POSITIONED FOR PROFITABLE GROWTH
|
MANAGEMENT DISCUSSION AND ANALYSIS GRUMA 1999 CONSOLIDATED RESULTS GRUMA's 1999 financial performance was affected by a combination of two nonrecurring factors. First, the surplus of corn in the Mexican market following the tortilla industry deregulation, and the resulting lower corn prices, depressed GIMSA's performance. Second, GRUMA continued with its growth strategy - to capture selected business opportunities and enhance its competitive position - which resulted in high investment levels and operating expenses. Both of these circumstances resulted in operating margins that were lower than those of the previous year. During 1999, however, GRUMA continued to show steady revenue growth over 1998, primarily due to Gruma Corporation's acquisitions, the acquisition of Monaca, and the consolidation of Demaseca, GRUMA's other Venezuelan corn flour operation, into the company. At the subsidiary level, GIMSA significantly improved its operating margins throughout the year; Gruma Corporation showed substantial growth in sales, profits, and margins. As GIMSA's performance improves, and as GRUMA's other subsidiaries strengthen their competitive advantages, the company expects to continue to grow and to increase profitability in 2000 and beyond. Net sales reached Ps 15.62 billion, 8% higher than in 1998. Gruma Corporation accounted for 46% of net sales; GIMSA, 32%; Gruma Venezuela(1), 8%; Gruma Centro América, 6%; Molinera de México, 6%; and other subsidiaries, 2%. Expressed as a percentage of consolidated net sales, net sales from foreign operations increased to 59% from 51% in 1998. The higher percentage in net sales was primarily due to increased sales in Gruma Corporation, the acquisition of Monaca, and the consolidation of Demaseca. As a percentage of net sales, cost of sales increased to 65.9% from 63.5% in 1998. This was due primarily to the acquisition of Monaca, whose proportion of cost of sales to sales is higher than that of GRUMA's other operations, and to the increase in GIMSA's cost of sales to 75.6% from 70.9%. Overall, GRUMA's total cost of sales increased 13% to Ps 10.29 billion from Ps 9.14 billion last year. Gross profit of Ps 5.33 billion was 1% higher than in 1998. Gross margin declined to 34.1% from the 36.5% reported in the previous year. This was primarily due to lower gross margins in GIMSA and other subsidiaries(2) and to the acquisition of Monaca. Selling, general, and administrative (SG&A) expenses were 19% higher than in 1998. The primary drivers of the increase were Gruma Corporation, GRUMA's other subsidiaries, and the Monaca acquisition. Expressed as a percentage of net sales, SG&A expenses increased to 31.8% from 29.0%. Operating income was Ps 361 million, 67% lower than in 1998. The reduction was due primarily to lower operating profits in GIMSA and higher operating losses in other subsidiaries (mainly from expenses associated with the bread business launch and the final stage of the business process upgrade (BPU) program in Corporate Services). Operating margin was 2.3% compared to 7.5% in 1998. Interest expense was Ps 617 million compared to Ps 394 million in 1998, an increase of Ps 223 million, primarily due to higher debt levels. Interest income was Ps 142 million, a decrease of Ps 61 million compared to the Ps 203 million reported last year, due to lower cash balances. Net foreign exchange (FX) gain was Ps 80 million, an increase of Ps 143 million over the net FX loss of Ps 63 million in 1998. This gain was due to the peso appreciation over higher debt levels. GRUMA had a net monetary position gain of Ps 195 million, a Ps 208 million increase over the net monetary position loss of Ps 13 million, due to higher net monetary liability position. Other expenses, net, were Ps 160 million, Ps 93 million lower than in 1998, as a result of lower expenses related to the BPU program and because the 1998 figure reflects the one-time expense of moving Gruma Corporation's headquarters from Los Angeles to Dallas. Provisions for income taxes and employee profit sharing were Ps 253 million, Ps 307 million more than in the previous year. In 1998, provisions for income taxes and employee profit sharing resulted in an income of Ps 54 million from fiscal benefits. GRUMA's share of unconsolidated associated