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Focus
Leadership
Strength
2004 ANNUALREPORT
|| CONTENTSALFA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ALFA’s Groups . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Financial Highlights . . . . . . . . . . . . . . . . . . . . . 4
Letter to Shareholders . . . . . . . . . . . . . . . . . . . 5
The Evolution of ALFA. . . . . . . . . . . . . . . . . . . 10
Focus, Leadership, Strength
Operating Review
Alpek . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Sigma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Versax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Onexa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Hylsamex . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Environmental Report . . . . . . . . . . . . . . . . . . 20
Board of Directors . . . . . . . . . . . . . . . . . . . . . 22
Corporate Governance . . . . . . . . . . . . . . . . . . 24
Executive Committee . . . . . . . . . . . . . . . . . . . 25
Financial Statements . . . . . . . . . . . . . . . . . . . 26
Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
THE COMPANY
ALFA is a Mexican company comprised of five businesses groups:
Alpek (petrochemical products), Sigma (refrigerated foods), Versax
(aluminum auto parts and other businesses), Hylsamex(1) (steel) and
Onexa (telecommunications). || In 2004, the company generated rev-
enues of Ps. 58,809 million (US$ 5,069 million), including foreign
sales of US$ 2,213 million. At year end, assets totaled Ps. 90,412 mil-
lion (US$ 8,026 million). || ALFA has production facilities in Mexico,
the United States, Canada, Germany, Slovakia, Costa Rica, the Do-
minican Republic, El Salvador and the Czech Republic. In addition,
the company exports its products to more than 45 countries. || ALFA
has developed associations and strategic alliances with 19 compa-
nies of Argentina, Brazil, England, France, Germany, Japan, Mexico,
the United States and Venezuela, each leaders in their respective
industries. || ALFA shares are quoted on the Mexican Stock Exchange
(BMV) and on the Latibex market of the Madrid Stock Exchange.
(1) Hylsamex is being spun off. As a result, it is being treated as Discontinued Operations, and its financial results are not fully consolidated into ALFA’s.
Note: In this annual report, monetary figures are expressed in Mexican pesos (Ps.) as of December 2004 and/or U.S. dollars (US$), unless otherwise specified. Conversions were made using the average exchange rate of the month in which the revenues or disbursements were transacted. Comparisons in pesos are in real terms, that is, discounting inflation.
AlfaStrong financial results in 2004 validate
the strategy ALFA has executed in the
past few years, of focusing on business-
es with the greatest potential for growth
and profitability.
The steps the company has taken in recent
years have created a new ALFA, a company
ready to capitalize on opportunities that
each of its key businesses has identified.
|| The business portfolio has been trans-
formed: it is now stronger, more bal-
anced and less subject to volatility from
industry cycles.
|| The key businesses have attained a
solid competitive position in their rel-
evant markets.
|| They have increased their contribution
to consolidated results: in 2004, 67%
of EBITDA was generated by the PTA/
PET, foods and auto parts businesses,
compared to 58% in 2000.
|| The company’s financial condition has
been strengthened: in 2004, interest
coverage was 7.5 times, and debt, net
of cash to EBITDA, was 1.7 times.
|| Financial results in 2004 were the best
in the company’s history.
ALFA has a more international profile now,
with operations in nine countries from
America and Europe.
ALFA will continue developing investment
projects for growth and value creation,
based on the three characteristics that
distinguish each of the company’s busi-
nesses: focus, leadership and strength.
1
COMPANIES PRODUCTS MARKETS MAIN BRANDS JV’s & ALLIANCES
Petrotemex PTA/DMT Polyester, containers •Petrocel DMT Polyester, containers•TEMEX PTA Polyester, containers BP (9%)
DAK Americas •Dak Monomers PTA Polyester•Dak Resins PET Containers Laser+® •Dak Fibers Polyester staple Textiles, carpets Dacron®, Hydrotec®Indelpro Polypropylene Packaging, fibers Profax®, Valtec® Basell (49%)Polioles Expandable polystyrene Construction, packaging, BASF (49%) Glycol, solvents & uretanes insulatingNylon de México Textile nylon Textiles & garments DuPont (49%)Nyltek Textile nylon Textiles & garments DuPont (49%)Polykrón Polyester staple Textiles & carpets Dacron® DuPont (49%)Fielmex Lycra® Textiles Lycra® DuPont (49%)Dupek Nylon 6,6 Textiles Univex Caprolactam & Raw material for nylon DuPont (49%) ammonium sulphate FertilizersTeijin–Akra* Polyester filament Textiles & garments Teijin (75%)
Sigma Alimentos Processed meats Refrigerated food Fud®, San Rafael®, Tangamanga®, Iberomex® Oscar Mayer San Antonio®, Chimex®, Viva®, Galicia®, Zar® Checo®, Vitta®, Sosúa®, Oscar Mayer® Yogurt, desserts and creams Yoplait®, Chen®, La Lupita®, Norteñita®, Chalet® Sodima Internacional Cheese La Villita®, Del Prado®, Bugambilia® Chen Nor-Mex®, Colonos®, Norteño®, Camelia® Prepared meals, beverages El Cazo Mexicano®, Sugerencias del Chef®, Café Olé®, Quick & Fresh®, Chepina Peralta® ConAgra (49%) Solé®, Menú del Sol®, Kid Cuisine®, Banquet®
Nemak Aluminum engine Automotive Nemak® Ford (15%) heads & blocksTerza Carpets & rugs Floor coverings Terza®, Luxor® y Mohawk® Shaw Industries (49%)Colombin Bel Polyurethane foam, Automotive, furnishing, bonding shoes
Alestra* Voice & data transmission Telecommunications AT&T® BBVA-Bancomer Internet AT&T
Galvak Galvanized & painted steel sheet Construction Galvakolor® Insulated panels Industrial Galvaneal® Construction systems Automotive Galvateja® Pipe & angles Galvamet®Hylsa Hot & cold rolled steel Industrial AK Steel Rebar & wire rod, pipe Steel technology HYL® FerrostaalAcerex Steel service center Construction Worthington (49%) Las Encinas Iron ore SteelCons. Minero B. Juárez Peña Colorada Iron ore Steel Sidor* Steel Construction, Industrial Usiminas, Sivensa, Siderar, Tenaris
Alfa’s Groups
ALPEK
SIGMA
VERSAX
ONEXA
HYLSAMEX
PRODUCTION FACILITIES
< United States
< Canada
Mexico >
El Salvador >
Costa Rica >
< Dominican Republic
* Associated company
2
GROUP’S CONTRIBUTION 2004
Alpek 54%
Sigma 24%
Versax 22%
|| REVENUES
Sigma 21%
Versax 24%
|| ASSETS
Sigma 29%
|| EBITDA
Alpek 49%Alpek
55%
Versax 22%
COMPANIES PRODUCTS MARKETS MAIN BRANDS JV’s & ALLIANCES
Petrotemex PTA/DMT Polyester, containers •Petrocel DMT Polyester, containers•TEMEX PTA Polyester, containers BP (9%)
DAK Americas •Dak Monomers PTA Polyester•Dak Resins PET Containers Laser+® •Dak Fibers Polyester staple Textiles, carpets Dacron®, Hydrotec®Indelpro Polypropylene Packaging, fibers Profax®, Valtec® Basell (49%)Polioles Expandable polystyrene Construction, packaging, BASF (49%) Glycol, solvents & uretanes insulatingNylon de México Textile nylon Textiles & garments DuPont (49%)Nyltek Textile nylon Textiles & garments DuPont (49%)Polykrón Polyester staple Textiles & carpets Dacron® DuPont (49%)Fielmex Lycra® Textiles Lycra® DuPont (49%)Dupek Nylon 6,6 Textiles Univex Caprolactam & Raw material for nylon DuPont (49%) ammonium sulphate FertilizersTeijin–Akra* Polyester filament Textiles & garments Teijin (75%)
Sigma Alimentos Processed meats Refrigerated food Fud®, San Rafael®, Tangamanga®, Iberomex® Oscar Mayer San Antonio®, Chimex®, Viva®, Galicia®, Zar® Checo®, Vitta®, Sosúa®, Oscar Mayer® Yogurt, desserts and creams Yoplait®, Chen®, La Lupita®, Norteñita®, Chalet® Sodima Internacional Cheese La Villita®, Del Prado®, Bugambilia® Chen Nor-Mex®, Colonos®, Norteño®, Camelia® Prepared meals, beverages El Cazo Mexicano®, Sugerencias del Chef®, Café Olé®, Quick & Fresh®, Chepina Peralta® ConAgra (49%) Solé®, Menú del Sol®, Kid Cuisine®, Banquet®
Nemak Aluminum engine Automotive Nemak® Ford (15%) heads & blocksTerza Carpets & rugs Floor coverings Terza®, Luxor® y Mohawk® Shaw Industries (49%)Colombin Bel Polyurethane foam, Automotive, furnishing, bonding shoes
Alestra* Voice & data transmission Telecommunications AT&T® BBVA-Bancomer Internet AT&T
Galvak Galvanized & painted steel sheet Construction Galvakolor® Insulated panels Industrial Galvaneal® Construction systems Automotive Galvateja® Pipe & angles Galvamet®Hylsa Hot & cold rolled steel Industrial AK Steel Rebar & wire rod, pipe Steel technology HYL® FerrostaalAcerex Steel service center Construction Worthington (49%) Las Encinas Iron ore SteelCons. Minero B. Juárez Peña Colorada Iron ore Steel Sidor* Steel Construction, Industrial Usiminas, Sivensa, Siderar, Tenaris
< Czech Republic< Germany
Slovakia<
3
Financial Highlights
(1) Hylsamex results are presented in this line.(2) Based on the weighted average number of outstanding shares: 581 million in both years.(3) Based on the number of outstanding shares: 581 million in both years.(4) Due to the dollarization of its revenue, which is estimated to be higher than 75%, and due to the holding of shares by foreign investors, ALFA provides equivalent US
dollar amounts for some of its financial data.
MILLIONS OF PS. US$ MILLIONS(4)
2004 2003 % Change 2004 2003 % Change
|| Income Statement
Net Sales 58,809 49,217 19 5,069 4,242 19
Operating Income 5,267 4,917 7 453 424 7
Result of Discontinued Operations(1) 6,235 -860 825 540 -72 851
Net Majority Income 4,350 1,030 322 375 90 317
Net Majority Income per Share(2) (Pesos and US Dollars) 7.49 1.77 326 0.65 0.16 317
EBITDA 7,441 6,994 6 641 603 6
|| Balance Sheet
Total Assets of Continued Operations 56,313 53,379 5 4,999 4,516 11
Total Assets of Discontinued Operations 34,099 31,422 9 3,027 2,659 14
Total Liabilities of Continued Operations 34,753 33,502 4 3,085 2,835 9
Total Liabilities of Discontinued Operations 15,545 20,374 -24 1,380 1,724 -20
Stockholders’ Equity 40,114 30,925 30 3,561 2,616 36
Majority Interest 24,534 24,963 -2 2,178 2,112 3
Book Value per Share(3) (Pesos and US Dollars) 42.26 43.00 -2 3.75 3.64 3
4
Letter to Shareholders
Dear Shareholders:
The year 2004 has been the best in ALFA’s history, as EBITDA and finan-cial condition reached record levels. Furthermore, the business portfolio changed and the subsidiary compa-nies enjoyed an excellent competi-tive position.
ALFA’s financial results confirm the strat-egy it has been following is the right one: to focus investments in those of its busi-nesses with the greatest potential for growth and profitability, reinforce the competitive position of each one of them, and improve the financial condition.
In recent years, tough decisions were made to tackle important problems created mainly by the difficult busi-ness environment. This is especially true for the steel subsidiary, which faced the worst crisis in more than fifty years. These problems have been overcome, which allow management to direct actions now to the most rel-evant goal of creating more value for the shareholders.
In 2004, the first step was taken to spin off Hylsamex, a process that will create value by reconfiguring ALFA’s business portfolio to be less depen-dent on industrial cycles. In addition, Alpek developed investment pro-jects which lay the foundation for its future growth, Sigma completed a transaction to achieve a solid posi-tion in the Mexican cheese market, and expanded its presence in the Caribbean with an acquisition in the Dominican Republic. In January 2005, Nemak concluded the acqui-sition of a German aluminum auto parts maker, reinforcing its presence in the European market.
MACROECONOMIC ENVIRONMENT:The macroeconomic environment was more favorable for ALFA in 2004 than it had been in 2003. Economic perfor-mance improved globally, as well as in Mexico and the United States, where ALFA has the majority of its operations. Mexico’s GDP grew 4.4%, an increase over last year’s 1.3%. Manufacturing activity increased 3.8%, strongly push-ing demand for ALFA’s products.
Dionisio Garza Medina Chairman of the Board of Directors and Chief Executive Officer
5
Inflation in Mexico increased to 5.2%, compared to the 4% rate in the previ-ous year. This increase was the result of a combination of factors, such as lower production of certain agricul-tural goods, as well as the high price of energy supplied by state-owned companies in Mexico. In conjunction with higher inflation, interest rates rose, averaging 7.1% in 2004, com-pared to 6.8% of the previous year.
High energy prices continued to limit the competitiveness of Mexican com-panies. Natural gas and electricity prices in Mexico are significantly high-er than in other countries, even those without sufficient natural resources to produce them domestically.
OPERATIONS:The aforementioned increase in man-ufacturing activity led to a 7% rise in ALFA’s sales volume, comprised of pet-rochemicals, foods and auto parts.
Average sales prices for ALFA’s prod-ucts increased 13% in 2004. In most cases, however, increases reflected higher raw material costs and as such, had no real impact on operat-ing margins.
Some raw material costs increased significantly. In petrochemicals, for example, volatility in oil prices in-creased the cost of certain derivatives such as paraxylene and benzene. Raw materials costs for Sigma’s products also increased markedly, particularly chicken and turkey. In addition, the price for aluminum, a raw material for Nemak, rose substantially, but in this particular case, the company had
the ability to pass on the increase di-rectly to the customer.
To respond to these cost pressures, the ALFA companies implemented di-verse strategies. Product pricing was revised to the extent that the market and client contracts would allow. Pro-ductivity and efficiency were also in-creased by lowering consumption of some raw materials and secondary materials. Additionally, the company invested in new equipment that con-sumes less energy or allows for the use of lower cost fuel alternatives.
ALFA continued to promote its busi-nesses outside Mexico. As a result, 2004 foreign sales totaled US$ 2,213 million, 19% more than 2003.
Important progress was made in cen-tralizing administrative processes in an effort to increase efficiency and reduce administrative expenses. This project was implemented throughout the year, reducing expenses for IT, billing and collections, which are now handled on a centralized basis for all participating ALFA companies.
FINANCES:Overall, ALFA’s results were very sat-isfactory. Revenues rose to Ps. 58,809 million (US$ 5,069 million), 19% over 2003. This increase is the result of higher sales volume and price in-creases that were implemented to offset higher raw material costs. Op-erating income was Ps. 5,267 million (US$ 453 million), 7% over 2003, due to the aforementioned increase in raw material and energy costs, which partially absorbed the benefit of higher revenues.
The business portfolio
has changed and the
companies now enjoy
a solid competitive
position and healthy
finances.
|| LETTER TO SHAREHOLDERS
6
EBITDA rose to Ps. 7,441 million (US$ 641 million), 6% higher than the previous year. This is largest amount recorded in ALFA’s history, on a com-parable basis.
The integral cost of financing (ICF) was a negative Ps. 318 million, which compares favorably with 2003, when exchange losses were higher. Net financial expenses were slightly lower.
ALFA’s net majority income rose to Ps. 4,350 million, or Ps. 7.49 pesos per share, far above the Ps. 1,030 mil-lion and Ps. 1.77 per share achieved in 2003. In addition to positive financial results for ongoing operations, the Hylsamex subsidiary, currently in the process of being spun off, reported strong profits that were registered on the “Discontinued Operations” line. As well, ALFA reported an important net profit for its participation in non-consolidated affiliated companies Alestra, Teijin-Akra and Sidor.
On the other hand, the application of accounting principle C-15 “Impairment of Long-lived Assets and their Disposal” began in 2004. This principle is simi-lar to Bulletin IAS 36 issued by the International Accounting Standards Board. Its application resulted in an accounting charge of Ps. 1,274 million, although it was a non-cash entry with no impact on EBITDA.
Capital expenditures in the year totaled US$ 221 million. These re-sources were invested in expansion projects in expandable polystyrene, processed foods, aluminum auto parts and others. ALFA also invested
in acquisitions and other strategic operations at Sigma, as well as up-grading its distribution network.
EBITDA less capital expenditures and other disbursements resulted in ex-cess cash of US$ 148 million, which was used to reduce ALFA’s net con-solidated debt. At year-end 2004, ALFA’s net debt totaled US$ 1,101 mil-lion, 12% less than in 2003.
ALFA’s financial condition remained very solid. The frequently-used fi-nancial ratios of interest coverage and debt, net of cash to EBITDA reg-istered levels of 7.5 and 1.7 times, re-spectively, better than the 6.9 and 2.1 times reported in 2003.
STRATEGY:To better understand ALFA’s strat-egy during 2004, some background is required.
In mid-2000, ALFA decided to focus on its businesses with the best pros-pects for growth and profitability. Simultaneously, it would reduce its exposure to other businesses, partic-ularly those most affected by indus-trial cycles.
The period from mid-2000 to 2002 was especially difficult. Because of prevailing conditions in the industry, it was necessary to recapitalize and re-structure the debt of Hylsamex, ALFA’s steel subsidiary. ALFA supported this, helping the company to solve its prob-lems and recover financial viability.
At the same time, ALFA carefully de-veloped its main businesses, taking advantage of investment and acquisi-
|| EBITDA/ MAIN BUSINESSES*US$ Millions
|| Consolidated Net DebtUS$ Millions
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*PTA/PET, Food, Autoparts
7
tion opportunities that allowed these businesses to reach or consolidate market leadership positions. Such is the case of the PTA/PET business, where Alpek became the second most important player in the NAFTA region. Likewise, Sigma consolidated its posi-tion in Mexico, not just in processed meats but also in cheese. Sigma also expanded into Central America and the Caribbean, and even more impor-tantly, in the U.S. Hispanic market. Furthermore, Nemak became a global player in the auto parts industry, with plants in the Americas and Europe.
In 2004, the company made impor-tant progress in its business strat-egy. For example, Alpek launched two investment projects to facilitate future growth. The first, in expand-able polystyrene production, was the expansion of the Altamira, Tamau-lipas plant from 60,000 to 150,000 tons per year, which will begin oper-ations in the second quarter of 2005. The other project is the construction of a second polypropylene plant, also in Altamira, which will increase in-stalled capacity from 220,000 tons per year to 570,000 tons. The new plant is scheduled to start up opera-tions near year-end 2006.
Sigma associated with Grupo Chen to achieve a strong position in Mex-ico’s cheese market. It also acquired a processed meat and dairy company in the Dominican Republic, and now has five companies operating in Cen-tral America and the Caribbean, ad-vancing its objective of replicating its successful Mexican business model. Lastly, Sigma reached an agreement with the New Zealand-based compa-
ny Fonterra, to acquire its cheese op-erations in Mexico. This transaction is subject to approval from the Federal Trade Commission, and is still under review as of the date of this report.
Sigma continued expanding its pres-ence in the U.S. Hispanic market, an effort with significant importance be-cause of its enormous potential. The process of introducing Sigma’s Mexi-can products to this market has had very favorable results. In little less than two years, over 1,300 stores in selected U.S. cities now carry Sigma’s products.
Nemak continued to increase its pro-duction capacity in both Mexico and Canada in response to contract com-mitments signed in recent years. It continued to grow, albeit at a slower pace, leveraging its technological and cost advantages over the competition.
