Industrias Unidas, S.A. de C.V. Consolidated Results of Operations for Q4 2018

Industrias Unidas, S.A. de C.V. (IUSA or the Company) has announced its audited results for the twelve months ended December 31 of 2018. Figures are audited and have been prepared in accordance with Mexican Financial Reporting Standards (MFRS), which are different in certain respects from Generally Accepted Accounting Principles in the United States (U.S. GAAP). The results from any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. Unless stated otherwise, reference herein to Pesos, pesos, or Ps. are to pesos, the legal currency of Mexico and references to U.S. dollars, dollars, U.S. $ or $ are to United States dollars, the legal currency of the United States of America. Except as otherwise indicated, all peso amounts are presented herein in pesos with purchasing power as of December 31, 2018 and in pesos with their historical value for other dates cited. The dollar translations provided in this document are calculated solely for the convenience of the reader using an exchange rate of Ps. 19.66 per U.S. dollar, the exchange rate published by Banco de Mexico, the countrys central bank, on December 31, 2018.

Twelve months ended December 31, 2018 compared to twelve months ended December 31, 2017.

The following table summarizes our results of operations for the twelve months ended December 31, 2018 and 2017:

  (Figures in Millions of Pesos)
For the twelve months ended December 31,

2017

 

2018

Revenues 18,577.7 19,394.1
Cost of Sales 15,814.1 17,127.6
Gross Profit 2,763.6 2,266.5
Selling and Administrative Expenses 1,373.4 1,444.5
Operating Income (Loss) 1,390.2 822.0
Other Expenses – Net (98.4) (99.4)
Comprehensive Financing Result (401.6) (670.2)
Taxes and Statutory Employee Profit Sharing (394.5) 40.6
Equity in Income (Loss) of Associated Companies 36.5 36.4
Consolidated Net Income (Loss) 1,321.2 48.2
D&A 486.1 490.3
EBITDA 1/ 1,876.3 1,312.3

1/ EBITDA for any period is defined as consolidated net income (loss) excluding i) depreciation and amortization, ii) total net comprehensive financing result (which is comprised of net interest expense, exchange gain or loss, monetary position gain or loss and other Financing costs), iii) other expenses net, iv) income tax and statutory employee profit sharing and v) equity in income (loss) of associated companies. EBITDA should not be considered as an alternate measure of net income or operating income, as determined on a consolidated basis using amounts derived from statements of operations prepared in accordance with MFRS, or as an indicator of operating performance or to cash flows from operating activity as a measure of liquidity. EBITDA is not a recognized term under MFRS or U.S. GAAP and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activity as a measure of liquidity.

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Our consolidated net income for the twelve months ended December 31, 2018 was Ps.48.2 million (US$2.5 million), compared to a net income of Ps.1,321.2 million in the same period of 2017. This change is primarily due to a less tax benefit, a cost in the comprehensive financing result due to exchange rate variations and a decrease in our operating income, driven for a lower margin in our sales.

Revenues

Our net revenues for the twelve months of 2018 increased 4.4% to Ps.19,394.1 million (US$986.2 million) from Ps.18,577.7 million in the same period of 2017. This increase was the result of increase our mix of products, driven by market conditions, and the increase of Comex copper prices which were passed into the final selling price of our copper products.

Our costs and revenues follow copper prices very closely since the market practice is to pass on to the buyer changes in raw material price.

Our sales are primarily to customers engaged in the commercial, industrial and residential construction, and their related maintenance and renovation activities. We also sell to customers engaged in electrical power generation, transmission and distribution and to the sector of gas, water and air conduction in the Heating, Ventilation, Air conditioning and Refrigeration (HVACR).

Our revenues consist mainly of sales of copper-based products (tubing, wire, cable and alloys) and electrical products.

By country of production, approximately 60.9% of our revenues in the twelve months ended December 31, 2018 came from products manufactured in Mexico and the remaining 39.1% from products manufactured in the U.S.

In terms of sales by region during the twelve months ended December 31, 2018 we derived approximately 44.6% of our revenues from sales to customers in the United States, 53.1% from customers in Mexico and 2.3% from the rest of the world (ROW).

In terms of volume, consolidated sales of copper products during the twelve months ended December 31, 2018 increased by 4.0% as compared to the same period in 2017:

  (Metric tons)
For the twelve months ended December 31,
Copper Products Volume Sales 2/

2017

 

2018

USA 52,878 53,201
Mxico 29,633 32,197
ROW 1,684 2,153
Total 84,196 87,551
2/ Includes aluminum wire and cable

Cost of sales

Our cost of sales in the first twelve months ended December 31, 2018 increased by 8.3% to Ps.17,127.6 million (US$871.0 million) from Ps.15,814.1 million in the same period of 2017. As percentage of revenues, cost of sales was 88.3% and 85.1% respectively.

We do continue to reduce our cost base through several initiatives, including plant scheduling, raw material handling, and overall manufacturing overhead costs. According to our accounting policies, we make an inventory valuation at average purchase price. In the case of copper cathodes, an aftermath adjustment is required due to the quotation period agreed with the suppliers (M+1). This initiative allows us to hedge purchases for 30 days at no additional cost. The adjustment is recorded to the cost of sales in the month in which it occurs.