companies' net income was Ps 74 million, an increase of Ps 2 million versus 1998. The company sustained a total net loss of Ps 178 million, recording a net majority loss of Ps 282 million versus net majority income of Ps 436 million in 1998. RESULTS BY OPERATING SUBSIDIARY Gruma Corporation Combined corn flour and tortilla sales volume was 1.74 billion pounds, 10% higher than in 1998. The increase was due to higher retail tortilla and corn flour sales in all regions. Gruma Corporation achieved net sales of Ps 7.11 billion, or US$749 million, an increase of 11% versus 1998. Revenue growth outpaced volume growth, due essentially to real price increases across key product lines in the tortilla business. The retail sector, especially in the central United States, was primarily responsible for the rise in tortilla sales. A significant portion of the increase is attributable to Gruma Corporation's acquisition of several tortilla plants in Texas and North Carolina in early 1999. In addition, the Houston facility became fully operational in the beginning of September. As a percentage of net sales, cost of sales improved to 56.1% from 57.3% in 1998, primarily as a result of increases in capacity utilization in the corn flour business, reductions in the cost of certain raw materials (especially corn), and increased corn flour retail sales. The tortilla business also contributed to this improvement mainly through better pricing. Overall, Gruma Corporation's cost of sales increased 9% to Ps 3.99 billion (US$420 million) from Ps 3.68 billion (US$387 million) in 1998. Gross profit of Ps 3.12 billion (US$329 million) was 14% higher than in 1998. Gross margin was 43.9%, an improvement over last year's 42.7% gross margin. SG&A expenses were 13% higher than in the previous year, amounting to Ps 2.63 billion. Expressed as a percentage of net sales, SG&A expenses increased to 37.0% from 36.2%. Gruma Corporation reported higher selling expenses related to the conversion of independent distributors' routes to company-owned routes. Consolidated operating income increased 18% to Ps 488 million (US$51 million) over 1998. Operating margin was 6.9% compared to 6.5% last year. GIMSA A combination of the following factors, most of which are nonrecurring, produced a significant corn surplus, weak corn prices, and decreased demand for corn flour during 1999, adversely affecting GIMSA's 1999 operating results:
These factors affected GIMSA's ability to price its products accordingly as well as the demand for and sales volumes of its products. Sales volume totaled 1.55 million metric tons, 13% less than in 1998, a reduction driven mainly by lower bulk sales. Retail sales volume decreased 15% to 241,880 metric tons from 283,146 metric tons in the previous year. Lower sales volumes were partially due to the internal restructuring of DICONSA, the government-owned distribution network for rural consumers, which accounts for 10% of GIMSA's total sales volume. GIMSA's revenues during 1999 were Ps 4.90 billion, 14% less than in 1998, due mostly to lower sales volume. As a percentage of net sales, cost of sales increased to 75.6% from last year's 70.9%, primarily due to expensive corn inventories not fully reflected in the price of corn flour. To ensure availability of corn supply, GIMSA had built large inventories during the winter harvest (November 1998-January 1999). As a result of the oversupply of corn, domestic corn prices were depressed during 1999, and GIMSA's corn flour prices could not fully reflect its corn costs. Additionally, lower sales volume resulted in lower absorption of fixed costs. Gross profit was Ps 1.20 billion, 28% lower than in 1998. Gross margin decreased to 24.4% from 29.1%. Gross profit per ton decreased 17% versus last year. These decreases were all due to the aforementioned factors. SG&A expenses were Ps 829 million, 9% higher than in the previous year, primarily as a result of higher advertising, sales team reinforcement, and expenses related to the information technology modernization program. As a percentage of net sales, SG&A expenses increased to 16.9% from 13.4%; this higher percentage was also due to lower net sales. Operating income was Ps 367 million, 59% less than in 1998. Operating margin declined to 7.5% from 15.7%. Gruma Venezuela Sales volume reached 