In addition, in early 2005, Nemak completed the acquisition of Rauten-bach, a German company that is well known for its advanced technology for the production of aluminum cylinder heads and other high-tech aluminum components. This transaction allows Nemak to expand its presence in the European market, since Rautenbach is an important supplier to automakers such as Audi, BMW and Porsche. Also, the acquisition permits Nemak to strengthen its technology leadership.
ALFA is now in a much more favor-able position to take advantage of business opportunities. As such, in the coming years the company will continue investing in its most impor-tant businesses, developing projects
|| LETTER TO SHAREHOLDERS
ALFA has a strong
international
presence, with
operations in nine
countries and exports
to more than 45.
8
that will allow it to continue to grow and generate value.
Each of ALFA’s main companies has interesting projects in the planning. At Alpek, a decision could be made in 2005 regarding the construction of a new PTA plant in Altamira, as well as the conversion of polyester produc-tion facilities to PET in the U.S. Sig-ma expects continued growth in the Mexican market in both its tradition-al businesses and through the launch of new value-added food products. The company will press forward with greater determination to introduce its products to the U.S. Hispanic mar-ket. Lastly, Nemak will continue in-vesting in its plants based on capacity requirements, and will consolidate its recent acquisition in Germany.
OUTLOOK:Analysts have a favorable outlook for the Mexican and U.S. economies. Indications are that both countries will register solid economic growth in 2005, which will increase consumer spending and benefit companies like ALFA that market their products in both countries.
The ALFA companies are develop-ing important initiatives to be more competitive. Whether in the area of energy consumption or use of raw materials, the companies are improv-ing every aspect of their respective operations and consolidating their strong market position.
ALFA’s consolidated capital expenditure budget for 2005 totals US$ 285 million, with resources targeted for important petrochemical projects at Alpek, expan-
sions at Sigma and Nemak, and energy conservation projects. ALFA’s financial position allows it to develop these in-vestments with confidence.
As such, ALFA foresees a bright fu-ture in the coming years, based on three fundamental characteristics: a focus on businesses with great po-tential, market leadership and finan-cial strength.
On behalf of the Board of Directors, I appreciate the confidence placed in us by shareholders, clients, suppli-ers, financial institutions, and govern-mental authorities. I especially wish to recognize the employees of all our companies, whose dedication, creativ-ity and professionalism significantly contributed to our year results.
San Pedro Garza Garcia, N.L., Mexico, February 1st, 2005
Dionisio Garza Medina Chairman of the Board of Directors and Chief Executive Officer
The strong
competitive
and financial
conditions of the
ALFA companies
allow them to keep
on growing and
generating value.
9
The Evolution of Alfa
In the beginning of the 1990s, ALFA was concentrated in basic steel and synthetic fibers, which generated 50% of revenue and 45% of EBITDA (Graph #1). Mexico began the process of liberalizing trade, leading to the landmark event of 1994, the signing of the North American Free Trade Agreement (NAFTA) with the Unit-ed States and Canada. For many Mexi-can companies, greater competition in the market presented a serious threat.
To compete in this new environment, ALFA invested more than US$ 1 billion to modernize its basic steel business, and gradually refocus it on products with greater added value. The company also reinforced its competitive position in the petrochemical, foods and auto parts industries, which propelled growth.
This strategy delivered results: the steel business, which was the most exposed to trade liberalization, performed sol-idly until 1997, when the crisis in Asia, Russia and Brazil began to impacted all basic industries. ALFA’s non steel busi-nesses, on the other hand, performed well, and eventually the company’s rev-enues and EBITDA depended less on the steel business and more on the others (Graph #2).
ALFA maintained its investment strat-egy towards the end of the 1990s, seeking to improve the competitive po-sition of its companies in each of their key markets, as well to promote their growth and add value to their products. In addition, the company reinforced its efficiency and productivity programs. Accordingly, Alpek expanded its PTA production capacity in Mexico, Sigma consolidated its leadership in the pro-cessed meats market in Mexico, and positioned itself in the dairy industry, and Nemak expanded its presence in the global automotive market for alu-minum cylinder heads.
In 2000, ALFA was well positioned in the markets where it had presence. However, the modernization of Hylsa-mex required a significant increase in this subsidiary’s debt. After a promis-ing first semester, steel prices began to collapse, and in 2002 reached their lowest level in more than 50 years. At the same time, the price of natural gas, a key imput, grew disproportionately. This affected the finances of Hylsamex (Graph #3).
Graph 1
At beginnings of the 90s, EBITDA came primarily from basic steel and synthetic fibers.
|| Consolidated EBITDA 1993US$ 271 Million
Graph 2
EBIDTA generation changed gradually.Steel and fibers performed well until 1997, then declined due to industry cycles, although steel reversed course in 2004. The rest of ALFA: sol-id growth.
Graph 3
Steel prices declined which caused a drop in EBITDA.In addition to lower prices, demand declined due to the recession, natural gas prices in-creased, and the peso strengthened.
|| Hylsamex | EBITDA|| EBITDAUS$ Million
Basic Steel
27%Rest of ALFA
55%
Fibers
18%
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Basic steel and FibersRest of ALFA
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Growth due to modernizationIndustry crisisNatural Gas Price
10
|| ALFA has modified its business strategy to adapt itself to changing market
conditions. It has created a more stable portfolio concentrated on businesses
with high potential for growth and profitability. The path has not been easy, but
the end results are very satisfactory. ALFA today is a more focused company
with modern facilities, cutting-edge technology, and presence in nine countries.
It is a more competitive company with a strong financial condition that will con-
tinue to grow and create value.
ALFA reoriented its strategy to focus on those of its businesses with the great-est potential for growth and profit-ability: PTA, foods and auto parts. In addition, the company decided to re-duce its exposure to the steel industry and its level of debt.
In accordance with this strategy, in the period of 2001 to 2002, ALFA divested some of its smaller businesses and re-capitalized Hylsamex in order to facili-tate its financial recovery. At the same time, the company expanded its main businesses via acquisitions and invest-ments. In contrast with the steel busi-ness, ALFA’s other businesses, with the exception of synthetic fibers, maintained their solid performance (Graph #4).
Thanks to this strategy, permanent im-provements in efficiency and produc-tivity, and the strengthening of each of its markets, in 2004 ALFA attained the best financial results of its history, as the PTA/PET, foods and auto parts businesses kept on growing and mak-ing profits.
In addition, the company took the first step to spin off Hylsamex from its port-folio, a process that should culminate in 2005. This subsidiary also had its best year ever, as a result of the recov-ery in the global steel industry and the company’s efforts to reduce costs and increase productivity and efficiency. With a healthier financial condition, Hylsamex now has total flexibility to make decisions that will maximize shareholder value (Graph #5 ).
Today, ALFA is a more focused com-pany, enjoys a leadership position in its key markets, and has a solid financial condition. It has become a more global company, expanding into international markets (Graph #6). Furthermore, the company has attractive investment projects and the financial capacity to carry them out, ensuring the continued generation of value in coming years.
Graph 4
ALFA’s non-steel businesses have per-formed solidly.
|| NON-STEEL BUSINESSES | EBITDAUS$ Million
Graph 5
EBITDA reached its highest level in Hylsamex history.Recovery is due not only to pricing, as oper-ating improvements, a better sales mix and higher volume contributed as well. Gas prices are still high. Galvak has obtained a 15% CAGR from 1990 to 2004.
|| Hylsamex | EBITDA
Graph 6
In 1993, ALFA was concentrated in Mexico. Now it has international pres-ence in nine countries from America and Europe.
|| ALFA* | SALESUS$ Million
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14% CAGR
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GalvakBasic steelNatural Gas Price
1993 US$ 1,570
2004 US$ 5,069
Foreign sales
27%44%
11
FocusSince 2000, ALFA has executed a highly focused strategy, devoting maximum attention to its PTA/PET, foods and auto parts businesses, which have great potential for long-term profitable growth.
The company has dedicated important resources to strengthen these businesses by investing in Mexico as well as internationally, as their mar-kets extend beyond national borders. As a result, these businesses have increased their market share, expanded their size, and developed new technologies. In a word, they are stronger.
> Increased PTA production with the ac-quisition of a plant in the United States, capturing a good part of the market growth from 2000 to date
> Successfully entered the PET business, where the company had no presence in 2000
Production capacityThousand tons/year
> Increased production capacity in pro-cessed meats
> Reached a strong position in Mexico’s cheese market by associating with a key competitor
> Entered the Central American and Caribbean markets, as well as the Hispanic market in the U.S.
Total production volumeThousand tons/year
> Expanded production capacity in Mexico, where it now has five plants
> Acquired two plants in Canada and con-structed a plant in the Czech Republic
> In 2005, acquired a German company with plants in Germany and Slovakia
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PTA/PET> Alpek
Auto Components> Nemak
Food> Sigma
LeadershipALFA’s main businesses hold a solid position in their markets, with the leadership position in most cases, or a strong second place.
Alpek
Nemak
Sigma
> World leader in the production of aluminum cylinder heads for the automotive industry
> Quality leader: the lowest scrap rate in the industry, well below standards
> The largest petrochemicals group in Mexico
> The second largest producer of PTA in North America; the only producer in Mexico
> The only manufacturer of polypropyl-ene in Mexico
> Market leader in Mexico for expand-able polystyrene
Mexican petrochemical companiesRevenue
> Market leader in Mexico for processed meats, with 49% market share
> Strong market position in Mexico for cheese, with 21%
> Strong second position in the Mexican market for yogurt, with 24%
Market share in processed meats Mexico
49%
75%of all aluminum engine heads and blocks contracts awarded by the three main OEM's in the USA over the past 7 years
19%Alpek
Pemex Petroche-micals 12%
DuPont Mex. 10%
Girsa 8%Cydsa 8%
Bayer 7%
Basf 7%
Celanese 4%Idesa 3%
Others 22%
Nemak has obtained
StrengthThe ALFA companies have developed signifi cant strengths in terms of effi ciency, low costs, healthy fi nancials, quality and customer service, creating the basis for continued growth and profi tability.
Alpek
Nemak
Sigma
> The most-recognized brand names in its business in Mexico
> The most effi cient distribution network of its kind in Mexico
> Product innovation> Cutting edge production technology> Solid fi nancial condition
> State-of-the-art technology in products and processes
> The highest standards of quality> Rapid response to customers insofar as
the launch of new products> Competitive cost of production> Global presence to meet client demand
in North America and Europe
> Highly competitive production costs> State-of-the-art technology> Differentiated products> Solid fi nancial condition to support
future growth
StandoutTechnology
clients visited at least once per week
290,000
Average time to develop a product prototypeMonths
��
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NemakIndustry average
Alpek
Alpek achieved good results in 2004 despite uncertainty in some of its businesses resulting from high raw material costs. Successful cost reduc-tion efforts, higher productivity and efficiency, and the contribution of business lines such as polypropylene, explained the results.
From a strategic point of view, Alpek significantly increased its capacity in expandable polystyrene and initi-ated an expansion in polypropylene. These projects, as well as others un-der analysis, constitute the basis of future growth for the company.
OPERATIONS:Demand for the company’s products was strong in 2004, allowing plants to operate at high capacity utiliza-tion rates. As a result, sales volumes grew 6%. Virtually all product lines registered growth, with plastics and chemicals in particular.
At the same time, the average dollar price for Alpek’s products grew 17% in comparison with 2003. This was the result of the company’s efforts to
pass on significant increases in raw material costs — such as paraxylene and benzene — as well as higher en-ergy costs arising from oil price vola-tility. In addition, a tighter supply and demand balance in certain lines of business helped increase prices.
Each of Alpek’s businesses performed differently during the year as a result of the particular dynamics of their in-dividual markets.
The PTA business, the most important for Alpek, registered a 33% increase in domestic sales. This resulted from high raw materials costs passed on to clients, as well as higher sales vol-ume coming from a contract signed with a client during 2003. PET busi-ness sales rose 50% in the year on account of expanded capacity at the Cooper River plant in North Carolina, USA, which started up in 2003.
The plastic and chemicals business capitalized on important opportuni-ties in the polypropylene export mar-ket, with sales increasing by 30%. As for the nylon fibers and Lycra® busi-nesses, demand was affected by high raw material costs. Nevertheless it grew by 8%.
FINANCES:The company’s financial results in 2004 improved over 2003. Revenue increased by 24% due to the afore-mentioned volume increase, a better sales mix, and price increases imple-mented during the year.
In spite of higher raw material costs in some businesses, operating income grew 19% as a result of cost and ex-pense savings and greater productivity.
FINISHED PRODUCTS WAREHOUSE, EPS PLANTAltamira, Tamaulipas, Mexico
12
|| FINANCIAL HIGHLIGHTS Millions of Ps. US$ Millions
2004 2003 %Change 2004 2003 %Change
Net Sales 31,770 25,634 24 2,738 2,209 24
Operating Income 2,426 2,042 19 209 176 19
EBITDA 3,615 3,268 11 311 282 10
Debt, Net of cash to EBITDA (times) 2.2 2.8 2.2 2.7
Interest Coverage (times) 6.9 5.4 6.9 5.4 Notes:EBITDA = operating income + depreciation and amortization.Debt, Net of Cash to EBITDA = total debt – cash reserves / EBITDA.Interest Coverage = EBITDA/financial expenses net of interest products on cash reserves.
|| REVENUE BREAKDOWN
EBITDA reflected higher operating in-come, rising to US$ 311 million, a 10% increase over 2003.
Alpek invested US$ 62 million during the year, in fixed assets at different plants. Investments were primarily tar-geted towards increasing production capacity and reduce energy consump-tion. Despite these expenditures, net debt was reduced by 10%, or US$ 75 million, during the year, reflecting the company’s ability to generate free cash flow. As a result, Alpek’s financial con-dition strengthened.
STRATEGY:Alpek continued to execute its strat-egy of reinforcing its competitive po-sition, focusing on markets with the greatest potential for growth and profitability, and increasing product differentiation.
In 2004, significant progress was made in the construction of a second expandable polystyrene line at the Al-tamira, Tamaulipas plant. Operations will start up in the second quarter of 2005, adding 90,000 tons per year of capacity. This will make the plant the largest of its kind in North America and the fifth largest in the world. Pro-duction will meet growing demand for this product in Mexico and the U.S.
In addition, the company began de-velopment of the second polypropyl-ene line, which will increase capacity to 570,000 tons per year. This plant will reduce conversion costs by 40% through better utilization of exist-ing facilities. Once operations begin, scheduled for year-end 2006, Alpek will become the lowest cost polypro-pylene producer in North America.
In conjunction with two private com-panies, one Mexican and the other Canadian, Alpek’s subsidiary, Indel-pro announced its participation in the PEMEX-sponsored Phoenix Project. The goal is to build a petrochemical complex in Mexico that, among other things, will produce propylene, a raw material used by Indelpro in its poly-propylene business. If realized, this project will lead to the construction of a third polypropylene plant, with 500,000 tons of capacity. A decision on the Phoenix Project will be made in 2005.
Alpek is also analyzing projects to expand PTA production capacity in Mexico, through a new plant in Tam-aulipas, as well as a new conversion of polyester assets to PET in the U.S. Decisions on both projects could be made in 2005.
OUTLOOK:Alpek’s outlook is favorable, as the economies of Mexico and the U.S. are expected to continue growing, which will be reflected in greater demand for the company’s main products and a likely improvement in margins.
In addition, the company has under-taken multiple efforts in recent years to increase its market presence, en-hance productivity and efficiency, and strengthen its finances. As such, Al-pek is prepared to fully capitalize on business opportunities already under analysis, which will lay the foundation for the company’s future growth.
Raw materials for polyester & polyester products
63%
Plastics & Chemicals
24%
Nylon & raw materials
13%
REACTOR, POLYPROPYLENE PLANTAltamira, Tamaulipas, Mexico
13
Sigma
In 2004 Sigma extended its trend of improving results each year, achiev-ing gains in revenue and EBITDA despite higher raw material costs. Strategically, the company carried out important actions that enabled it to secure a solid position in the Mexi-can cheese market and to consoli-date its presence in the Caribbean. In addition, Sigma increased its ef-forts in the attractive U.S. Hispanic market.
OPERATIONSSigma’s sales volume in 2004 reached 488,000 tons, 15% higher than in the previous year. Growth was seen across all the company’s prod-uct lines, supported by a larger client base and new product launches. Also, companies acquired during the year contributed to this increase.
In the company’s core business — pro-cessed meats — sales volume grew 11%. Sigma reaffirmed its market leadership in Mexico reaching a 49% share. Volume growth was the result of better marketing and distribu-tion, and the strength of its brands, primarily Fud®, San Rafael® and Tan-gamanga®, which allowed Sigma to capitalize on a dynamic market. The acquisition of Sosúa also contributed to the increase in sales volume.
The dairy business grew 24% in 2004 as a result of the launch of new prod-ucts and presentations, the compa-ny’s efforts to strengthen its brands, and the organic market growth.
As in the previous year, the yogurt segment was very dynamic. The company kept on developing an in-novative strategy of launching new value-added product lines, such a pro-digestive yogurt under the Yo-plus® brand, custards and desserts to expand this product category.
The cheese business showed signifi-cant growth as a result of a more ag-gressive promotion and advertising campaign, greater distribution cover-age, and the integration of Chen. The acquisition of Sosúa in the Dominican Republic also contributed to growth in this segment.
FINANCESThe company’s financial results re-flected the correct execution of its growth strategy and solid operating performance at each of Sigma’s busi-nesses during 2004.
Revenues totaled US$ 1,220 million, a 16% increase over the previous year. Growth resulted from higher sales volume, as well as price increases that reflected higher costs.
It is important to highlight that some of Sigma’s raw materials suffered sig-nificant price increases. In some cases, limited availability at the beginning of the year forced the company to use al-ternative raw materials at higher cost. Sigma addressed this situation by in-creasing production efficiencies and reducing costs and expenses.
EBITDA amounted to US$ 184 million. Out of that amount, US$ 114 million
SIGMA CONTINUED TO INNOVATE PRODUCTS AND PRESENTATIONS
14
were invested in the year, with re-sources used to expand production and distribution capacity, improve information systems, and carry out the operations with Chen and Sosúa. Sigma’s financial condition continued to be very strong.
STRATEGYThe company made important advanc-es towards its goal of becoming the market leader in refrigerated foods in Mexico, Central America, the Caribbe-an and the US Hispanic market.
In accordance with the above, in 2004 Sigma continued to invest in strength-ening its brands, particularly cheeses, with La Villita® attaining the most rec-ognized cheese brand in Mexico. Fur-thermore, the association with Chen enabled Sigma to gain a solid pres-ence in the Mexican cheese market.
New product development was also a major focus, including the launch of new lines of yogurt, desserts, soy-based drinks and prepared foods. Of particu-lar note is the launch of the “Chepina Peralta®” line of products, leveraging on the recognition Mrs. Peralta has in the market place in Mexico.
Regarding the Central American and Caribbean strategy, the acquisition of Sosúa, allowed Sigma to expand its presence in the Dominican Republic and become one of the most impor-tant processed meat and dairy com-panies in the market.
Sigma continued its determined ef-forts to penetrate the U.S. Hispanic market. Sales in this market grew by more than 100% in the year, and by year-end Sigma’s products were distributed through over 1,300 U.S. stores. Sigma’s strategy is to concen-trate its efforts in cities where the
Hispanic presence is the greatest, marketing its products Mexican-style.
Sigma continued to expand and modernize its distribution network in order to support product market-ing efforts in Mexico and to continue offering superior client service. In 2004, Sigma increased its fleet of re-frigerated units to more than 2,900 enabling the company to service more than 290,000 points of sale at least once per week.
OUTLOOKThe Mexican refrigerated foods indus-try has performed solidly in recent years and is expected to continue to do so in the future, based on an im-proved economic situation. As such, Sigma’s outlook is very positive.
