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2000 Fourth Quarter Results
Tamsa
Francisco Suárez (52) 5325 2898
March 12, 2001
BUY
Activities with Pemex decreased 14.5% YoY due to the change in the Mexican government, as well as weather
conditions that inhibited project execution. However, volume with non-oil related domestic costumers rose 12.8%.
Export volumes (which accounted for 68.4% of total volumes), surged 73.4%, and volume posted by TAVSA rose
68.4%. As volume soared (total volumes increased by 50.6% YoY), efficiencies arise in the operation, as costs per metric
ton decreased by 14%, and, consequently, gross margins rose 11.1pp. A B2B start up in 4Q00 took 2pp of the EBITDA
margin. Other factors such as increased freight charges due to the strong export activity and different shipment conditions
led to a 61.3% increase in SG&A expenses. The improvement in the ICF is explained mainly by the reduction in net
interest expense and higher monetary gains. Tamsa’s balance sheet remains outstanding, with an interest coverage level
of 10.2x, a net debt to equity ratio of just 14.0% and a debt to EBITDA ratio of merely 1.0x.
The market for Tamsa’s products remains strong, as the latest statistics reveal. The world’s oil rig count performed by
Baker Hughes for the month of February reveals a 2.3% growth in drilling activity compared to January. On a yearly
basis, Hughe’s rig count soared 30% to 2,430 projects, a level not seen since before the Asian crisis. Rig activity relates
strongly with oil prices, as a higher oil price leads to a higher return on a gas/oil project. In spite of the current slowdown,
it seems that oil prices should trade at the US$ 25.00pb level, that is a relatively high price, supported by a tight market
over the next two years. Tamsa believes that its SG&A expenses can return to the range between 17%-18% of net sales.
Results for 2001 should be strong, and there is an upside potential if Pemex exercises its E&P budget as signaled.
Although concerns on how minority shareholders are treated should prevail, we think that Tamsa should benefit strongly
from current conditions in its market, and investors have the chance of sharing that success at current prices.
March 12, 2001
Price*
52 Week Range:
Shares Outstanding:
Market Capitalization:
Ps 118.00
Ps 167.00 To 112.84
67.9 Million
US$ 825.5 million
Price/Book:
1.14x
ROE
4.8%
ROA
8.1%
Enterprise Value: US$ 930.5 million
INCOME STATEMENT (thousands of constant pesos as of Dec 31, 2000)
1999
Margin
2000
Margin
Net Sales
100.0% 5,856,541
100.0%
4,624,438
Cost of Goods Sold
70.6% 3,834,555
65.5%
3,262,981
Gross Profit
29.4% 2,021,986
34.5%
1,361,457
P/E on Dec T12
P/NCE T12
P/EBITDA T12
EV/EBITDA T12
20.11x
10.54x
6.12x
6.90x
Change
26.6%
17.5%
48.5%
4Q99
1,152,122
844,171
307,951
Margin
100.0%
73.3%
26.7%
4Q00
1,613,687
1,004,440
609,247
Margin
100.0%
62.2%
37.8%
Change
40.1%
19.0%
97.8%
Operating Expenses
853,611
18.5%
1,064,832
18.2%
24.7%
201,680
17.5%
325,312
20.2%
61.3%
Operating Profit
507,846
11.0%
957,154
16.3%
88.5%
106,271
9.2%
283,935
17.6%
167.2%
Integral Cost of Financing
Interest Expense
Interest Income
Foreign Exchange Loss
Monetary Loss
132,344
175,727
67,279
20,502
3,394
2.9%
3.8%
1.5%
0.4%
0.1%
80,236
134,323
65,098
33,493
(22,482)
1.4%
2.3%
1.1%
0.6%
-0.4%
-39.4%
-23.6%
-3.2%
63.4%
#N/A
57,311
40,310
14,858
32,486
(628)
5.0%
3.5%
1.3%
2.8%
-0.1%
30,505
33,986
20,839
22,651
(5,293)
1.9%
2.1%
1.3%
1.4%
-0.3%
-46.8%
-15.7%
40.3%
-30.3%
743.2%
Other Financial Expenses
Pretax Income
Taxes
(12,673)
388,175
369,064
-0.3%
8.4%
8.0%
8,952
867,966
438,349
0.2%
14.8%
7.5%
#N/A
123.6%
18.8%
2,175
46,785
61,250
0.2%
4.1%
5.3%
(6,149)
259,579
154,661
-0.4%
16.1%
9.6%
#N/A
454.8%
152.5%
Non-Cons. Subsidiaries
Extraordinary Items (gains)
Minority Interest
Net Income
Earnings Per Share
(343,558)
(240,292)
(27,443)
(56,712)
(0.836)
-7.4%
-5.2%
-0.6%
-1.2%
(47,672)
0
(16,153)
398,098
5.867
-0.8%
0.0%
-0.3%
6.8%
-86.1%
-100.0%
-41.1%
#N/A
(62,923)
(13,676)
(6,104)
(57,607)
(0.849)
-5.5%
-1.2%
-0.5%
-5.0%
(13,272)
0
(6,790)
98,436
1.451
-0.8%
0.0%
-0.4%
6.1%
-78.9%
-100.0%
11.2%
#N/A
906,610
13.361
19.6%
22.3%
44.2%
205,038
3.022
17.8%
373,311
5.501
23.1%
82.1%
EBITDA
EBITDA Per Share
1,307,744
19.272
BALANCE SHEET (thousands of constant pesos as of Dec 31, 2000)
Dic-99
% of T.A.
