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Annual Report 2007
MEXICHEM is a Mexican group
of chemical and petrochemical
companies that are leaders in
the Latin American market, have
annual sales of nearly USD2.2
billion, and export to more
than 50 countries.
With more than 50 years of growth and 29 years on the
Mexican stock exchange, we actively contribute to the
development of the country, as our principal products have
a broad market in the most dynamic growth sectors—
construction, housing, infrastructure, potable water, urban
sewage, and irrigation systems—in Mexico and throughout
Latin America.
Mexichem is one of the five most efficient producers in the
world. We have the most important chlorine, soda, and PVC
plants in Latin America, a region in which we are also the
top producer of PVC resins. We possess the largest fluorite
Mexichem Annual Report 2007
mine in the world, in San Luis Potosí, Mexico, and we are
the only integrated producer of our raw materials in Mexico
and the largest integrated producer of hydrofluoric acid in
America. Thanks to recently announced acquisitions, we are
the principal producer of PVC pipe in Latin America; we own
plants in 14 countries and market our products throughout
virtually the entire region.
Currently, the strategic position of the group is focused on the
chemical and petrochemical sector through three producing
chains: the Chlorine-Vinyl Chain, the Fluorine Chain, and the
Transformed Products chain, which includes styrene products,
compounds, and pipe.
Sales
MXN23,017 million
55% Transformed
products
36% Chlorine-Vinyl
9% Fluorine
Table of Contents
Corporate Offices
Río San Javier 10
Fraccionamiento Viveros del Río
Tlalnepantla, Estado de México C.P. 54060
Tel. 52+ (55) 53 66 40 00
Fax. 52+ (55) 53 97 88 36
www.mexichem.com
vision
20/20 20
We make chemistry
the cornerstone of construction
01
02 03 04 06 08 10 14 16 17 20 22 23 24 Introduction
Financial highlights
Relevant events
Message to shareholders
Leadership position
Geographic coverage
Market potential
Efficiency and growth
Social responsibility
Analysis and discussion of results
Share information
Board of directors
Corporate governance
Audited financial statements
EBITDA
MXN4,354 million
39%
40%
21%
Transformed
products
Chlorine-Vinyl
Fluorine
Annual Report 2007
than 50 countries.
Latin America.
Sales
MXN23,017 million
55% Transformed
products
36% Chlorine-Vinyl
9% Fluorine
Table of Contents
Corporate Offices
Río San Javier 10
Tel. 52+ (55) 53 66 40 00
Fax. 52+ (55) 53 97 88 36
www.mexichem.com
vision
20/20 20
We make chemistry
01
02 03 04 06 08 10 14 16 17 20 22 23 24 Introduction
Relevant events
Leadership position
Geographic coverage
Market potential
Share information
Board of directors
EBITDA
MXN4,354 million
39%
40%
21%
Transformed
products
Chlorine-Vinyl
Fluorine
Design: www.signi.com.mx
1,664.6
1,299.4
1,256.6
364.4
8,331.1
6,375.8
MEXCHEM
28.1
%
increase in
operating income
03
04
05
06
07
Sales
Fluorine Chain
04
05
06
07
1,858.9
2,086.7
225.9
367.3
424.6
707.8
780.9
MXN millions
03
04
05
06
07
03
04
05
06
07
%
increase in sales
10.3
Subscription date
September 1978
Number of outstanding shares
548.8 million
Independent auditor
Galaz, Yamazaki, Ruiz Urquiza, S.C.
Member of Deloitte Touche Tohmatsu
Operating income
Fluorine Chain
MXN millions
12.3
03
1,498.3
Acid-grade fluorspar is a concentrated mineral from which some impurities have been
eliminated. When combined with sulfuric acid, which comes from sulfur, this fluorite is
used in the manufacture of hydrofluoric acid. Hydrofluoric acid is utilized primarily in
the manufacture of refrigerant gases for air conditioners, refrigerators, and freezers. It is
also is used as a propellant in gasoline; for pickling stainless steel; to make nuclear fuels,
integrated circuits, and Teflon coatings; and to produce fluoridated salts, including
lithium salts used in batteries and sodium-fluoride salts used in toothpaste.
Markets where quoted
Mexican stock exchange, Bolsa Mexicana
de Valores (BMV), Mexico
Ticker symbol on the BMV
increase in sales
Fluorine Chain
Calcium fluoride, better known as fluorspar, is a nonmetallic mineral which, in its
essential function as a flux, is considered metallurgical grade. In its natural form, this
mineral, extracted from the earth, is used to provide significant energy savings in the
steel, cement, glass, and ceramic industries.
MXN millions
6,297.4
%
2,535.4
30.7
2,045.0
MXN millions
1,101.2
Soda is used to manufacture soap, shampoo, cream, and detergent and is also used
for water treatment. Chlorine is used to produce cleaners, purify water, disinfect
floors and walls, bleach paper, and to make white pigments. Our acquisition of the
Colombian company Prodesal allows us to maintain balance in each link of the chain
and continue to grow in those regions and product lines that bring us the highest
profit potential.
Operating income
Chlorine-Vinyl Chain
564.8
Salt is the origin of the chlorine-vinyl chain, which we convert into chlorine and soda.