The company’s business strategy is designed to reinforce the competitive position of its businesses and to capi-talize on growth opportunities that may arise in each of its markets. The company will continue growing in the Mexican market, through its tradition-al businesses as well as launching new value-added products. As well, it will expand outside of Mexico into mar-kets with similar tastes and consump-tion habits.
Sigma will continue to rely on its sol-id competitive advantages — market leadership, brand equity, extensive distribution network, and high-tech development of products and pro-cesses — in order to continue its trend of profitable and sustained growth.
|| FINANCIAL HIGHLIGHTS Millions of Ps. US$ Millions
2004 2003 %Change 2004 2003 %Change
Net Sales 14,146 12,190 16 1,220 1,051 16
Operating Income 1,661 1,696 -2 143 146 -2
EBITDA 2,133 2,092 2 184 181 2
Debt, Net of cash to EBITDA (times) 0.9 0.6 0.9 0.6
Interest Coverage (times) 10.4 19.0 10.4 19.1 Notes:EBITDA = operating income + depreciation and amortization.Debt, Net of Cash to EBITDA = total debt – cash reserves/EBITDA.Interest Coverage = EBITDA/financial expenses net of interest products on cash reserves.
|| REVENUE BREAKDOWN
Processed meats
67%
Cheese
22%
Yogurt
9%
Others
2%
THE ASSOCIATION WITH CHEN ALLOWED SIGMA TO EXPAND ITS SHARE IN THE MEXICAN CHEESE MARKET
15
Versax
In 2004 Nemak consolidated its glob-al leadership position in the produc-tion of high-tech aluminum cylinder heads and engine blocks. In addition, in early 2005 it incorporated a well-known German company into its op-erations, reinforcing its presence in the European market and diversifing its client base. Meanwhile Terza, the carpeting business, improved its op-erating and financial results.
NEMAKOPERATIONS:Nemak delivered good results in 2004 despite low growth in its main market, the North American automo-tive industry.
The company continued to benefit from the penetration of aluminum components as a replacement for cast iron. Although light vehicle pro-duction in North America remained steady at 15.8 million units, similar to 2003 production levels, aluminum penetration reached 89% in cylinder heads and 45% in engine blocks, as compared to 86% and 38% respec-tively in 2003.
Nemak sold a total of 13.1 million equivalent cylinder heads in 2004, 2% more than in 2003. Contributing to the year’s success was the launch of 10 new programs, five for cylinder heads and five for engine blocks. Some of these replaced existing ones; others represent totally new product launch-es. In 2004, Nemak supplied 23 auto-motive plants in eight countries from its five plants in Mexico, two in Canada and one in the Czech Republic.
FINANCES:Nemak’s revenue totaled US$ 970 million in 2004, 15% higher than in 2003. This resulted from both higher
sales volume and higher average unit prices, which was as much a reflec-tion of a better sales mix as it was the higher cost of aluminum that was passed on to customers.
EBITDA for the year reached US$ 132 mil-lion, 9% above that of 2003. Capital ex-penditures in 2004 totaled US$ 47 mil-lion, with resources devoted to increasing production capacity to meet demand from new contracts, as well as to improve operating efficiency at the plants.
The company’s improved financial po-sition is illustrated by financial ratios such as interest coverage and debt, net of cash to EBITDA, which rose to 6.2 and 2.1 times respectively, com-pared to 5.7 and 2.5 times respective-ly in 2003.
STRATEGY:Nemak continued to consolidate its leadership position as the preferred supplier to the three main US auto makers. The company obtained sev-en new cylinder head contracts in the year, representing a total of US$ 180 million in revenue per year. Four of these contracts are for existing pro-grams, while three are new.
The acquisition of the German com-pany Rautenbach reinforces Nemak’s presence in the European market as it broadens and diversifies its client base and product lines, including cyl-inder heads for diesel engines.
Rautenbach produces aluminum cyl-inder heads as well as suspension and chassis parts. Its production plants in Germany and Slovakia currently sup-ply important European auto makers, such as Audi, Volkswagen, Porsche, BMW, Daimler Chrysler, Peugeot-Citroen and Ssang Yong from Korea.
NEMAK CYLINDER HEADS ASSEMBLED AT THE DAIMLER-CHRYSLER ENGINE PLANTSaltillo, Coahuila, Mexico
16
Sales in 2004 were approximately US$ 175 million.
By merging the newly acquired plants with the existing plant in the Czech Re-public, Nemak will be better positioned to actively participate in expected in-dustry growth, which will be driven by Eastern Europe, without neglecting its North American operations.
OUTLOOK:Short-term expectations for the North American automotive industry continue to be moderate. Analysts forecast production of approximately 15.9 million vehicles in 2005, slightly above 2004 levels.
Additionally, the increasing use of aluminum components is expected to continue, especially in engine blocks. This will allow Nemak to grow at a faster rate than the industry. Nemak plans to launch seven new programs in 2005, four for cylinder heads and three for engine blocks.
Nemak’s strategy is to improve its cost structure, product quality and techno-logical edge. In addition, the company will broaden its presence in the Euro-pean market, and continue to diversify its technologies and processes.
TERZAThe company capitalized on the ben-efits of restructuring operations in previous years. In 2004, Terza’s ex-port sales increased by 21%, rug sales for the domestic market by 47%, and laminated flooring by 161%.
Alestra, Onexa’s subsidiary in the telecommunications service indus-try, aggressively promoted its data, Internet and local telephony services in 2004, focusing primarily on the business segment. However, results for the year were impacted by falling prices for international traffic, due to the gradual deregulation of the mar-ket and the elimination of the pro-portional return rule.
OPERATIONS:Total long distance traffic on Alestra’s network reached 3,539 million minutes, 1% lower than in 2003. Data, local and Internet service traffic increased more than 40%, reaching 1.6 million equiva-lent lines in data transmission.
The company continued to broaden its service offering with products such as virtual private networks, global data networks for multinational com-panies and VOIP for businesses. The promotion of these services was re-flected in their increase as a percent-age of total revenue, rising from 24% in 2003 to 33% in 2004.
FINANCES:Alestra’s revenue totaled US$ 420 mil-lion in 2004, a 16% decrease from the previous year. Long distance revenue fell 27% due to declining prices for international long distance service. Revenue from data, Internet and local services grew 18%, to US$ 140 million.
Administrative and sales expenses were cut by 8%. However, this was not sufficient to prevent a decline in EBITDA to US$ 95 million, 12% less than in the previous year.
The company invested US$ 38 million, primarily to provide connectivity to clients and to support the growth of data, local and Internet services.
Alestra registered a net loss of US$ 15 million in 2004. Through the equity method, ALFA recognized a loss of US$ 4 million for its share in Alestra.
As a result of last year’s financial re-structuring the company’s risk profile was reduced to a reasonable level. The ratio of debt, net of cash, to EBIT-DA in 2004 was 3.6 times and inter-est coverage was 2.5 times.
STRATEGY AND OUTLOOKIn 2004 Alestra moved forward on the integration process with AT&T’s global data network, allowing the company to service multinationals with opera-tions in Mexico. As well, Alestra will intensify its efforts to become a more fully integrated telecommunications service provider and less dependent on traditional long distance services.
Onexa
DATA, LOCAL AND INTERNET SERVICE TRAFFIC THROUGH ALESTRA’S NETWORK INCREASED MORE THAN 40%
17
Hylsamex
The year 2004 was an extraordinary one for the steel industry in general, and for Hylsamex in particular. The company’s operating and financial performance reached record levels, allowing it to substantially reduce its net debt and thus fulfill a priority objective. The company now enjoys a solid financial condition with the flexibility necessary to strengthen its competitive position and generate value for its shareholders.
As announced, ALFA completed the first phase in the process of divesting Hylsamex from its business portfolio.
OPERATIONS: In 2004, the global steel market ex-perienced growing demand and price levels that were unprecedented for the last 30 years. This was the re-sult of favorable performance by the world’s main economies, China’s sustained consumption of steel, and a relative scarcity of raw materials. These factors allowed the industry to recover financially.
The Mexican market reflected in-ternational conditions, reinforced by growth in the Mexican economy. Steel demand grew by 6% in the year; production of basic steel grew by 10% and finished products by 6%.
Hylsamex’s key performance indica-tors reached their highest levels in its history. Sales volume was 3.2 million tons, 10% higher than in 2003. Pric-es in dollars increased 42% and high value-added products represented 62% of revenue.
Domestic sales grew 9%, totaling 2.5 million tons. High international prices stimulated export sales of 716 thou-sand tons, a 13% increase over the
previous year. Total exports rose to US$ 527 million, an increase of 59% and representing 23% of total sales.
Hylsamex’s ongoing cost reduction strategy and integrated production capability enabled the company to manage the scarcity and high cost of raw materials. While natural gas pric-es increased 61%, scrap metal 57%, and iron ore 19%, the company’s vari-able costs increased only 12%.
FINANCE:The combination of higher sales volume and better prices allowed Hylsamex to generate record revenues of US$ 2,305 million in 2004, a 59% increase. Oper-ating income totaled US$ 636 million, ten times that of 2003.
EBITDA was US$ 759 million, 306% higher than last year’s level. This re-flects the company’s ability to effec-tively capitalize on conditions in the steel market, and combined with ef-ficiency efforts made over the years, helped position Hylsamex as one of the best in the industry.
Investments in fixed assets totaled US$ 47 million in 2004, 40% of which was used to expand installed capacity in order to make the best use of iron ore reserves. Investments to replace equipment in the production facilities, at Hylsa in particular, equaled 32% of the total.
These strong financial results allowed for a significant US$ 468 million re-duction of the company’s net debt, leaving a total of US$ 546 million at year end 2004. The key financial ra-tios reflect that change: interest cov-erage rose from 2.0 to 9.2 times, and debt, net of cash, to EBITDA improved from 5.4 to 0.7 times.
HYLSA’S FLAT STEEL PLANTMonterrey, Nuevo Leon, Mexico
18
STRATEGY: 2004 was a watershed year in the history of Hylsamex as the company’s position substantially changed rela-tive to the steel industry and as an ALFA subsidiary.
From a financially constrained posi-tion, the company obtained flexibility. ALFA reduced its equity participation in Hylsamex from 90% to 42.5%.
The high priority objective of reducing debt during the year was accomplished, granting the company decision-mak-ing flexibility for its own benefit and that of its shareholders. Apart from the substantial cash flow generation of the year, the debt reduction was made possible by accessing the capital mar-kets in Mexico, the United States and Europe via the placement of “L” Series restricted shares, netting proceeds of US$ 137 million.
Research into developing new tech-nology that reduces natural gas con-sumption in the production of sponge iron advanced satisfactorily. Tests at the pilot plant were very positive. In 2005, the economic viability of this process will be evaluated, so that investment in large scale facilities could be addressed.
As discussed, ALFA completed the first phase in divesting Hylsamex from its portfolio of businesses, dis-tributing 39% of Hylsamex shares to shareholders. A decision regard-ing the second phase of that process would be taken during 2005.
Once this process is done, Hylsamex will be an independent company, which will facilitate more accurate valuation by financial institutions and provide it with better access to capital markets.
OUTLOOK: Steel analysts forecast that the indus-try will remain in the upper part of the curve during 2005, which should allow steel companies to consolidate their operating and financial gains from 2004.
Demand and pricing will continue to be favorable as key global economies, including Mexico, sustain good growth rates. As well, China will continue to play a significant role in the consump-tion of steel and raw materials.
Hylsamex’s new financial condition will allow it to reinforce its competitive position based on its strategy of mod-ernization, cost reduction, high value-added products and customer service.
|| FINANCIAL HIGHLIGHTS Millions of Ps. US$ Millions
2004 2003 %Change 2004 2003 %Change
Net Sales 26,760 16,806 59 2,305 1,449 59
Operating Income 7,395 731 912 636 63 910
EBITDA 8,821 2,168 307 759 187 306
Debt, Net of Cash to EBITDA (times) 0.7 5.5 0.7 5.4
Interest Coverage (times) 9.3 2.0 9.2 2.0 Notes:EBITDA = operating income + depreciation and amortization.Debt, Net of Cash to EBITDA = total debt – cash reserves/EBITDA.Interest Coverage = EBITDA/financial expenses net of interest products on cash reserves.
GALVAK’S INSULATED PANEL PLANTMonterrey, Nuevo Leon, Mexico
Non-flat steel
28%
Pipe
7%
Coated steel
28%
Others
3%
Flat steel
34%
|| REVENUE BREAKDOWN
19
Environmental Report
The sustainable development model that ALFA has employed throughout its history has focused on promot-ing respect towards the environment, particularly in those places where the company’s plants are located. Also, the rational use of natural resources, particularly non-renewable ones, is sought after.
In accordance with that model, in 2004 the ALFA companies focused special attention on areas such as en-ergy savings and materials recycling.
ENERGY SAVINGSAlpek continued to carry out the “En-ergy Efficiency” program aimed at optimizing the consumption of prima-ry energy sources such as electricity, fuel oil and natural gas and decreasing greenhouse gas emissions. In 2004, the company implemented more than 20 initiatives that once operational, will reduce fuel oil consumption by 26,000 cubic meters per year and equivalent carbon dioxide (CO
2) emis-
sions by 47,000 tons per year.
Construction of the Power Integra-tion project continued at Tereftalatos Mexicanos (Temex) in Cosoleacaque, Veracruz, with a total investment of US$ 30 million, for the installation of more efficient equipment that will al-low the use of steam currents gener-ated during the production process. When the project starts up opera-tions in mid-2005, it is expected to reduce demand for electricity, and decrease consumption of primary fu-els. This project will reduce more than 270,000 equivalent tons of direct and indirect carbon dioxide emissions per year. Given the impact on reduc-ing CO
2 emissions, Temex registered
this project under the Mechanism for Clean Development with the United Nations Framework Convention on Climate Change.
Alpek will start registering other projects such as Univex, located in Salamanca, Guanajuato, which devel-oped a technology to capture carbon dioxide and integrate it into the am-monium carbonate production pro-cess. This reduced CO
2 emissions by
25,000 tons per year.
Having obtained permits from SEMARNAT (Mexican Ministry of the Environment and Natural Resources), the Alpek companies worked to maxi-mize the use of alternate fuels using proprietary and third-party technol-ogy, in order to substitute demand for fuel oil and natural gas. In 2004, 10,708 cubic meters of alternate fu-els were recycled, which reduced emissions of nitrogen oxide, sulphur and fully suspended fuel particles. Furthermore, containing and co-pro-cessing alternate fuels helped reduce the possibility of affecting thousands of cubic meters of fresh water.
Hylsamex also made use of 875,000 liters of its own oil that had been used in internal processes as alterna-tive fuel to generate energy.
RECYCLINGWith an investment of US$1.1 million, Sigma opened a new water treatment plant in Atitalaquia, Hidalgo. Also, Galvak was able to more than double the capacity of its water treatment plant in Monterrey, N.L. with an in-vestment of US$ 400,000. The ALFA companies in Mexico currently have 24 water treatment plants that allow them to reuse more than 90% of the water used for production processes.
Additionally, the ALFA companies continued to work on reducing water consumption in their production pro-cesses. For example, the Hylsa flat steel plant in Monterrey reduced its water consumption from 2.52 cubic
WATER TREATMENT PLANT AT HYLSAMEXMonterrey, Nuevo Leon, Mexico
20
meters per ton of steel produced in 2003, to only 1.21 meters per ton in 2004. At Petrotemex’s DMT and PTA plants in Altamira, the company has been able to reduce by almost 50% the consumption of water per ton produced from 1998 to 2004. Also, in July 2005 Temex will start up opera-tions of a project that will enable the company to recover 28 cubic meters of water per hour in its processes.
The Hylsamex companies recycled 916,000 tons of scrap steel during the year, a 24% increase from 2003, helping to promote a cleaner envi-ronment and to reduce energy con-sumption in the furnaces.
Also, the company continued to re-cover and market slag steel, a by-product of its production process that is used as an asphalt aggregate. In 2004, the company sold 415,000 tons of this material to government agencies and private companies, a 19% increase from 2003.
Finally, Nemak acquired 52,381 tons of aluminum cans, as well as 90,297 tons of other types of aluminum scrap, reaf-firming its position as the leading alu-minum recycling company in Mexico.
FAUNA PROTECTIONAs they have done in recent years, the ALFA companies continued to support programs for the protection of endangered species. For example, Las Encinas, in conjunction with oth-er private companies in the state of Colima, created a civic association in 1998 named Wildlife Heritage whose goal is to protect the sea turtles that land each year on the state’s coasts.
From its founding to date, the as-sociation has protected more than 7,800 nests and released more than 550,000 hatchlings. Las Encinas also
supports the encampment that shel-ters the turtles during their repro-ductive process, from ovulation until the hatchlings go out to sea.
Similarly, Petrotemex and Indelpro encouraged their employees and families to participate in a program that releases Lora turtles on the Tam-aulipas coasts, which takes place ev-ery year in coordination with the Port Authority of Altamira.
AWARDSIn September 2004, the President of Mexico awarded Galvak with the Recognition of Environmental Excel-lence. This is the premier environmen-tal award in the country granted by SEMARNAT through PROFEPA (Mexi-can Federal Environmental Protection Agency), the result of a national com-petition that recognizes companies that employ environmental manage-ment systems that exceed government regulations, and have community de-velopment programs.
Additionally, eight plants, four at Al-pek and four at Sigma, which were due in 2004 to renew their “Clean Industry” status succeeded in obtain-ing such certification.
PTA PLANTAltamira, Tamaulipas, Mexico
21
1 Dionisio Garza MedinaChairman of the Board and Chief Executive Officer - ALFA, S.A. de C.V.
Member of the Board since April 1990 and Chairman since 1994. Sits on the Finance, Hu-man Resources and Audit Committees. Mr. Gar-za is a related proprietary member.
2 José Calderón AyalaChairman of the Board and Chief Executive Officer - Franca Industrias, S.A. de C.V.
Member of ALFA’s Board since June 1974. He cur-rently sits on the Audit Committee. Mr. Calderón is an independent proprietary member.
3 Lorenzo H. Zambrano TreviñoChairman of the Board and Chief Executive Officer - Cemex, S.A. de C.V.
Mr. Zambrano is a Board member since April 1994. He currently sits on the Human Resources Com-mittee and is an independent board member.
4 Claudio X. González LaporteChairman of the Board and Chief Executive Officer - Kimberly Clark de México, S.A. de C.V.
Member of the ALFA Board since December 1987. Mr. González is an independent member and sits on the Human Resources Committee.
5 Mauricio Fernández GarzaMember of ALFA’s Board since April 1990. Mr. Fernández is an independent proprietary member and sits on the Audit Committee.
6 Ricardo Guajardo TouchéNamed a member of the ALFA Board in March 2000. Mr. Guajardo is an independent member, presides the Audit Committee, and sits on the Finance Committee.
7 Armando Garza SadaPresident of Versax, S.A. de C.V. and Onexa, S.A. de C.V.
Named a member of ALFA’s Board in April 1991. Mr. Garza Sada is a related proprietary member and sits on the Finance Committee.
8 Valentín Diez MorodoPresident of Grupo Nevadi Internacional, S.A. de C.V.
Member of the Board member since April 2002. Currently sits on the Human Resources Commit-tee. Mr. Diez is an independent board member.
9 Antonio Madero BrachoExecutive Chairman of the Board - SANLUIS Corporación, S.A. de C.V.
Member of ALFA’s Board since December 1987. Mr. Madero is an independent board member and heads the Finance Committee.
Board of Directors
22
1 2 3 4 5 6 7 8 9
10 Bernardo Garza de la FuenteDirector of Planning and Development - Sigma Alimentos, S.A. de C.V.
Member of ALFA’s Board since April 1994. Cur-rently sits on the Audit Committee. Mr. Garza is a related proprietary member.
11 Adrián Sada GonzálezChairman of the Board - Vitro, S.A. de C.V.
Named a member of the Board in April 1994. Mr. Sada heads the Human Resources Commit-tee and is an independent board member.
