in Argentina and Mexico were offset by the negative translation effect resulting from the depreciation of the Argentine Peso, the Brazilian Real and the Colombian Peso 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 as of July 1, 2018. FEMSA Comercio – Proximity Division’s revenues increased 11.8% to Ps. 167, 458 million, driven by the opening of 1,422 net new OXXO stores combined with an average increase of 5.2% in same-store sales. FEMSA Comercio – Health Division’s revenues increased 9.1% to PS. 51,739 million, driven by the opening of 136 net new stores combined with an average increase of 5.8% in same-store sales. FEMSA Comercio – Fuel Division revenues increased 22.3% to Ps. 46,936 million in 2018, driven by the addition of 87 total net new stations in the last twelve months, and a 5.6% increase in same-station sales.
Consolidated gross profit increased 8.1% to Ps. 175,170 million in 2018 compared to Ps. 162,090 million in 2017. Gross margin increased 50 basis points to 37.3% of total revenues compared to 2017, reflecting gross margin expansion across all business units.
Consolidated operating expenses increased 9.7% to Ps. 133,594 million in 2018 compared to Ps. 121,828 million in 2017. As a percentage of total revenues, consolidated operating expenses increased from 27.6% in 2017 to 28.4% in 2018.
Consolidated administrative expenses increased 13.7% to Ps. 17,313 million in 2018 compared to Ps. 15,222 million in 2017. As a percentage of total revenues, consolidated administrative expenses increased 20 basis points, from 3.5% in 2017, to 3.7% in 2018.
Consolidated selling expenses increased 8.2% to Ps. 114,573 million in 2018 as compared to Ps. 105,880 million in 2017. As a percentage of total revenues, selling expenses increased 40 basis points, from 23.9% in 2017 to 24.3% in 2018.
Consolidated income from operations increased 3.3% to Ps. 41,576 million in 2018 as compared to Ps. 40,261 million in 2017. As a percentage of total revenues, operating margin decreased 30 basis points, from 9.2% in 2017 to 8.9% in 2018 reflecting an operating margin contraction at Coca-Cola FEMSA and the faster growth of FEMSA Comercio’s three divisions, whose lower margins tend to compress FEMSA’s consolidated margins over time.
Some of our subsidiaries pay management fees to us in consideration for corporate services we provide to them. These fees are recorded as administrative expenses in the respective business segments. Our subsidiaries’ payments of management fees are eliminated in consolidation and, therefore, have no effect on our consolidated operating expenses.
Net financing expenses increased to Ps. 7,380 million from Ps. 3,302 million in 2017, reflecting a demanding comparison base in 2017, driven by a foreign exchange gain related to the effect of FEMSA’s US Dollar-denominated cash position, as impacted by the depreciation of the Mexican peso during 2017, and by other financial income related to Coca-Cola FEMSA hyperinflationary subsidiaries. This movement was enough to offset an interest expense decrease of 11.4% to Ps. 9,825 million in 2018, compared to Ps. 11,092 million in 2017, mainly reflecting lower interest expense at Coca-Cola FEMSA.
Income before income taxes and share of the profit in Heineken results decreased 6.6% to Ps. 33,322 million in 2018 compared with Ps. 35,673 million in 2017, reflecting a demanding comparison base in 2017, driven by a foreign exchange gain related to FEMSA’s U.S. dollar-denominated cash position, and by other financial income related to Coca-Cola FEMSA hyperinflationary subsidiaries.
These impacts were partially offset by growth in our income of operations and lower financing expenses.
Our accounting provision for income taxes in 2018 was Ps. 10,169 million, as compared to Ps. 10,213 million in 2017, resulting in an effective tax rate of 30.2% in 2018, as compared to 28.6% in 2017, in line with our expected medium-term range of 30%.
