Fomento Economico Mexicano de CV : FEMSA Announces Third Quarter 2018 Results - Full Version

FEMSA Announces Third Quarter 2018 Results

Monterrey, Mexico, October 26, 2018 - Fomento Económico Mexicano, S.A.B. de C.V. ("FEMSA") (NYSE: FMX; BMV: FEMSAUBD) announced today its operational and financial results for the third quarter of 2018.

As of the third quarter of 2018, we have 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 will only include proximity and proximity‐related operations, most of which operate today under the OXXO brand across markets. This change will provide a more accurate picture of the performance of this key, high‐growth business.

FINANCIAL HIGHLIGHTS:

•  7.9% revenue growth (8.9% on an organic1 basis) at FEMSA Consolidated

•  12.1% revenue growth (11.7% on an organicϣ basis) at FEMSA Comercio's Proximity Division

•  29.5% income from operations growth at FEMSA Comercio's Health Division

•  41.5% income from operations growth at FEMSA Comercio's Fuel Division

•  8.2% income from operations growth (‐6.9% on an organicϣ basis) at Coca‐Cola FEMSA

FINANCIAL SUMMARY FOR THE THIRD QUARTER AND FIRST NINE MONTHS OF 2018

Change vs. same period of last year

Revenues

Gross Profit

Same‐Store Sales

FEMSA CONSOLIDATED

7.9% 5.1%

9.3% 6.9%

3Q18	YTD18	3Q18	YTD18	3Q18	YTD18	3Q18	YTD18
FEMSA COMERCIO
Proximity Division	12.1%	12.0%	17.2%	15.7%	8.7%	11.6%	6.2%	5.5%
Health Division	10.2%	10.2%	11.8%	14.1%	29.5%	46.0%	6.3%	6.2%
Fuel Division	26.7%	21.6%	47.4%	47.0%	41.5%	122.8%	7.1%	5.3%
COCA‐COLA FEMSA	(0.7%)	(4.7%)	0.6%	(2.1%)	8.2%	1.6%

Eduardo Padilla, FEMSA's CEO, commented:

"During the third quarter, we continued to see our business units making steady progress. Store counts, comparable sales and gross margins once again grew across retail formats and markets. However, operating margins were under moderate pressure particularly in Mexico, reflecting tight labor conditions and higher operational costs, as well as OXXO's increased international organic expansion efforts. At Coca‐Cola FEMSA, we saw positive top‐line performance in several of our markets, particularly Mexico, as well as encouraging signs of progress in other regions, including the recently acquired operations in Guatemala and Uruguay.

On the strategic front, there are interesting news as well. We recently announced our entry into Ecuador through our Health Division, with a transaction that is still subject to regulatory approval, and today we are announcing our

1 Excludes the effects of significant mergers and acquisitions in the last twelve months and the results of Coca‐Cola FEMSA Venezuela in ϤϢϣϩ. For this quarter, it includes the consolidation of Caffenio, our sole coffee supplier in Mexico, which we now control with ϧϢ% share ownership.

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entry into Peru through the opening of our first OXXO store in the city of Lima. These two announcements reflect our commitment to continue expanding our small‐box platform across Latin America.

As we look toward the end of 2018 and into next year, we continue to see some macroeconomic uncertainty in many of our markets, including Mexico and Brazil. However, uncertainty can often bring opportunity, and with that view we are optimistic about our possibilities to create value as we chart our strategic path for 2019 and beyond."

QUARTERLY RESULTS

Results are compared to the same period of previous year

FEMSA CONSOLIDATED

FEMSA CONSOLIDATED

3Q18 Financial Summary

CONSOLIDATED BALANCE SHEET

(Millions of Ps.)

(Millions of Ps.)

3Q18	3Q17	Var.	Org.	As of September 30, 2018	Ps.	US$2
Revenues	118,371	109,749	7.9%	8.9%	Cash	54,166	2,896
Income from Operations	9,992	9,240	8.1%	(1.2%)	Short‐term debt	12,349	660
Income from Operations Margin (%)	8.4	8.4	0 bps	Long‐term debt	117,071	6,259
Operative Cash Flow (EBITDA)	15,046	14,106	6.7%	2.6%	Net debt3	75,254	4,023
Operative Cash Flow (EBITDA) Margin (%)	12.7	12.9	‐20 bps

Net Income

6,598 33,715 (80.4%)

Total revenues increased 7.9%, reflecting growth across FEMSA Comercio's three business units, partially offset by a slight decrease at Coca‐Cola FEMSA. On an organic basis,ϣ total revenues grew 8.9%.