12 Fernando Senderos MestreChairman of the Board and Chief Executive Officer - Desc, S.A. de C.V.
A member of the ALFA’s Board since April 1995. Mr. Senderos sits on the Finance Committee and is an independent board member.
13 Rogelio M. Rebolledo Rojas Chairman of the Board and Chief Executive Officer - Frito-Lay Internacional
Board member since March 2004. Member of the Finance Committee. Independent board member.
14 Enrique Osorno HeinzePartner, PricewaterhouseCoopers Statutory Auditor
Mr. Enrique Osorno was designated Statutory Auditor in March 2000.
15 Carlos Arreola Enríquez Partner, PricewaterhouseCoopers Alternate Statutory Auditor
Alternate Statutory Auditor since March 2001.
16 Leopoldo Marroquín MoralesSecretary
Mr. Leopoldo Marroquín has served as Secre-tary of ALFA’s Board since May 1986.
17 Carlos Jiménez BarreraAlternate Secretary
Mr. Carlos Jiménez has been Alternate Secre-tary of the Board since April 1994.
|| STATUTORY AUDITORS AND SECRETARIES
23
11 12 1310 14 15 16 17
Oficina de la PresidenciaCorporate Governance
ALFA adheres to the stipulations of Mexico’s current Code of Best Corporate Practices.
This code, a framework for corporate governance established to increase investor confidence in Mexican companies, was created in 2000 following an initiative of the Securities Commision and with the participation of market and legal specialists, investors, and Mexican business leaders.
Mexican companies whose stocks trade on the Stock Exchange are not required to adhere to this Code of Best Corporate Practic-es. They are however, required to declare the extent to which they do so. This is confirmed annually via a standard questionnaire sent to all companies and provided to investors on the Stock Exchange’s web site.
Following is a summary of ALFA’s corporate governance as declared in the June 2004 questionnaire, with any pertinent informa-tion updated.
a) The Board of Directors is comprised of 13 proprietary members who have no alternates. Of this number, 10 are independent. This annual report provides information on all of the Board’s members, identifying who are independent. It also provides a brief description of the professional background of each one and the committees in which they participate.
b) Three committees assist the Board of Directors to carry out their duties: Finance, Audit and Human Resources. Independent Board members participate in at least one committee each. All three commites are headed by an independent board member.
c) The Board of Directors meets every two months. Meetings of the Board can be called by agreement of at least 25% of its members. At least one of these meetings is dedicated to defining the company’s medium and long-term strategy. Procedures exist to ensure that members have all the necessary information to evaluate strategic issues at least five days prior to any Board meeting.
d) Members must inform the President of any conflicts of interest that may arise, and decline participation in the corresponding deliberations. Average attendance at Board meetings was 78% during 2004.
e) The Audit Committee is responsible for studying and issuing recommendations to the Board on matters such as the selection and determination of fees to the external auditor, coordinating with the internal audit area of the company, and studying ac-counting policies, among others.
f) The company has internal control systems with general guidelines. These are submitted to the Audit Committee for their opinion; in addition, the external auditor validates the effectiveness of the internal control system and issues corresponding reports.
g) The Finance Committee is responsible for evaluating all matters relating to its particular area and issuing recommendations to the Board on matters such as feasibility of investments, strategic positioning of the company, alignment of investment and financing policies, and review of investment projects.
h) The Human Resources Committee is responsible for issuing recommendations to the Board in such matters as employment terms and severance pay for senior executives, and compensation policies, among others.
i) There is a department dedicated to maintaining an open line of communication between the company and its shareholders and investors. This ensures that investors have the financial and general information they require in order to evaluate the company’s development and progress.
24
1 Mario H. Páez President, Sigma
2 José de Jesús Valdez President, Alpek
3 Dionisio Garza MedinaChairman of the Board and CEO, ALFA
4 Alejandro M. Elizondo President, Hylsamex
5 Armando Garza SadaPresident, Versax and Onexa
6 Alfonso González Chief Financial Officer
|| STAFF OF THE EXECUTIVE COMMITTEE
7 Ángel Casán Vice President, Human Resources and Institutional Relations
8 Carlos Jiménez Vice President, Legal Counsel
9 Felipe C. Canales Vice President, Planning and Economics Studies
Executive Committee
25
1 2 3 4 5 6
8 97
Financial Statements
26
|| CONTENTS
Management's Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Report of independent auditors . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Consolidated financial statements
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Statement of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
Statement of changes in financial position . . . . . . . . . . . . . . . . .43
Statement of changes in stockholders' equity . . . . . . . . . . . . . . .44
Supplementary information
Financial summary 2004 to 2000. . . . . . . . . . . . . . . . . . . . . . . . . 58
Significant quarterly information 2004 and 2003. . . . . . . . . . . .60
ALFA, S.A. DE C.V. AND SUBSIDIARIES
27
ALFA, S.A. DE C.V. AND SUBSIDIARIES
2004The following report should be read in conjunction with the Letter to the Shareholders (pages 5-9), the Audited Financial State-ments (pages 39-57), and the Supplementary Information (pages 58-61). Unless otherwise indicated: a) figures are stated in mil-lions of pesos (Ps) of December 2004 purchasing power and percentage changes are in real terms, that is, discounting the effects of inflation; and b) interest rates are stated in real terms. In addition, some figures are stated in millions of dollars (US$).
The financial information contained in this analysis has been expanded in some sections to include three years, thus complying with the regulations applicable to issuers and other participants in the securities market issued by the National Banking and Securities Commission on March 19, 2003.
San Pedro Garza García, N. L, January 24, 2005.
ECONOMIC ENVIRONMENTThe business climate in Mexico in 2004 was better than in 2003, and this benefited the results of ALFA’s businesses.
The real Gross Domestic Product (GDP) grew 4.4% (a), compared to growth of 1.3% (b) in 2003 and an increase of 0.7% (b) in 2002. This situation is explained in part by the behavior of the economy in the United States (c), Mexico’s most important busi-ness partner. The recovery of the U.S. industrial sector had a positive impact on the Mexican economy.
Consumer price inflation in Mexico was 5.2% (d) in 2004, higher than the 4.0% (d) figure recorded in 2003. The Mexican peso had depreciated 0.3% (e) in nominal terms by the end of 2004, on top of the 9.0% (e) depreciation suffered in 2003. In real terms the annual average appreciation of the peso vis-à-vis the dollar fell to 13.5% (f) in 2004, from 16.6% (f) in 2003.
The average nominal 3-month dollar LIBOR rate for the year was 1.6% (g) in 2004, up from 1.2% (g) in 2003. Adjusting for the nominal depreciation of the peso vis-à-vis the dollar, real LIBOR fell from 6.1% (a) in 2003 to -3.1% (a) in 2004.
In Mexico, the TIIE was 7.1% (d) in 2004 in nominal terms, up from 6.8% (d) in 2003. In real terms it fell slightly, from an average of 3.0% (a) in 2003 to 2.1% (a) in 2004.
ALFA – RECONFIGURATION OF THE BUSINESS PORTFOLIODuring 2004 ALFA continued executing a strategy of concentrating on its principal businesses, making significant investments in these. The results of the year confirm the correctness of this strategy. In addition, it achieved considerable reductions in its debt and improved its maturity profile.
In February 2004 the first stage in the separation of Hylsamex was carried out. The purpose of this operation is to create shareholder value by configuring a business portfolio less dependent on industrial cycles. This first stage was carried out by reducing ALFA’s capital stock through a payment in kind with Hylsamex shares.
Management’sAnalysis
(a) Source: Consultores Económicos Especializados. S. A. de C. V. (CEE)(b) Source: Instituto Nacional de Estadística, Geografía e Informática (INEGI)(c) Source: Bureau of Economic Analysis (BEA)(d) Source: Banco de México (Banxico)(e) Source: Banxico. Exchange rate for liquidating liabilities denominated in foreign currency and payable in Mexico.(f) Source: CEE. Base 1990. Bilateral with the U. S., adjusting for consumer prices. In a floating exchange rate system, such as that currently in place in Mexico, it is
more appropriate to speak of appreciation or depreciation, with reference to a base year, than of overvaluation or undervaluation of the currency.(g) Source: British Bankers Association28
ALFA, S.A. DE C.V. AND SUBSIDIARIES
During the third quarter of 2004 Hylsamex’s capital was increased through an issue of shares with limited voting rights in which ALFA did not participate. As a result, ALFA’s investment in Hylsamex’s total capital was reduced to 42.5%. However, it retained 51% of the common shares and therefore continued to control Hylsamex. The limited vote shares will be converted to common shares one year after the date of issuance.
In order to present comparable financial information, as a result of the decision to spin off Hylsamex generally accepted ac-counting principles require Hylsamex’s assets, liabilities and net income to be shown separately in ALFA’s consolidated finan-cial statements as “Discontinued operations”. All the other financial statement captions refer to the companies comprising the rest of ALFA’s business portfolio, frequently subtotaled under the caption “Continuing operations”.
RESULTS OF OPERATIONSSALESThe following table shows ALFA’s sales for the years 2004, 2003 and 2002, showing the effects of volume and price changes (the indexes are calculated on a base of 1999=100):
2004 2003 2002 Change 2004/2003 Change2003/2002Consolidated Sales 58,809 49,217 41,854 9,592 7,363Volume index 147.5 138.0 135.4 7% 2%Price index Pesos 117.6 104.3 89.8 13% 16%Price index dollars 132.6 117.5 108.1 13% 9%
The consolidated sales broken down by ALFA’s principal business groups were as follows:
2004 2003 2002 Change 2004/2003 Change 2003/2002Alpek 31,770 25,634 20,635 6,136 4,999Sigma 14,146 12,190 10,941 1,956 1,249Versax 12,599 11,025 9,857 1,574 1,168Consolidated total 58,809 49,217 41,854 9,592 7,363
The behavior of sales is explained as follows:
2004-2003Consolidated sales reflect the individual efforts of each of ALFA’s companies, which together achieved a 7% increase in volume and a 13% increase in average prices. Following is a discussion of the performance of each of the principal business groups:
Alpek had a significant increase in sales in 2004, resulting from both volume and price increases. In general terms, all its business segments reported increased sales volumes due to a strong demand for their products, especially PTA, PET, poly-propylene and expansible polystyrene. In most cases, sales price increases were implemented in response to increases in raw material prices.
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29
ALFA, S.A. DE C.V. AND SUBSIDIARIES
Sigma recorded a significant increase in sales in 2004. This was a result both of organic growth and of acquisitions of compa-nies, and also of increases in prices in some product lines. As far as sales volumes are concerned, the processed meat line grew 11%, as a result both of a greater marketing and distribution effort and of the consolidation of the processed meat operations of Sosua, in the Dominican Republic, which was acquired in September. The cheese line grew 24%, partly due to the consolida-tion from September onwards of the Chen company, with which Sigma entered into a strategic association, and also that of Sosua, which also produces and markets cheeses. Other actions contributing to volume growth included the launching of new yoghurt products and presentations and new prepared food lines.
Sigma effected price adjustments throughout the year in response to price increases in some of its raw materials, such as chicken and turkey meat. On the average Sigma’s prices increased 1% in 2004.
In Versax, Nemak increased the volume of engine head equivalents sold by 2% over 2003, despite a 0.6% decrease in light vehicle production in North America. This increase is explained by the growing penetration of aluminum in place of cast iron in high technology components, such as the engine heads and monoblocks which Nemak produces. Nemak’s sales prices also increased 9.5%, as it passed on significant increases in the cost of its principal raw material, aluminum, as previously agreed with its customers.
2003-2002The growth of ALFA’s consolidated sales reflected significant increases in the principal subsidiaries, which are explained as follows:
In Alpek a considerable increase in sales was achieved, as a result mainly of price increases due to increased costs of raw materials, such as paraxylene, benzene and ethylene glycol, although in some segments of the business, such as PET and syn-thetic fibers, it was not possible to fully pass the higher costs on to the customer, due, among other things, to new production capacity which could not be placed on the market, or to the effect on demand of competition from Asian products or from contraband garment imports. Alpek’s sales volume remained unchanged in 2003.
Sigma had a very satisfactory year, as shown by its growth in sales in spite of facing significant challenges. The processed meat line grew 6.6% in volume, increasing its market share to 47%. The dairy product line grew 16%, thanks to a very favor-able performance of the yoghurt market, which enabled this product to grow and also gain market share. In addition, recent acquisitions in El Salvador and the Dominican Republic, which strengthened Sigma’s presence in the region, contributed to the sales increase. Also Sigma continued its successful development of new products and new presentations, which contributed to its growing market presence.
The prices of some of the principal raw materials increased during the year. In addition, the depreciation of the peso vis-à-vis the dollar increased the price of imported materials such as turkey. However, most of these increases could be passed on as sales price increases. At the same time, competition has intensified as a result of the further reduction of international trade barriers.
In Versax, Nemak increased its sales due to a 1% volume increase. This was achieved despite a 3% fall in light vehicle produc-tion in North America. This increase was possible due to the launching of new programs and the increased substitution of aluminum for cast iron in the manufacture of engine heads and monoblocks.
OVERSEAS SALESOverseas sales comprise ALFA’s exports from Mexico and also sales made by its overseas subsidiaries. These have evolved over the last three years as follows:
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30
ALFA, S.A. DE C.V. AND SUBSIDIARIES
Each year’s growth is due to the following factors: in Alpek, to increases in the volume sold and in the sales prices of Alpek’s U.S. subsidiaries’ products; in Sigma, to the acquisition of subsidiaries in Central America; in Versax, to increases in sales vol-ume achieved by Nemak in its Canadian subsidiaries and, more recently, in the Czech Republic. Geographically, North America is the preponderant region for ALFA’s overseas businesses; Central and South America the second in importance.
OPERATING PROFITALFA’s operating profit in 2004, 2003 and 2002 is explained as follows:
2004-2003 Change by GroupOperating Profit 2004 2003 Chge. Alpek Sigma Versax OtherSales 58,809 49,217 9,592 6,136 1,956 1,574 (74)Operating profit 5,267 4,917 350 384 (35) 79 (78)Operating marginConsolidated (%) 9.0 10.0Alpek (%) 7.6 8.0Sigma (%) 11.7 13.9Versax (%) 9.4 10.0
The amount of operating profit showed improvements in Alpek and Versax and a slight decrease in Sigma. In percentage terms, there were reductions in all ALFA’s groups due to the fact that the increases in sales prices were not in proportion to the increases in costs. Thus, the consolidated figure was also lower in 2004 than in 2003.
Alpek’s operating profit increased principally due to the increase in its income. In addition, it continued with its efforts to reduce costs and improve the sales mix, which contributed to the increase in operating profit. Alpek was able to reduce the negative impact of high energy prices, thanks to various programs for saving and making more efficient use of energy in practically all its plants.
Sigma faced a significant challenge in 2004, since some of its principal raw materials, such as chicken and turkey meat and dairy products, suffered from price increases and supply shortages. Thus, the company had to have recourse to alternative sources of raw materials, although in some cases that meant higher costs. To deal with this, Sigma increased sales prices as far as the market would permit. It also found ways to increase production efficiency, and also to save on expenses. This enabled it to reduce the negative impact on costs and achieve an adequate level of operating profit, although slightly lower than in the previous year.
Nemak was able to increase its operating profit in 2004, basically due to the increase in sales volume and to cost- and expense-reduction campaigns in its manufacturing operations.
In addition to the continuous improvements in the manufacturing, marketing and distribution processes, ALFA has also sought to create synergies in the administrative areas which enable it to reduce expenses. Thus, the shared services project was reinforced during 2004. It also continued to improve the implementation of its common electronic purchasing system, with significant benefits in the year.
At the same time, ALFA companies have carried out outstanding work in the field of technological research and development, which has won them tax benefits and financial grants from the Mexican federal government. The amounts received by ALFA for these concepts amounted to Ps60 in 2003 and Ps51 in 2004. This year’s amount was lower due to an increase in the number of companies participating in the benefit programs, as well as to a different approach in the allocation of funds.
31
ALFA, S.A. DE C.V. AND SUBSIDIARIES
2003-2002The consolidated operating profit in 2003 was very similar to that in 2002. Although Sigma and Versax achieved significant in-creases, Alpek reported a decrease. Following is a table summarizing these results, together with the relevant explanations:
Change by GroupOperating profit 2003 2002 Chge. Alpek Sigma Versax OtherSales 49,217 41,854 7,363 4,999 1,249 1,168 (53)Operating profit 4,917 4,927 (10) (290) 148 137 (5)Operating marginConsolidated (%) 10.0 11.8Alpek (%) 8.0 11.3Sigma (%) 13.9 14.1Versax (%) 10.0 9.8
Alpek’s operating profit decreased due mainly to the high cost of energy in North America, both electricity and natural gas. The company reduced the negative impact of these cost factors by the use of price hedges and by an intense and sustained effort to increase efficiency in its consumption of energy.
In the case of Sigma, the increase in its operating profit was due mainly to the increase in sales. Although the prices of some of its principal raw materials increased during the year, and the depreciation of the peso vis-à-vis the dollar increased the prices of imported materials, such as turkey, the company was able to pass on to the consumer a significant portion of these increases, and also to increase as much as possible the efficiency and productivity of its plants.
In Versax, the increase in operating profit was due mainly to the fact that Nemak was able to achieve a small increase in sales volume, while at the same time holding down its production costs and operating expenses.
COMPOSITION OF SALES AND OPERATING PROFITThe percentage structure of ALFA’s sales and operating profit remained almost unchanged between 2004 and 2003, as the following table shows:
% of Total Sales Operating Profit 04 03 02 04 03 02Alpek 54 52 49 46 42 48Sigma 24 25 26 32 35 32Versax 22 23 25 22 23 20Consolidated 100 100 100 100 100 100
COMPREHENSIVE FINANCING INCOME (EXPENSE) (CFI/E)The macroeconomic environment, which was discussed briefly in the Economic Environment section at the beginning of this Analysis, has been the principal factor affecting ALFA’s CIF/E during the last three years, as indicated below:
CFI/E Determinants 2004 2003 2002General inflation (Dec.- Dec.) 5.2 4.0 5.7% Change in nominal closing exchange rate (0.3) (9.0) (12.8)Nominal closing exchange rate 11.26 11.24 10.31Real peso/dollar appreciation (depreciation)over previous year:
Year end 1.6 (6.8) (9.3)Average for year (2.7) (9.4) (0.1)
Average interest rate:Nominal LIBOR 1.62 1.22 1.79Implicit nominal rate on ALFA’s net debt 7.12 6.68 6.65LIBOR in real terms (3.1) 6.1 8.6Implícit real rate on ALFA’s net debt 2.3 12.0 14.0
ALFA’s average monthly debt, net of cash, in US$ 1,207 1,305 1,335
32
ALFA, S.A. DE C.V. AND SUBSIDIARIES
Expressed in dollars, the net financial expense per year for 2004, 2003 and 2002 were US$86, US$87 and US$89, respectively. The causes of the changes between years were, in general, the following:
Changes in net financial expense in US$ 04/03 03/02From higher interest rate (6) -From lower debt, net cash 7 2Net change 1 2
Measured in pesos, the CFI/E was composed as follows: ChangeCFI/E 2004 2003 2002 04/03 03/02Financial expense (1,169) (1,155) (1,178) (14) 23Financial income 172 144 215 28 (71)Net financial expense (997) (1,011) (963) 14 (49)Exanche gain (loss) 75 (1,145) (1,529) 1,220 384Gain on monetary position 603 413 542 190 (129)Total CFI/E (319) (1,743) (1,950) 1,424 207CFI/E capitalized 1 109 127 (108) (18)Net CFI/E (318) (1,634) (1,823) 1,316 189
The changes in total CFI/E between years were due to the following factors:
Change in total CFI/E 04/03 03/02From lower interest rate 1,399 282From lower (higher) debt, net of cash 25 (75)Net change 1,424 207
EQUITY IN INCOME (LOSS) OF ASSOCIATED COMPANIESThe 2004 profit was Ps92, compared with a profit of Ps 219 in 2003. In 2004 ALFA’s indirect equity in Sidor, the Venezuelan steel company, produced a profit of Ps175. Sidor achieved good operating results as a result of the improvement in the global steel industry. However, ALFA had to recognize losses in Onexa and Teijin-Akra of (Ps19) and (Ps64), respectively.