Consolidated net income was Ps. 33,079 million in 2018 compared to Ps. 37,206 million in 2017, reflecting a demanding comparison base stemming from: i) a foreign exchange gain related to FEMSA’s U.S. dollar-denominated cash position, impacted by the depreciation of the Mexican peso during 2017; ii) a higher participation in Heineken’s results for most of the comparable period; and iii) other financial income related to Coca-Cola FEMSA’s hyperinflationary operations. This was partially offset by growth in our income from operations, and lower financing expenses.
Controlling interest amounted to Ps. 23,990 million in 2018 compared to Ps. 42,408 million in 2017. Controlling interest in 2018 per FEMSA Unit1 was Ps. 6.70 (US$ 3.42 per ADS).
Coca-Cola FEMSA
Coca-Cola FEMSA total revenues decreased 0.5% to Ps. 182,342 million in 2018, compared to Ps. 183,256 million in 2017, as the consolidation of recently acquired territories in Guatemala and Uruguay, volume growth in Brazil, Central America and Colombia, flat volumes in Mexico, and price increases above inflation in Argentina and Mexico were offset by the negative translation effect resulting from the depreciation of the Argentine Peso, the Brazilian Real and the Colombian Peso 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 as of July 1, 2018. On a comparable2 basis, total revenues grew 5.9%, driven by average price per unit case growth ahead of inflation in Mexico, coupled with volume growth in Brazil, Colombia, Central America, and flat volume performance in Mexico.
Coca-Cola FEMSA gross profit increased 0.5% to Ps. 83,938 million in 2018, compared to Ps. 83,508 million in 2017, with a gross margin expansion of 40 basis points. Pricing initiatives, coupled with lower sweetener prices, were partially offset by higher PET costs across most of their operations, higher concentrate costs in Mexico, and the depreciation in the average exchange rate of all Coca-Cola FEMSA’s operating currencies as applied to U.S. dollar-denominated raw material costs. Gross margin reached 46.0% in 2018.
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 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 the local currency, 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.
Operating expenses increased 1.3% to Ps. 59,265 million in 2018, compared to Ps. 58,513 million in 2017.
Administrative expenses increased 4.0% to Ps. 7,999 million in 2018, compared to Ps. 7,694 million in 2017. Selling expenses decreased 0.8% to Ps. 49,925 million in 2018 compared with Ps. 50,352 million in 2017.
Income from operations decreased 1.3% to Ps. 24,673 million in 2018 compared to Ps. 24,996 million in 2017.
FEMSA Comercio – Proximity Division
FEMSA Comercio – Proximity Division total revenues increased 11.8% to Ps. 167,458 million in 2018 compared to Ps. 149,833 million in 2017, primarily as a result of the opening of 1,422 net new OXXO stores during 2018, together with an average increase in same-store sales of 5.2%. As of December 31, 2018, there were a total of 17,999 OXXO stores. As referenced above, OXXO same-store sales increased an average of 5.2% compared to 2017, driven by a 3.6% increase in average customer ticket while store traffic increased 1.6%. On an organic basis3, total revenues grew 11.4%.
Cost of goods sold increased 8.8% to Ps. 101,929 million in 2018, compared to Ps. 93,706 million in 2017. Gross margin increased 160 basis points to reach 39.1% of total revenues. This increase reflects; i) the sustained growth of the services category, including income from financial services; ii) healthy trends in our commercial income activity; iii) increased and more efficient promotional programs with our key supplier partners and iv) the consolidation of Caffenio, our sole coffee supplier in Mexico, which we now control with 50% share ownership. As a result, gross profit increased 16.8% to Ps. 65,529 million in 2018 compared with 2017.
Operating expenses increased 18.3% to Ps. 51,452 million in 2018 compared to Ps. 43,491 million in 2017. The increase in operating expenses was driven by: i) our continuing and gradual shift from commission-based store teams to employee based teams; ii) higher secure cash handling costs driven by increased volume and higher operational costs including fuel prices; iii) the consolidation of Caffenio; and iv) organic growth of OXXO’s international operations that achieved healthy sales levels per store, but have yet to reach sufficient scale to better absorb overhead.
