Industrias Unidas, S.A. de C.V. Consolidated Results of Operations for Q3 2018

Industrias Unidas, S.A. de C.V. (IUSA or the Company) has announced its unaudited results for the first nine months ended September 30 of 2018. Figures are unaudited 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 September 30, 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. 18.72 per U.S. dollar, the exchange rate published by Banco de Mexico, the countrys central bank, on September 28, 2018.

Nine months ended September 30, 2018 compared to nine months ended September 30, 2017.

The following table summarizes our results of operations for the first nine months ended September 30, 2018 and 2017:

  (Figures in Millions of Pesos)
For the first nine months ended September 30,

2017

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2018

Revenues 13,543.5 14,722.4
Cost of Sales 11,173.8   12,969.9  
Gross Profit 2,369.7 1,752.5
Selling and Administrative Expenses 1,325.1   1,073.1  
Operating Income (Loss) 1,044.6 679.4
Other Expenses – Net (91.1 ) (127.3 )
Comprehensive Financing Result 391.0 (135.6 )
Taxes and Statutory Employee Profit Sharing (18.6 ) 4.8
Equity in Income (Loss) of Associated Companies 25.9   26.8  
Consolidated Net Income (Loss) 1,389.0   438.5  
D&A 348.3 358.6
EBITDA 1/ 1,392.9 1,038.0
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.

Our consolidated net income for the first nine months ended September 30, 2018 was Ps.438.5 million (US$23.4 million), compared to a net income of Ps.1,389.0 million in the same period of 2017. This change is primarily due to a negative variation in the comprehensive financial result driven by the variation of the quotation of the Mexican peso against US Dollar.

Revenues

Our net revenues for the first nine months of 2018 increased 8.7% to Ps.14,722.4 million (US$786.6 million) from Ps.13,543.5 million in the same period of 2017. This increase was the result of 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 61.0% of our revenues in the first nine months ended September 30, 2018 came from products manufactured in Mexico and the remaining 39.0% from products manufactured in the U.S.

In terms of sales by region during the first nine months ended September 30, 2018 we derived approximately 44.8% of our revenues from sales to customers in the United States, 53.0% from customers in Mexico and 2.2% from the rest of the world (ROW).

In terms of volume, consolidated sales of copper products during the first nine months ended September 30, 2018 increased by 4.2% as compared to the same period in 2017:

  (Metric tons)
For the first nine months ended September 30,
Copper Products Volume Sales 2/

2017

 

2018

USA 40,900 41,660
Mxico 22,139 23,765
ROW 1,260 1,561
Total 64,300 66,986
2/ Includes aluminum wire and cable

Cost of sales

Our cost of sales in the first nine months ended September 30, 2018 increased by 16.1% to Ps.12,969.9 million (US$692.9 million) from Ps.11,173.8 million in the same period of 2017. As percentage of revenues, cost of sales was 88.1% and 82.5% 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.

Gross Profit

Our gross profit in the first nine months ended September 30, 2018 decreased 26.0% to Ps.1,752.5 million (US$93.6 million) from Ps.2,369.7 million in the same period of 2017. As percentage of sales, gross profit in 2018 was 11.9% vs 17.5% in 2017.

Selling and Administrative Expenses

Our selling and administrative expenses in the first nine months ended September 30, 2018 decreased 19.0% to Ps.1,073.1 million from Ps.1,325.1 in the same period of 2017.

Operating Income (Loss)

Our operating income in the first nine months ended September 30, 2018 decreased 35.0% to Ps.679.4 million (U.S. $ 36.3 million) from Ps.1,044.6 in the same period of 2017.

EBITDA

In the first nine months ended September 30, 2018 our EBITDA decreased 25.5% to Ps.1,038.0 million (or US$55.5 million), from Ps.1,392.9 million in the same period of 2017. The corresponding depreciation and amortization figures are Ps.358.6 million for January to September 2018 and Ps.348.3 million for the same period of 2017.

Comprehensive Financing Result

The following table shows our comprehensive financing result for the first nine months ended September 30, 2017 and 2018:

  (Figures in Millions of Pesos)
For the first nine months ended September 30,

2017

 

2018

Interest Expense (473.6 ) (464.9 )
Interest Income 34.9 40.2
Exchange Gain (Loss) – Net 833.7 297.1
Other Financing Costs (4.0 ) (8.0 )
Comprehensive Financing Result 391.0   (135.6 )

Our comprehensive financing result in the first nine months ended September 30, 2018 was a cost of Ps.135.6 million compared to a benefit of Ps.391.0 million in the same period of 2017. This was explained mainly by the depreciation of the Mexican peso against the US dollar. The exchange rate at the end of 2017 was $19.66 and at the end of September of 2018 was $18.72

Taxes and Statutory Employee Profit Sharing

The provision for current and deferred income taxes and statutory employee profit sharing in the first nine months ended September 30, 2018 was an expense of Ps.4.8 million compared to a benefit of Ps.18.6 million in the same period of 2017.

Consolidated Net Income (Loss)

Our consolidated net income for the first nine months ended September 30, 2018 was Ps.438.5 million (US$23.4 million), compared to a net income of Ps.1,389.0 million in the same period of 2017.

Liquidity and Capital Resources

Liquidity

As of September 30, 2018, we had cash and cash equivalents for Ps.321.5 million (U.S. $17.2 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 10.3% in the first nine months ended September 30, 2018 to $2.99 US dollar per pound from $2.71 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 September 30, 2018, our outstanding short-term debt, including the current portion of long-term debt totaled Ps.2,221.0 million (U.S. $118.7 million), all of which was dollar-denominated.

On the same date, our outstanding consolidated long-term debt, excluding current portion thereof, totaled Ps.4,587.7 million (U.S.$245.1 million), all of which was dollar-denominated.

Accounts receivable from third parties as of September 30, 2018 were Ps.3,571.7 million (U.S.$190.8 million). Days outstanding in the domestic market were 31 days as of September 30, 2018.

Debt Obligations

The following table summarizes our debt as of September 30, 2018:

Consolidated debt   September 30, 2017
(In Millions of Pesos)
U.S. subsidiaries debt 1,229.9
Mexican debt 5,578.9
Total 6,808.8

This total includes the restructured debt of the Company.

Capital Expenditures

For the first nine months ended September 30, 2018, we invested Ps. 143.5 million (U.S. $ 7.7 million) in capital expenditure projects, mainly related to expansion of production and maintenance.

In the first nine months ended September 30, 2018 our capital expenditures were allocated by segments as follows: 41.2% to copper tubing, 3.2% to wire and cable, 9.2% to valves and controls, 7.8% to electrical products and the remaining 38.7% to other divisions. By geographic region 59.7% of total capital expenditures were invested in our Mexican facilities and the remaining 40.3% in the U.S.

You should read this document in conjunction with the unaudited consolidated financial statements as of September 30, 2018, including the notes to those statements.

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