INCOME TAX, ASSET TAX AND EMPLOYEES’ PROFIT SHARINGFollowing is an analysis of the principal determinants of the income tax, asset tax and employees’ profit sharing, starting from the concept of income before income tax, defined as Operating profit less CFI/E and less Other expenses, net.
ChangeIncome tax, asset tax and employees’ profit sharing 2004 2003 2002 04/03 03/02Income before income tax, asset tax and employees’ profit sharing (a) 3,943 2,815 3,532 1,128 (717)Statutory tax rate 33% 34% 35%Income tax at statutory rate (1,301) (957) (1,236) (344) 279
+/(-) Tax effect of permanent tax/accounting differences:Tax vs. accounting basis of CFI/E 40 (27) (28) 67 1Effects of allowances for non-recoverable tax loss carryforwards and asset tax credits (673) 254 99 (927) 155Other 378 (152) (65) 530 (87)Total tax effect of permanent differences (255) 75 6 (330) 69Total income tax provision charged to income before effect of change in tax rate (b) (1,556) (882) (1,230) (674) 348
Effective tax rate (b/a) 39.4% 31.3% 34.8%
Income tax, asset tax and employees’ profit sharing:Currently payable (1,630) (1,072) (536) (558) (536)Deferred 74 190 (693) (116) 883Effect of reduction in tax rate 681 493 681 (493)Total tax provision charged to income (875) (882) (736) 7 (146)Employees’ profit sharing (109) (105) (98) (4) (7)Total (984) (987) (834) 3 (153) 33
ALFA, S.A. DE C.V. AND SUBSIDIARIES
The tax charge to income decreased from Ps882 in 2003 to Ps875 in 2004. Before analyzing the principal reasons for this change, the following situations should be taken into account: a) the statutory income tax rate was 34% in 2003 and 33% in 2004; b) up to 2004 the deferred tax was calculated at a 32% rate; c) in 2004 the rate for the purposes of calculating deferred tax changed from 32% to 28%. Thus, the decrease of Ps7 mentioned above is the net effect of having a higher income before income tax, asset tax and employees’ profit sharing in 2004 and the favorable effect recognized in 2004 of Ps681 from the change in the tax rate used for calculating deferred taxes.
INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX, ASSET TAX AND EMPLOYEES’ PROFIT SHARING This item includes only the consolidated net income of Hylsamex, in accordance with the accounting treatment described in the section Reconfiguration of the Business Portfolio.
Hylsamex obtained net income of Ps6,235 in 2004, compared to a net loss of Ps860 in 2003, due to a combination of various factors.
The global steel industry had an extraordinary year in 2004. The greater worldwide economic growth caused a strong demand for steel. At the same time, the scarcity of steel and the resulting increase in international prices were accentuated by the limited response of steel producers, due to the following factors: the consolidation of the industry, the definitive closings of productive capacity, the scarcity of raw material, which affected principally producers using basic oxygen furnace, and insuf-ficient new investment in recent years because of low profitability.
Hylsamex’s operating profit increased from Ps731 in 2003 to Ps7,395 in 2004. It experienced an unprecedented year, obtaining a record operating cash flow of Ps8,821. Sales increased 59% as a result of an increase in the demand for steel in most of the world, especially in China. As a result, Hylsamex increased its volume by 10% and its revenue per ton by 45%, both in pesos and in dollars. Hylsamex’s shipments in 2004 set a new annual record, surpassing the volume reached in 2003: 3.2 million tons vs. 2.9 in 2003. A more positive economic environment in Mexico had a favorable impact on domestic demand for both hot-rolled and cold-rolled sheet – important flat products for Hylsamex which grew 15%. Exports represented 23% of total sales volume, the highest percentage since 1996. Sales prices trended upwards, as mentioned above.
The increase in demand for steel also caused increases in the prices of some important raw materials for Hylsamex, such as scrap iron, which reached record levels in the United States. In addition, Hylsamex’s effective prices for natural gas and elec-tric power increased by 16% and 21%, respectively, during the year. In the case of natural gas, Hylsamex adopted an effective hedging strategy which reduced the volatility in the cost of this input. On the other hand, the higher sales volume allowed a better absorption of fixed production costs, with operating expenses remaining practically constant.
Hylsamex’s CFI/E decreased by Ps988, principally as a result of a large reduction in debt with respect to 2003. On the other hand, income tax, asset tax, employees’ profit sharing and other items increased by a total of Ps557, due to the better results in 2004. Other items include Hylsamex’s equity in the net income of Amazonia, an associated company and the parent of Sidor, which amounted to Ps781. Like Hylsamex, Sidor had a very successful year.
NET INCOMEALFA’s consolidated and majority net income for the years 2004, 2003 and 2002 are shown in the following table and are the results of the circumstances already explained with respect to operating profit, CFI/E, equity in the net income of associated com-panies, taxes, net income from discontinued operations and other accounting charges related to the adoption of Statement C-15:
ChangeIncome Statement 2004 2003 2002 04/03 03/02Operating profit 5,267 4,917 4,927 350 (10)CFI/E (1) (318) (1,634) (1,823) 1,316 189Other expenses, net (1,006) (468) 428 (538) (896)Equity in net income of associated companies 92 219 (624) (127) 843Taxes (2) (984) (987) (834) 3 (153)Net income from continuing operations 3,051 2,047 2,074 1,004 (27)Net income from discontinued operations 6,235 (860) (982) 7,095 122Initial effect of a change in accounting principle (1,274) (1,274)Consolidated net income 8,012 1,187 1,092 6,825 95Majority net income 4,350 1,030 1,528 3,320 (498)
(1) Comprehensive financial income (expense)(2) Income tax (currently payable and deferred), asset tax and employees’ profit sharing.
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ALFA, S.A. DE C.V. AND SUBSIDIARIES
COMPREHENSIVE INCOMEComprehensive income (loss) is shown in the statement of changes in stockholders’ equity, and its purpose is to show the total effect of all transactions and events which affected earned surplus, irrespective of whether they were recognized in the statement of income or directly in stockholders’ equity. It excludes operations between the company and its shareholders, principally dividends. Comprehensive income for 2004 and 2003 was as follows:
Consolidated MajorityComprehensive income 2004 2003 2002 2004 2003 2002Net income 8,012 1,187 1,092 4,350 1,030 1,528(Loss) gain from holding non-monetary assets (296) 1,195 1,546 (666) 724 1,336Cumulative translation adjustment 67 380 126 56 322 114Gain on options on own shares 1 15 1 15Effect of dilution in subsidiaries, net (51)Comprehensive income 7,783 2,763 2,779 3,689 2,077 2,993
The net income in 2004 and 2003 is explained in a previous section of this Analysis. The (loss) gain from holding non-mon-etary assets results principally from the difference between: a) the restatement of fixed assets of foreign origin by applying the general inflation index of their country of origin and then converting to pesos at the year-end exchange rate, and b) their restatement using the Mexican National Consumer Price Index. The loss incurred in 2004 was due to the appreciation of 1.6% in real terms of the Mexican peso vis-à-vis the U. S. dollar, since the nominal depreciation of the peso was less than general inflation in Mexico. This was the opposite of what occurred in 2003, when the peso depreciated 6.8%. The impact of this was considerable, since a significant proportion of ALFA’s fixed assets are of foreign origin.
DIVIDENDS DECLARED AND GROWTH IN STOCKHOLDERS’ EQUITYIn 2004 ALFA’s Stockholders’ Meeting declared a dividend of Ps505, equivalent to 0.87 pesos per share, 23% more than in 2003. The dividend declared in 2003 was Ps412, or 0.71 pesos per share, 59% more than in 2002.
Consolidated stockholders’ equity increased by 30% in 2004, while majority stockholders’ equity decreased by 2%. In 2003 they increased by 7% and 6%, respectively. The foregoing is a result of the comprehensive income, the dividends declared and the other operations affecting capital during 2004. Of the latter, the most significant were: the effect of the first stage of the spin-off of Hylsamex, (Ps 3,613), the increase in the minority interest of Ps435 due to the issuance of limited voting stock by Hylsamex (in which ALFA did not participate) and by Sigma, plus the payment of dividends to the minority interest and other concepts, in the amount of Ps102.
CHANGES IN FINANCIAL POSITIONRESOURCES PROVIDED BY OPERATIONSThe resources provided by operations in 2004 were Ps5,167, considerably more than in 2003, when they amounted to Ps3,632.
Resources provided by operations 2004 2003 2002Operating cash flow (1) 7,441 6,994 6,736Total net financial expense (2) (997) (1,011) (964)Income tax, asset tax and employees’ profit sharing (1,739) (1,177) (634)Changes in NWC (3), excluding debt financing 335 (252) 709Other (552) (299) (336)Net cash profit after changes in NWC 4,488 4,255 5,511Exchange gain (loss) and monetary gain 678 (732) (987)CFI/E capitalized 1 109 128Resources provided by operations 5,167 3,632 4,652
(1) Defined as operating profit plus depreciation and amortization.(2) Befote deducting portion capitalized in fixed assets.(3) Net working capital.
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ALFA, S.A. DE C.V. AND SUBSIDIARIES
The principal causes of this increase are the increases of Ps1,220, Ps587, and Ps448 in the exchange gain, NWC and operating cash flow. The increase of Ps562 in the current income tax, asset tax and employees’ profit sharing in 2004 compared to 2003 is explained by ALFA’s companies’ obtaining a greater taxable income.
Days NWC 2004 2003 2002Alpek 38 43 50Sigma 23 21 22Versax 41 53 48Consolidated 34 39 42
In 2004 the NWC decreased by Ps335, while in 2003 it increased by Ps252. This decrease, together with the increase in sales in 2004, enabled ALFA to reduce the number of days in NWC from 39 in 2003 to 34 in 2004.
INVESTMENTS, FINANCING AND OTHERStarting from the resources provided by operations, the following table shows the principal transactions in the respective years:
Investments, financing and other 2004 2003 2002Resources provided by operations 5,167 3,632 4,652Property, plant and equipment (2,569) (2,097) (2,011)Divestment of (investment in) shares 3,180 (554) (2,987)Reduction in capital stock (3,613)Dividends declared by ALFA (505) (412) (261)Other assets 471 (282) (214)Other capital movements 244 (404) (220) 2,375 (117) (1,041)Effect on ALFA of restructuring of subsidiaries’ debt 716Net debt of companies divested (22) (31) (23)Change in interest payable 10 14 109Decrease in net debt 2,363 (134) (239)Debt net of cash at end of year 12,401 14,764 14,630
INVESTMENTSProperty, plant and equipmentThe total new investments by Group were as follows:
% Change Last 5 years 2004 2003 04/03 Investment %Alpek 716 490 46 5,567 43Sigma 1,326 867 53 3,403 26Versax 583 754 (23) 4,340 33Others (56) (14) (300) (319) (2)Total 2,569 2,097 23 12,990 100
Some of the principal projects were: in Alpek, increases in efficiency in the use of electrical power in Tereftalatos Mexicanos, and expansion of the second finishing line in expansible polystyrene in Polioles; in Sigma, the acquisition of subsidiaries, purchase of trademarks, and expansion of warehousing centers in the distribution network, and transportation equipment; in Nemak, expansion of aluminum engine head and monoblock production capacity, in both Mexico and Canada.
SHARESThe total decrease in the year amounted to Ps3,180, the most important item being the first stage of the spin-off of Hylsamex, referred to above. Some investments in shares were also made by Sigma.
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ALFA, S.A. DE C.V. AND SUBSIDIARIES
CHANGES IN DEBT NET OF CASHGiven that the preponderant currency of ALFA’s debt is the U. S. dollar, the changes in its debt net of cash are best explained in that currency. When measured in pesos, the results are significantly affected by the by the valuation effects resulting from the appreciation in real terms of the peso vis-à-vis the dollar, such as fluctuations in exchange rates and the monetary gain arising from the reduction of the debt in real terms as a result of general inflation. The principal changes in the net debt of ALFA and its Groups were the following:
Consolidated Alpek Sigma Versax OthersChanges in debt net of cash Ps US$ US$Balance december 31, 2003 14,764 1,249 769 113 309 58Net effect of appreciation/inflation (951) Long term financing, Net of repayments:Financing 8,709 752 491 203 49 9Repayments (8,735) (750) (559) (51) (63) (77) (26) 2 (68) 152 (14) (68)Short term financing, net of repayments 341 23 7 16 - -Total net financing 315 25 (61) 168 (14) (68)Effect of currency conversion 2 2Change in debt, per statement of changes in financial position (636) 27 (61) 168 (14) (66)Debt of acquired companies 58 5 5Total change in debt (578) 32 (61) 173 (14) (66)(Increase) decrease in cash and restricted cash (1,775) (179) (13) (118) (13) (35)Change in interest payable (10) (1) (1) 1 1 (2)(Decrease) increase in debt net of cash (2,363) (148) (75) 56 (26) (103)Balance december 31, 2004 12,401 1,101 694 169 283 (45)
Alpek, Versax and ALFA (parent company) reduced their debt net of cash. Sigma increased it to finance part of its new investments.
ALFA’s groups extended the average maturity of their debt, except for Versax, whose maturities remained unchanged. The schedule of debt maturities of ALFA and its groups changed during the year as follows:
Alpek Sigma Versax OthersShort and long term debt by group 2004 2003 2004 2003 2004 2003 2004 2003Total debt (US$) 842 903 378 204 444 458 59 126Percentage of total debtShort term debt 16 11 10 8 3 2 - -Long term 1 year 17 15 2 4 5 7 1 32
2 11 20 2 24 9 16 1 40 3 7 31 6 4 18 17 1 20 4 16 13 42 10 47 19 86 1 5 years or more 33 10 38 50 18 39 11 7
Total 100 100 100 100 100 100 100 100Average term of long term debt (years) 2.9 2.5 3.7 3.3 3.1 3.1 3.9 2.2Average term of total debt (years) 2.7 2.3 3.4 3.1 3.1 3.1 3.9 2.2
US$ % of totalConsolidate short and long term debt: 2004 2003 Change 2004 2003Short term debt 185 122 63 11 7Long term 1 year 172 219 (47) 10 13
2 141 355 (214) 8 213 162 396 (234) 9 234 558 229 329 32 145 years or more 505 370 135 30 22
Total 1,723 1,691 32 100 100Average term of long term debt (years) 3.2 2.7Average term of total debt (years) 2.9 2.6
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ALFA, S.A. DE C.V. AND SUBSIDIARIES
FINANCIAL RATIOSLIQUIDITYThe ratio of debt net of cash to cash flow decreased between 2003 and 2004, both consolidated and in the Groups, except for Sigma, which increased its debt net of cash proportionately more than its EBITDA due to the use of resources for its new investments, as the following table shows:
Debt net of cash/Cash flow (in pesos) 2004 2003 2002GroupsAlpek 2.16 2.78 2.73Sigma 0.89 0.64 0.68Versax 1.92 2.41 2.55Consolidated 1.67 2.11 2.17
The interest coverage improved both at the consolidated level and in the groups, except for Sigma.
Interest coverage * Due to Due to
Change Cash Financial Change Cash Financial
2004 2003 2002 04/03 Flow Expenses 03/02 Flow Expenses
Alpek 6.92 5.43 5.39 1.49 0.58 0.91 0.04 (0.23) 0.27Sigma 10.40 19.00 21.52 (8.60) 0.38 (8.98) (2.52) 2.38 (4.90)Versax 6.62 6.12 6.07 0.50 0.57 (0.07) 0.05 0.93 (0.88)Consolidated 7.46 6.92 6.99 0.55 0.45 0.10 (0.08) 0.27 (0.35)
* Defined as operating profit plus depreciation and amortization, divided by net financial expense.
FINANCIAL STRUCTUREALFA’s financial structure indicators experienced significant changes, the most important being the ratio of Total liabilities/Stockholders’ equity, which fell from 1.74 in 2003 to 1.25 in 2004. This was due to a decrease in liabilities in the majority of ALFA’s groups, as well as to a 30% increase in consolidated capital due to the favorable results for the year and to the various issues of capital stock.
Financial indicators 2004 2003 2002Total liabilities/Stockholders’ equity 1.25 1.74 1.74Long term debt/Total debt(%)-continuing operations 79 79 78Total foreign currency debt/Total debt(%)-continuing operations 82 91 96
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ALFA, S.A. DE C.V. AND SUBSIDIARIES
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
Report of independent auditors
To the Stockholders of Alfa, S. A. de C. V.
Monterrey, N. L., January 24, 2005
1. We have audited the consolidated balance sheets of Alfa, S. A. de C. V. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, of changes in stockholders’ equity and of changes in financial position for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements include those of Sigma Alimentos, S. A. de C. V. and subsidiaries; in 2004 its assets and revenues, which represent 12.7% and 24.1% of the total consolidated amounts, respec-tively, were examined by other independent accountants. Our opinion, as expressed in paragraph 5, insofar as it relates to the amounts included for such entity, is based solely on the report of the other independent accountants.
2. We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstate-ment and that they were prepared in accordance with generally accepted accounting principles. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
3. On January 1, 2004 the Company adopted the standards contained in Statement C-15 “impairment of long-lived assets and their disposal” issued by the Mexican Institute of Public Accountants. As a result of the studies carried out to assess the recoverability of the Company’s long-lived assets, the Company determined an initial impairment of Ps1,274 million at January 1, 2004, net of income tax; such amount was charged to the statement of income for the year ended December 31, 2004 as an initial effect of a change in accounting principles.
4. As described in Note 1 to the financial statements, on February 4, 2004 the Company’s stockholders approved a proposal by the Board of Directors to carry out a significant corporate restructuring consisting of a two-stage divestiture of Hylsamex, S. A. de C. V. from the Company’s portfolio of businesses. Consequently, the assets, liabilities and operations of the steel and steel-making technology business segment are shown in the 2004 and 2003 financial statements under the caption “Discontinued operations”.
5. In our opinion, based on our audits and on the report of the other independent accountants referred to in paragraph 1 above, the aforementioned financial statements present fairly, in all material respects, the financial position of Alfa, S. A. de C. V. and subsid-iaries at December 31, 2004 and 2003, and the results of their operations, the changes in their stockholders’ equity and the chang-es in their financial position for the years then ended, in conformity with accounting principles generally accepted in Mexico.
6. Our audits were performed for the purpose of issuing an opinion on the basic financial statements mentioned in the preceding paragraphs. The supplementary information shown on pages 58 and 59, which comprises the financial summary for 2004 to 2000, was subjected to the auditing procedures applied in the audit of the corresponding basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. This information is presented for purposes of additional analysis and is not a part of such financial statements.
PricewaterhouseCoopers
Carlos Arreola Enríquez
39
Consolidated balance sheet
AT DECEMBER 31, 2004 WITH COMPARATIVE FIGURES FOR 2003 || MILLIONS OF MEXICAN PESOS OF DECEMBER 31, 2004 PURCHASING POWER
2004 2003
ASSETS
CURRENT ASSETS:Cash and temporary investments Ps 7,084 Ps 5,016
Trade accounts receivable 7,420 6,214
Other accounts and notes receivable 1,754 1,351Inventories (Note 3) 6,533 5,331Other assets 260 436
Total current assets from continuing operations 23,051 18,348
Current assets from discontinued operations (Note 14) 10,158 6,945
Total current assets 33,209 25,293
INVESTMENT IN SHARES OF ASSOCIATED COMPANIES (Notes 1 and 4) 1,206 1,339
PROPERTY, PLANT AND EQUIPMENT (Note 5) 29,980 31,292
DEFERRED CHARGES (Note 2.g) 1,687 1,591
OTHER ASSETS (Note 2.h) 389 809
Total non-current assets from continuing operations 33,262 35,031
Non-current assets from discontinued operations (Note 14) 23,941 24,477
Total non-current assets 57,203 59,508
Total assets Ps 90,412 Ps 84,801
The accompanying sixteen notes are an integral part of these financial statements.