Administrative expenses increased 20.2% to Ps. 3,587 million in 2018, compared to Ps. 2,983 million in 2017; as a percentage of sales, they increased slightly to 2.1% in 2018, from 2.0% in 2017. Selling expenses increased 18.1% to Ps. 47,589 million in 2018 compared with Ps. 40,289 million in 2017; as a percentage of sales they reached 28.4% in 2018.
Income from operations increased 11.4% to Ps. 14,077 million in 2018 compared to Ps. 12,636 million in 2017, resulting in an operating margin of 8.4% as a percentage of total revenues for the year, in line with 2017.
FEMSA Comercio – Health Division
FEMSA Comercio – Health Division total revenues increased 9.1% to Ps. 51,739 million compared to Ps. 47,421 million in 2017, primarily as a result of the opening of 136 net new stores during 2018, together with an average increase in same-store sales of 5.8%. As of December 31, 2018, there were a total of 2,361 drugstores in Mexico, Chile and Colombia. As referenced above, same-store sales increased an average of 5.8%, reflecting strong performance in our South American operations, as well as gradually improving trends in Mexico, coupled with a positive currency translation effect related to the depreciation of the Mexican peso compared to the Chilean and Colombian pesos in our operations in South America.
Cost of goods sold increased 8.0% to Ps. 35,874 million in 2018, compared with Ps. 33,208 million in 2017. Gross margin increased 70 basis points to reach 30.7% of total revenues. This was mainly driven by more efficient and effective commercial activity, particularly in South America, and to benefits that are gradually beginning to materialize in Mexico from our integration into a single operating platform. As a result, gross profit increased 11.6% to Ps. 15,865 million in 2018 compared with 2017.
Operating expenses increased 9.2% to Ps. 13,750 million in 2018 compared with Ps. 12,595 million in 2017. This increase was partially offset by cost efficiencies and tight expense control throughout our territories.
Administrative expenses increased 25.1% to Ps. 2,055 million in 2018, compared with Ps. 1,643 million in 2017; as a percentage of sales, they reached 4.0% in 2018. Selling expenses increased 6.5% to Ps. 11,557 million in 2018 compared with Ps. 10,850 million in 2017; as a percentage of sales, they reached 22.3% in 2018.
Income from operations increased 30.7% to Ps. 2,115 million in 2018 compared with Ps. 1,618 million in 2017, resulting in an operating margin expansion of 70 basis points to 4.1% as a percentage of total revenues for the year, compared with 3.4% in 2017.
FEMSA Comercio – Fuel Division
FEMSA Comercio – Fuel Division total revenues increased 22.3% to Ps. 46,936 million in 2018 compared to Ps. 38,388 in 2017, primarily as a result of the opening of 87 net new OXXO GAS service stations during 2018, together with an average increase in same-station sales of 5.6%. As of December 31, 2018, there were a total of 539 OXXO GAS service stations. As referenced above, same-station sales increased an average of 5.6% compared to 2017, as the average price per liter increased by 15.1%, while the average volume decreased by 8.2% reflecting consumer reaction to the higher prices, and, to a lesser degree, increased competition.
Cost of goods sold increased 19.9% to Ps. 42,705 million in 2018, compared with Ps. 35,621 million in 2017. Gross margin increased 180 basis points to reach 9.0% of total revenues. This increase reflects improved supply terms and a recovery from a low comparable base last year, when gross profit per liter was held flat in peso terms for most of the comparable period in 2017. As a result, gross profit increased 52.9% to Ps. 4,231 million in 2018 compared with 2017.
Operating expenses increased 51.1% to Ps. 3,773 million in 2018 compared with Ps. 2,497 million in 2017. The increase in operating expenses was driven by: i) higher wages implemented to reduce turnover in a tight labor market; ii) expenses related to the remodeling of our stations and the installation of new environmental controls and; iii) provisions related to certain unprofitable institutional clients.