We add value to chlorine through the vinyl chloride monomer (VCM), ethylene plus
chlorine, which, when converted to PVC, is used to make many different products. PVC
is used predominately in housing and infrastructure construction; for example, it is used
to make pipe, which is used in homes as well as in large-diameter water and drainage
pipes, and also to manufacture cable coatings, window frames, doors, floors, kitchen
coatings, closets, bathrooms, ceilings, facades, and many other products.
Sales
234.1
Investor Relations
Enrique Ortega Prieto
Director of Strategic Planning
and Investor Relations
Tel. 52 (55) 53 66 40 65
Fax. 52 (55) 53 97 88 36
[email protected]
%
increase in
operating income
Our Transformed Products processes include the manufacture of plasticizers and phthalic
anhydride. Because phthalic anhydride is the primary raw material for plasticizers and
the manufacture of styrene, both laminated and expanded, Mexichem uses phthalic
anhydride to create its own manufacturing chain. Applications for laminated polystyrene
include products such as illuminated bus stop signs, and decorative applications include
products such as translucent or opaque laminates. One of the principal applications of
expanded polystyrene is to lighten the weight of concrete slabs in construction.
%
215.0
191.3
34.5
25.9
12,599.5
MXN millions
2,182.4
MXN millions
1,823.4
Operating income
Transformed Products
383.4
477.3
Sales
287.5
This chain integrates the processes and products with the highest aggregate value,
such as PVC compounds and products made to client specifications to be transformed
into final products, such as cable coatings, blood or dialysis bags, films, toys, and other
products. These products are formulated with other additives to meet the desired
characteristics of the final product and for optimal processing in the clients’ equipment.
The most important product in this chain, however, is PVC pipe, which we produce for all
of Latin America and which provides for the development and well-being of millions of
people. Even when the pipe is made with different plastic or polymers, the most widely
used is PVC. Given that Mexichem is the largest integrated producer of PVC in Latin
America, our market position is outstanding.
1,154.3
Transformed Products Chain
increase in sales
436.9
%
increase in
operating income
03
04
05
06
07
03
04
05
06
07
This document contains certain statements about the general information of MEXICHEM, S.A.B. de C.V. (Mexichem), regarding its activities today.
This document includes a summary of information about Mexichem, which is not intended to cover all information related to the company. This
information was not included to give specific advice to investors. The statements contained herein reflect the current vision of Mexichem with
respect to future events and are subject to certain risks, uncertainties, and assumptions. Several factors could cause future results, performance,
or achievements of Mexichem to differ from those expressed or assumed in the following statements. If one or more of these risks were to occur,
or the assumptions or estimates are proved incorrect, the results in the future could vary significantly from those described, anticipated, alleged,
estimated, expected, or budgeted. Mexichem does not intend to update the statements presented below nor does it assume any obligation to do so.
1,664.6
1,299.4
1,256.6
364.4
8,331.1
6,375.8
MEXCHEM
28.1
%
increase in
operating income
03
04
05
06
07
Sales
Fluorine Chain
04
05
06
07
1,858.9
2,086.7
225.9
367.3
424.6
707.8
780.9
MXN millions
03
04
05
06
07
03
04
05
06
07
%
increase in sales
10.3
Subscription date
September 1978
548.8 million
Independent auditor
Operating income
Fluorine Chain
MXN millions
12.3
03
1,498.3
increase in sales
Fluorine Chain
MXN millions
6,297.4
%
2,535.4
30.7
2,045.0
MXN millions
1,101.2
profit potential.
Operating income
564.8
Sales
234.1
Investor Relations
Tel. 52 (55) 53 66 40 65
Fax. 52 (55) 53 97 88 36
[email protected]
%
increase in
operating income
%
215.0
191.3
34.5
25.9
12,599.5
MXN millions
2,182.4
MXN millions
1,823.4
Operating income
383.4
477.3
Sales
287.5
1,154.3
increase in sales
436.9
%
increase in
operating income
03
04
05
06
07
03
04
05
06
07
Our strategy is characterized
by a clear vision that guides the company
and allows the discovery of new horizons and new
challenges. Our vision has established growth, efficiency,
and profitability as the three fundamental drivers of our
business, with annual growth of 20% in sales, 20% in EBITDA,
and 20% in return on equity. This, what we call our 20/20/20
vision, is an allusion to 20/20, that indicator of perfect vision in
human beings. With this focus, we have not only reached
our planned goals. We have exceeded them with a
five-year consolidated annual growth rate in sales,
in dollar terms, of 48.83%; in EBITDA of
67.37%; and in return on equity
(ROE) of 21.7%.
