Coca-Cola FEMSA, S.A.B. de C.V. — 2018 Form 20-F
Business context and period. This is an annual report, filed April 12, 2019, for the fiscal year ended December 31, 2018—not a standalone fourth-quarter filing. Coca-Cola FEMSA is a Latin American Coca-Cola bottler operating in Mexico, Central America, Colombia, Brazil, Argentina and Uruguay. Financial statements are audited and prepared under IFRS in nominal Mexican pesos; U.S. dollar amounts are convenience translations.
Key financial and operating metrics
Unless otherwise stated, amounts below are in millions of Mexican pesos.
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Total revenue | 182,342 | 183,256 | Down 0.5%; comparable revenue growth was 5.9% |
| Gross profit / margin | 83,938 / 46.0% | 83,508 / 45.6% | Profit up 0.5%; margin expanded 40 basis points |
| Income before tax and equity-method results | 17,190 | (11,255) | 2017 included a major Venezuela deconsolidation charge |
| Continuing-operations net income | 11,704 | (15,379) | 2018 net income attributable to parent: 10,936 |
| Discontinued-operations net income | 3,366 | 3,725 | Primarily the Philippines business |
| Consolidated net income | 15,070 | (11,654) | Net margin: 8.3%, versus a 2017 loss margin of 6.4% |
| Operating cash flow, continuing operations | 27,581 | 26,536 | Discontinued operations generated a further 1,962 |
| Capital expenditures | 11,069 | 12,917 | 2017 comparison excludes Philippines capex |
| Cash and cash equivalents at year-end | 23,727 | 18,767 | 2018 included proceeds from the Philippines sale |
| Total debt | 81,805 | 83,360 | Down 1,555; current ratio was 1.26, versus 1.00 |
- Cash flow from investing activities for continuing operations was negative 8,291; financing activities were negative 14,235. Dividends paid were 7,038.
- Year-end current assets were 57,490 and current liabilities were 45,524. Cash less total debt was approximately 58,078 net debt, calculated from reported balances.
- After swaps, 17.3% of debt was variable-rate at year-end; measured on a weighted-average debt-life basis, the filing reports 6.9%. A 100-basis-point rate increase was estimated to raise 2018 interest expense by 134.
Material changes versus the prior year
- Reported revenue and volume were broadly flat, but currency translation and the Venezuela deconsolidation weighed on reported revenue. Comparable revenue rose 5.9% and comparable sales volume rose 1.3%.
- Total sales volume was 3,321.8 million unit cases, up 0.1% reported. Mexico and Central America volume rose 2.3%; South America rose 1.7%. Argentina volume fell 14.9%, while Brazil rose 2.9% and Colombia rose 2.4%.
- Gross margin improved overall, but regional trends diverged: Mexico and Central America margin fell 60 basis points to 48.1%; South America fell 110 basis points to 43.5%. Higher PET resin and concentrate costs, currency weakness and other input-cost pressures offset pricing and lower sweetener costs.
- Other expenses fell sharply from 32,899 to 2,450. The 2017 figure included the 28,177 Venezuela deconsolidation loss, largely non-cash. In 2018, other expenses included a 432 impairment of the Estrella Azul investment and contingency provisions.
- Comprehensive financing expense increased 29.5% to 6,943, primarily reflecting a shift from a foreign-exchange gain to a loss, partly offset by lower interest expense.
Outlook, commentary, risks and unusual items
- Investment plan: Management budgeted approximately US$579 million (Ps.11,369 million at year-end exchange rates) of 2019 capital expenditures, mainly for capacity, market equipment, returnable packaging, distribution and information technology. It expected internally generated funds to cover the budget; spending could change with market conditions and financial resources. No formal revenue or earnings guidance is provided in the filing.
- Portfolio changes: The company completed the sale of its 51% Philippines stake to The Coca-Cola Company on December 13, 2018, recording the operation as discontinued and a 3,335 gain on sale. The sale generated US$715 million of proceeds. It acquired two Guatemalan bottlers and the Uruguay bottler during 2018.
- Reporting comparability: Venezuela was deconsolidated effective December 31, 2017; its operating results are excluded from 2018 consolidated results. Argentina became hyperinflationary in 2018, requiring inflation adjustments and period-end currency translation. Philippines results are presented as discontinued operations, with 2017 restated.
- Costs and commercial relationship: PET resin prices in U.S. dollars rose 21.8% in 2018. The Coca-Cola Company sets concentrate pricing under bottler agreements and supplies all concentrate for Coca-Cola trademark beverages; its marketing contributions are discretionary. Management said the scheduled Mexican concentrate-price increases were not expected to have a material adverse effect based on its estimates.
- Legal and contingency exposure: Recorded tax, labor and legal provisions totaled 8,298. Separately, management described approximately 53,333 of unsettled lawsuits as less than probable but not remote, including about 51,070 in Brazilian tax contingencies; these amounts are not the same as recorded provisions. Brazilian tax contingencies of 7,739 were collateralized at year-end.
- Disputes: An arbitration over Heineken Brazil’s attempt to terminate the beer distribution agreement could significantly affect Brazilian operations if resolved adversely. A separate Unilever Brazil AdeS pricing arbitration could adversely affect the AdeS business. The company also disclosed potential sanctions related to São Paulo PET-bottle recycling requirements.
- Other key risks: Dependence on The Coca-Cola Company and its bottler agreements; consumer health and packaging preferences; competition; water availability and permits; commodity prices and foreign-exchange movements; political, economic, tax and regulatory developments; and acquisition integration. Management reported no material off-balance-sheet arrangements and said it was in compliance with debt covenants.
Important facts for investors to verify
- Review the audited statements and notes for the 2017 Venezuela charge, Philippines disposal gain and discontinued-operation presentation; these materially affect year-over-year comparisons.
- Check comparable, currency-neutral performance against reported results, especially the effects of Argentina’s hyperinflation accounting and the acquisition contributions from Guatemala and Uruguay.
- Assess whether pricing and cost controls can offset PET resin, concentrate, labor and freight pressures, and monitor the separate regional margin trajectories.
- Review debt maturities, refinancing needs, cash availability by country and currency, and the use and effectiveness of derivatives; 2018 cash included significant one-time sale proceeds.
- Track outcomes and potential cash effects of the Heineken and AdeS arbitrations, Brazilian tax disputes, and São Paulo recycling proceedings; distinguish recorded provisions from disclosed possible claims.
- Note that the internal-control assessment excluded the newly acquired Guatemalan and Uruguay businesses, which together represented 2.5% of revenue and 2.8% of net income; verify their subsequent integration and control coverage.