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Gross Profit

Our gross profit in the twelve months ended December 31, 2018 decreased 18.0% to Ps.2,266.5 million (US$115.3 million) from Ps.2,763.6 million in the same period of 2017. As percentage of sales, gross profit in 2018 was 11.7% vs 14.9% in 2017.

Selling and Administrative Expenses

Our selling and administrative expenses in the twelve months ended December 31, 2018 increased 5.2% to Ps1,444.5 million from Ps.1,373.4 in the same period of 2017.

Operating Income

Our operating income in the twelve months ended December 31, 2018 decreased to Ps.822.0 million (U.S. $ 41.8 million) from Ps.1,390.2 in the same period of 2017.

EBITDA

In the twelve months ended December 31, 2018 our EBITDA decreased to Ps.1,312.3 million (or US$66.7 million), from Ps. 1,876.3 million in the same period of 2017. The corresponding depreciation and amortization figures are Ps.490.3 million for January to December 2018 and Ps.486.1 million for the same period of 2017.

Comprehensive Financing Result

The following table shows our comprehensive financing result for the twelve months ended December 31, 2017 and 2018:

  (Figures in Millions of Pesos)
For the twelve months ended December 31,

2017

 

2018

Interest Expense (729.0) (691.6)
Interest Income 58.3 60.5
Exchange Gain (Loss) – Net 266.1 (31.7)
Other Financing Costs 3.0 (7.4)
Comprehensive Financing Result (401.6) (670.2)

Our comprehensive financing result in the twelve months ended December 31, 2018 was a cost of Ps.670.2 million, and at the end of December 31, 2017 was a cost of Ps.401.6 million as well. This increase was explained mainly by the trend of the Mexican peso against the US dollar. The exchange rate at the end of 2018 was $19.665 and at the end of December of 2017 was $19.660 this variation of $0.005 pesos by US dollar, caused us a little exchange loss in 2018. In the other hand, we have an exchange gain in 2017 because of the appreciation of the Mexican peso against the US dollar, the variation was a benefit of $0.98 pesos by one US dollar. The exchange rate at the end of 2016 was $20.64

Taxes and Statutory Employee Profit Sharing

The provision for current and deferred income taxes and statutory employee profit sharing in the twelve months ended December 31, 2018 was a cost of Ps.40.6 million compared to a benefit of Ps.394.5 million in the same period of 2017.

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Consolidated Net Income

Our consolidated net income for the twelve months ended December 31, 2018 was Ps.48.2 million (US$2.5 million), compared to a net income of Ps.1,321.2 million in the same period of 2017.

Liquidity and Capital Resources

Liquidity

As of December 31, 2018, we had cash and cash equivalents for Ps.121.6 million (U.S. $6.2 million). Our policy is to invest available cash in short-term instruments issued by Mexican and U.S. banks as well as in securities issued by the governments of Mexico and the U.S.

Our cash flow from operations and operating margins are significantly influenced by world market prices for raw copper, as quoted by COMEX and the London Metal Exchange (LME). Copper prices are subject to significant market fluctuations; average copper prices increased 4.3% in the twelve months ended December 31, 2018 to $2.93 US dollar per pound from $2.80 US dollar per pound in the same period of 2017.

We obtain short-term financing from various sources, including Mexican and international banks. Short-term financing consists in part of lines of credit denominated in pesos and dollars. As of December 31, 2018, our outstanding short-term debt, including the current portion of long-term debt totaled Ps.1,969.9 million (U.S. $100.2 million), all of which was dollar denominated.

On the same date, our outstanding consolidated long-term debt, excluding current portion thereof, totaled Ps.4,551.9 million (U.S.$231.5 million), all of which was dollar denominated.

Accounts receivable from third parties as of December 31, 2018 were Ps.3,566.1 million (U.S.$181.3 million). Days outstanding in the domestic market were 34 days as of December 31, 2018.

Debt Obligations

The following table summarizes our debt as of December 31, 2018:

Consolidated debt   December 31, 2018
(In Millions of Pesos)
U.S. subsidiaries debt 1,194.7
Mexican debt 5,327.2
Total 6,521.9

This total includes the restructured debt of the Company.

Capital Expenditures

For the twelve months ended December 31, 2018, we invested Ps. 186.2 million (U.S. $ 9.5 million) in capital expenditure projects, mainly related to expansion of production and maintenance.

In the twelve months ended December 31, 2018 our capital expenditures were allocated by segments as follows: 45.3% to copper tubing, 5.8% to wire and cable, 12.8% to valves and controls, 6.5% to electrical products and the remaining 29.6% to other divisions. By geographic region 56.7% of total capital expenditures were invested in our Mexican facilities and the remaining 43.3% in the U.S.

You should read this document in conjunction with the audited consolidated financial statements as of December 31, 2018, including the notes to those statements.

Francisco Rodriguez
[email protected]
Tel
(5255) 5216 4028