1
Mexichem, S.A.B. de C.V., in millions of constant pesos as of December 31, 2007
2007
2006
Variation
$ 10,417
121%
Net sales
$ 23,017
Gross profit
7,460 3,082
142%
Net majority income
1,823 1,188
53%
Operating cash flow (EBITDA)
4,354 2,485
75%
Free cash flow
5,281
3,447
53%
Total assets
$ 25,077
$ 10,812 132%
Cash and short-term investments
1,551
437
255%
Clients
4,549
1,876
142%
Inventories
2,653 850
212%
Other liquid assets
570 1,028 -45%
Long-term assets
15,755
6,619 138%
$
5,804 191%
Current liabilities
8,381 3,705
126%
Long-term liabilities
8,534 2,099
307%
Consolidated stockholders’ equity
8,162 $
5,007 101%
67
189
-65%
8,095 4,818 68%
Total liabilities
$ 16,915
$
Minority interest
Majority interest
2
February: Acquisition of Grupo Amanco (Amanco), a leading conglomerate in Latin America in the production and sale
of solutions for conducting fluids, primarily water. Amanco
markets its products through 55 thousand points of sale in 29
countries in Latin America, a region in which it owns 19 production plants in 14 countries. In 2006 Amanco’s sales reached
USD800 million.
23,017
10,417
9,816
4,180
3,071
Relevant events 2007
March: Announcement of the acquisition of Petroquímica Colombiana (Petco), which is dedicated to the production of PVC
resins and markets its products in various countries around the
world. In 2006 its sales were USD375 million.
+121
%
07
Sales
million pesos
+64%
07
Operating income
million pesos
5,281
06
3,447
05
1,805
04
1,172
692
03
+53%
03
04
05
06
07
June: Debt prepayment of USD158 million, out of the
USD700 million contracted for the acquisitions of Grupo
Amanco and Petco.
July: Acceptance of the issue of mandatory convertible share
obligations, up to USD200 million. // Payment of dividend, in
kind, with the shares of Dermet, S.A.B. de C.V., at the rate of one
share of Dermet for approximately 5.08 shares of Mexichem.
// Acquisition of 50% of the shares of Geon Andina; the other
50% is owned by PolyOne Corporation, a world leader in the
manufacture of composites.
3,270
06
1,998
05
1,662
04
676
464
03
May: Capital increase equivalent to 12%, from 490 million to
548.8 million shares.
Free cash flow
million pesos
October: Cancellation of issuance of mandatory convertible
share obligations.
2008
January: Acquisition of Plastubos, a Brazilian company dedicated to the manufacture of PVC pipe; this acquisition increases Mexichem’s share of the Brazilian market to 32%. // Acquisition of Dripsa, an Argentine company that manufactures
pipe for the agricultural sector, and the creation of Mexichem
Soluciones Agrícolas, a new subsidiary that incorporates the
part of Amanco dedicated to this sector. The objective of this
subsidiary is to provide solutions for the transportation of water in the biofuel and food sectors throughout Latin America.
February: Execution of framework agreement for the acquisition of Prodesal, a Colombian company dedicated to the
manufacture and marketing of salt for human and industrial
consumption, chlorine soda, and chlorate derivatives.
March: Execution of agreement for the acquisition of Tubos
Flexibles, S.A. de C.V., a Mexican company that has been in
the market for more than 50 years and that owns four plants
that produce and market pipe and fittings made of PVC, CPVC,
polyethylene, and polypropylene.
3
For Mexichem, 2007 was an excellent year; as we have
done year after year, we surpassed all expectations.
In fact, in this, the best year in our brief history,
we exceeded our 2006 results by a broad margin.
T
he global environment changed dramatically during
the fourth quarter of 2007, with the subprime crisis
in the United States having serious effects on several
global financial institutions. As a result, the high growth
experienced in recent years in the United States now gives
way to the threat of a recession, which could significantly
impact the world economy. This turn of events places all
countries on alert. For the first time in history, the emerging
economies, in particular those of the so-called BRIC (Brazil,
Russia, India, and China), could become the new drivers of the
world economy. The dollar’s weakness with respect to other
currencies has caused changes in funding mechanisms and
reserves in many countries. In general, increased oil and rawmaterial prices have limited global economic growth. The
threat of a recession in the United States has begun to reduce
economic growth in Mexico but also marks an opportunity
for Mexico to become part of the solution.
During 2007 the Mexican economy developed in a stable
environment, with inflation of 3.76%—again, less than that
of the United States—and the peso/dollar exchange rate
experiencing no significant change. GDP growth is barely 3.2%,
however, and considerably less than the country needs. The
expectation for 2008 is for even slower growth.
Oil prices reached historical highs during the year and kept
the prices of raw materials higher than those seen in 2006. The
price of gas was reduced, although it should be noted that
natural gas in North America is the most expensive in the
world, which makes us less competitive than the Asian and
Middle Eastern economies.
4
For Mexichem, 2007 was an excellent year; as we have done
year after year, we surpassed all expectations. In fact, in this,
the best year in our brief history, we exceeded our 2006 results
by a broad margin.
Thanks to the acquisitions of Amanco and Petco,
sales more than doubled over that of the previous year. And due to synergies from these acquisitions,
Amanco generated EBITDA of USD140 million, compared with
USD83 million in 2006. For Petco, EBITDA increased from USD33
million in 2006 to USD55 million in 2007. Mexichem’s EBITDA in
2007 was slightly less than USD400 million, which is 75% higher
than in 2006.
Operating income increased: 64%
Net earnings increased: 55%
to MXN1.842 billion,
MXN3.44 per share.