221,296 metric tons (146,027 metric tons of corn flour, 65,557 metric tons of wheat flour, and 9,712 of other products), representing Ps 1.22 billion in net sales. Cost of sales was Ps 982 million; or, as a percentage of net sales, 80.7%. Gross profit was Ps 234 million; gross margin was 19.3%. SG&A expenses were Ps 214 million. As a percentage of net sales,SG&A expenses were 17.6%. Operating income was Ps 20 million; operating margin was 1.7%. Molinera de México Sales volume totaled 317,761 metric tons, 30% more than in 1998. One-half of the increase resulted from acquisitions completed in July and December 1999. Net sales were Ps 995 million, 12% higher than in the previous year, resulting from sales volume increases. Net sales grew at a much lower rate than did sales volumes, due to lower wheat flour and wheat bran prices. The wheat flour industry is in the process of consolidating, and, therefore, pricing remains very competitive. As a percentage of net sales, cost of sales declined to 82.9% from 87.1% in 1998. This decrease is the result of lower wheat costs, economies of scale from higher sales volumes, lower fixed costs from shifting production to more efficient plants, and the increased percentage of wheat flour extracted per kilo of wheat due to better production processes. Gross profit was Ps 171 million, 49% higher than in the previous year. Gross margin rose to 17.1% from 12.9%. SG&A expenses were Ps 164 million, 64% higher than in 1998. This was primarily due to sales team reinforcement, expenses associated with new warehouses, and the information technology modernization program. Higher expenses also resulted from acquisitions completed in July and December 1999. As a percentage of net sales, SG&A expenses increased to 16.5% from 11.3% in 1998. Operating income was Ps 7 million, 52% lower than in 1998. Operating margin declined to 0.7% from 1.6%. Gruma Centro América Corn flour sales volume was 96,655 metric tons, 7% higher than in 1998. The increase was driven mainly by stronger relations with small tortilla manufacturers through the 100 Club, Gruma Centro América's customer incentive program. Net sales were Ps 937 million, an increase of 2% over 1998. The increase also resulted from higher sales of bread and tortillas. Cost of sales decreased 4% to Ps 606 million from Ps 628 million last year. As a percentage of net sales, cost of sales decreased to 64.7% from 68.1%. The decrease is primarily due to operating efficiencies achieved in most of the businesses. Gross profit was Ps 331 million, 13% higher than in 1998. Gross margin was 35.3%, an improvement over last year's 31.9% gross margin. SG&A expenses were Ps 319 million, 1% higher than in 1998. As a percentage of net sales, SG&A expenses were similar to 1998 at 34.1%. Operating income rose to Ps 12 million from an operating loss of Ps 21 million in 1998. Operating margin was 1.3%, compared to a negative operating margin of 2.3% in the previous year.
FINANCIAL SITUATION As of December 31, 1999, GRUMA's assets totaled Ps 20.97 billion, of which Ps 5.81 billion were current assets; Ps 11.45 billion represented property, plant, and equipment; and Ps 3.71 billion represented other assets. Total assets were Ps 3.01 billion higher than the balance as of December 31, 1998, primarily from increases in property, plant, and equipment due to the acquisition of Monaca; the consolidation of Demaseca; acquisitions and expansion in Gruma Corporation; acquisitions in Molinera de México; and, to a lesser extent, expansion of the bread plant in Mexico and the frozen bread project in Central America. The increase in total assets was also due to higher inventories and accounts receivable, primarily from the Monaca acquisition. Total liabilities increased Ps 1.98 billion to Ps 9.38 billion as of December 31, 1999, primarily due to higher debt levels necessary to finance the expansion and acquisitions program and to repurchase GIMSA shares. Total liabilities were Ps 6.98 billion in debt (Ps 305 million in short-term debt and Ps 6.67 billion in long-term debt), and Ps 2.40 billion in other liabilities. Stockholders' equity as of December 31, 1999, totaled Ps 11.59 billion, Ps 1.03 billion higher than the balance as of December 31, 1998, due mainly to the rights offering completed on September 30, 1999.
