The following report should be read in conjunction with the letter to the Stockholders (pages 13 – 15) and the Audited Financial Statements (pages 41 – 105). Unless otherwise indicated, the figures from 2012 to 2014 are stated in millions of nominal Mexican pesos (Ps.) Percentage fluctuations are stated in nominal terms. In addition, some figures are stated in millions of dollars from the United States (US dollar or US$) and millions of Euros (€).
The financial information contained in this Management’s Analysis corresponds to the last three years (2012, 2013 and 2014), and has been adjusted to the International Financial Reporting Standards (IFRS). Furthermore, some sections of this information have been expanded in order to include three years and adjust it to the General Regulations, applicable to the Issuers and other Securities Market Participants, issued by the National Banking and Securities Commission (CNBV by its Spanish acronym) up to September 24, 2014.
San Pedro Garza García, N. L., March 17, 2015.
During 2014, the global economy experienced a divergence in the regional growth rates. The economy of the United States grew at a robust pace of 2.4%, while that of the Eurozone barely reached 0.9%, and that of Japan stalled with 0.1%. Given these growth rate differences, their corresponding monetary authorities implemented opposing policies, causing a strong appreciation of the U.S. Dollar against other major currencies, such as the Euro and the Japanese Yen.
Meanwhile, in emerging economies the growth decelerated. In China, the growth was one of the lowest in two decades, reaching 7.4%; and in Mexico, the growth was below trend, at 2.1%.
Finally, the oversupply of oil production led to a pronounced fall of more than 50% in its prices during the second half of the year. This event boosted growth in oil-importing countries and hindered that of oil-exporting countries.
The economic indicators of Mexico relevant to understand ALFAs results, are described below:
The GDP growth of Mexico was 2.1% in 2014, slightly higher than that of 2013. The consumer inflation was 4.0% (b) in 2014, higher than the 3.8% (b) average 2013. The Mexican Peso experienced a nominal depreciation of 12.5% (c) in 2014, higher than the 0.5% (c) depreciation of 2013. In real terms, the annual average overvaluation of the Mexican peso vis-á-vis the US dollar amounted to 15.6% (d) in 2014 and 15.5% (d) in 2013.
The 28-day TIIE nominal interest rate for Mexican pesos averaged 3.5% (b) in 2014, below the 4.3% average of 2013. In real terms, the interest rates were negative, averaging 0.4% in 2013 to -0.5% in 2014.
The nominal 3-month Libor for U.S. Dollars averaged a historic low 0.2% (b) in 2014, slightly lower than the 0.3% (b) average of 2013. Taking into account the nominal depreciation of the Mexican peso and its inflation, the real rate of the 3-month Libor was 8.4% (a) in 2014, higher than the negative rate of -3.1% (a) in 2013.
(a) National Institute of Statistics and Geography (INEGI).
(b) The Bank of Mexico (Banxico).
(c) Banxico. Exchange rate to liquidate liabilities denominated in foreign currency and payable in Mexico.
(d) Own calculations with data from INEGI, bilateral with the United States, adjusting for consumer prices.
ALFA CONTINUES TO GROW
During 2014, ALFA made investments in organic growth and acquisitions in order to enter into new geographies, expand its production capacity and add value to its products. This is how ALFA successfully faced a volatile and pressure-filled environment relative to margins in some of its main businesses.
The following table shows ALFA’s revenues for the years 2014, 2013 and 2012 breaking down by volume and price components (indexes are calculated on a 2009=100 base):
|Concept||2014||2013||2012||Var. 2014-2013 (%)||Var. 2013-2012 (%)|
|Price index in Mexican pesos||116.9||112.0||113.4||4||(1)|
|Price index in US dollars||123.1||123.0||120.7||0||2|
The consolidated revenues broken down by ALFA’s business groups are as follows:
|Concept||2014||2013||2012||Var. 2014-2013 (%)||Var. 2013-2012 (%)|
The revenues behavior is explained as follows:
Consolidated revenues in 2014 amounted to Ps229,226 (US$17,224), 12.7% higher than in 2013 (8.5% in US dollars). Following is an explanation of the performance of each of ALFA’s business groups:
Alpek’s sales in US dollars during 2014 were 8% lower than in 2013, due to an excess of capacity in Asia and the raw materials price volatility. The plastic and chemicals business showed a favorable performance, except for caprolactam, which continued to be affected by the excess capacity in China. However, the Company’s financial performance allowed it to continue implementing projects seeking to reduce costs, as well as improve the efficiency and integration of its operations.