Administrative expenses increased 57.1% to Ps. 242 million in 2018, compared with Ps. 154 million in 2017; as a percentage of sales, they increased 10 basis points to 0.5% in 2018. Selling expenses increased 51.3% to Ps. 3,526 million in 2018 compared with Ps. 2,330 million in 2017; as a percentage of sales, they reached 7.5% in 2018.
Income from operations increased 69.6% to Ps. 458 million in 2018 compared with Ps. 270 million in 2017, resulting in an operating margin expansion of 30 basis points to 1.0% as a percentage of total revenues for the year, compared with 0.7% in 2017. This increase reflects better operating leverage that more than offset higher personnel, remodeling and expansion-related expenses.
Key Events during 2018
The following text reproduce our press releases exactly as the time they were published.
Coca-Cola FEMSA acquires bottlers in Guatemala
On April 25, 2018, Coca-Cola FEMSA announced that through its subsidiary “Compañía Inversionista en Bebidas del Norte, S.L.”, it had closed an acquisition agreement with the shareholders of the Guatemalan company “ABASA”, a bottler of Coca-Cola products, in an all-cash transaction for an amount of US$ 53.4 million on a cash free and debt free basis. ABASA would continue to operate in the same way, considering the particular business realities and opportunities of its territory. ABASA operates in the northeast area of Guatemala with 1 plant, 9 distribution centers and 791 employees.
On that same date, Coca-Cola FEMSA also announced that through its subsidiary “Compañía de Inversiones Moderna, S.L.”, it had closed an acquisition agreement with the shareholders of the Guatemalan company “Los Volcanes”, a bottler of Coca-Cola products, in an all-cash transaction for an amount of US$ 124.6 million on a cash free and debt free basis. Los Volcanes, will continue to operate in the same way, considering the particular business realities and opportunities of its territory. Los Volcanes, operates in the southwest area of Guatemala with 1 plant, 7 distribution centers and 1,066 employees.
Coca-Cola FEMSA acquires bottler in Uruguay
On June 28 2018, Coca-Cola FEMSA announced the acquisition of Montevideo Refrescos S.R.L. (“MONRESA”) from The Coca-Cola Company, in an all cash transaction. The aggregate enterprise value for this transaction is US$ 250.7 million, on a cash free and debt free basis. MONRESA was founded in 1943 and is the exclusive distributor and manufacturer of the extensive Coca-Cola beverage portfolio in Uruguay, serving a market of 3.4 million consumers through 26 thousand points of sale. The integration of this franchise increased Coca-Cola FEMSA’s presence to 11 countries worldwide. “As part of our strategic framework and the consolidation of leadership in the global beverage market, the integration of MONRESA reaffirms our commitment to generating economic and social value for our shareholders and stakeholders.” Said John Santa Maria, CEO of Coca-Cola FEMSA.
Coca-Cola FEMSA exercises a put option to sell its 51% stake in Coca-Cola FEMSA Philippines, Inc.
On August 16, 2018, Coca-Cola FEMSA announced that it had notified The Coca-Cola Company (“TCCC”), the exercise of KOF’s put option to sell its 51% stake in Coca-Cola FEMSA Philippines, Inc. (“CCFPI”). As part of the transaction structure for the acquisition of a 51% stake in CCFPI, closed on January 25, 2013, KOF obtained a put option to sell back to TCCC not less than all of KOF’s shares in CCFPI at a price to be determined according to an agreed formula, which cannot exceed the aggregate enterprise value of the original purchase. KOF will work closely with TCCC in all aspects of the transaction, and will fully cooperate with TCCC to ensure a smooth transition of the CCFPI business. “As part of our efforts to expand our geographic reach, we have been operating in the Philippines for more than five years, deploying our expertise and capabilities to develop and operate in fragmented markets, leading to an efficient turnaround of this operation. However, given the recent evolution in the business outlook in the Philippines, and our commitment to a disciplined capital allocation approach focused on driving shareholder returns, our Board of Directors has concluded that exercising our put option represents the best course of action for Coca-Cola FEMSA’s shareholders. This was not an easy decision, and it comes after a deep and thorough process of analysis based on our best interest to protect our shareholders’ value. Going forward, we will continue to look and assess other potential strategic opportunities for long-term value creation”, said John Santa Maria, Chief Executive Officer.