Gross profit grew 9.3%. Gross margin expanded by 50 basis points, reflecting strong margin expansion across all business units.

Income from operations increased 8.1%. On an organic basis,ϣ income from operations decreased 1.2%, reflecting a decline at Coca‐Cola FEMSA. Consolidated operating margin remained in line at 8.4% of total revenues, mostly driven by margin expansion at Coca‐Cola FEMSA reflecting a non‐cash operating foreign exchange gain in Mexico, and operating expense efficiencies in South America. This expansion was offset by modest margin contraction at FEMSA Comercio's Proximity Division, driven by higher operating expenses.

Our effective income tax rate was 36.6% in 3Q18 compared to 16.4% in 3Q17.

Net consolidated income decreased 80.4% to Ps. 6,598 million, reflecting a demanding comparison base caused by the extraordinary non‐operating income generated in 3Q17 from the sale of 5.24% of the combined interest in the Heineken

ϣ Excludes the effects of significant mergers and acquisitions in the last twelve months and the results of Coca‐Cola FEMSA Venezuela in ϤϢϣϩ. For this quarter, it includes the consolidation of Caffenio, our sole coffee supplier in Mexico, which we now control with ϧϢ% share ownership.

Ϥ The exchange rate published by the Federal Reserve Bank of New York for September ϤϪ, ϤϢϣϪ was ϣϪ.ϩϢϧϢ MXN per USD.

ϥ Includes the effect of derivative financial instruments on long‐term debt.

Group. This decrease also reflected a non‐cash foreign exchange loss related to FEMSA's U.S. dollar denominated cash position, as impacted by the appreciation of the Mexican peso and partially offset by lower interest expense.

Net majority income was Ps. 1.31 per FEMSA Unit2 and US$ 0.70 per FEMSA ADS.

Capital expenditures amounted to Ps. 6,650 million, reflecting higher investments across all business units.

FEMSA COMERCIO - PROXIMITY DIVISION

FEMSA COMERCIO - PROXIMITY DIVISION

3Q18 Financial Summary

(Millions of Ps. except same‐stores sales)

3Q18	3Q17	Var.	Org.
Same‐store sales (thousands of Ps.)	811	763	6.2%
Revenues	43,967	39,212	12.1%	11.7%
Income from Operations	3,610	3,320	8.7%	6.3%
Income from Operations Margin (%)	8.2	8.5	‐30 bps
Operative Cash Flow (EBITDA)	4,997	4,436	12.6%	9.4%
Operative Cash Flow (EBITDA) Margin (%)	11.4	11.3	10 bps

Total revenues increased 12.1% in 3Q18 compared to 3Q17. On an organic basis,ϣ total revenues grew 11.7%, reflecting the opening of 182 net new OXXO stores in the quarter to reach 1,430 total net new store openings for the last twelve months. As of September 30, 2018, FEMSA Comercio's Proximity Division had a total of 17,478 OXXO stores. OXXO's same‐store sales increased an average of 6.2%, reflecting resilient consumer demand and the undemanding comparison base that was affected by the natural disasters in central and southern Mexico during September 2017. This performance was driven by 3.6% growth in average customer ticket and a robust increase of 2.5% in store traffic.

Gross profit increased 17.2%, resulting in a gross margin expansion of 170 basis points to 38.8% of total revenues. This expansion mainly reflects: i) sustained growth of the services category, including income from financial services; ii) increased

ϣExcludes the effects of significant mergers and acquisitions in the last twelve months. For this quarter, it includes the consolidation of Caffenio, our sole coffee supplier in Mexico, which we now control with ϧϢ% share ownership.

ϤFEMSA Units consist of FEMSA BD Units and FEMSA B Units. Each FEMSA BD Unit is comprised of one Series B Share, two Series D‐B Shares and two Series D‐L Shares. Each FEMSA B Unit is comprised of five Series B Shares. The number of FEMSA Units outstanding as of September ϥϢ, ϤϢϣϪ was ϥ,ϧϩϪ,ϤϤϨ,ϤϩϢ, equivalent to the total number of FEMSA Shares outstanding as of the same date, divided by ϧ.

and more efficient promotional programs with our key supplier partners; iii) healthy trends in our commercial income activity, and iv) the consolidation of Caffenio.