In 2014, Sigma sold 1.4 million tons of food, 21% more than in 2013. Revenues were increased to US$5,359, 40% more than in 2013 supported by the consolidation of Campofrío beginning on July 2014. On the other hand, the Mexican consumer market showed weakness and the prices of raw materials experienced strong increases. The Company faced this environment by strengthening its marketing and distribution efforts, launching new products, investing in brand capital, as well as making operations more efficient. The Food service business was strengthened by capitalizing synergies derived from the acquisition of ComNor in 2013.
On the other hand, the sales volume of Nemak grew 4%, adding 49.8 million equivalent pieces. As a result, revenues increased to US$4,645, an increase of 6% compared to 2013. The Company took advantage of the North American automotive industry growth, a slightly better performance in Europe and its new production capacity in Asia. As evidence of the trust it has earned, during the year, Nemak got 60 new contracts, representing future revenues of US$1.7 billion. Five of these are related to the production of structural pieces, new market with a great potential.
In Alestra, revenues added up to US$415, 5% more than in 2013. The increase was due to a growth in revenues from added value services (AVS), mainly those related to IT security, integration of systems and cloud services, among others. The SVA represented 85% of the Company’s total revenues.
Finally in 2014, Newpek connected 122 new Wells to sales in the Eagle Ford Shale to add up to 497 producing Wells in such formation. In the Wilcox formation, nine exploratory wells were drilled and completed in the year. In Oklahoma, Newpek operates 29 additional wells. Overall, the production of all these formations amounted to 8.2 thousand average equivalent oil barrels per day, 21% more than in 2013. Sales amounted to US$170, 28% more than in 2013.
Consolidated revenues in 2013 amounted to Ps203,456 (US$15,870), 2% higher than 2012 (5% in US dollars). Following is an explanation of the performance of each of ALFA’s companies:
Alpek’s sales in US dollars during 2013 were 3% lower than in 2012. An environment of lower prices and margins in the polyester and caprolactam global markets translated into a reduction in the sales volume. However, the Company continued to implement the projects that will improve the efficiency and the integration of its operations.
In 2013, Sigma sold 1.2 million tons of food, 4% higher than in 2012. The revenues increased to US$3,820, 11% higher than in 2012. These increases reflect higher sales in cold meats and dairy in Mexico, in addition to improvements in productivity and its distribution network.
The sales volume of Nemak increased 11%, for a total of 47.6 million equivalent pieces. As a result, revenues increased to US$4,391, a 13% progress compared to 2012. In North America, car sales grew 8%, for a total of 15.6 million vehicles. A repressed demand and the availability of consumer credit were the main drivers of this increase. In Europe, the market decreased by 2%, however, the greater concentration of Nemak with German assemblers, who have been successful in finding export opportunities outside of the Eurozone resulted in an increase of the sales volume of 3% for the Company.
Furthermore, the use of aluminum auto parts to replace iron parts continues to increase, favoring the Company.
Alestra continued to promote added value services, such as cloud applications, security and managed networks, as well as data services, local and Internet services for the business segment, which contributed 84% of the Company’s revenues in 2013. Revenues amounted to a total of US$395, 13% more than in 2012.
Finally, Newpek connected 125 new wells to sales, for a total of 411. Of these 411 wells, 371 operate in Eagle Ford Shale and 40 in Edwards Trend. The net sales production of equivalent crude barrels amounted to 6,737, 37% more than in 2012. Out of the total volume, 52% were liquids and oil with a value considerably higher than dry gas, with respect to 50% in 2012.
