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1999 Third Quarter Results ACERLA Marissa Garza (525) 325-2800 ext. 2707 November 3, 1999 Seemingly, Acerla’s results have started to reflect the strong efforts made by the company, as Acerla finally posted operating income, after posting operating losses for the last 7 quarters. Revenues grew 10.0% (37.6% in terms of dollars), thanks to Acerla’s strategy of selling through alternate channels, which also led to an 62% increase in sales volumes, but a 15.0% decline in average prices in dollar terms. The latter caused a 70 bp contraction in gross margin to 13.3%. Higher sales and the 33.5% drop in operating expenses, which resulted from Acerla’s strong and continued efforts and strict controls implemented by the company to achieve higher operating efficiencies, translated into operating profit of Ps 2.9 million, comparing favorably to 3Q98 losses. The company posted financial income of Ps 1.9 million, as a reflection of 42.2% lower net interest expense and higher monetary gains, which offset increased FX losses. Finally, the company registered net losses of Ps 4.7 million, down 91.3% vs. 3Q98 levels. We believe that the company has already started to reap the benefits of its marketing strategy and operating restructuring. However, Acerla will have to continue making strong efforts to obtain new clients and at the same, improve its operations, as despite the success achieved with alternate distribution channels, a price war is still underway in the market. For the time being, we prefer to wait until we see a clear trend towards recovery during the next few quarters. November 3, 1999 Price *: 52 Week Range: Market Capitalization: Shares Outstanding: Ps 2.69 Ps 5.46 To 2.50 US$ 26.6 million 95.5 Million Price/Book: P/E on Sep T12 ROE ROA 0.64x -0.78x -54.9% -13.0% INCOME STATEMENT (thousands of constant pesos as of September 30, 1999) 9m98 Margin 9m99 Margin Change Net Sales 100.0% 1,744,148 100.0% -22.6% 2,254,267 Cost of Goods Sold 90.3% 1,499,178 86.0% -26.4% 2,036,488 Gross Profit 9.7% 14.0% 12.5% 217,779 244,970 3Q98 703,953 605,343 98,610 Operating Expenses Operating Profit Enterprise Value: P/NCE T12 P/EBITDA T12 EV/EBITDA T12 US$ 49.7 million -0.86x -1.21x -2.25x Margin 100.0% 86.0% 14.0% 3Q99 774,287 671,130 103,158 Margin 100.0% 86.7% 13.3% Change 10.0% 10.9% 4.6% 367,269 (149,490) 16.3% -6.6% 302,188 (57,218) 17.3% -3.3% -17.7% -61.7% 150,815 (52,205) 21.4% -7.4% 100,246 2,912 12.9% 0.4% -33.5% #N/A Integral Cost of Financing Interest Expense Interest Income Foreign Exchange Loss Monetary Loss 14,304 51,936 13,591 (2,571) (21,470) 0.6% 2.3% 0.6% -0.1% -1.0% 26,986 32,293 7,379 11,823 (9,751) 1.5% 1.9% 0.4% 0.7% -0.6% 88.7% -37.8% -45.7% #N/A -54.6% 885 18,835 5,028 1,137 (14,058) 0.1% 2.7% 0.7% 0.2% -2.0% (1,881) 9,737 1,760 8,897 (18,755) -0.2% 1.3% 0.2% 1.1% -2.4% #N/A -48.3% -65.0% 682.5% 33.4% Other Financial Expenses Pretax Income Taxes (4,605) (159,189) 7,938 -0.2% -7.1% 0.4% 5,309 (89,513) 21,088 0.3% -5.1% 1.2% #N/A -43.8% 165.7% 1,828 (54,918) (523) 0.3% -7.8% -0.1% 1,720 3,073 7,357 0.2% 0.4% 1.0% -5.9% #N/A #N/A Non-Cons. Subsidiaries Extraordinary Items (gains) Minority Interest Net Income Earnings Per Share 0 11,635 (5,411) (173,351) (1.815) 0.0% 0.5% -0.2% -7.7% 0 5,988 899 (117,488) (1.230) 0.0% 0.3% 0.1% -6.7% #N/A -48.5% #N/A -32.2% 0 (145) (374) (53,876) (0.564) 0.0% 0.0% -0.1% -7.7% 0 (104) 502 (4,682) (0.049) 0.0% 0.0% 0.1% -0.6% #N/A -28.1% #N/A -91.3% EBITDA EBITDA Per Share (134,514) (1.409) -6.0% (41,892) (0.439) -2.4% -68.9% (47,194) (0.494) -6.7% 8,504 0.089 1.1% #N/A Sep-98 1.5x 85.1% 96.8% 54.5% 142.7% 9m98 84 73 75 -2.6x -2.3x -0.4x Sep-99 1.1x 75.0% 91.2% 51.9% 307.3% 9m99 103 79 159 -1.3x -1.1x -0.3x BALANCE SHEET (thousands of constant pesos as of September 30, 1999) Sep-98 % of T.A. Sep-99 % of T.A. Total Assets 100.0% 1,675,666 100.0% 1,929,665 Cash & Equivalents 3.1% 3.0% 59,524 49,701 Other Current Assets 77.4% 1,274,765 76.1% 1,494,477 Long Term 0.0% 0.0% 0 0 Fixed (Net) 12.1% 13.9% 233,660 233,439 Deferred 7.4% 7.0% 142,004 117,761 Other 0.0% 0.0% 0 0 Total Liabilities 58.8% 1,264,249 75.4% 1,134,572 Short Term Debt 21.7% 11.8% 419,356 197,488 Other Current Liabilities 33.2% 1,001,101 59.7% 641,569 Long Term Debt 3.8% 3.9% 73,647 65,660 Other Liabilities 0.0% 0.0% 0 0 Shareholders Equity 41.2% 24.6% 795,093 411,417 Minority Interest 1.3% 0.5% 24,697 8,739 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 A/R Turnover (days) Inventory Turnover (days) A/P Turnover (days) EBITDA to Interest Expense Interest Coverage Ratio Annualized EBITDA to ST Debt ENTERPRISE VALUE (EV) = Mkt cap. + Net Debt + Minority Int. NCE = Net income + Monetary Loss + Fx Loss + Depreciation 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. 