Dic-00
% of T.A.
Total Assets
100.0% 11,755,967
100.0%
11,895,666
Cash & Equivalents
2.3%
2.6%
271,330
300,454
Other Current Assets
28.0% 3,487,343
29.7%
3,334,334
Long Term
6.3%
8.0%
752,906
938,203
Fixed (Net)
63.4% 7,029,967
59.8%
7,537,096
Deferred
0.0%
0.0%
0
0
Other
0.0%
0.0%
0
0
Total Liabilities
18.5% 4,699,880
40.0%
2,205,881
Short Term Debt
10.2%
2.8%
1,212,906
334,070
Other Current Liabilities
7.1% 1,167,252
9.9%
842,333
Long Term Debt
0.0%
8.1%
0
957,220
Other Liabilities
1.3% 2,241,338
19.1%
150,642
Shareholders Equity
81.5% 7,056,087
60.0%
9,689,785
Minority Interest
0.2%
0.2%
28,087
28,129
FINANCIAL ANALYSIS
Current Ratio
Short Term Debt to Total Debt
Foreign Liab. to Total Liab.
Net Debt to Total Equity
Total Liab. to Total Equity
Dic-99
Dic-00
1.8x
2.5x
100.0%
25.9%
73.3%
43.4%
9.7%
14.0%
22.8%
66.6%
1999
2000
A/R Turnover (days)
116
114
Inventory Turnover (days)
164
126
A/P Turnover (days)
68
79
WC net of debt to Sales
60%
45%
Interest Coverage Ratio
5.5x
10.2x
Total Debt to annualized EBITDA
1.3x
1.0x
ENTERPRISE VALUE (EV) = Mkt cap. + Net Debt + Minority Int.
NCE = Net income + Monetary Loss + Fx Loss + Depreciation
ROA=T12m Op Profit to Avg. Assets; ROE=T12m Net Profit to Avg. Equity
The information contained herein has been obtained from sources that we believe to be reliable, but we make no representation as to its accuracy or completeness. Neither CASA DE BOLSA
BANORTE, S.A. DE C.V. nor AFIN SECURITIES INTERNATIONAL accepts any liability for any losses arising from any use of this report or its contents.
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2000 Fourth Quarter Results
Tamsa
BUY
Operating Results
Sales Volume
Product/Market
4Q99
%
4Q00
Operating Data *
%
Growth
4Q99
Petroleum Pipes
Non-oil related domestic costumers
Exports
TAVSA
Steel & Other
22,660
19,505
72,937
5,988
1,609
18.5%
15.9%
59.4%
4.9%
1.3%
19,365
21,995
126,454
10,085
6,912
10.5%
11.9%
68.4%
5.5%
3.7%
-14.5%
Revenues
12.8%
COGS
73.4%
EBITDA
68.4% Revenue per metric ton
329.6%
COGS per metric ton
Total
122,699
100%
184,811
100%
50.6%
4Q00
Growth
$111
$82
$20
$170
$106
$39
53%
30%
98%
$907.76
$665.12
EBITDA per metric ton $161.55
$919.75
$572.50
$212.78
1%
-14%
32%
* Implied figures in US$ millions. Casa de Bolsa Banor te estimates.
Domestic shipments to Pemex dropped strongly, as its offshore drilling activity decreased due to delays in projects as the government
exchanged hands, and to a lesser extent, weather conditions. In contrasts, non-oil related domestic consumer demand was unaffected, as
volumes increased by 12.8% YoY. Revamping of the Madero refinery and sales to domestic distributors, as economic conditions in Mexico
remain strong, caused the improvement. Export volumes soared thanks to higher oil prices that support the Oil Country Tubular Goods
(OCTG) market. The most active countries/regions behind these numbers where Venezuela, the Middle East, and Indonesia. Recovery in
drilling activity in Venezuela, again thanks to relatively high oil prices, led to strong sales volumes of TAVSA.