We have announced the creation of a new subsidiary, Mexichem
Soluciones Agrícolas, which focuses on offering integrated
projects for handling water in the field. In addition, we recently
made acquisitions in Brazil, Peru, and Colombia with a view
toward improving our market position in those countries.
visión
20/20 20
Operational efficiency and our responsibility to the environment
are also fundamental themes to which we have devoted our
attention. Examples include the upgrading of our chlorine
installations in Santa Clara and the operational and energy
efficiency programs we implemented in all of our plants, which
have generated significant savings and allowed us to maintain
our margins despite increased energy prices. Similarly, we
make social and environmental responsibility a part of our
daily operations in order to meet and exceed the standards
that apply to our activities and to help the communities in
which our plants are located. As a result, we recently received
certification as a “Socially Responsible Company”, granted
annually by Cemefi, the most important Mexican organization
for the promotion of corporate social responsibility.
We have maintained a solid financial structure that is flexible
enough to support our plans for growth. In accordance with
our commitment, our net-debt-to-EBITDA ratio was 1.63 times
at the end of the year, well below our established goal of 2.0
times. In May, we successfully increased our capital by USD158
million and applied that increase mainly to advance payment
of our debt and an additional amortization of USD219 million,
so that we reduced debt by USD377 million between March
and December.
Quotations, which lists the 35 issuers with the highest market
exposure. Thanks to good operational and financial results, our
share price rose from MXN18.85 in late 2006 to MXN43.61 in late
2007, an increase of 131%.
The year 2008 brings new and interesting challenges. We
will continue to monitor and seek favorable solutions to
global market and environment complexities, while pursuing
aggressive growth and expansion plans and geographic and
cultural diversity for our businesses.
I wish to thank our shareholders, clients, suppliers, and financial
institutions, and the communities in which we operate, for the
confidence they have placed in us. Mexichem’s directors and
employees deserve special mention for making ours a leadingedge company. Many thanks to each of them.
In 2007 we made an extraordinary effort to
position Mexichem as the leading issuer in
the chemical and petrochemical sector on the
Mexican Stock Exchange. That effort resulted in our
Antonio del Valle Ruiz
inclusion in the Mexican Stock Exchange Index of Prices and
Chairman of the Board of Directors
5
Leadership Position
“
6
To be a leader is an attitude, a commitment to everything we
do. Day to day we strive for the vision and the will to reach
where we want to go and to instill in others the passion that
moves us.
“
Arcenie Liliane Galindo Fischer
Administrative assistant
O
ur extraordinary growth, guided by our 20/20/20 vision and driven by our strategy, has made Mexichem
the indisputable leader in the production of chlorine
soda and PVC in Latin America. With more than 800,000 tonnes
per year of installed capacity, we are the top producer of PVC
resins and the only integrated producer of hydrofluoric acid in
the Americas, where we have the largest fluorite mine in the
world and the second-largest hydrofluoric acid (HF) manufacturing plant. Mexichem is the leading manufacturer of composites and plasticizers in Mexico and the leading Latin American
manufacturer and marketer of pipe.
Leadership in Latin America
Product Position Percentage
Mexico PVC
No. 1
56%
Mexico Composites No. 1
36%
Mexico Chlorine No. 1
83%
Mexico Soda No. 1
54%
Mexico Pipe No. 1
20%
Ecuador
Pipe No. 1
66%
El Salvador
Pipe No. 1
56%
Colombia
Pipe No. 1
55%
Colombia
PVC
No. 1
80%
Honduras
Pipe No. 1
51%
Panama
Pipe No. 1
48%
Guatemala
Pipe No. 1
37%
Venezuela
Pipe No. 1
37%
Argentina
Pipe No. 1
31%
Perú
Pipe No. 1
17%
Costa Rica
Pipe No. 2
42%
Nicaragua
Pipe No. 2
40%
Brazil Pipe No. 2
21%
We are the leaders in the production
of pipe throughout Latin America; pipe
represents 41% of Mexichem’s sales.
Our leadership position has allowed us to not only generate
significant savings—thanks to the synergies derived from
acquisitions, our geographic distribution, and the critical mass
we have reached—but also set the standard in technological
development of several products and processes that keep us
at the forefront of our industry.
With installed capacity of more than
800,000 tonnes annually, we are
the largest producer of PVC resins
and the only integrated producer of
hydrofluoric acid in the Americas.
Mexichem is the leading
manufacturer of compounds
and plasticizers in Mexico and
the leading Latin American
manufacturer and marketer
of pipe.
7
Geographic Coverage
“
Our presence throughout the Americas gives us a competitive
advantage that is difficult to match. We have achieved risk
distribution through market diversification, which reduces our
dependency on the North American market.
Ricardo Moreno
Sales manager
“
I
n 2002 our geographic presence included Mexico and the
United States, and we had plants in Jalisco, Veracruz, the
State of Mexico, San Luis Potosí, and Texas. Thanks to our
20/20/20 vision, we have expanded our presence throughout
the Americas; today we have production facilities not only in
Mexico and the United States but also in Guatemala, El Salvador,
Nicaragua, Honduras, Panama, Costa Rica, Ecuador, Colombia,
Venezuela, Argentina, Chile, Brazil, and Peru. Our geographic
presence covers a total of 14 countries in Latin America, a region on which we have focused due to its enormous growth
potential, primarily in the construction sector.