The operating profit of ALFA in 2014, 2013 and 2012 is explained as follows:
|Operating profit||Change by Group|
|Consolidated operating margin (%)||7.5||6.9|
The 22% increase in consolidated operating profit from 2013 to 2014 is explained by the individual performance of the Group’s Companies, as described below:
In the case of Alpek, additionally to the lower margin environment in global markets of polyester and caprolactam, the price fall in crude oil put even more pressure on the margins and resulted in a non-cash charge of US$71 for inventory devaluation. It is important to keep in mind that the operating profit for 2013 was affected by an impairment of fixed assets due to the closing of the Cape Fear plant, amounting to $2,421. In this sense, even though the above explanation, the operating profit of 2014 is higher than of 2013.
In Sigma, the operating profit showed a strong increase mainly due to the consolidation of Campofrío beginning on July 2014. Excluding this effect, the operating profit showed a slight decrease despite the increase in prices of raw materials that had to be compensated through higher sales prices.
In Nemak, the operating profit grew 27% in pesos during the year. This was due to the increase in sales already explained above, as well as to the implementation of actions to reduce costs and increase efficiency.
In 2014, Alestra increased its operating profit by 3%, mainly derived from an increase of added value service revenues and reduced costs. It is important to point out that the operating profit of 2013 was benefited due to an extraordinary revenue amounting to US$21 as a result of a favorable resolution of disputes over interconnection costs from prior years.
The operating profit of Newpek decreased by 46% in 2014 vs 2013, mainly due to an extraordinary charge of $310 for depreciation not included in 2013. Without this charge, revenues would have increased by 47%, since the Company currently has more operating oil and gas wells. The production of liquids, including condensed and oil, represented 62% of the total volume as compared to 52% in 2013. The best production mix also contributed to a better operating profit.
|Operating profit||Change by Group|
|Consolidated operating margin (%)||6.9||8.1|
The 14% decrease in consolidated operating profit from 2012 to 2013 is explained by the individual performance of ALFA’s companies, as explained below:
In Alpek’s case, additionally to the lower margin environment in the global polyester and caprolactam markets, an item of Ps2,421 was charged related to the cost from closing the facilities and reducing fixed assets in Cape Fear, which affected the operating profit.
In Sigma, the increase in sales explained above was evident in an increase in operating profit.
Nemak recorded an operating profit 27% higher than in 2012. This was the result of an increase in sales volume, as well as more efficiency in the use of its assets and obtaining synergies among its 34 plants globally, and the incipient integration of some added value services, such as manufacturing of parts.
In 2013, Alestra continued to strengthen its revenue mix, increasing its margins and strengthening its infrastructure to reduce costs. Additionally, it obtained a favorable legal resolution on fixed interconnection tariffs. This allowed Alestra to increase its operating income by 43% as compared to 2012. It is important to mention that in 2012 the income included the benefit of an agreement in favor of Alestra for fixed-mobile interconnection tariffs.
Newpek’s operating profit increased 22% in 2013 vs. 2012. This was a result of having more operating wells. It is important to mention that the operating profit to sales ratio decreased in 2013 in relation to 2012 due to expenses related to new projects that the Company will start to develop in 2014.
COMPOSITION OF REVENUES AND OPERATING PROFIT
The percentage structure of revenues and operating profit of ALFA experienced changes between 2014 and 2013 mainly due to the decrease in sales and operating profit of Alpek and an increase in the operating profit of Sigma and Nemak, all of which are explained above.
The following table shows these effects:
The exchange loss is explained mainly by the macroeconomic environment during the year. As explained in the beginning, the Mexican peso had an annual nominal depreciation of 12.5% in 2014. Therefore, it was a determining factor of ALFA’s finance cost during 2014. Another significant item was the impairment in fair value of the financial investment available for sale corresponding to the investment in Pacific Rubiales Energy, considered as non-cash.
|Determinants of finance cost||2014||2013|
|General inflation (Dec.- Dec.)||4.1||4.0|
|Variation % in nominal exchange rate at year end||(12.5)||(0.5)|
|Closing exchange rate, nominal||14.72||13.08|
|Real appreciation (depreciation)
Mexican pesos / dollars with respect to the prior year:
|Average of the year||(1.3)||5.1|
|Average interest rate:|
|Nominal implicit, ALFA debt||5.7||5.9|
|LIBOR in real terms||8.4||(3.1)|
|Real implicit, ALFA debt||14.3||2.6|
|Average monthly debt of ALFA in US$||5,737||4,170|
Expressed in US$, the finance cost, net for the years 2014, 2013 and 2012 were US$328, US$295 and US$279, respectively.
|Variation in finance cost, net in US $||14/13||13/12|
|Due to a (higher) lower interest rate||62||(34)|
|Due to a (higher) lower net petty cash debt||(95)||18|
Net financial expenses in profit include premiums paid in operations, such as: refinancing, operating interests, in 2014, 2013 and 2012, besides financial bank expenses.