As volume soared, COGS increased in absolute terms. However, and in spite of the substantial increases in energy prices, unit costs
experienced a fall of 14% per metric ton YoY, as more volume led to operating efficiencies and management mitigated the negative effects
derived from energy using scrap –a cheaper raw material. In addition, since 2H00 Tamsa started to supply steel bars to Algoma Tubular (an
associated company), in order to increase utilization at the melt shop. However, SG&A expenses increased strongly during the quarter.
Management offered some answers for this. Firstly, during the quarter, Tamsa posted non-recurrent expenses related to start-up B2B
investments (2% of net sales), and maintenance in port facilities (0.5% of net sales). Secondly, an important component of SG&A expenses
relates to freight charges. This tariffs vary depending on the type of shipment (i.e. sales mix), and on shipment conditions –i.e. FOB vs. CIF.
As exports surged in the quarter, tariffs impacted negatively on expenses by 1% of net sales, as well as dumping expenses -0.5% of net sales.
Financing Activities
Lower interest financing rates explains the 42% reduction in net interest expense YoY. Also, the relative strength of the peso and a different
mix between peso denominated and foreign currency denominated assets led to a lower FX loss. In addition, as deferred taxes implied higher
liabilities on the balance sheet compared to 4Q99, Tamsa posted higher monetary gains. All of the above factors explain the improvement in
the ICF. The loss under non-consolidated subsidiaries reflects Tamsa’s 14.1% stake at Amazonia, which in turn holds a 70% interest in Sidor.
It is worth mentioning that ALFA (LONG-TERM BUY), posted a net profit of Ps 65 million in 4Q00 from Sidor. The difference arises from
ALFA’s exclusion of Amazonia’s 4Q99 results, which were reported in 1Q01 due to the discontinuation of a one quarter delay reporting
policy. The firm’s investment in Amazonia amounts Ps 394 million. On taxes for the quarter, Ps 46 million (30% of total taxes recorded in
4Q00), are non-cash in nature (i.e. deferred taxes), in compliance with the D-4 bulletin. Net income of Ps 98 million compares favorably to the
loss experienced in 4Q99, supported by the strong operating improvement.
Outlook
World rig activity has blossomed since the Asian crisis. Particularly, a strong trend began in June, 1999 to date, fueled by relatively
high oil prices. Statistics show that strong market conditions for Tamsa’s products remain, as rig count performed by Baker Hughes
reveals that new rigs has increased 30% YoY to a total of 2,430 by February. That figure is 2.3% higher than the previous month. We
think that conditions for worldwide drilling activity are sound, and they could only be halted by a harsh shock, similar to the one that
began in Asia in 1997 -a very unlikely scenario.
Company guidance sets volume growth for 2001 similar to that of 2000 including TAVSA. Management also thinks that a sustainable
level of SG&A expenses to net sales should be in the range of 17% to 18% this year, as B2B investment should continue (although not
at the level observed in 4Q00), and the expected sales mix implies higher freight charges. There is an upside potential in this scenario: if
Pemex’ activity increases, then will see a shift towards domestic projects benefiting margins as freight expenses should be lower.
Although Pemex has announced a huge increase in its E&P budget for the next six years, Tamsa’s management remains cautious: even
if the budget looks promising, Pemex has not given any specifics on where, when and how much should be spent on the short term.
Nevertheless, the company confirmed that Pemex is very active in gas-related projects, particularly in the northern part of the country.
We think investors are concerned with the high SG&A expenses posted in the quarter, as rumors over a “dividend” paid to Tekchem
spread around. The company strongly denied this when it held its 4Q00 earnings conference call. Even if this was just a mere rumor,
this might reflect doubts on how minority stockholders are treated. Tamsa’s Board of Directors proposed a 5:1 split for the shares traded at
the Mexican Bolsa, although maintaining the current ADR level. It also proposed a US$ 0.4374 cash dividend (a 3.5% dividend yield), and the
voting will take place on the 27 of April. We think that Tamsa should benefit strongly from current and future conditions in the oil market, and
investors have the chance of sharing that success at current prices.
Francisco Suárez [email protected]
The information contained herein has been obtained from sources that we believe to be reliable, but we make no representation as to its accuracy or completeness. Neither CASA DE BOLSA
BANORTE, S.A. DE C.V. nor AFIN SECURITIES INTERNATIONAL accepts any liability for any losses arising from any use of this report or its contents.
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