ALFA, S.A. DE C.V. AND SUBSIDIARIES
40
2004 2003
LIABILITIES AND STOCKHOLDERS’ EQUITY
SHORT-TERM LIABILITIES:Current portion of long-term debt (Note 7) Ps 1,939 Ps 2,593Bank loans and notes payable (Note 7) 2,085 1,444Suppliers 7,296 5,283Other accounts payable and accrued expenses 2,340 2,412
Current liabilities from continuing operations 13,660 11,732
Current liabilities from discontinued operations (Note 14) 4,537 3,786
Total current liabilities 18,197 15,518
LONG-TERM LIABILITIES:Long-term debt (Note 7) 15,384 15,950 Other liabilities (Note 2.k) 36Deferred income tax (Note 13) 4,875 5,026Estimated liabilities for seniority premiums and pension plans (Notes 2.j and 8) 798 794
Long-term liabilities from continuing operations 21,093 21,770
Long-term liabilities from discontinued operations (Note 14) 11,008 16,588
Total long-term debt 32,101 38,358
Total liabilities 50,298 53,876
STOCKHOLDERS’ EQUITY (Note 9):Majority interest:Nominal capital stock 264 290Restatement of capital stock 54 3,274Contributed capital 318 3,564Earned surplus 24,216 21,399Total majority interest 24,534 24,963
Minority interest 15,580 5,962
Total stockholders’ equity 40,114 30,925
Total liabilities and stockholders’ equity Ps 90,412 Ps 84,801
Ing. Dionisio Garza Medina Ing. Alfonso González MigoyaCHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
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ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
Consolidated statements of income
2004 2003
Net sales Ps 58,809 Ps 49,217
Cost of sales (46,606) (37,882)
Gross margin 12,203 11,335
Operating expenses (6,936) (6,418)
Operating income 5,267 4,917
Comprehensive financing expense, net (Note 10) (318) (1,634) 4,949 3,283Special item (Note 11) (526)Other expense, net (Note 12) (480) (468)Equity in net income of associated companies 92 219
Income from continuing operations, before the following provisions 4,035 3,034Provisions for (Note 13):Income tax and asset tax (875) (882)Employees’ profit sharing (109) (105)Income from continuing operations 3,051 2,047
Income (loss) from discontinued operations, net of income tax, asset taxand employees’ profit sharing (Note 14) 6,235 (860)Initial effect of a change in accounting principles (Note 5) (1,274)
Consolidated net income Ps 8,012 Ps 1,187
Minority interest in:Continuing operations Ps 632 Ps 223Discontinued operations 3,243 (66)Initial effect of a change in accounting principles (213)
Net income corresponding to minority interest Ps 3,662 Ps 157
Majority interest in:Continuing operations Ps 2,419 Ps 1,824Discontinued operations 2,992 (794)Initial effect of a change in accounting principles (1,061)
Net income corresponding to majority interest Ps 4,350 Ps 1,030
Earnings (loss) per share applicable to majority interest, in pesos (Note 2.p):Continuing operations Ps 4.17 Ps 3.13Discontinued operations 5.15 (1.36)Initial effect of a change in accounting principles (1.83)
Earnings per share applicable to majority interest Ps 7.49 Ps 1.77
FOR THE YEAR 2004 WITH COMPARATIVE FIGURES FOR 2003|| MILLIONS OF MEXICAN PESOS OF DECEMBER 31, 2004 PURCHASING POWER
Ing. Dionisio Garza Medina Ing. Alfonso González MigoyaCHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
The accompanying sixteen notes are an integral part of these financial statements.
42
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
Consolidated statement of changes in financial position
2004 2003
OperationsConsolidated net income Ps 8,012 Ps 1,187Net (income) loss from discontinued operations (6,235) 860Initial effect of a change in accounting principles 1,274Income from continuing operations 3,051 2,047
Items not affecting resources:Depreciation and amortization 2,174 2,077Equity in net income of associated companies (92) (219)Deferred income tax (755) (190)Other, net 454 169 4,832 3,884
Changes in working capital, other than financing:Accounts receivable (1,030) (937)Inventories (899) (141)Suppliers 1,930 346Other 334 480Resources provided by operations 5,167 3,632
InvestmentInvestment in shares 3,180 (554)Property, plant and equipment (2,569) (2,097)Other assets 471 (282)Resources provided by (used in) investment activities 1,082 (2,933)
Resources provided before financing activities 6,249 699
FinancingShort-term loans 4,129 2,589Long-term loans 8,709 6,422 12,838 9,011
Repayment of loans (13,474) (8,630)(Decrease) increase in bank financing (636) 381Reduction in capital stock (3,613)Changes in restricted cash 293 245Increase (decrease) in minority interest 435 (38)Dividends declared by ALFA (505) (412)Dividends of subsidiaries to minority interest (191) (85)Purchase of own shares (149)Loss from options on own shares (132)Resources used in financing activities (4,217) (190)Increase in cash and temporary investments 2,032 509Cash and temporary investments of acquired companies 36 16Cash and temporary investments at beginning of year 5,016 4,491
Cash and temporary investments at end of year from continuing operations Ps 7,084 Ps 5,016
FOR THE YEAR 2004 WITH COMPARATIVE FIGURES FOR 2003 || MILLIONS OF MEXICAN PESOS OF DECEMBER 31, 2004 PURCHASING POWER
The accompanying sixteen notes are an integral part of these financial statements.
Ing. Dionisio Garza Medina Ing. Alfonso González MigoyaCHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
43
Consolidated statements of changes in stockholders’ equity
Contributed capital Earned surplus Deficit on Cumulative Total Total Capital Retained restatement translation majority Minority stockholders’ stock earnings of capital adjustment Total interest interest equity
Balances at December 31, 2002 Ps 3,612 Ps 25,292 Ps (4,952) Ps (511) Ps 19,829 Ps 23,441 Ps 5,373 Ps 28,814
Changes in 2003:Gain from options on own shares 1 1 1 1Net income 1,030 1,030 1,030 157 1,187Cumulative translation adjustment 322 322 322 58 380Gain from holding nonmonetary assets 724 724 724 471 1,195
Comprehensive income 1,031 724 322 2,077 2,077 686 2,763
Dividends declared by ALFA (0.71 peso cents per share) (412) (412) (412) (412)Dividends of subsidiaries to minority interest (85) (85)Reclassification of accounts of subsidiaries (656) 656Shares held in treasury, net (48) (95) (95) (143) (143)Changes in minority interest (12) (12) (48) (1,163) 656 (507) (555) (97) (652)
Balances at December 31, 2003 3,564 25,160 (3,572) (189) 21,399 24,963 5,962 30,925
Changes in 2004:Net income 4,350 4,350 4,350 3,662 8,012Cumulative translation adjustment 56 56 56 11 67Loss from holding nonmonetary assets (666) (666) (666) 370 (296)Effect of dilution in subsidiaries, net (51) (51) (51) 51
Comprehensive income 4,299 (666) 56 3,689 3,689 4,094 7,783
Reduction in capital stock (Note 9) (3,246) (367) (367) (3,613) (3,613)Dividends declared by ALFA (0.87 peso cents per share) (505) (505) (505) (505)Dividends of subsidiaries to minority interest (128) (128)Reclassification of accounts of subsidiaries (4,300) 4,300Changes in minority interest 5,652 5,652 (3,246) (4,805) 3,933 (872) (4,118) 5,524 1,406
Balances at December 31, 2004 (Note 9) Ps 318 Ps 24,654 Ps (305) Ps (133) Ps 24,216 Ps 24,534 Ps 15,580 Ps 40,114
FOR THE YEAR 2004 WITH COMPARATIVE FIGURES FOR 2003|| MILLIONS OF MEXICAN PESOS OF DECEMBER 31, 2004 PURCHASING POWER
The accompanying sixteen notes are an integral part of these financial statements.
ALFA, S.A. DE C.V. AND SUBSIDIARIES
44
Contributed capital Earned surplus Deficit on Cumulative Total Total Capital Retained restatement translation majority Minority stockholders’ stock earnings of capital adjustment Total interest interest equity
Balances at December 31, 2002 Ps 3,612 Ps 25,292 Ps (4,952) Ps (511) Ps 19,829 Ps 23,441 Ps 5,373 Ps 28,814
Changes in 2003:Gain from options on own shares 1 1 1 1Net income 1,030 1,030 1,030 157 1,187Cumulative translation adjustment 322 322 322 58 380Gain from holding nonmonetary assets 724 724 724 471 1,195
Comprehensive income 1,031 724 322 2,077 2,077 686 2,763
Dividends declared by ALFA (0.71 peso cents per share) (412) (412) (412) (412)Dividends of subsidiaries to minority interest (85) (85)Reclassification of accounts of subsidiaries (656) 656Shares held in treasury, net (48) (95) (95) (143) (143)Changes in minority interest (12) (12) (48) (1,163) 656 (507) (555) (97) (652)
Balances at December 31, 2003 3,564 25,160 (3,572) (189) 21,399 24,963 5,962 30,925
Changes in 2004:Net income 4,350 4,350 4,350 3,662 8,012Cumulative translation adjustment 56 56 56 11 67Loss from holding nonmonetary assets (666) (666) (666) 370 (296)Effect of dilution in subsidiaries, net (51) (51) (51) 51
Comprehensive income 4,299 (666) 56 3,689 3,689 4,094 7,783
Reduction in capital stock (Note 9) (3,246) (367) (367) (3,613) (3,613)Dividends declared by ALFA (0.87 peso cents per share) (505) (505) (505) (505)Dividends of subsidiaries to minority interest (128) (128)Reclassification of accounts of subsidiaries (4,300) 4,300Changes in minority interest 5,652 5,652 (3,246) (4,805) 3,933 (872) (4,118) 5,524 1,406
Balances at December 31, 2004 (Note 9) Ps 318 Ps 24,654 Ps (305) Ps (133) Ps 24,216 Ps 24,534 Ps 15,580 Ps 40,114
Ing. Dionisio Garza Medina Ing. Alfonso González MigoyaCHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
45
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
Notes to the consolidated financial statements
AT DECEMBER 31, 2004 WITH COMPARATIVE FIGURES FOR 2003 || MILLIONS OF MEXICAN PESOS OF DECEMBER 31, 2004 PURCHASING POWER(EXCEPT WHERE OTHERWISE INDICATED)
1. ACTIVITIES OF ALFA COMPANIESAlfa, S. A. de C. V. (ALFA) is a holding company whose activities are carried out through subsidiary companies, of which it owns or con-trols, directly or indirectly, the majority of the common stock or which it controls through other means. Its activities are also carried out through associated companies, in whose management it has a significant participation but which it does not control.
On November 25, 2003, the Board of Directors resolved to carry out a significant corporate restructuring involving the divestiture of Hylsamex, S. A. de C. V. (Hylsamex). This resolution was confirmed at the extraordinary stockholders’ meeting held on February 4, 2004 (see Notes 9 and 14). Consequently, the assets, liabilities and operations of the steel and steel-making technology business segment are included in the 2004 and 2003 financial statements under the caption “Discontinued Operations”.
Generally accepted accounting principles establish that in the event of the disposal of a significant operation, such as is the case of Hylsamex, the financial information relating to that operation be included in the consolidated financial statements under the caption “Discontinued Operations”. The financial statements and notes thereto basically describe continuing operations. The items included in the consolidated financial statements as “Discontinued Operations” for the years presented refer to the financial information of the steel and steel-making technology business segment. All the other items included in the consolidated financial statements, as well as the information disclosed in the notes, except Note 14, exclusively refer to “Continuing Operations”, which are those that will remain as ongoing operations of ALFA.
At December 31 the principal subsidiaries and associated companies were:
% ownership at December 31, (a) 2004 2003
Continuing operationsPetrochemicals and synthetic fibersAlpek, S. A. de C. V. (Holding company) 100 100 Filamentos Elastoméricos de México, S. A. de C. V. 51 51 Grupo Centek, S. A. de C. V. 51 51 Nylon de México, S. A. de C. V. 100 100 Unimor, S. A. de C.V. 100 100 Grupo Petrotemex, S. A. de C. V. 100 100 Dak Americas, L.L.C. (b) 100 100 Petrocel, S. A. 100 100 Tereftalatos Mexicanos, S. A. de C. V. 91 91 Indelpro, S. A. de C. V. 51 51 Polioles, S. A. de C. V. 51 51 Polykrón, S. A. de C. V. 100 100 Teijin Akra, S. A. de C. V. (formerly Fibras Químicas, S. A. de C. V.) (c) 25 25
Refrigerated and frozen foodSigma Alimentos, S. A. de C. V. (Holding company) 100 100 Alimentos Finos de Occidente, S. A. de C. V. 100 100 Sigma Alimentos Centro, S. A. de C. V. 100 100 Sigma Alimentos Lácteos, S. A. de C. V. 100 100 Sigma Alimentos Noreste, S. A. de C. V. 100 100 Grupo Chen, S. de R. L. de C. V. 65
Auto components and other businessesVersax, S. A. de C. V. (Holding company) 100 100 Colombin Bel, S. A. de C. V. 100 100 Tenedora Nemak, S. A. de C. V. (Note 9) 85 80 Nemak, S. A. 100 100 Nemak Canadá, S. A. de C. V. (d) 100 100 Nemak Ontario, S. A. de C. V. (d) 100 100 Terza, S. A. de C. V. 51 51
46
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
% ownership at December 31, (a) 2004 2003
TelecommunicationsOnexa, S. A. de C. V. (Holding company) (c) 51 51 Alestra, S. de R. L. de C. V. (c) 51 51
Other companies Alfa Corporativo, S. A. de C. V. 100 100Dinámica, S. A. de C. V. 100 100
Discontinued operations (Note 14)Steel and steel-making technologyHylsamex, S. A. de C. V. (Holding company) (Note 9) 43 90 Galvak, S. A. de C. V. 100 100 Acerex, S. A. de C. V. 51 51 Hylsa, S. A. de C. V 100 100 Consorcio Minero Benito Juárez, Peña Colorada, S. A. de C. V. 51 51 Hylsa Norte, S. A. de C. V. 100 100 Hylsa Puebla, S. A. de C. V. 100 100 Hylsa Latin, L.L.C. 100 100 Consorcio Siderurgia Amazonia, Ltd. 12 37 Siderúrgica del Orinoco, C. A. (Sidor) 60 60
(a) % ownership ALFA has in the holding companies of each business group and % ownership these holding companies have in their subsidiaries.
(b) Subsidiary companies headquartered in North Carolina, U. S. A.(c) Mexican associated companies (see Note 4).(d) Companies jointly owning a 100% interest in Nemak of Canada Corporation, a subsidiary company located in Canada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe consolidated financial statements comprise those of ALFA and all its subsidiaries.
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in Mexico, including the standard requiring comprehensive recognition of the effects of inflation on the financial information. Consequently, all financial statements, including those of prior periods presented for comparative purposes, are stated in constant pesos of December 31, 2004 purchasing power.
The financial statements of the foreign subsidiaries and associated companies are conformed to accounting principles generally ac-cepted in Mexico. The related cumulative translation adjustment is recorded directly in stockholders’ equity.
The preparation of the financial information in accordance with accounting principles generally accepted in Mexico requires manage-ment to make estimates and assumptions that affect the reported amounts at the date of the financial statements. Actual results could differ from those estimates.
The most important indexes (National Consumer Price Index - NCPI) used to reflect the effects of inflation on the financial statements were: 112.550, 106.996 and 102.904 at December 31, 2004, 2003 and 2002, respectively (second half of June 2002 = 100).
Following is a summary of the most significant accounting policies:
(a) Temporary investments These investments are stated at market value. The differences in value between the investment date and the balance sheet date
are recorded in the statement of income under the caption comprehensive financing income (expense).
(b) Inventories and cost of sales (Note 3) Inventories are stated at estimated replacement cost, basically at the latest purchase prices and production costs of the year. The
amounts shown for inventories do not exceed market value. The cost of sales is shown based on the estimated replacement costs prevailing on the dates when the sales were effected.
(c) Investment in shares of associated companies (Note 4) The investment in associated companies is accounted for by the equity method. In accordance with this method, changes in the
carrying amount of the shares derive from the changes occurring after the acquisition date in the stockholders’ equity accounts of the investees.
(d) Absorption (dilution) of control in subsidiary and associated companies (Note 9) The effect of absorption (dilution) of control in subsidiary and associated companies comprises an increase in the percentage of
control and is recorded in the stockholders’ equity, directly in the retained earnings account, in the period in which the transac-tions that cause such effects occur. The effect of absorption (dilution) of control is determined by comparing the book value of the investment based on the equity before the absorption (dilution) of control against the book value, after the relevant event.
47
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
e. Property, plant, equipment and depreciation (Note 5) Property, plant and equipment and the related accumulated depreciation are stated at cost restated by applying factors derived
from the NCPI to the historical cost, except for machinery and equipment of foreign origin, which are stated at cost restated by applying factors derived from the general inflation index of the country of origin to the corresponding foreign currency amounts and translating those amounts to pesos at the exchange rate prevailing at the closing date.
Depreciation is calculated by the straight-line method based on the estimated useful lives of the assets as determined by the companies.
The net comprehensive financing expense (or income) incurred to finance construction in progress is capitalized as part of the cost of these assets until they become operational on a normal basis.
f. Impairment of long-lived assets and their disposal (Note 5) On January 1, 2004 the Company adopted the standards contained in Statement C-15 “Impairment of Long-Lived Assets and Their
Disposal” issued by the Mexican Institute of Public Accountants. This Statement contains general standards covering the identi-fication, determination and, where appropriate, recording of losses due to impairment or reduction in value of long-lived assets, tangible or intangible, including goodwill.
g. Deferred charges This caption is stated at cost restated by applying factors derived from the NCPI to the historical cost. It comprises principally the
excess of cost over book value of shares of subsidiaries and associated companies, expenses for placement of debt, costs of deve-lopment and implementation of integral computer systems and preoperating expenses, all of which are subject to amortization.
h. Other assets This caption mainly comprises an intangible asset related to the pension plan.
i Transactions in foreign currency and exchange differences (Note 6) Monetary assets and liabilities in foreign currencies, mainly U.S. dollars, are stated in Mexican currency at the rates of exchange
in effect at the balance-sheet date. Exchange differences arising from changes in exchange rates between the transaction and settlement dates or the balance-sheet date are charged or credited to income.
j. Estimated liabilities for seniority premiums and pension plans (Note 8) The cost of the employee retirement plans (pension, health-care expenses and seniority premiums), both formal and informal, is
recognized as an expense of the years in which the services are rendered in accordance with actuarial studies made by indepen-dent actuaries.
