FEMSA 2017 Annual Report Summary
Reporting period: Fiscal year ended December 31, 2017. Although the request identifies 2017 Q4, this Form 20-F reports full-year results; standalone fourth-quarter figures are not clearly provided in the filing text. Filed April 24, 2018. Financial statements are audited and prepared under IFRS, with Mexican pesos (Ps.) as the reporting currency. Amounts below are generally in millions of pesos unless stated otherwise.
Business context and reporting period
FEMSA is a Mexican holding company with operations in Coca-Cola bottling, small-format retail (principally OXXO), pharmacies, fuel stations, logistics and other businesses. It also holds an equity-method investment in Heineken. Mexico accounted for 63% of 2017 consolidated revenue. Reporting comparisons are affected by acquisitions, foreign-exchange movements and the year-end deconsolidation of Venezuelan operations.
Key financial metrics
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Total revenue | Ps. 460,456 | Ps. 399,507 | Up 15.3% |
| Gross profit / margin | Ps. 170,268 / 37.0% | Ps. 148,204 / 37.1% | Profit up 14.9%; margin down 0.1 percentage point |
| Income before tax and equity-method earnings | Ps. 39,866 | Ps. 28,556 | Up 39.6% |
| Income tax / effective rate | Ps. 10,583 / 26.5% | Ps. 7,888 / 27.6% | 2017 rate benefited from tax efficiencies related to one-time items; management cited about 30% as its medium-term expectation |
| Consolidated net income | Ps. 37,206 | Ps. 27,175 | Up 36.9% |
| Net income attributable to controlling interest | Ps. 42,408 | Ps. 21,140 | Includes unusual effects described below; non-controlling interests recorded a Ps. 5,202 loss in 2017 |
| Cash from operating activities | Ps. 40,135 | Ps. 50,131 | Down Ps. 9,996 |
| Cash from investing activities | Ps. 31,417 | Ps. (38,645) | 2017 inflow principally reflected Heineken share-sale proceeds |
| Cash from financing activities | Ps. (21,539) | Ps. 1,297 | Outflow included debt repayments and dividends |
| Capital expenditures | Ps. 25,180 | Ps. 22,155 | Up 13.7% |
| Total debt / cash and cash equivalents | Ps. 131,348 / Ps. 96,944 | Ps. 139,248 / Ps. 43,637 | Debt declined; cash rose. Simple debt less cash was Ps. 34,404 at year-end |
| Current assets / current liabilities | Ps. 181,188 / Ps. 105,022 | Ps. 117,951 / Ps. 86,289 | 2017 current ratio was approximately 1.72 |
| Total assets / total equity | Ps. 588,541 / Ps. 336,912 | Ps. 545,623 / Ps. 286,170 | Both increased year over year |
Material changes versus the prior comparable period
- Reported revenue growth reflected acquisitions and consolidation changes as well as pricing and currency translation. Coca-Cola FEMSA revenue rose 14.7%; Retail Division revenue rose 12.4%; Health Division revenue rose 9.2%; and Fuel Division revenue rose 34.1%.
- Coca-Cola FEMSA reported sales volume growth of 16.1%, but this included Vonpar and the Philippines. On a comparable basis, excluding Vonpar and Venezuela and including the Philippines as if consolidated from January 2016, volume declined 1.5%.
- OXXO same-store sales increased 6.4%, while the Retail Division opened 1,301 net new stores. Fuel Division same-station sales increased 19.8%, partly reflecting higher fuel prices; average volume per station declined 1.1%.
- FEMSA sold a 5.24% combined economic interest in Heineken in September 2017, reducing its stake from 20.0% to 14.76%. It recorded a Ps. 29,989 gain on the sale and Ps. 50,790 in cash proceeds; Heineken equity income was Ps. 7,847, versus Ps. 6,342 in 2016.
- Operating cash flow decreased despite higher earnings, with the filing citing lower collections of trade receivables, higher supplier payments and increased income taxes paid. The investing cash-flow swing largely reflected the Heineken sale and the prior year’s acquisition spending.
Outlook, management commentary, risks and unusual items
- Venezuela deconsolidation: Coca-Cola FEMSA stopped consolidating its Venezuelan subsidiary as of December 31, 2017 and began measuring the investment at fair value. The change produced a Ps. 28,177 loss in other expenses, including Ps. 26,123 of accumulated currency translation losses reclassified from equity and impairment and remeasurement charges. Before deconsolidation, Venezuela contributed Ps. 4,005 in sales and a Ps. 2,223 net loss in 2017. The filing says future results will no longer include Venezuela on a consolidated basis from January 1, 2018.
- Heineken sale and earnings: The Heineken disposal generated a substantial one-time gain and cash inflow. Consequently, reported earnings and cash flows should be distinguished from recurring operating performance.
- Investment plans: FEMSA budgeted 2018 capital expenditures of US$1.349 billion (approximately Ps. 26.432 billion), subject to market conditions, results and financial resources. The filing does not provide consolidated earnings or revenue guidance.
- Dividend: Shareholders approved a Ps. 9,221 million dividend related to fiscal 2017, payable in two installments in May and November 2018. FEMSA notes that it is a holding company and depends on subsidiary distributions to fund dividends.
- Risks: Key exposures include currency and interest-rate volatility, commodity and packaging costs, Coca-Cola bottler agreement economics, beverage taxes and health-related consumer shifts, water availability, competition, political and economic conditions, cybersecurity, and integration of acquisitions. Management cited near-term macroeconomic and currency pressures in Mexico and South America, and lower structural margins and higher sensitivity to sales changes in FEMSA Comercio’s retail and fuel activities.
- Contingencies: Recorded loss-contingency provisions totaled Ps. 12,855, including Ps. 6,836 for taxes, Ps. 3,296 for legal matters and Ps. 2,723 for labor matters. Additional contingencies assessed as more than remote but less than probable totaled Ps. 70,830 and were not reserved. Brazilian tax contingencies of Ps. 9,433 were collateralized. Coca-Cola FEMSA also faced an arbitration with Heineken Brazil over termination of a beer distribution agreement; an adverse outcome could significantly affect its Brazilian operations.
- Accounting and controls: FEMSA expected IFRS 15 and IFRS 9 adoption in 2018 to have no significant financial-statement impact. IFRS 16, effective in 2019, is expected to materially affect reported assets and liabilities, particularly because of FEMSA Comercio’s leases. Management and the auditor reported effective internal control over financial reporting, but the assessment excluded the newly consolidated Philippines business, which represented 4.5% of 2017 revenue.
Most important facts for investors to verify
- Separate the Ps. 29,989 Heineken disposal gain and Venezuela deconsolidation loss from recurring earnings; reconcile the resulting difference between consolidated and controlling-interest net income.
- Review comparable Coca-Cola FEMSA volume and revenue trends, especially the effect of acquisitions, currency translation and the Venezuela accounting change.
- Confirm the sustainability of operating cash flow after its 20% decline, planned 2018 capital spending, debt maturities and the availability of subsidiary cash for parent-company obligations and dividends.
- Assess the status and potential outcomes of the Ps. 70,830 unreserved contingencies and the Heineken Brazil arbitration.
- Track the 2018 Philippines sweetened-beverage excise tax, Mexico beverage-tax changes, exchange-rate movements, and the implementation and balance-sheet effects of IFRS 16.