Business context and reporting period
Fomento Económico Mexicano, S.A.B. de C.V. (FEMSA) filed this Form 20-F on April 24, 2019, covering the fiscal year ended December 31, 2018—not a standalone fourth quarter. FEMSA operates Coca-Cola FEMSA, OXXO and other retail businesses, and holds a non-controlling investment in Heineken. Financial statements are audited and prepared under IFRS, in nominal Mexican pesos unless otherwise noted.
Financial performance and position
Amounts below are in millions of Mexican pesos unless stated otherwise. Comparative results reflect the filing’s treatment of Coca-Cola FEMSA Philippines as discontinued operations.
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | 469,744 | 439,932 | +6.8% |
| Gross profit | 175,170 | 162,090 | +8.1% |
| Gross margin | 37.3% | 36.8% | +0.5 percentage points |
| Income before tax from continuing operations and equity-accounted investees | 33,630 | 35,771 | −6.0% |
| Consolidated net income | 33,079 | 37,206 | −11.1% |
| Net income from continuing operations | 29,713 | 33,480 | −11.3% |
| Operating cash flow from continuing operations | 47,414 | 33,435 | +41.8% |
- Administrative expenses rose 13.7% to Ps.17,313 million; selling expenses rose 8.2% to Ps.114,573 million.
- Income tax expense was Ps.10,169 million; the effective tax rate was 30.2%, compared with 28.6% in 2017. Interest expense declined to Ps.9,825 million from Ps.11,092 million.
- Equity-accounted investee income was Ps.6,252 million, including Ps.6,478 million from Heineken, compared with Ps.7,847 million and Ps.7,847 million, respectively, in 2017.
- At year-end, total assets were Ps.576,381 million, total equity Ps.335,542 million, cash and cash equivalents Ps.62,047 million, and current liabilities Ps.101,464 million. Current assets were Ps.177,607 million.
- Total debt was Ps.128,664 million, down from Ps.131,348 million; Ps.13,674 million was short-term debt, including current maturities. Debt was 84.9% fixed-rate after derivatives; average borrowing cost after swaps was approximately 6.8%. Debt less cash was Ps.66,617 million; the company also held Ps.30,924 million of current investments.
- Investing cash flow from continuing operations was negative Ps.57,662 million; financing cash flow was negative Ps.23,011 million. Capital expenditures, net of disposals, were Ps.24,266 million, primarily funded from operations. Cash declined from Ps.96,944 million at year-end 2017.
Material changes versus the prior comparable period
- FEMSA revenue growth was led by retail and fuel expansion, while Coca-Cola FEMSA revenue declined 0.5% as reported, reflecting currency translation, Venezuela deconsolidation and other comparability effects. Management said comparable Coca-Cola FEMSA revenue would have grown 5.9%.
- Proximity Division revenue increased 11.8%, supported by 1,422 net new OXXO stores and 5.2% same-store sales growth. Health Division revenue rose 9.1%; Fuel Division revenue rose 22.3%.
- Consolidated gross margin improved 0.5 percentage points. All three FEMSA Comercio divisions reported gross-margin expansion; Coca-Cola FEMSA’s gross margin rose to 46.0% from 45.6%.
- Net income fell despite revenue and gross-profit growth, in part because 2017 included a Ps.29,989 million gain from a partial Heineken share sale and a large one-time Venezuela deconsolidation charge. FEMSA sold a 5.2% combined Heineken economic interest in 2017, reducing its holding to 14.76%.
- Cash from operations improved, but investing cash flow turned substantially negative, reflecting increased purchases of investments and the absence of 2017 Heineken sale proceeds. Debt declined modestly while cash also fell.
Outlook, risks, contingencies and unusual items
- No consolidated revenue or earnings guidance is provided. Management’s 2019 capital-expenditure budget was US$1,388 million (approximately Ps.28,114 million), subject to change with market conditions, results and available resources.
- Management cited macroeconomic uncertainty, currency volatility and excise taxes in Mexico, Brazil and South America. Other material risks include dependence on Coca-Cola trademarks and bottler agreements; concentrate and packaging costs; water availability; beverage taxes and changing consumer preferences; intense retail competition; political and economic uncertainty; and cyber, security and natural-disaster risks.
- Coca-Cola FEMSA completed the sale of its 51% stake in KOF Philippines to The Coca-Cola Company on December 13, 2018 for approximately Ps.14,039 million (US$715 million). The 2018 discontinued-operations result includes a Ps.3,335 million sale gain; discontinued operations reported total net income of Ps.3,366 million.
- Argentina was treated as hyperinflationary from July 1, 2018; prior-period financial statements were not restated. Coca-Cola FEMSA stopped consolidating Venezuela from January 1, 2018 after deconsolidating it in 2017.
- Effective January 1, 2019, IFRS 16 was expected to add right-of-use assets and lease liabilities estimated at 8.5%–9.5% of 2018 total assets. This is significant given the retail divisions’ leased locations.
- Recorded loss-contingency provisions were Ps.9,928 million. Additional contingencies assessed as more than remote but less than probable totaled Ps.57,446 million and were not reserved. Brazilian tax contingencies of Ps.7,739 million were collateralized. Coca-Cola FEMSA also faced arbitration over termination of its Heineken Brazil distribution agreement; an unfavorable outcome could significantly affect Brazilian operations. A Sao Paulo PET-recycling requirement and related proceedings create potential fines or other sanctions.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor gave an unqualified opinion. The internal-control assessment excluded four recently acquired entities, together representing 2.5% of revenue.
Important facts for investors to verify
- Reconcile continuing and discontinued results, particularly the KOF Philippines sale gain and the 2017 Heineken and Venezuela items, when assessing underlying earnings.
- Review cash and short-term investments alongside debt maturities, currency exposure, derivative positions and the decline in year-end cash.
- Assess the scale, timing and eventual cash impact of the Ps.57,446 million unreserved contingencies, including Brazilian tax disputes.
- Track IFRS 16’s actual opening lease balances and effects on reported debt, earnings and cash-flow presentation.
- Monitor OXXO same-store sales and expansion returns, fuel volumes and margins, and comparable Coca-Cola FEMSA growth after currency and portfolio changes.
- Verify progress and outcomes in the Heineken Brazil arbitration, Sao Paulo recycling litigation and the announced Ecuador pharmacy acquisition.