Gruma: reports fourth quarter 2012 results

Monterrey / MX. (gr) During Q4/2012, sales volume and financial results of Gruma S.A.B. de C.V. reflected a particular situation related to production down times arising from labor issues at its operations in Venezuela. However, the remaining subsidiaries, including Gruma Corporation and Gimsa, showed improvements on a sequential and year over year basis. Those labor issues have resolved positively and January 2013 sales volume and financial results have shown a significant recovery. Following are the highlights of the consolidated results for the quarter:

• Sales volume declined five percent, driven mainly by Gruma Venezuela.
• Net sales were two percent lower due to the decline in Gruma Venezuela sales volume and the effect of the peso appreciation impacting Gruma Corporation figures when converted to peso terms. Higher prices at Gimsa partially offset these declines.
• Operating income and Ebitda decreased 28 percent and 23 percent, respectively, driven mainly by Gruma Venezuela.
• Majority net income fell 64 percent, resulting principally from the situation in Venezuela and comprehensive financing cost in contrast to a gain in Q4/2011.
• Debt increased by 502 million USD to 1’550 million USD from September 2012 mostly in connection with the acquisition of ADM´s stakes in Gruma and certain of its subsidiaries, previously announced.

Consolidated Results of Operations Q4/2012 versus Q4/2011

• Sales volume declined five percent to 1’206 thousand metric tons due mostly by the aforementioned labor issues at Gruma Venezuela and, to a lesser extent, by Gimsa.
• Net sales were 16’398 million MXN, two percent lower, due to Gruma Venezuela and the effect of the peso appreciation impacting Gruma Corporation figures when converted to peso terms. Higher prices at Gimsa partially offset these declines. Sales from non-Mexican operations constituted 64 percent of consolidated net sales.
• Cost of sales as a percentage of net sales increased to 70,8 percent from 69,2 percent, primarily in connection with Gruma Venezuela and, to a lesser extent, Gruma Corporation. In absolute terms, cost of sales was flat at 11’616 million MXN.
• Selling, general and administrative expenses (SG+A) as a percentage of net sales increased to 23,8 percent from 23,0 percent, driven mainly by Gruma Venezuela. Also, there were one time severance payments and other expenses for approximately 46 million MXN. In absolute terms, SG+A increased one percent, to 3’896 million MXN.
• Other expense, net, decreased 61 percent to 65 million MXN primarily due to lower impairment of long-lived assets and lower losses from the sale of fixed assets.
• Operating income decreased 28 percent, to 821 million MXN due to Gruma Venezuela. Operating margin declined to 5,0 percent from 6,8 percent.
• Net comprehensive financing cost was 231 million MXN versus an income of 99 million MXN. The 330 million MXN change was mainly because in Q4/2011 the company had gains on foreign-exchange-rate hedging related to corn procurement as well as gains on raw-material hedging, which in 2012 were reclassified to other expenses, net; also the company registered foreign exchange losses of 128 million MXN in Q4/2012 resulting from higher Dollar denominated debt as opposed to a 47 million MXN gain in Q4/2011.
• Income taxes totalled 115 million MXN, four percent lower. During Q4/2012 there were favourable accounting adjustments on tax provisions. The effective tax rate was 19,5 percent.
• Majority net income decreased by 591 million MXN to 327 million MXN, driven by lower operating profits mainly at Gruma Venezuela and higher comprehensive financing cost.

Financial Position

Total assets were 49’460 million MXN, an increase of three percent driven mainly by higher inventories related to grain procurement at most subsidiaries. To a lesser extent, the increase in total assets was also driven by higher property, plant and equipment, especially at Gruma Corporation.

Total liabilities were 35’127 million MXN, 22 percent more derived from higher debt in connection with the previously announced acquisition of ADM´s stakes in Gruma and certain of its subsidiaries during December 2012.

Shareholders´ equity totalled 14’334 million MXN, 25 percent less due to the aforementioned transaction with ADM as most of the shares repurchased were subsequently cancelled.

Gruma´s debt totalled 1’550 million USD, of which approximately 81 percent was Dollar denominated.