United States
of America
Mexico
We have established a logistical and operational control center
in Colombia, from which we centralize our operations in the
Central-Southern region of South America. We are now strategically positioned in countries in the Northern region (Mexico),
in the Central-Southern region (Colombia), and the Southern
region (Brazil).
Guatemala
El Salvador
Nicaragua
Colombia
Ecuador
Peru
8
77% of our sales are made in
Latin America; the other 23%
are exported to nearly the entire
world, including Europe.
We have broad geographic coverage that positions us as
a proven industry consolidator in countries in which the
productive chains are not integrated and in which, thanks
to our vertical integration, we have a competitive advantage
because of synergies that provide greater efficiency.
Honduras
Panama
Venezuela
Brazil
Chile
Argentina
Presence
No presence
Thanks to our 20/20/20
vision, we have expanded
our presence throughout the
Americas, and today we
have production facilities
in practically the entire
Western Hemisphere.
9
Market potential
“
Infrastructure in Mexico and Latin America is driving the region’s economy. Despite the possible recession in North America,
sales of our products continue to grow, indicating that our clients’
businesses are also growing.
“
Ramón Resendiz
Shipments
A
s we have stated on other occasions, construction is
the main driver of Mexichem’s business; nearly 70%
of sales are related to this segment. In Latin America,
the potential for growth is impressive, and countries such as
Brazil, Colombia, Ecuador, Peru, and Venezuela have enjoyed
double-digit growth in housing, similar to that which Mexico
has experienced and that is expected to continue over the next
several years.
Latin America has an opportunity to become a center for
development, driven primarily by growth in infrastructure and
housing. For example, the growth potential in sanitation is
significant because slightly more than 21% of the inhabitants of
this region—approximately 120 million people—do not have
these services.
Competitiveness of infrastructure
1 = little developed and inefficient 7 = among the best in the world
(Source: World Economic Forum)
6.5 6.1
5.8 5.8 5.4
5.1
4.6 4.4
4.1 4.0
3.8 3.6 3.5
3.5
3.4 3.3
3.3
When we observe the
growth potential and total
sales by product, we see that
slightly more than 80%
is related to PVC.
10
Argentina (72)
Brazil (71)
Mexico (64)
India (62)
China (60)
Uruguay (58)
El Salvador (54)
South Africa (49)
Panama (46)
Chile (35)
Ireland (31)
Malaysia (23)
Korea (21)
Canada (13)
USA (12)
Japan (7)
Germany (1)
Average: 3.7
In 2006 potable water coverage in rural
areas was 72%, compared with 68% in
2000. In urban areas it is 95%, the same
percentage as in 2000.
Competitiveness of infrastructure in Latin America
Competitiveness of infrastructure for potable water (2006)
4.9 4.4
4.1 3.8 3.8
3.6
3.4 3.3
3.3 3.2
3.2 2.8 2.7
9.2 8.5
7.0 6.4 5.2
4.8
4.3
Average: 3.7
Venezuela (21)
Mexico (17)
Peru (14)
Brazil (9)
Argentina (5)
Colombia (2)
Chile (1)
Ecuador (94)
Venezuela (84)
Colombia (75)
Costa Rica (73)
Argentina (72)
Brazil (71)
Mexico (64)
Uruguay (58)
El Salvador (54)
Jamaica (53)
Panama (46)
Chile (35)
Barbados (28)
Average: 5.8
When we observe the growth potential and the total sales by
product, we see that slightly more than 80% is related to PVC.
Worldwide, 55% of PVC is used in pipe. Accordingly, our strategy—to acquire Amanco to support the entire vinyl-chlorine
productive chain—enables us to tap into this growth potential.
Amanco’s product has a high aggregate value and enormous
growth potential due to its role in the construction of infrastructure and housing.
Sales by product
41% Pipe
31% PVC
12% Composites
4% Soda
4% HF
4% Fluorite
3% Chlorine
1% Derivatives
11
The agricultural sector is becoming another
important pillar of developmen t for Latin American
countries; Mexico currently has 6.5 million hectares
under irrigation.
Sector Total 287
4
Railroads 49
8
Ports
71
Airports 59 10
12
Telecommunications 283 47
Potable water and drainage
154 26
48
380 63
Production of hydrocarbons 822 137
Refining, gas, and petrochemicals 379 63
Venezuela
Argentina
Mexico
120.6 90.0 76.9 62.0 42.2 40.9 18.3 16.3
94%
37%
59%
2002
2003
2004
2005
2006
28% 30%
32%
35%
36%
USA
Brazil
90%
Korea
Argentina
86%
China
76%
Mexico
Total
Spain
2006
Percentage of wastewater treatment in Mexico
12
Brazil
(hectares per thousand inhabitants)
Chile
2000
Rural areas
Colombia
Surface under irrigation
2,532 422
Sewage coverage in Mexico
Urban areas
2.8 1.8
8
Electricity
Total
3.9 3.7
Annual
average
Highways Hydro-agriculture and flood control
4.2
World average
(billions of pesos in 2007)
6.7 5.2 4.6
Northern Asia
Estimated investment in Mexico by sector 2007/2012
Europe
21.1 7.0
China
PVC consumption per capita
USA
The agricultural sector is becoming another important pillar for
development in Latin American countries. For example, there
are currently 6.5 million hectares under irrigation in Mexico. To
capture this sector’s tremendous potential, we have created
a new subsidiary, Mexichem Soluciones Agrícolas, whose
principal objective will be to provide solutions for handling
water and important projects in the areas of biofuel and food,
both sectors that demand advanced technology and service for
all of Latin America.