Measured in pesos, the finance cost, net was integrated as follows:
|Finance Cost, net||2014||2013||2012||14/13||13/12|
|Financial expenses, net||(4,735)||(3,708)||(3,693)||(1,027)||(15)
|Result from exchange fluctuation, net of derivative
financial exchange rate operations.
|Impairment in the fair value of financial investments
available for sale
|Total finance cost, net||(18,621)||(4,057)||(2,731)||(14,564)||(1,326)
The fair value of ALFA’s derivative financial instruments at December 31, 2014 and 2013 is as follows:
(Millions of US dollars)
|Type of derivative, value or contract||Dec. 14||Dec. 13|
|Cross Currency Swaps||(49)||(29)|
Following is an analysis of the principal determinants of income tax in each one of the years in comparison, starting from the concept of taxable income defined as operating profit less finance cost and other expenses, net.
|Profit (loss) before income tax||(1,686)||9,987||13,941||(11,673)||(3,954)
|Share of losses of associates
Recognized by the equity method
|Income tax at statutory rate||419||(3,008)||(4,182)||3,427||1,174
|+ / (-) Tax effect of permanent tax-accounting differences:
Tax vs. Accounting basis finance cost, net
|Other permanent differences, net||(556)||(139)||241||(417)||(380)|
|Total tax effect of permanent differences||319||199||893||120||(694)|
|Income tax provision based on operations of the year||738||(2,809)||(3,289)||3,547||480|
|Recalculation of back taxes and other||(181)||(383)||(101)||202||(282)|
|Total income tax provision (charged) credited to income||557||(3,192)||(3,390)||3,749||198|
|Effective tax rate||39%||32%||25%|
|Income tax :|
|Total income tax provision charged to income||557||(3,192)||(3,390)||3,749||198|
During the year, ALFA generated a net consolidated loss, as broken down in the table below, and it is the result of the before explained with regard to the operating profit, finance cost, net and taxes:
|Statement of income||2014||2013||2012||14/13||13/12|
|Finance cost, net (1)||(18,621)||(4,057)||(2,731)||(14,564)||(1,326)
|Equity in losses of associates||(291)||(41)||(250)||(41)
|Net consolidated income (loss)||(1,129)||6,795||10,551||(7,924)||(3,756)
|Net income (loss) of the controlling interest||(2,037)||5,926||9,361||(7,963)||(3,435)
(1) Comprehensive financing result
(2) Income tax (payable and deferred)
Comprehensive income is shown in the statement of changes in stockholders’ equity and its objective is to show the total effect of all transactions and events which affected earned surplus, regardless of whether these were recorded in the statement of income, or directly in the capital account. Operations between the Company and its shareholders are excluded, mainly dividends paid. Comprehensive income in 2014, 2013 and 2012 was as follows:
|Effects of translation of foreign entities||3,679||456||(2,887)
|Effects of derivative financial instruments||(744)||234||87|
|Remeasurement of obligations for employees’ benefits||(238)||734||(306)
|Consolidated comprehensive income||1,568||8,219||7,445
|Owners of the controlling company||(315)||7,740||6,332|
|Comprehensive income for the year||1,568||8,219||7,445|
A previous section of this report explains the net profit obtained in 2014, 2013 and 2012. The translation effect of subsidiaries abroad, which shows the effect from using different exchange rates between asset and liability accounts, against income and capital accounts, experienced an important change due to the volatility of the exchange rates of the currencies of different countries where ALFA has presence.
Durante el presente ejercicio tuvo un movimiento importante debido a la volatilidad de los tipos de cambio de las monedas de distintos países donde ALFA tiene presencia.