1 1999 Third Quarter Results ACERLA Operating Results The following table shows contribution to Acerla’s sales by country: Sales Distribution by Country 3Q98 3Q99 ACERLA 7.2% 15.2% 4.6% 4.6% 34.2% 3.2% 1.3% 29.7% Argentina Brazil Chile Colombia Mexico Peru Venezuela Rest of Latin America 3.8% 8.7% 3.1% 4.4% 65.7% 3.0% 0.7% 10.6% Strong performance in group revenues resulted from Acerla’s strategy of selling through alternate channels, mainly the distribution agreement signed with Telmex. However, excluding these revenues, sales would have dropped by around 26%. Therefore, we feel that it is extremely important for Acerla to continue making efforts to obtain new clients and selling higher volumes. It is important to note that although the agreement with Telmex has huge growth potential, the existence of other new brands that satisfy the demands of this project affects Acerla’s participation. Furthermore, even though Acerla has stated that it has the necessary infrastructure to satisfy Telmex’ entire demand, the company has had a few problems in meeting lead times, something that could affect the group’s sales. Specifically by country, the Mexican subsidiary’s significant contribution to total sales resulted from the contribution of sales to Telmex. Even though no specific information regarding Acerla’s market share has been disclosed, the company stated that it has improved over the past few months. At the Brazilian subsidiary, despite the return to relatively stable conditions in Brazil, high credits risks and interest rates continued to affect sales. However, sales in Brazil are expected to recover gradually, supported by lower operating expenses and direct sales, which allow for better pricing. The subsidiaries that continue to be of concern are the ones in Argentina, Venezuela and Ecuador, due to low commercial demand, and the prevailing political and/or economic instability. Operating expenses fell 33.5%, thanks to the operative restructuring carried out over the past few quarters and strict controls implemented by the company. This decline, however, was also partly due to the peso appreciation. Acerla will not stop making efforts to cut its expenses, maintaining a regional infrastructure to allow the company to satisfy its needs and achieving higher efficiencies in its operating processes. In addition, aiming to improve its operations at the logistics level, Acerla now has the support of executives from Grupo Acer Taiwan, whose participation will both facilitate communication between Acerla and Grupo Acer and allow for better planning as regards the entry and exit of platforms, in accordance with technological progress. This last issue is crucial, as it will allow for better equipment turnover, avoiding obsolescence while still in the distribution channel and increasing the company’s competitiveness. Financing Activities The company posted financial income of Ps 1.9 million, comparing favorably to 3Q98 financial costs of Ps 885,000. This was due mainly to 42.2% lower net interest expense, lower cost-bearing debt levels and 33.4% higher monetary gains, which more than offset higher FX losses derived mainly from the devaluation of the Colombian and Brazilian currencies. Leverage rose by 69.2 pp vs. 2Q99 to 307.3%, due to a decline in shareholder’s equity, in turn attributable to strong losses posted over the last twelve months, but also as a result of a 37.5% increase in suppliers. Working capital improved by 25 days as compared to 2Q99, due mainly to the increase in suppliers and lower inventory levels. The increase posted with respect to 3Q98 was due to sales through alternate distribution channels. Finally, the company posted net losses of Ps 4.7 million, down 91.3% vs. 3Q98 levels. Outlook Seemingly, Acerla has started to reap the benefits of its marketing strategy and operating restructuring. However, the company will have to continue making strong efforts to obtain new clients, as despite the success achieved with alternate distribution channels, such as the agreements signed with Telmex and a few financial institutions, a price war is still underway in the market. As such, the company will have to sell higher volumes to offset lower average prices. Currently, Acerla is analyzing the possibility of entering into agreements similar to Telmex’ in other South American countries. We prefer to wait until we see a clear trend towards recovery in the group’s results during the next few quarters. Marissa Garza: [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. 2