Sanitation coverage in Latin America
31%
Unconventional
“In situ”
21%
Without coverage
48%
Conventional
The potable water and drainage
sector, which is directly involved in
pipe manufacturing, will make annual
investments of MXN26 billion during the
next six years.
Chile
Peru
1.2 0.5
Ecuador
1.2
Argentina
2.9 2.7 2.6
Venezuela
6.7 4.3
Colombia
(million houses)
Mexico
At Mexichem, in accordance with our 20/20/20 vision, we have
been consolidating companies in the areas with the greatest
potential in Latin America, integrating our productive chains
with products of greater aggregate value. As a result, our sales
have gone from just over USD200 million in 2002 to almost
USD2.1 billion in 2007. In only five years, EBITDA has increased
from nearly USD30 million to nearly USD400 million.
Housing deficit
Brazil
In Mexico, the federal government has announced that, over
the next six years, it will invest more than MXN2.5 trillion in infrastructure that will directly impact the growth of the country
and, as a result, Mexichem. The potable water and drainage sector, which is directly involved in pipe manufacturing, will make
annual investments of MXN26 billion during the next six years,
and the average annual investment in the hydro-agriculture and
flood-control sector will be MXN8 billion.
The potable water and drainage
sector, which is directly involved in
pipe manufacturing, will make annual
investments of MXN26 billion during
the next six years.
agp k
13
Efficiency and Growth
“
A characteristic of all of our acquisitions is our ability to achieve
synergies that yield significant benefits for Mexichem, and this is
the most important point for us in project analysis.
Patricia Mendoza
Accounting manager
Y
ear after year we have met the challenges of achieving
an industry leadership position, a commercial presence,
and operations throughout the Americas. We have also
met our commitment to generate value for our shareholders
and to grow with responsibility, intelligence, and a healthy
financial structure that allows us to maintain our stride and our
direction. In 2007 we increased our sales by 121%, EBITDA by
75%, and consolidated net earnings by 55%. These increases
are attributable, in part, to the acquisitions themselves, but are
due primarily to the synergies we obtained as a result of their
integration. When we acquired Amanco, its sales were about
USD800 million, and EBITDA was USD83 million, a historical
record for Amanco. Within only ten months of its acquisition
by Mexichem, Amanco’s 12-month sales represented about
USD900 million. Moreover, EBITDA between January and
December was USD140 million.
In an industry such as ours, cost reduction is vital. That is why,
in each business unit and in each plant, we seek operational
excellence and process efficiencies that reduce costs, which,
in turn, will allow us to maintain our competitiveness and
leadership position. In 2006 we created the Mexichem
Research and Development Center, through which we have
developed in-house fluorite purification technology, and
increased our margins in the Fluorine Chain. In 2007 we
changed the technology of the Santa Clara plant, in the
State of Mexico, which manufactures chlorine-soda and
chloride derivatives using state-of-the-art technology. This
plant is the only one of its type in North or South America.
With this investment, totaling nearly USD70 million, we
reduced electricity consumption—the principal cost in the
manufacture of chlorine-soda—by more than 30% and
generated important synergies in other areas that yield
savings of more than USD15 million per year.
In 2007 we increased our sales by
121%, EBITDA by 75%, and consolidated
net earnings by 55%. These increases
are attributable, in part, to the
acquisitions themselves, but are due
primarily to the synergies we obtained
as a result of their integration.
14
“
We have invested in the products and
regions with the highest potential for
growth and profitability in all of Latin
America, and we have capitalized on
economies of scale and synergies in
information technologies, logistics,
accounting, and human resources.
In 2008 we plan to make acquisitions in Mexico and other Latin
American countries totaling nearly USD300 million; in the first
quarter we invested more than USD200 million. During the next
five years, we plan to invest nearly USD1 billion to maintain the
growth rate necessary to reach our goal without sacrificing
the stability and flexibility that has characterized our financial
condition.
To coordinate these efforts and achieve results throughout
North and South America requires not only talented management but advanced, innovative tools. Mexichem has a platform
of information technologies that guides and facilitates our ability to achieve all of our objectives.
We use the SAP system for real-time monitoring of operational
and financial information from plants, distribution centers, sales
offices, research centers, and corporate offices throughout the
entire organization, which expedites decision-making and
improves efficiency across all of our operations.
We have invested more
than USD200 million in
acquisitions so far in 2008,
and we plan to invest
approximately USD1 billion
over the next five years.
15
As a company committed to social responsibility,
Mexichem is dedicated to fully meeting the
expectations of all of its stakeholders, both
internal and external, with regard to its economic,
social, human, and environmental surroundings.