The effect in capital of derivative instruments represents the effect for energy by-products that, in accordance with International Financial Reporting Standards, is shown in stockholders’ equity. The effect of remeasurement of obligations for employees’ benefits is the gain(loss) in actuarial estimates.
DIVIDENDS DECLARED AND INCREASE IN STOCKHOLDERS’ EQUITY
INVESTMENT IN DAYS NWC(1)
In 2014, the sales to NWC ratio at a consolidated level decreased, which resulted in consolidated NWC days to decrease, from 26 in 2013 to 20 in 2014.
|Days in NWC||2014||2013||2012|
(1) Net working capital
Property, plant and equipment
The total investments by group were as follows:
|% Change||Last 5 years|
The acquisition process by Sigma of 58% of the shares of Campofrío concluded in 2014. In Ecuador, Sigma acquired Fábrica Juris, company engaged in the processing of cold meats in such country, expanding its presence in South America. On the other hand, Alpek acquired CabelmaPET in Argentina, company engaged in recycling PET.
Based on the cash flows generated by operations, the following table shows the main transactions in 2014.
|Cash flows provided by operations||23,953||19,758
|Property, plant and equipment and others||(14,430)||(12,198)
|Acquisition of financial assets available for sale||(14,135)
|Increase in Bank Financing||15,677||4,918
|Dividends paid by ALFA SAB||(3,510)
|Dividends paid to the non-controlling interest||(183)||(1,612)
|Repurchase of shares||(258)||(99)
|Net Interest Paid||(4,490)||(3,631)
|Increase (decrease) in cash||4,074||(1,809)
|Adjustment in cash flows from changes in exchange rates||693||50|
|Cash, cash equivalents and restricted cash at beginning of year||11,902||13,661
|Total cash at end of year||16,669||11,902
The principal changes in the net debt of ALFA and its groups were as follows:
|Changes in net cash debt US$||Consolidated||Alpek||Sigma||Nemak||Alestra||Newpek||Other|
|Balance at December 31, 2013||3,473||766||1,319||1,140||175||83||(10)|
|Long-term financing, net of payments:|
|Short term financing, net of payments||207||(23)||(47)||173||40||-||64|
|Total financing, net of payments||1,208||(33)||28||111||26||19||1,057|
|Debt variation in the statement of cash flows||883||(26)||(251)||60||24||18||1,057|
|Debt from acquired companies and others||981||3||971||0||5||0||2|
|Total debt variation||1,864||(23)||720||60||29||18||1,059|
|Decrease (increase) in cash and restricted cash||(230)||(28)||(185)||71||14||(3)||(99)|
|Change in interest payable||16||0||8||(1)||(8)||0||17|
|Increase (decrease) in debt net of cash||1,650||(51)||543||130||35||15||978|
|Balance at December 31, 2014||5,123||715||1,862||1,270||210||98||968|
|Short and long term debt by group||2014||2013||2014||2013||2014||2013||2014||2013||2014||2013|
|Debt balance (US$)||1,094||1,118||2,189||1,465||1,352||1,293||260||230||1,361||273|
|Debt balance percentage|
|Long-term 1 year||0||2||2||15||8||6||1||87||0||18|
|Long-term 5 years or more||90||85||12||77||37||58||65||0||59||2|
|Average life, long-term debt (years)||7.3||8.1||2.8||4.5||5.5||6.0||6.1||2.5||10.4||2.1|
|Average life, total debt (years)||7.2||7.7||2.8||3.7||4.3||5.5||5.3||0.8||8.7||1.2|
|Consolidated short and long term debt:||US$||% of total|
|Long-term 1 year||147||561||(414)||2||13|
|Long-term 5 years or more||2,915||2,826||89||47||64|
|Average term of, long-term debt (years)||7.3||5.9|
|Average term of, total debt (years)||6.6||4.9|
Debt net of cash / Cash flow (in US dollars, last 12 months)
|Interest coverage (in US dollars) *||Change||Due to|
* Defined as operating profit plus depreciation and amortization, divided by net financial expense.
ALFA’s financial structure indicators improved during 2014, as observed in the table below:
|Total liabilities / Stockholders’ equity||2.36||1.54|
|Long-term debt / Total debt (%)||89||82|
|Total currency debt / Total debt (%)||94||88|