Other compensation based on length of service to which employees may be entitled in the event of dismissal or death, in accor-dance with the Mexican Labor Law, is charged to income in the year in which it becomes payable.
k. Derivative financial instruments Assets and liabilities arising from derivative financial instruments are stated at fair value and are included in the balance sheet as
other assets or liabilities. The differences between the fair value and the acquisition cost (including purchase expenses and pre-miums or discounts), as well as gains and losses incurred, are recorded directly in income, except for those arising from financial transactions on ALFA’s own shares, which are recorded directly in stockholders’ equity net of income tax.
l. Shares held in treasury The maximum limit for the acquisition of ALFA’s own shares is determined based on stockholders’ resolutions. Shares acquired
are held in treasury and their acquisition cost is charged to stockholders’ equity, as follows: a portion is charged to capital stock at restated theoretical value and the difference to retained earnings. These amounts are stated at cost restated by applying factors derived from the NCPI to the historical cost.
m. Revenue recognition The companies recognize revenues when merchandise is delivered and billed to customers. The revenues and the accounts recei-
vable are recorded net of allowances for returns and doubtful accounts, respectively.
n. Comprehensive financing income (expense) (Note 10) This item is determined by grouping in the statement of income all interest and other financial income and expense, exchange
gains and losses, and the gain or loss on monetary position. The gain or loss on monetary position represents the effect of inflation, as measured by the NCPI, on the Company’s monthly net
monetary assets or liabilities during the year.
o. Income tax, asset tax and employees’ profit sharing (Note 13) Income tax and employees’ profit sharing are recorded by the accounting method requiring recognition of deferred tax assets
and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of all assets and liabilities and their respective tax bases.
ALFA and its subsidiaries file consolidated income tax and asset tax returns in accordance with the applicable regulations.
p. Earnings per share Earnings per share are computed on the basis of the weighted average number of common shares outstanding during the year.
There are no effects arising from potentially dilutive shares.
q. Comprehensive income The transactions recorded in the various captions relating to earned surplus for the year, other than those carried out among
stockholders, are included in the statement of changes in stockholders’ equity under the caption comprehensive income (loss).
48
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
3. INVENTORIESConsolidated inventories were analyzed as follows:
2004 2003
Finished goods Ps 2,579 Ps 2,068Raw materials and work in process 2,824 2,122Other 1,130 1,141
Estimated replacement cost Ps 6,533 Ps 5,331
4. INVESTMENT IN SHARES OF ASSOCIATED COMPANIESThis investment comprised the following:
2004 2003
Onexa /Alestra Ps 674 Ps 701Teijin Akra 208 284Other 532 354 1,414 1,339Less - Impairment in value of investment (208)
Ps 1,206 Ps 1,339
5. PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment comprised the following:
2004 2003
Land Ps 2,011 Ps 1,959Depreciable assets 49,169 47,354Construction in progress and other assets 2,301 2,227 53,481 51,540Accumulated depreciation (22,095) (20,248) 31,386 31,292Less - Impairment in value of assets (1,406)
Net restated cost Ps 29,980 Ps 31,292
In accordance with the provisions of Statement C-15, as a result of studies carried out to assess the recoverability of the Company’s long-lived assets, at January 1, 2004 the Company determined an initial impairment in the net book value of such assets of Ps1,406, mainly in the petrochemicals and synthetic fibers business segment, and Ps208 in the book value of its investment in associated companies (see Note 4 above), net of income tax of Ps340 (see Note 13); the net amount of Ps1,274 was charged to the statement of income for the year ended December 31, 2004 as an initial effect of a change in accounting principles. In making such determination, the Company evaluated the performance of its various business segments, products and related product lines. The study made by the Company at December 31, 2004 did not reflect any additional impairment or any recovery of the impairment initially recorded.
Depreciation charged to income represented annual average rates of 4.3% in 2004 and 3.9% in 2003.
6. FOREIGN CURRENCY POSITIONAt December 31, 2004 and 2003, the exchange rates were 11.26 and 11.23 nominal pesos to the U.S. dollar, respectively. At January 24, 2005, date of issuance of these audited financial statements, the exchange rate was 11.25 nominal pesos to the dollar.
Amounts shown below are expressed in millions of U.S. dollars (US$), since this is the currency in which most of the companies’ for-eign currency transactions are carried out.
49
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
At December 31, 2004 the companies had the following foreign currency assets and liabilities:
Mexican Foreign subsidiaries subsidiaries Total
Monetary assets US$ 741 US$ 246 US$ 987Current liabilities (657) (216) (873)Long-term liabilities (874) (197) (1,071)
Foreign currency monetary position US$ (790) US$ (167) US$ (957)
Nonmonetary assets US$ 1,711 US$ 478 US$ 2,189
The nonmonetary assets of the Mexican subsidiaries (inventories, machinery and equipment) mentioned above are those manufac-tured outside Mexico and are stated at their net restated cost.
Following is a consolidated summary of the transactions in foreign currency carried out by the Mexican subsidiaries:
2004 2003
Goods and services:Exports US$ 938 US$ 879Imports (1,359) (1,048) (421) (169)Interest:Income 26 27Expense (81) (97) (55) (70)
Net outflow US$ (476) US$ (239)
Imports of machinery and equipment US$ (47) US$ (34)
7. SHORT-TERM BANK LOANS AND LONG-TERM DEBTAt December 31 the consolidated bank loans and current notes payable caption comprised the following:
2004 2003
Bank loans Ps 1,990 Ps 1,178Notes payable 95 266
Ps 2,085 Ps 1,444
At December 31 the long-term debt of ALFA and its subsidiaries comprised the following:
Interest rate (*) 2004 2003 2004
Loans in U.S. dollars:Bank loans secured by accounts receivableand by the assets acquired Ps 4,273 Ps 2,853 3.24%Bank loans secured by export sales (a) 1,000 3,323 10.75%Unsecured bank loans (b) 7,836 8,414 5.97%Other 644 2,075 3.76%Loans in Mexican currency:Unsecured bank loans 2,570 826 6.02%Unsecured - Debt certificates 1,000 1,052 7.54% 17,323 18,543Current maturities (1,939) (2,593)
Long-term debt Ps 15,384 Ps 15,950
(*) Nominal weighted average rates effective at December 31, 2004.
50
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
At December 31, 2004 long-term debt maturities were as follows:
2006 Ps 1,5842007 1,8212008 6,2852009 onwards 5,694
Ps 15,384
(a) There are deposits made in cash (restricted cash) to guarantee future related interest. At December 31, 2004 and 2003, these deposits amounted to US$2.5 million and US$27.2 million, respectively, equivalent to Ps28 and Ps306, respectively. They are in-cluded in the balance sheet under the caption ”Other assets”.
(b) These loans include cross currency swap agreements entered into by a subsidiary with financial intermediaries for a total amount of Ps1,000 (notional amount). These agreements stipulate, among other things, the obligation for the subsidiary to make semian-nual payments which are determined by applying variables rates to the notional amount.
The current bank loan agreements contain the usual covenants, covering the maintenance of certain financial ratios, payment of divi-dends, submission of financial information, etc. In the event noncompliance with such ratios is not cured in a time period satisfactory to the banks, the latter may require immediate payment of the entire indebtedness. At December 31, 2004, the companies were in compliance with such covenants and restrictions.
At December 31, 2004 accounts receivable of Ps291, property, plant and equipment of Ps702 and shares of subsidiaries with a book value of Ps611, were pledged to guarantee liabilities totaling Ps4,273.
8. ESTIMATED LIABILITIES FOR SENIORITY PREMIUMS AND PENSION PLANSThe valuation of the liabilities for employee retirement plans both formal (covering approximately 36% of the companies’ employees in 2004 and 39% in 2003) and informal, covers all employees and is based primarily on their years of service, their present age and their remuneration at date of retirement.
During 2004 certain subsidiaries of ALFA modified some of their most important retirement programs to convert them into defined contribution schemes. In accordance with the structure of these new plans, the reduction in labor liabilities associated with this modi-fication will be reflected progressively over the next years.
The principal subsidiaries of ALFA have established irrevocable trust funds for payment of pensions and seniority premiums and health-care expenses. Contributions amounted to Ps31 in 2004 (Ps21 in 2003).
Following is a summary of the principal consolidated financial data relative to these obligations:
2004 2003
Accumulated benefit obligation Ps 1,920 Ps 1,757
Unfunded accumulated benefit obligation Ps 622 Ps 657
Projected benefit obligation Ps 2,462 Ps 2,480Plan assets at market value (1,584) (1,257)Unamortized prior service costs (transition liability) (375) (476)Unamortized actuarial gains and losses, net 83 (212)Unfunded accrued seniority premiums and pension cost 586 535Additional liability 212 259
Estimated liability for seniority premiums and pension plans Ps 798 Ps 794
Net cost for the period Ps (151) Ps (186)Defined contribution component (12)
Net cost for the year Ps (163) Ps (186)
Prior service cost (transition liability), plan amendment costs and actuarial gains and losses are recorded through charges to income by the straight-line method over the average remaining service life of the employees expected to receive the benefits, as follows:
2004 2003
Amortization period:Transition liability 12 years 12 yearsUnamortized actuarial gains and losses 19 years 19 yearsWeighted real discount rate 5.0% 5.0%Real estimated return at long-term on plan assets 7.0% 6.5%
51
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
9. STOCKHOLDERS’ EQUITYAt the extraordinary meeting held on February 4, 2004, the stockholders resolved to reduce the Company’s capital stock and stock-holders’ equity through a reimbursement in kind, which involved making a pro rata distribution among its stockholders of 197,334,903 Ordinary Participation Certificates (CPOs) issued by Nacional Financiera, S.N.C. (NAFIN). These CPOs represents the same number of shares of Hylsamex, equivalent to 38.97% of its capital stock (see Note 14). In order to effect this reimbursement, it was resolved to reduce the nominal capital stock by Ps26, without affecting the number of outstanding shares, the restatement of capital stock by Ps3,220 and the deficit on restatement of capital by Ps367, so as to reduce ALFA’s stockholders’ equity by an amount equal to 38.97% of Hylsamex’s stockholders’ equity.
At the above-mentioned meeting, the stockholders also resolved to modify certain Company by-laws relating to the shares repre-senting ALFA’s capital stock by classifying them, as follows: (a) Class “I” shares, representing the entire fixed minimum portion of the capital stock without right of withdrawal, and (b) Class “II” shares, representing all the shares comprising the variable portion of the capital stock, with right of withdrawal.
The capital stock will remain variable, with a fixed minimum of Ps274 without right of withdrawal. The subscribed and paid-in capi-tal stock is represented by 600,000,000 Class “I” Series “A” nominative shares without par value. The variable portion with right of withdrawal will be represented by Class “II” nominative shares without par value of any of the Series “A”, “L” and/or “C”; the two latter Series may not at any time jointly exceed 25% of the total capital stock.
In July 2004, ALFA recognized its dilution in Hylsamex as a result of the issuance of 101.1 million Hylsamex shares representing com-mon stock with limited voting rights placed by Hylsamex in the domestic and international markets in which subscription ALFA did not participate. The dilution effect amounted to Ps250, which was charged to the stockholders´ equity. From that date onwards, ALFA owns 43% of Hylsamex’s capital stock, maintaining control for consolidation purposes in accordance with generally accepted accounting principles.
Simultaneously, in December 2004 ALFA recognized through its subsidiary Versax an absorption of control in Tenedora Nemak in the amount of Ps199; the net effect of (Ps51) resulting from the dilution in Hylsamex and the absorption in Tenedora Nemak is shown in the statement of changes in stockholders’ equity for the year ended December 31, 2004.
At December 31, 2004 the restated amounts of stockholders’ equity were as follows:
Nominal Restated amount Restatement amount
Contributed capital:Capital stock Ps 264 Ps 54 Ps 318Earned surplus:Retained earnings 16,049 8,605 24,654Deficit on restatement of capital (305) (305)Cumulative translation adjustment (133) (133)
Total earned surplus 16,049 8,167 24,216Total majority interest 16,313 8,221 24,534Minority interest 12,333 3,247 15,580
Consolidated stockholders’ equity Ps 28,646 Ps 11,468 Ps 40,114
At December 31, 2004 the capital stock was variable, with a fixed minimum of Ps264 without right of withdrawal. The subscribed and paid-in capital stock was represented by Class “I” Series “A” nominative shares without par value. Ownership of Series “A” shares is restricted to Mexicans.
At December 31, 2004, ALFA had 19,450,800 shares held in treasury; each such share had a market value of 57.00 pesos.
Dividends paid from retained earnings which have not previously been taxed are subject to an income tax payable by the Company, which may be credited against the income tax payable by the Company in the year in which the dividends are paid and in the two following years.
The (deficit) surplus on restatement of capital comprises principally the (loss) gain from holding nonmonetary assets and represents the difference between restating these assets by the specific cost method and restating them based on inflation measured in terms of the NCPI.
52
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
10. COMPREHENSIVE FINANCING EXPENSE, NET
2004 2003
Financial expense Ps (1,169) Ps (1,155)Financial income 172 144Exchange gain (loss), net 75 (1,145)Gain on monetary position 603 413 (319) (1,743)
Portion capitalized in property, plant and equipment 1 109
Ps (318) Ps (1,634)
11. SPECIAL ITEMAt December 31, 2004 there existed restricted funds of US$46.4 million, equivalent to Ps526, deposited to cover the financial obliga-tions of associated companies, which were fully reserved at that date; this reserve is included in the statement of income for the year ended December 31, 2004, under the caption “Special item”.
12. OTHER EXPENSE, NETAt December 31 this caption comprised the following:
2004 2003
Severance compensation Ps (79) Ps (105)Write-off of assets of operations closed down (347) (155)Other expenses, net (54) (208)
Ps (480) Ps (468)(
13. INCOME TAX, ASSET TAX AND EMPLOYEES’ PROFIT SHARINGThe net charge to consolidated income for income tax was as follows:
2004 2003
Currently payable Ps (1,630) Ps (1,072)Deferred 755 190
Total income tax Ps (875) Ps (882)
The reconciliation between the statutory and effective income tax rates is shown below:
2004 2003
Income before income tax and employees’ profit sharing Ps 4,035 Ps 3,034Equity in net income of associated companies (92) (219)
Ps 3,943 Ps 2,815
Income tax at statutory rate (33% and 34%, respectively) Ps (1,301) Ps (957)Add (deduct) effect of income tax on:Permanent differences in comprehensive financing expense 40 (27)(Recovery) cancellation of allowance for unrecoverable tax loss carryforwards and asset tax credits (673) 254Other permanent differences, net 378 (152)Total income tax provision charged to income, beforeeffect of reduction in statutory income tax rate (1,556) (882)Effect on deferred income tax of reduction in statutory income tax rate (1) 681
Total income tax provision charged to income Ps (875) Ps (882)
Effective income tax rate 39.4% 31.3%
53
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
At December 31 the principal temporary differences requiring recognition of deferred income tax were analyzed as follows:
2004 2003
Inventories Ps 5,026 Ps 3,267Property, machinery and equipment, net 14,215 15,603Asset valuation allowances (845) (383)Estimated liabilities (644) (235)Tax loss carryforwards (116) 494 17,636 18,746
Income tax at statutory rate applicable to temporary differences (1) 28% 32%Deferred income tax 4,938 5,999Recoverable asset tax (223) (1,077)Deferred income tax asset 160 104
Deferred income tax liability, net Ps 4,875 Ps 5,026
(1) In accordance with the amendments to the Mexican Income Tax Law published on December 1, 2004, the corporate income tax rate for the year 2005 will be reduced to 30%; this rate will be reduced by 1% annually until reaching a 28% rate in the year 2007. This change resulted in a decrease of Ps681 in the amount of deferred income tax payable recorded at December 31, 2004. Such amount was credited to 2004 income.
The deferred income tax recorded at December 31 was (charged) credited to the following accounts:
2004 2003
Balance from prior year Ps (5,999) Ps (5,665)Income for the year 755 190Initial effect of a change in accounting principles 340Deficit on restatement of capital (34) (524)
Total Ps (4,938) Ps (5,999)
Employees’ profit sharing is determined separately in each subsidiary at the rate of 10% on the taxable income adjusted as pre-scribed by the Income Tax Law.
14. DIVESTITURE OF HYLSAMEXAt a meeting held on February 4, 2004, the Company’s Stockholders approved carrying out a significant corporate restructuring consisting of a two-stage divestiture of Hylsamex from the Company’s portfolio of businesses, by reducing ALFA’s capital stock and stockholders’ equity and distributing among the Company’s stockholders all the shares it owns in Hylsamex, with the first reduction of capital taking effect immediately and further resolving to instruct the Company’s Board of Directors to call the shareholders to an additional extraordinary meeting during the first quarter of 2005 at which the proposal to implement the second reduction will be presented for approval. Consequently, the assets, liabilities and operations of the steel and steel-making technology business seg-ment are included in the 2004 and 2003 financial statements under the caption “Discontinued Operations”.
Taking into consideration that on February 2004 the Hylsamex shares owned by ALFA were pledged to guarantee loans payable by the former in accordance with a “Caución Bursátil” agreement, the first capital reduction took place through the issuance of Ordinary Participation Certificates (CPOs).
In July 2004, the “Caución Bursátil”over Hylsamex shares was extinguished, and the CPOs were canceled and exchanged for shares free of lien.
54
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
A summary of the discontinued operations as of and for the years ended December 31, 2004 and 2003, is as follows:
2004 2003
Balance sheetAssetsCurrent assets:Cash and temporary investments Ps 1,413 Ps 1,009Trade accounts receivable 4,483 3,254Inventories 4,249 2,607Other current assets 13 75Total current assets 10,158 6,945Investment in shares of associated companies 1,220 709Property, plant and equipment 20,722 21,571Deferred charges 1,625 1,788Other non-current assets 374 409Total non-current assets 23,941 24,477
Total assets Ps 34,099 Ps 31,422
Liabilities and stockholders’ equityCurrent portion of debt Ps 332 Ps 770Other current liabilities 4,205 3,016Total current liabilities 4,537 3,786Long-term debt 7,159 12,219Other long-term liabilities 3,849 4,369Total long-term liabilities 11,008 16,588Total liabilities 15,545 20,374Stockholders’ equity 18,554 11,048
Total liabilities and stockholders’ equity Ps 34,009 Ps 31,422
Statement of incomeNet sales Ps 26,760 Ps 16,806Cost of sales (17,942) (14,815)Operating expenses (1,423) (1,260)Operating income 7,395 731Comprehensive financing expense, net (641) (1,629)Taxes and other (519) 38Consolidated net income (loss) 6,235 (860)Minority interest (51) (18)
Majority net income (loss) Ps 6,184 Ps (878)
Statement of changes in financial positionConsolidated net income (loss) Ps 6,235 Ps (860)Depreciation and amortization 1,427 1,437Equity in income of associated companies (781) (315)Deferred income tax 1,008 (73)Others items not affecting resources 105 178Changes in working capital (2,735) 50Resources provided by operations 5,259 417Investment in property, plant and equipment (539) (611)Other investments 38 (92)Financing, net (4,352) 658
Changes in cash and temporary investments Ps 406 Ps 372
55
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
15. INFORMATION BY BUSINESS SEGMENTThe Company controls and evaluates its continuing operations through three units: Alpek (petrochemicals and synthetic fibers), Sigma (refrigerated and frozen food) and Versax (auto components and other businesses). These operating units are managed inde-pendently because their products and the markets they serve are different. Their activities are carried out through various subsid-iary companies.
The accounting policies followed by the operating units mentioned above are similar to those described in Note 2.