Income from operations increased 8.7%. On an organic basis,ϣ income from operations grew 6.3%. Operating expenses increased 19.7% to Ps. 13,440 million, above revenues, mainly reflecting: i) higher secure cash transportation costs driven by increased volume and higher operational costs including fuel prices; ii) our continuing and gradual shift from commission‐ based store teams to employee based teams; iii) an increase in electricity tariffs during the last month of the quarter, 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. Operating margin contracted 30 basis points to 8.2% of total revenues.

FEMSA COMERCIO - HEALTH DIVISION

FEMSA COMERCIO - HEALTH DIVISION

Same‐store sales (thousands of Ps.)	1,532
Revenues	12,562
Income from Operations	540
Income from Operations Margin (%)	4.3
Operative Cash Flow (EBITDA)	789
Operative Cash Flow (EBITDA) Margin (%)	6.3

3Q18 Financial Summary
(Millions of Ps. except same‐stores sales)
3Q18	3Q17	Var.
1,442	6.3%
11,395	10.2%
417	29.5%
3.7	60 bps
636	24.1%
5.6	70 bps

Total revenues increased 10.2% in 3Q18 compared to 3Q17, mainly driven by growth in our South American operations as well as a continuation of gradually improving trends in Mexico. As of September 30, 2018, FEMSA Comercio's Health Division had a total of 2,303 points of sale across our territories. This figure reflects the addition of 52 net new stores, including a small acquisition in Colombia to reach 125 total net new stores for the last twelve months. Same‐store sales for drugstores increased an average of 6.3%, which includes 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.

ϣ Excludes the effects of significant mergers and acquisitions in the last twelve months. For this quarter, it includes the consolidation of Caffenio, our sole coffee supplier in Mexico, which we now control with ϧϢ% share ownership.

Gross profit increased 11.8%, resulting in a gross margin expansion of 40 basis points to 30.3% of total revenues. This increase reflects commercial activity driving positive margin mix and volume, as well as more effective execution across markets, mainly in South America.

Income from operations grew 29.5%. Operating expenses increased 9.4% to Ps. 3,272 million, below revenues. Operating margin increased 60 basis points to 4.3% of total revenues reflecting the sales growth and gross margin expansion as described above, combined with: i) the strength of the Chilean and Colombian pesos relative to the Mexican peso during the third quarter; and ii) increased operating leverage generated by cost efficiencies and tight expense control.

FEMSA COMERCIO - FUEL DIVISION

FEMSA COMERCIO - FUEL DIVISION

Same‐station sales (thousands of Ps.)	8,742
Revenues	12,196
Income from Operations	133
Income from Operations Margin (%)	1.1
Operative Cash Flow (EBITDA)	175
Operative Cash Flow (EBITDA) Margin (%)	1.4

3Q18 Financial Summary
(Millions of Ps. except same‐stations sales)
3Q18	3Q17	Var.
8,163	7.1%
9,624	26.7%
94	41.5%
1.0	10 bps
130	34.6%
1.4	0 bps

Total revenues increased 26.7% in 3Q18 compared to 3Q17, reflecting the addition of 20 net new OXXO GAS stations in the quarter to reach 122 total net new stations in the last twelve months. As of September 30, 2018, FEMSA Comercio's Fuel Division had a total of 519 OXXO GAS service stations. Same‐station sales increased an average of 7.1%, as average price per liter increased by 19.5%, while average volume decreased 10.4% reflecting consumer reaction to the higher prices and, to a lesser degree, increased competition.

Gross profit increased 47.4%, above revenues, resulting in a gross margin expansion of 120 basis points to 8.7% of total revenues, reflecting improved supply terms and a recovery from a low comparable base as gross profit per liter was held flat in 3Q17 in peso terms in some of our territories.

Income from operations increased 41.5%. Operating expenses increased 48.3% to Ps. 927 million, above revenues, reflecting higher labor costs implemented to reduce turnover and a one‐off provision related to institutional customers. In spite of this, operating margin recovered 10 basis points to 1.1% of total revenues.