Relevant Events

At the most recent meeting of Gruma´s Board of Directors, the following appointments were approved:

• Mr. Juan González Moreno, current Chairman of the Board of Directors, as Gruma´s Chief Executive Officer. Mr. Joel Suárez Aldana, former Chief Executive Officer of the company, resigned for personal reasons.
• The creation of Gruma´s Executive Committee to strengthen the link between the Board of Directors and the company´s management and the decision making process; members of this committee are Mr. Juan González Moreno, Gruma´s Chairman of the Board of Directors and Chief Executive Officer; Mr. Carlos Hank González, Gruma´s Vice Chairman of the Board of Directors and Chief Executive Officer of Grupo Financiero Interacciones and Grupo Hermes; Mr. Eduardo Livas Cantú and Mr. Javier Vélez Bautista. The latter two members were Gruma´s Chief Executive Officer and Chief Financial Officer, respectively, as well as Board of Directors members in prior years.

At the same meeting, several initiatives were also approved to enhance the company´s value creation by consolidating its growth in recent years. These initiatives strongly emphasize the company´s top priority of improving profitability and cash flow generation and strengthening its financial structure by reducing debt, which will be the basis towards resuming more aggressive and profitable growth in the future. Some of the initiatives being implemented are:

• Focus on core businesses and analysis of potential reductions in the business portfolio.
• Rationalization of administrative expenses by optimizing shared services and administrative structures at corporate and operational levels.
• Rationalization of marketing expenses, especially advertising, through highly targeted campaigns.
• Reduction in allowances programs by focusing on effectiveness and targeted products, especially at Gruma Corporation.
• Reduction in capital expenditures based on:
  • Postponing entry into new regions
  • Leveraging available installed capacity in regions where we have presence
  • Stricter profitability criteria for each investment

We expect to see benefits from these initiatives as soon as 1Q13 with increases throughout the year, allowing the company to improve results and reduce debt.
Separately, Gruma will shortly submit a proposal for approval by Gruma´s shareholders´ meeting to cancel the shares repurchased from ADM last December.

Subsidiary Results of Operations – Gruma Corporation

Sales volume rose one percent to 405 thousand metric tons despite having one less week of operations versus Q4/2011.

Net sales declined 0,5 percent to 6’735 million MXN, driven by the change in the sales mix towards corn grits in Europe.

Cost of sales as a percentage of net sales increased to 65,5 percent from 64,2 percent due to temporary price discounts at the U.S. tortilla business as well as a change in the sales mix towards foodservice products, which have lower gross margins. In absolute terms, cost of sales increased two percent to 4’412 million MXN, mainly reflecting the growth in sales volume and higher health insurance costs during the quarter.

SG+A as a percentage of net sales improved to 28,9 percent from 29,4 percent. In absolute terms, SG+A decreased two percent to 1’948 million MXN due to lower advertising and marketing expenses at the corn flour business, as well as lower freight expenses in the tortilla business reflecting ongoing efforts to manage transportation costs via improved routing, better cubing (utilization of space in the trucks) and assessing the transportation services´ provider to ensure maximum value for the company.

Operating income rose 19 percent to 425 million MXN and operating margin improved to 6,3 percent from 5,3 percent, driven mainly by a favourable comparison of 127 million MXN in other expenses as during Q4/2011 the company generated losses from asset disposals.

Subsidiary Results of Operations – Gimsa

Sales volume decreased four percent, to 509 thousand metric tons, versus Q4/2011 when customers built up their corn flour inventories prior to the effective price increase, whereas in December 2012 the price increase was effective immediately. Also, there were sales volume reductions at government channels in connection with price increases.

Net sales increased eight percent to 4’564 million MXN, resulting from price increases implemented throughout the year.

Cost of sales as a percentage of net sales increased to 74,6 percent from 74,3 percent. Gross profit per ton was higher than last year; however, the mathematical effect of having a larger base of sales led to the decrease in gross margin. In absolute terms, cost of sales increased eight percent to 3’407 million MXN in connection with higher cost of corn and costs related to corn procurement.