The information by business segment is as follows:
Other companies, discontinued operations Alpek Sigma Versax Subtotal and eliminations Consolidated
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
IncomeNet sales from continuing operations Ps 31,770 Ps 25,634 Ps 14,146 Ps 12,190 Ps 12,599 Ps 11,025 Ps 58,515 Ps 48,849 Ps 294 Ps 368 Ps 58,809 Ps 49,217-Mexico 16,769 13,327 12,861 11,365 3,210 2,531 32,840 27,223 294 368 33,134 27,591-United States 10,148 9,600 278 90 5,433 6,031 15,859 15,721 15,859 15,721-Canada 14 3,544 2,208 3,558 2,208 3,558 2,208-Other countries 4,839 2,707 1,007 735 412 255 6,258 3,697 6,258 3,697Operating income 2,426 2,042 1,661 1,696 1,179 1,100 5,266 4,838 1 79 5,267 4,917Comprehensive financing expense, net (139) (914) (82) (150) (26) (396) (247) (1,460) (71) (174) (318) (1,634)Income tax, asset tax and employee´s sharing (33) (466) (463) (566) (233) (264) (729) (1,296) (255) 309 (984) (987)Net income from continuing operations 1,710 227 1,008 908 672 342 3,390 1,477 (339) 570 3,051 2,047Net income (loss) from discontinued operations 6,235 (860) 6,235 (860)Initial effect of a change in accounting principles (1,201) (1,201) (73) (1,274)Net income 509 227 1,008 908 672 342 2,189 1,477 5,823 (290) 8,012 1,187
Financial positionCurrent assets from continuing operations Ps 11,220 Ps 9,441 Ps 5,213 Ps 3,001 Ps 5,268 Ps 5,010 Ps 21,701 Ps 17,452 Ps 1,350 Ps 896 Ps 23,051 Ps 18,348Current assets from discontinued operations 10,158 6,945 10,158 6,945Non-current assets from continuing operations 18,098 19,409 6,223 5,005 7,438 7,604 31,759 32,018 1,503 3,013 33,262 35,031Non-current assets from discontinued operations 23,941 24,477 23,941 24,477
Total assets Ps 29,318 Ps 28,850 Ps 11,436 Ps 8,006 Ps 12,706 Ps 12,614 Ps 53,460 Ps 49,470 Ps 36,952 Ps 35,331 Ps 90,412 Ps 84,801
Current liabilities from continuing operations Ps 9,646 Ps 7,338 Ps 2,150 Ps 1,577 Ps 2,224 Ps 2,264 Ps 14,020 Ps 11,179 Ps (360) Ps 553 Ps 13,660 Ps 11,732Current liabilities from discontinued operations 4,537 3,786 4,537 3,786Long-term liabilities from continuing operations 9,918 11,952 4,637 2,819 5,344 5,715 19,899 20,486 1,194 1,284 21,093 21,770Long-term liabilities from discontinued operations 11,008 16,588 11,008 16,588
Total liabilities Ps 19,564 Ps 19,290 Ps 6,787 Ps 4,396 Ps 7,568 Ps 7,979 Ps 33,919 Ps 31,665 Ps 16,379 Ps 22,211 Ps 50,298 Ps 53,876
Changes in financial positionConsolidated net income Ps 509 Ps 227 Ps 1,008 Ps 908 Ps 672 Ps 342 Ps 2,189 Ps 1,477 Ps 5,823 Ps (290) Ps 8,012 Ps 1,187Net (income) loss from discontinued operations (6,235) 860 (6,235) 860Initial effect of a change in accounting principles 1,201 1,201 73 1,274Depreciation and amortization 1,189 1,226 473 396 480 419 2,142 2,041 32 36 2,174 2,077Equity in income of associated companies 65 167 65 167 (157) (386) (92) (219)Deferred income tax (549) 66 56 4 (24) 18 (517) 88 (238) (278) (755) (190)Other ítems not affecting resources (55) (3) 3 39 243 40 191 76 263 93 454 169Changes in working capital 430 (538) (311) (1) (218) (138) (99) (677) 434 425 335 (252)Resources provided by operations 2,790 1,145 1,229 1,346 1,153 681 5,172 3,172 (5) 460 5,167 3,632Investment in property, plant and equipment (716) (490) (1,326) (867) (583) (753) (2,625) (2,110) 56 13 (2,569) (2,097)Other investments (429) 13 (417) (97) 23 (50) (823) (134) 4,474 (702) 3,651 (836)Financing, net (1,577) (808) 1,808 14 (242) 809 (11) 15 (4,206) (205) (4,217) (190)
Changes in cash and temporary investments Ps 68 Ps (140) Ps 1,294 Ps 396 Ps 351 Ps 687 Ps 1,713 Ps 943 Ps 319 Ps (434) Ps 2,032 Ps 509
Other dataExports and foreign sales of subsidiaries (Millions of US dollars) US$ 1,293 US$ 1,060 US$ 111 US$ 71 US$ 809 US$ 732 US$ 2,213 US$ 1,863 US$ 2,213 US$ 1,863Personnel 4,502 4,615 19,463 15,890 7,629 7,419 31,594 27,924 10,475 9,971 42,069 37,895
16. NEW ACCOUNTING PRONOUNCEMENTSOn January 1, 2005 the standards contained in Statement B-7 “Business acquisitions”, Statement C-2 “Financial instruments”, State-ment C-10 “Derivative financial instruments and hedge transactions” and Statement D-3 “Labor liabilities” issued by the Mexican Institute of Public Accountants became effective.
At the date of issuance of the these financial statements management was carrying out a study to determine the effect of these new statements on the financial statements from January 1, 2005, and the corresponding effects, if any, will be recognized in 2005.
56
ALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIESALFA, S.A. DE C.V. AND SUBSIDIARIES ALFA, S.A. DE C.V. AND SUBSIDIARIES
Other companies, discontinued operations Alpek Sigma Versax Subtotal and eliminations Consolidated
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
IncomeNet sales from continuing operations Ps 31,770 Ps 25,634 Ps 14,146 Ps 12,190 Ps 12,599 Ps 11,025 Ps 58,515 Ps 48,849 Ps 294 Ps 368 Ps 58,809 Ps 49,217-Mexico 16,769 13,327 12,861 11,365 3,210 2,531 32,840 27,223 294 368 33,134 27,591-United States 10,148 9,600 278 90 5,433 6,031 15,859 15,721 15,859 15,721-Canada 14 3,544 2,208 3,558 2,208 3,558 2,208-Other countries 4,839 2,707 1,007 735 412 255 6,258 3,697 6,258 3,697Operating income 2,426 2,042 1,661 1,696 1,179 1,100 5,266 4,838 1 79 5,267 4,917Comprehensive financing expense, net (139) (914) (82) (150) (26) (396) (247) (1,460) (71) (174) (318) (1,634)Income tax, asset tax and employee´s sharing (33) (466) (463) (566) (233) (264) (729) (1,296) (255) 309 (984) (987)Net income from continuing operations 1,710 227 1,008 908 672 342 3,390 1,477 (339) 570 3,051 2,047Net income (loss) from discontinued operations 6,235 (860) 6,235 (860)Initial effect of a change in accounting principles (1,201) (1,201) (73) (1,274)Net income 509 227 1,008 908 672 342 2,189 1,477 5,823 (290) 8,012 1,187
Financial positionCurrent assets from continuing operations Ps 11,220 Ps 9,441 Ps 5,213 Ps 3,001 Ps 5,268 Ps 5,010 Ps 21,701 Ps 17,452 Ps 1,350 Ps 896 Ps 23,051 Ps 18,348Current assets from discontinued operations 10,158 6,945 10,158 6,945Non-current assets from continuing operations 18,098 19,409 6,223 5,005 7,438 7,604 31,759 32,018 1,503 3,013 33,262 35,031Non-current assets from discontinued operations 23,941 24,477 23,941 24,477
Total assets Ps 29,318 Ps 28,850 Ps 11,436 Ps 8,006 Ps 12,706 Ps 12,614 Ps 53,460 Ps 49,470 Ps 36,952 Ps 35,331 Ps 90,412 Ps 84,801
Current liabilities from continuing operations Ps 9,646 Ps 7,338 Ps 2,150 Ps 1,577 Ps 2,224 Ps 2,264 Ps 14,020 Ps 11,179 Ps (360) Ps 553 Ps 13,660 Ps 11,732Current liabilities from discontinued operations 4,537 3,786 4,537 3,786Long-term liabilities from continuing operations 9,918 11,952 4,637 2,819 5,344 5,715 19,899 20,486 1,194 1,284 21,093 21,770Long-term liabilities from discontinued operations 11,008 16,588 11,008 16,588
Total liabilities Ps 19,564 Ps 19,290 Ps 6,787 Ps 4,396 Ps 7,568 Ps 7,979 Ps 33,919 Ps 31,665 Ps 16,379 Ps 22,211 Ps 50,298 Ps 53,876
Changes in financial positionConsolidated net income Ps 509 Ps 227 Ps 1,008 Ps 908 Ps 672 Ps 342 Ps 2,189 Ps 1,477 Ps 5,823 Ps (290) Ps 8,012 Ps 1,187Net (income) loss from discontinued operations (6,235) 860 (6,235) 860Initial effect of a change in accounting principles 1,201 1,201 73 1,274Depreciation and amortization 1,189 1,226 473 396 480 419 2,142 2,041 32 36 2,174 2,077Equity in income of associated companies 65 167 65 167 (157) (386) (92) (219)Deferred income tax (549) 66 56 4 (24) 18 (517) 88 (238) (278) (755) (190)Other ítems not affecting resources (55) (3) 3 39 243 40 191 76 263 93 454 169Changes in working capital 430 (538) (311) (1) (218) (138) (99) (677) 434 425 335 (252)Resources provided by operations 2,790 1,145 1,229 1,346 1,153 681 5,172 3,172 (5) 460 5,167 3,632Investment in property, plant and equipment (716) (490) (1,326) (867) (583) (753) (2,625) (2,110) 56 13 (2,569) (2,097)Other investments (429) 13 (417) (97) 23 (50) (823) (134) 4,474 (702) 3,651 (836)Financing, net (1,577) (808) 1,808 14 (242) 809 (11) 15 (4,206) (205) (4,217) (190)
Changes in cash and temporary investments Ps 68 Ps (140) Ps 1,294 Ps 396 Ps 351 Ps 687 Ps 1,713 Ps 943 Ps 319 Ps (434) Ps 2,032 Ps 509
Other dataExports and foreign sales of subsidiaries (Millions of US dollars) US$ 1,293 US$ 1,060 US$ 111 US$ 71 US$ 809 US$ 732 US$ 2,213 US$ 1,863 US$ 2,213 US$ 1,863Personnel 4,502 4,615 19,463 15,890 7,629 7,419 31,594 27,924 10,475 9,971 42,069 37,895
Ing. Dionisio Garza Medina Ing. Alfonso González MigoyaCHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
57
Financial summary
2004 2003 2002 2001 2000
INCOME
Net sales Ps 58,809 Ps 49,217 Ps 41,854 Ps 38,529 Ps 37,879
Operating income 5,267 4,917 4,927 3,966 4,818
Comprehensive financing expense, net (318) (1,634) (1,823) (80) (690)Special item and other (expense) income, net (1,006) (468) 428 (644) (255)Equity in income (loss) of associated companies 92 219 (624) (358) (209)Income tax, asset tax and employees’ profit sharing (984) (987) (834) 124 (1,229)Income from continuing operations 3,051 2,047 2,074 3,008 2,435
Income (loss) from discontinued operations, net of income tax, asset tax and employees’ profit sharing 6,235 (860) (982) (2,935) 201Initial effect of a change in accounting principles (1,274)
Consolidated net income Ps 8,012 Ps 1,187 Ps 1,092 Ps 73 Ps 2,636
Net income (loss) corresponding to minority interest Ps 3,662 Ps 157 Ps (436) Ps (339) Ps 571
Net income corresponding to majority interest Ps 4,350 Ps 1,030 Ps 1,528 Ps 412 Ps 2,065
FINANCIAL POSITIONCurrent assets from continuing operations Ps 23,051 Ps 18,348 Ps 16,618 Ps 17,670 Ps 17,692Current assets from discontinued operations 10,158 6,945 6,557 5,283 7,002Non-current assets from continuing operations 33,262 35,031 32,304 30,620 35,181Non-current assets from discontinued operations 23,941 24,477 24,729 25,211 28,706
Total assets Ps 90,412 Ps 84,801 Ps 80,208 Ps 78,784 Ps 88,581
Current liabilities from continuing operations Ps 13,660 Ps 11,732 Ps 10,733 Ps 10,373 Ps 10,370Current assets from discontinued operations 4,537 3,786 3,035 7,659 5,740Non-current assets from continuing operations 21,093 21,770 21,132 21,237 25,880Non-current assets from discontinued operations 11,008 16,588 16,493 13,258 16,545Total liabilities 50,298 53,876 51,393 52,527 58,535
Consolidated stockholders’ equity 40,114 30,925 28,815 26,257 30,046
Total liabilities and stockholders’ equity Ps 90,412 Ps 84,801 Ps 80,208 Ps 78,784 Ps 88,581
Majority interest Ps 24,534 Ps 24,963 Ps 23,442 Ps 20,709 Ps 21,905
Investment in property, plant and equipment of the year Ps 2,569 Ps 2,097 Ps 2,011 Ps 3,244 Ps 3,069
Depreciation and amortization of the year 2,174 2,077 1,809 1,667 1,710
FOR THE YEARS 2004 TO 2000 || MILLIONS OF MEXICAN PESOS OF DECEMBER 31, 2004 PURCHASING POWER|| (EXCEPT PER SHARE DATA)
ALFA, S.A. DE C.V. AND SUBSIDIARIES
58
2004 2003 2002 2001 2000
PER SHARE DATA
Mexican Pesos of December 31, 2004 Purchasing Power
Net income from continuing operations Ps 4.17 Ps 3.13 Ps 3.79 Ps 4.73 Ps 3.20
Net income (loss) from discontinued operations 5.15 (1.36) (1.19) (4.04) 0.26Initial effect of a change in accounting principles (1.83)
Net income Ps 7.49 Ps 1.77 Ps 2.60 Ps 0.69 Ps 3.46
Stockholders’ equity Ps 42.26 Ps 43.00 Ps 39.84 Ps 35.20 Ps 36.56
Dividends 0.87 0.71 0.44 0.63 1.29
Price at year end (a) 57.00 35.45 18.30 11.82 15.55
Price at year end / net income 7.61 20.06 7.04 17.03 4.49
Price at year end / stockholders’ equity 1.35 0.82 0.46 0.34 0.43
Number of outstanding shares (b) 580,549,200 580,549,200 588,379,200 588,379,200 599,219,000
Weighted average number of outstanding shares (c) 580,549,200 583,066,844 588,379,200 592,547,302 596,193,110
OTHER INDICATORSCurrent ratio 1.82 1.63 1.65 1.29 1.53
Total liabilities to total assets 0.56 0.64 0.63 0.66 0.66
Total liabilities to stockholders’ equity 1.25 1.74 1.74 1.94 1.92
Consolidated net income to average total assets (%) 9.15 1.44 1.40 0.09 2.98
Consolidated net income to average stockholders’ equity (%) 22.56 3.97 3.97 0.26 7.55
Interest-bearing debt, net of cash to cash flowfrom continuing operations (d) 1.67 2.11 2.17 2.62 2.73
Interest coverage from continuing operations (e) 7.46 6.92 6.99 4.16 3.68
(a) Market value on the basis of quotations in the Bolsa Mexicana de Valores, S. A. de C. V.(b) Equals number of outstanding shares at December 31 of each year. (c) Weighted average number of outstanding shares during the year.(d) Cash flow comprises: operating income plus depreciation and amortization.(e) Cash flow / Financial expense, net.
59
Significant quarterly information
Quarters 2004 1st. 2nd. 3rd. 4th.
Net sales Ps 13,404 Ps 14,165 Ps 14,923 Ps 16,317
Operating income 1,200 1,337 1,366 1,364
Income from continuing operations 700 450 851 1,050
Income from discontinued operations 728 1,459 1,393 2,655
Consolidated net income 360 1,909 2,037 3,706
Net income corresponding to majority interest 214 1,107 1,123 1,906
Income per share from continuing operations 0.99 0.64 1.22 1.32
Income per share from discontinued operations 0.85 1.27 1.08 1.95
Loss per share from initial effect of a change in accounting principles (1.47) (0.36)
Income per share (1) 0.37 1.91 1.94 3.27
Price per share:Highest 43.88 46.19 43.83 57.80Lowest 32.66 35.60 36.52 41.04At closing 43.88 40.17 43.83 57.00
Book value per share (2) 35.81 37.00 38.90 42.26
MILLIONS OF MEXICAN PESOS OF DECEMBER 31, 2004 PURCHASING POWER || (EXCEPT PER SHARE DATA WHICH ARE IN PESOS)
ALFA, S.A. DE C.V. AND SUBSIDIARIES
60
Quarters 2003 1st. 2nd. 3rd. 4th.
Net sales Ps 12,486 Ps 11,639 Ps 12,388 Ps 12,704
Operating income 1,274 1,263 1,295 1,085
Income from continuing operations 361 610 412 664
(Loss) income from discontinued operations (410) 495 (278) (667)
Consolidated net (loss) income (49) 1,106 133 (3)
Net (loss) income corresponding to majority interest (40) 958 95 17
Income per share from continuing operations 0.56 0.86 0.62 1.09
(Loss) income per share from discontinued operations (0.62) 0.77 (0.45) (1.06)
(Loss) income per share (1) (0.06) 1.63 0.17 0.03
Price per share:Highest 18.67 23.98 30.04 36.72Lowest 16.03 16.59 21.92 27.96At closing 16.67 22.63 28.41 35.45
Book value per share (2) 39.52 40.93 42.18 43.00
NOTE
The quarterly information contained in this page was not audited in conformity with generally accepted standards. However, it was subjected to limited review procedures by the external auditors.
(1) Based on the weighted average number of outstanding shares during each quarter of the year.
(2) Based on the number of outstanding shares at the end of each quarter.
61
Bonding: A process that uses heat to adhere polyurethane foam to cloth. Mainly used to upholster automobile seats.
Caprolactam: Raw material derived from cyclohexane, an oil byproduct, used to manufacture nylon.
Data transmission: The sending of data to other locations using digital or analog media that operates on a platform such as Frame Relay.
DMT (Dimethyl Terephtalate): Raw material used to manu-facture polyester.
Expandable polystyrene: Thermoplastic used for insulation and packaging.
Galvanizing: Corrosion protection applied to steel in the form of a zinc coating.
Glycol: Petrochemical used to manufacture polyester and in other industrial applications.
Hot and cold rolled steel: Steel that has been put through a hot and/or cold rolling process to reduce thickness and improve surface quality.
Independent Board Member: A board member selected by his experience, capability and reputation, who is not involved with the day-to-day management of the company.
Independent Proprietary Board Member: A board member that owns company shares but is not involved with the day-to-day management of the company.
Lycra®: Brand of elastane fiber patented by DuPont.
Nylon: Plastic resin used in the production of textile fiber and other engineering applications.
PET (Polyethylene Terephtalate): Plastic resin mostly used to manufacture containers.
Polyester: Plastic resin used to manufacture textile fibers, films, and containers.
Polypropylene: Propylene byproduct used to make plastics and fibers, among other products.
Propylene: Oil byproduct used to manufacture plastics.
PTA: Purified Terephthalic Acid, raw material used to manufac-ture polyester. In certain applications, DMT and PTA are inter-changeable.
Related Proprietary Board Member: A board member that owns company shares and is involved with the day-to-day man-agement of the company.
Urethane: Chemical compound derived from oil used to manu-facture plastic foam.
Virtual Private Network: Remote connection that integrates customer’s business locations into a single corporate network.
VOIP (Voice Over Internet Protocol): Transmission of voice over the Internet instead of regular phone lines.
Glossary
62
Share informationOutstanding shares (“A” series): 600 million
|| Volume (in million shares)
Mexican Stock Exchange Symbol: ALFAA Date listed: August 1978
Latibex (Madrid Stock Exchange) Symbol: ALFA C/I-S/A Date listed: December 2003
ALFA, S.A. de C.V. Ave. Gómez Morín 1111 sur Col. CarrizalejoSan Pedro, Garza García, N.L., México C.P. 66254 www.alfa.com.mx
Independent Auditors: PricewaterhouseCoopers
Investor Relations Enrique Flores Rodríguez Corporate Communications Vice President Tel.: 52 (81) 8748-1207Fax: 52 (81) 8748-2551 [email protected]
Raúl González Casas Investor Relations ManagerTel.: 52 (81) 8748-1177Fax.: 52 (81) 8748-2544 [email protected]
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