Without exception, we respect ethical values, our
people, our communities, and the environment.
Social responsibility is part of our culture and our values,
and is applied in each and every one of the activities that we
perform each day. We know that the only way to achieve longterm viability is through sustainable development. We have
developed programs to support the communities in which
our facilities are located. We have also established agreements
with the principal universities in these regions to develop
joint training and development programs. Through these
actions, we hope to help new generations understand the
intersections of industry, ecology, and society and be better
prepared to face the challenges and realities of operating in a
responsible manner.
As part of its commitment to social responsibility, and to
help those in greatest need, Mexichem makes monthly
contributions to Fundación Kaluz A.C. The Foundation puts
these donations to work for the common good by helping
individuals meet their basic food, clothing, or housing needs.
The Foundation also funds activities to promote human
development and a higher quality of life through education,
health, sport, arts, and entertainment.
Mexichem employees can support social projects on a
personal level by making voluntary contributions to the United
Way. We are proud that our employees, on their own initiative,
have created a campaign to raise awareness about the United
Way and spur greater participation. Employee committees
determine how the contributions are disbursed (based on
United Way categories) and verify their use. The percentage
of employees participating and the amount of money
collected has increased year after year, thereby benefiting our
communities and, most importantly, directly involving our
employees in addressing social challenges.
16
In July 2007 Mexichem attained Cemefi certification as a
Socially Responsible Company, demonstrating its ongoing
commitment to the community.
Our companies are fully compliant with Mexican environmental
and safety regulations. We have earned Clean Industry
certification and are implementing the integrated responsibility
program promoted by the National Chemical Industry
Association (ANIQ), a program similar to the Responsible Care
initiative developed in the United States. Our achievements
under the auspices of this program have been widely
recognized by ANIQ. Additionally, our facilities are certified to
the ISO 14000 standard.
In partnership with other companies, we have developed an
eco-efficiency program that promotes the efficient use of
byproducts from our manufacturing processes. This program
not only helps to preserve the environment, but it also generates
an economic benefit to the company, thus underscoring its
value as a viable and sustainable business model. In 2007 we
received two awards for Thermal Energy Savings in recognition
of the energy efficiency program that was implemented at
Cloro de Tehuantepec and Mexichem Resinas Vinílicas.
“Social responsibility is
part of everyone’s job at
Mexichem. It is not only
a corporate but also a
personal commitment.”
January - December
INCOME STATEMENT Net sales 2007
$ 23,017,321 Cost of sales Gross profit
Variation
$ 10,417,127
121%
15,557,351
Operating expenses
2006
7,335,523
112%
7,459,970 3,081,604
142%
4,189,873 1,083,565 287%
Operating income
3,270,097
1,998,039 64%
Comprehensive financing cost
371,679 150,356 147%
299,849 131,022 129%
2,598,569
1,716,661 51%
Special item and other
Net income from continuing
operations before income taxes
Provisions for income tax (%)
746,511 525,445 42%
1,852,058 1,191,216 55%
Discontinued operations
(10,354)
(5,486)
89%
Net income from continuing operations
Accumulated effects of change in accounting policy
- - Consolidated net income $ 1,841,704 $ 1,185,730
Net income of minority stockholders
Net majority income
18,513 1,823,191 EBITDA $ 4,354,055
55%
(2,512)
0%
1,188,242 53%
$
2,485,491 75%
17
Mexichem consolidated
Increase in sales
Expansion
Sales rose to MXN23.017 billion in 2007, 121% more than in
2006. This significant increase is due primarily to the Group’s
expansion strategy, in particular the acquisition of Amanco,
Petco, and Frigocel in February, March, and July, respectively.
Together, these subsidiaries reported sales of MXN12.232 billion
for the year.
Net income increased to MXN1.842 billion, an increase
of MXN656 million, or 55%, compared with net income
reported in 2006 resulting from acquisitions and favorable
operating results.
Sales in the Chlorine-Vinyl Chain were MXN8.331 billion, 30%
higher than in 2006. Sales volume was 1.593 million tonnes,
21% more than in the previous year. The total income of the
Fluorine Chain was MXN2.087 billion, 12% higher than in 2006,
with a volume of 911 thousand tonnes, 10% more than in
2006. This was due to the use of the fluorite purifier to use our
own fluorite, thereby ensuring the supply of our primary raw
material. The Transformed Products Chain had sales of MXN12.6
billion, thanks to the Amanco and Frigocel acquisitions.
Price strengthening
The gross margin increased by 142%, totaling MXN7.46 billion,
and represents 32% of income, an increase of almost 3%
compared with that of the previous year. This increased margin
was due primarily to the synergies achieved by integrating
Amanco and Petco into our productive chains, as well as price
increases in the Chlorine-Vinyl Chain and the implementation of
companywide cost-reduction projects, including a technology
change in the chlorine/soda plant in Santa Clara. We achieved
higher sales volumes and improved prices for practically all of
our products in 2007; prices in the Chlorine-Vinyl Chain and the
Fluorine Chain grew 11% and 2.6%, respectively, over those of
the previous year.
Net debt at the end of 2007 was MXN7.133 billion, compared
with MXN1.03 billion at the end of the same period in 2006.