SG+A as a percentage of net sales increased to 13,5 percent from 13,1 percent and in absolute terms, SG+A grew eleven percent to 616 million MXN, mainly as a result of higher promotion and advertising expenses related mostly to sponsorship of the Mexican Football Federation and the continued strengthening of several programs aimed at attracting traditional tortilla makers.

Operating income declined one percent to 512 million MXN and, as a percentage of net sales, fell to 11,2 percent from 12,2 percent reflecting principally the aforementioned higher SG+A.

Subsidiary Results of Operations – Gruma Venezuela

Sales volume fell 31 percent to 91 thousand metric tons, due mainly to production downtimes at certain plants related to labor conflicts (in connection with the negotiation of collective bargaining agreements) and, to a lesser extent, electrical power outages. The conflicts have been mostly resolved; the plants are already operating at normalized levels.

Net sales declined 15 percent to 2’430 million MXN, due to the aforementioned sales volume reduction.

Cost of sales as a percentage of net sales increased to 82,5 percent from 70,5 percent, as a result of the aforementioned sales volume reduction and higher raw material costs, which were not absorbed through price increases until the end of Q4/2012. In absolute terms, cost of sales was flat as sales volume declined and raw material costs and salaries increased.

SG+A as a percentage of net sales increased to 22,3 percent from 17,2 percent in connection with lower expense absorption and higher SG+A, which rose eleven percent in absolute terms due primarily to salary increases.

Operating income as a percentage of net sales fell to negative 4,9 percent from positive 12,3 percent and, in absolute terms, decreased 134 percent to an operating loss of 118 million MXN resulting principally from the aforementioned sales volume reduction and higher costs and SG+A.

Subsidiary Results of Operations – Molinera de México

Sales volume decreased one percent to 155 thousand metric tons, due to price increases.

Net sales grew eight percent, to 1’431 million MXN, as a result of wheat flour price increases implemented during 3Q12 to offset higher wheat costs and also higher byproduct prices in connection with shortage in the market.

Cost of sales as a percentage of net sales improved to 81,3 percent from 87,5 percent, due mainly to the aforementioned price increases which more than offset the higher wheat costs. In absolute terms, cost of sales was flat despite the sales volume reduction due mainly to the increase in wheat costs.

SG+A as a percentage of net sales improved to 11,3 percent from 11,9 percent due to better expense absorption. In absolute terms, SG+A rose three percent due mainly to salary increases and severance payments.

Operating income surged 867 percent to 74 million MXN and operating margin improved to 5,2 percent from 0,6 percent because price increases more than offset the rise in wheat cost.

Subsidiary Results of Operations – Gruma Centroamérica

Sales volume declined six percent to 52 thousand metric tons due to price increases in corn flour implemented by Gruma in a very competitive environment resulting from the availability of domestic cheap corn, which motivated some customers to shift to the traditional method of tortilla production. This availability rose significantly during 2012 in connection with the increasing popularity of genetically modified corn.

Net sales decreased two percent to 877 million MXN, resulting from the aforementioned decline in sales volume, which was mostly offset by price increases implemented in April 2012 to offset higher raw material costs.

Cost of sales as a percentage of net sales improved to 68,4 percent from 72,6 percent, due to (1) price increases, which more than offset higher raw material costs, (2) lower energy costs in connection with changes to lower-priced fuels and (3) production efficiencies. In absolute terms, cost of sales dropped seven percent due mainly to the aforementioned decline in sales volume.

SG+A as a percentage of net sales rose to 27,6 percent from 27,1 percent due principally to lower expense absorption. In absolute terms, SG+A was flat as reductions in promotion and advertising offset higher selling commissions.

Operating income was 35 million MXN versus two million MXN, achieving an operating margin of 3,9 percent compared to 0,3 percent, resulting mainly from the aforementioned improvements in cost of sales.

Other Subsidiaries and Eliminations: Operating loss was 107 million MXN, of which 90 million MXN related to the exit of part of the tortilla operations in Mexico and severance payments in connection with layoffs at corporate areas.