Coca-Cola FEMSA, S.A.B. de C.V. — FY2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017; filed April 18, 2018. This is an audited annual report, not a standalone fourth-quarter earnings report. Financial statements are prepared under IFRS and reported in nominal Mexican pesos. Unless noted otherwise, amounts below are in millions of pesos.
Business context
Coca-Cola FEMSA is a major Coca-Cola bottler operating in Mexico, Central America, South America and the Philippines. Its 2017 results include Vonpar in Brazil and the Philippines from February 1, 2017. Venezuela was consolidated through year-end for reported 2017 results, but was deconsolidated effective December 31, 2017 and will not be consolidated from 2018.
Key financial metrics
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Total revenue | 203,780 | 177,718 | Up 14.7%; comparable revenue growth was 3.6% after specified acquisition, Venezuela and currency adjustments. |
| Gross profit | 91,686 | 79,662 | Up 15.1%. |
| Gross margin | 45.0% | 44.8% | Selected financial table indicates a 20-basis-point increase. MD&A text instead describes a 20-basis-point decrease; verify this inconsistency. |
| Net income (loss) | (11,654) | 10,527 | Parent-attributable loss was (12,802), versus income of 10,070. |
| Basic EPS | (Ps.6.12) | Ps.4.86 | Loss largely reflects Venezuela deconsolidation charges. |
| Operating cash flow | 33,236 | 32,446 | Up from prior year. |
| Investing cash flow | (10,890) | (26,915) | 2016 included substantial Vonpar acquisition spending. |
| Financing cash flow | (10,775) | (9,734) | Dividends paid were 6,992. |
| Cash and cash equivalents | 18,767 | 10,476 | At year-end. |
| Total debt | 83,360 | 88,909 | Down 5,549; 12,171 was short-term and 71,189 long-term. |
| Current ratio | 1.00 | 1.14 | Current assets of 55,657 versus current liabilities of 55,594. |
| Capital expenditures | 14,612 | 12,391 | Focused on capacity, coolers, returnable packaging, distribution and IT. |
Reported sales volume rose 16.1% to 3,870.6 million unit cases, primarily from Vonpar and Philippines consolidation. On the company’s comparable basis, volume declined 1.5%. Comparable average price per unit case rose 5.1%, while reported average price fell 2.9% to Ps.49.29, mainly reflecting currency translation.
Material changes and unusual items
- Venezuela deconsolidation: Coca-Cola FEMSA recorded an extraordinary Ps.28,177 million loss in other expenses, comprising Ps.26,123 million of accumulated currency translation losses reclassified to income and approximately Ps.2,053 million of impairment and remeasurement charges. Venezuela contributed Ps.4,005 million of revenue and a Ps.2,223 million net loss before deconsolidation.
- Philippines: The company began consolidating KOF Philippines in February 2017, reporting 11 months of results: revenue Ps.20,524 million, gross profit Ps.8,178 million and net income Ps.896 million. The company’s internal-control assessment excluded this subsidiary, which represented 10% of consolidated revenue.
- Vonpar and equity issuance: The acquisition boosted reported Brazilian results; 27.9 million Series L shares were issued in 2017 in connection with the acquisition consideration.
- Segment trends: Mexico and Central America revenue rose 5.8%, while volume slipped 0.4% and segment gross margin declined to 48.7% (from 49.8%). South America excluding Venezuela revenue rose 21.5%, partly due to Vonpar and currency effects; comparable volume declined 6.0%, while gross margin expanded to 43.6%. Venezuela’s reported revenue declined 78.8% and volume 55.1%.
Outlook, risks and contingencies
- Outlook and investment: No formal revenue or earnings guidance is provided. Management budgeted approximately US$650 million of 2018 capital expenditures, expected to be funded by internally generated funds. The report also cites a 2017 dividend of Ps.3.35 per share, payable in two installments in May and November 2018.
- Costs and taxes: Coca-Cola concentrate price increases in Mexico were scheduled to continue through July 2020; management estimated incremental annual cost of about US$35 million for each year of the period. Philippine sweetened-beverage excise taxes took effect January 1, 2018. Management expected Brazil’s federal production and sales tax burden to rise to 16.0%–17.5% of net sales in 2018.
- Debt and liquidity: Most debt was fixed-rate; the company reported that it complied with debt covenants. US$445 million of 2.375% notes remained due in November 2018. After year-end, the company entered into Ps.10,100 million of Mexican-peso bank loans on April 10, 2018. Cash availability across countries may be constrained by local exchange controls or restrictions on remittances.
- Operating risks: Dependence on Coca-Cola bottler agreements and concentrate supply; raw-material and foreign-exchange volatility; competition and changing consumer preferences; beverage taxes and price controls; water availability and concessions; political and economic conditions; and weather, natural disasters and cyber risks.
- Legal and other contingencies: Recorded provisions totaled Ps.11,067 million (tax Ps.6,717 million; labor Ps.2,365 million; legal Ps.1,985 million). Additional unsettled lawsuits were estimated at Ps.64,558 million and classified as less than probable but not remote; management did not expect a material consolidated effect. Brazilian tax contingencies of Ps.9,433 million were collateralized. An arbitration over early termination of the Heineken beer distribution agreement could materially affect Brazilian operations if resolved unfavorably. A Bogotá sewer-services settlement of approximately Ps.216 million awaited judicial approval.
- Reporting and controls: Auditors issued an unqualified opinion on the financial statements and internal controls. Management and the auditor excluded KOF Philippines from the 2017 internal-control assessment.
Most important facts for investors to verify
- Reconcile the gross-margin disclosure: the selected financial data show 45.0% versus 44.8%, while MD&A says the margin decreased 20 basis points.
- Review the Venezuela deconsolidation accounting, the Ps.28,177 million charge, the fair value assigned to the retained investment and the effect on post-2017 comparability.
- Separate underlying performance from acquisition and currency effects; assess comparable revenue growth of 3.6% and comparable volume decline of 1.5%.
- Assess the 2018 maturity and refinancing plan, including the US$445 million notes due November 2018 and subsequent Ps.10,100 million bank borrowing.
- Monitor the Heineken arbitration, significant Brazilian tax exposures, the Bogotá sewer settlement approval and other disclosed contingencies.
- Evaluate 2018 capital spending, the scheduled dividend, Philippine beverage-tax effects and Mexico concentrate-price increases against actual subsequent results.