Later, on December 13, 2018, Coca-Cola FEMSA announced the closing by its subsidiary Controladora de Inversiones en Bebidas Refrescantes, S.L. (“CIBR”), of the transaction to sell its 51% stake in Coca-Cola FEMSA Philippines, Inc. (“CCFPI”) to the Coca-Cola Company (“TCCC”), for an aggregate amount of US$ 715 million. As previously announced, on August 16, 2018, CIBR notified to TCCC its decision to exercise its put option to sell its stake in CCFPI. The proceeds of this transaction will be used for debt repayment and general corporate purposes. The parties will continue to work and cooperate to ensure a smooth transition of the CCFPI business.
FEMSA Comercio enters the drugstore business in Ecuador
On September 24, 2018, FEMSA announced that through its majority-owned subsidiary Socofar, it had reached an agreement to acquire Corporación GPF (“GPF”). GPF is a leading drugstore operator based in Quito, Ecuador, with almost 90 years of solid trajectory, operating more than 620 points of sale nationwide mainly under the Fybeca and SanaSana banners. This transaction represents a new building block of FEMSA Comercio’s drugstore strategy in South America, following its successful acquisition of a controlling stake in the drugstore and distribution platform of Chile-based Socofar in 2015. Today’s announcement marks another important step for FEMSA Comercio as it brings its considerable retail expertise and Socofar’s deep industry knowledge to the Ecuadorian market and its more than 16 million consumers. GPF is a strong local operator with attractive growth prospects, and it will help Socofar as it continues to build a robust base from which to expand further in the region. The transaction is subject to customary regulatory approvals and is expected to close during the first quarter of 2019.
FEMSA Comercio opens its first OXXO store in Lima, Peru
On October 26, FEMSA Comercio announces that it is opening its first OXXO store in Lima, Peru. OXXO’s entry into Peru marks the beginning of a new stage in the format’s international growth strategy. Since 2009, when OXXO opened its first five stores in Colombia, OXXO has gradually and consistently improved its capabilities to adjust the value proposition of its stores to better satisfy the needs of different consumers, across different markets. These improved capabilities are already being put to work in Colombia and Chile, and now they will also enable growth at OXXO Peru. This announcement marks another important step for FEMSA Comercio as it brings its considerable expertise in small-box retail to the attractive Peruvian market and its more than 32 million consumers.
Coca-Cola FEMSA announces Chief Financial Officer succession plan
On November 1, 2018, Coca-Cola FEMSA announced that that Hector Treviño Gutierrez, had decided to retire effective December 31, 2018, after serving as Chief Financial Officer of KOF for more than 25 years and with an overall career in FEMSA of more than 37 years. The Board of Directors of the Company elected Constantino Spas to serve as Chief Financial Officer for Coca-Cola FEMSA, effective January 1, 2019. Constantino joined the Company on January 1, 2018 as Strategic Planning Officer. He has more than 25 years of experience in the food and beverage sector, with a demonstrated track record in companies such as Grupo Mavesa and Empresas Polar in Venezuela; Kraft Foods, SAB Miller in Latin America, and Bacardi, where he served as VP Managing Director for Mexico and then for Latin America and the Caribbean. Constantino worked alongside Hector to ensure an orderly and seamless transition of CFO duties. “Hector Treviño, was appointed CFO in 1993, year of KOF’s Initial Public Offering and listing in the Mexican Stock Exchange and in the New York Stock Exchange; and since then, Hector, has deeply contributed to the evolution and value creation of the business, playing a fundamental role in driving profitable growth throughout the years. His work ethic and financial discipline are a legacy that will continue to be a part of our core values for many years to come.” said John Santa Maria Otazua, Chief Executive Officer of the Company, and added: “Constantino is an experienced officer with proven results across different beverage categories; his strategic focus and talent make him an excellent successor to Hector.”