FINANCIAL STRATEGY GRUMA's financial strategy is to reduce its cost of capital by, among others, improving financial ratios, maintaining longer debt maturities, and significantly increasing EBITDA. From 1997 to year-end 1999, Standard & Poor's gave GRUMA an investment-grade rating in foreign debt of BBB-. That rating was dropped to BB+ at the end of 1999 due to (1) increased investment levels consistent with the company's growth strategy, and (2) GIMSA's decreased EBITDA levels. GRUMA is committed to improving that rating to investment grade in the near future.
INVESTMENT PROGRAM GRUMA's investment strategy is to invest in companies and facilities that are (1) consistent with and complementary to GRUMA's core businesses, and (2) located in markets that facilitate the company's ability to create long-term value. In recent years, GRUMA has substantially increased its installed capacity and, therefore, is able to increase revenues by more than 45% without additional investments. Based on its current level of installed capacity, GRUMA is positioned to substantially reduce its level of capital investment in 2000. During 2000, the company will concentrate on completing its 1999 acquisitions and investments and will direct its energies toward increasing margins and profitability. GRUMA invested Ps 3.10 billion in 1999, primarily in the acquisition of Monaca, Venezuela's second-largest corn and wheat flour producer, and, to a lesser extent, in Gruma Corporation's new tortilla plants and expansions and acquisitions of Molinera de México. In the third quarter of 1999, GRUMA completed the acquisition of Monaca for Ps 926 million. Monaca has an installed annual capacity of approximately 800,000 metric tons. The acquisition is an excellent strategic fit for GRUMA; it will enable the company to build on its leadership position in grain-based products and enhance its ability to serve the Venezuelan market. By consolidating GRUMA's existing Venezuela corn flour operations with Monaca, GRUMA has increased its market share in that country's corn flour market to 34% from 11% prior to the acquisition. The purchase of Monaca also gives GRUMA a 23% share in Venezuela's wheat flour market. In the United States, Gruma Corporation invested a total of Ps 1.22 billion in, among others, the following: the acquisition of three tortilla plants in Texas and one in North Carolina; construction of a new tortilla plant in Seattle, Washington, which began operations in September 1999; and the expansion of the tortilla plants located in Houston and Dallas, Texas. Gruma Corporation also continued expanding its corn flour mill located in Plainview, Texas, which is expected to begin operations in 2000. It has also begun construction of tortilla plants in North Carolina and England; the North Carolina plant began operations in the first quarter of 2000, and the England plant is expected to begin operating in the third quarter. During 1999, GIMSA invested Ps 131 million in fixed assets. GIMSA focused its investments on upgrading its corn flour production processes and acquiring computer and transportation equipment. Gruma Centro América invested Ps 265 million in capacity expansion for the corn flour plant in Honduras, which began operations at the end of 1999. The company also continued with its frozen bread project, expected to be operational by mid-2000. Molinera de México invested Ps 172 million in order to complete the acquisition of three plants located in the northwest region, which, in the aggregate, will add annual installed capacity of about 76,000 metric tons. Additionally, the company acquired the working capital (inventories and accounts receivable) of La Asunción, a wheat flour mill located in Puebla. La Asuncion represents additional annual installed capacity of approximately 225,000 metric tons. Molinera completed the acquisition of La Asunción in January 2000. Total investment for this acquisition was US$48 million. Prodisa, the packaged tortilla and bread business, invested Ps 330 million mostly in the expansion of the bread plant and in the corn chip and wheat flour tortilla units of the Monterrey plant. (1) GRUMA's Venezuela operations -Monaca and Demaseca- are refered to herein as GRUMA Venezuela. (2) Other subsidiaries include Prodisa, the Technology Division, Corporate Services, and other foreign subsidiaries, which, beginning in the fourth quarter of 1999, were reported under Gruma Corporation. These foreign subsidiaries include the tortilla operations in Europe, the Mexican sweet bread subsidiary in Los Angeles, and the tortilla distribution operations in South Florida.
GRUMA, S.A. DE C.V. AND SUBSIDIARIES Millions of Mexican pesos in constant terms as of December 31, 1999
(1) Working capital is defined as accounts receivable, net, plus inventories minus trade accounts payable (2) Depreciation and amortization affecting operating income (3) EBITDA is defined as operating income plus depreciation and amortization n.a. not assessable |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||