This increase is due to financing for acquisitions, less payment
of current credits and advance payment of long-term debt. It is
important to mention that the net-debt-to-EBITDA ratio closed
the year at 1.63 times, below international standards.
Mexichem and its subsidiaries
Growth
Operating
Growth
income
Total vs. 2006 income
vs. 2006
(MXN millions)
(%)
(MXN millions)
(%)
Mexichem
consolidated
$ 23,017121
$
3,270
64
$ 8,331 30
$
1,665
28
$ 2,087 12
$
781
10
$ 12,600477
$
1,154
437
Mexichem
Chlorine-Vinyl
Mexichem
Fluorine
Transformed
Products
Growth of operating income
Operating income increased by 64%, to MXN3.27 billion, driven
primarily by the new acquisitions. Operating cash flow was
MXN4.354 billion, 75% more than in 2006.
Expansion of the plant utilization capacity
Increase in sales
During 2007 we maintained high utilization rates at our
plants, thanks to improved operational efficiencies that
allowed us to reduce costs, capture synergies among our
operations, reduce and eliminate redundant costs, and
maintain our world-class operational leadership. The Santa
Clara plant increased production capacity by 10% thanks to
replacement technology.
Accumulated sales for 2007 were MXN8.331 billion, 30% more
than in 2006. Sales volume was 1.593 million tonnes, 21%
more than in 2006. Operating income increased by 28% but
lagged sales due to increases in energy prices. The above
results include nine months of operations of Petco, as well as
Mexichem América Inc.
18
Markets
Global supply continues to outpace global demand, due in
part to an increase in installed capacity, particularly in Asia.
Despite recent capacity increases in North America, there are
fewer surpluses in the region as a result of increased demand,
which places upward pressure on prices. South America
continues, however, to see a significant supply deficit. Our
new acquisitions have enabled us to better handle the surplus
balances and have created an important regional market for
us in Latin America.
Growth
Mexichem Resinas Colombia (Petco) has strengthened the
competitive position of the Chlorine-Vinyl Chain, not only in
Mexico but throughout Latin America, and provides a new
platform for growth in new markets, products, and services.
This acquisition also provides a platform for the acquisition of
other facilities that add greater value to our productive chain
and maintain balance in each of its links. The acquisition of
Procesal in Colombia will allow for further regional integration
of the chain, give us a better competitive position in Colombia,
and provide strategic flexibility for the future.
Fluorine Chain
Increase in sales
Total sales were MXN2.087 billion, 12% more than in 2006.
Sales volume was 911 thousand tonnes, 10% more than
in 2006. The Fluorine Chain maintained its profit margins
at 100% production capacity. For the first time, the
Matamoros plant achieved a production and sales volume
of 230 million pounds, 15% more than its nominal installed
capacity. EBITDA was MXN920 million, 10% more than in
2006. Prices for this chain increased by 2.6% over those of
the previous year because of a change in the product mix
due to expansion of the mine flotation capacity and market
conditions. During 2008, we will increase hydrofluoric acid
production capacity by 20%.
Markets
With approximately 49% of worldwide sales, China is the world’s
primary fluorite producer. Mexichem has the largest fluorspar
mine in the world and competes against China, a country
whose 1,500 mines’ total capacity is roughly equal to ours.
World demand for fluorspar continues to grow. In particular,
demand for high-purity fluorspar used in the manufacture of
refrigerants has grown and has driven prices to levels higher
than those in 2006. Indicators point to continued high demand
in the near term. The demand for HF has also increased, and
our supply contracts with our current clients have enabled our
plant to operate at 100% capacity.
Growth
Mexichem’s Fluorine Chain has achieved near total integration.
Our use of fluorite from our own mine has generated significant
improvement in margins and made this chain much more
profitable. As the only integrated producer of our own raw
material in the Americas, we will increase our HF production
capacity by almost 20% this year and will thus provide a more
solid growth platform for higher-value-added products.
Increase in sales
Accumulated sales for 2007 were MXN12.6 billion, with
operating income of MXN1.154 billion. The above includes
the sales of composites and styrenes and sales from Amanco
beginning in March.
Markets
Amanco has plants in 14 Latin American countries, including
Mexico; a presence in 29 countries; and more than 55 thousand
points of sale in the region. The major driver for the pipe market
is construction, of both housing and infrastructure, which is
recording double-digit growth in countries such as Mexico,
Colombia, Peru, and Brazil. The countercyclical plans announced
by the Mexican government, together with Mexichem’s
geographic distribution, give us a very important competitive
advantage notwithstanding the slowing of the U.S. economy.
Growth
During 2008 we will invest more than USD150 million in
acquisitions in this chain. We have already announced the
acquisitions of Plastubos in Brazil; Dripsa in Argentina; and,
most recently, Tubos Flexibles in Mexico, which will provide
significant growth for Mexichem in this market.
19
Share information
Beginning in February 2008, Mexichem was included in the Mexican Stock Exchange Index of Prices and Quotations (IPyC),
which places the company at number 26 among companies that have high exposure on the exchange. This listing marks the
achievement of another of Mexichem’s objectives for the year: to belong to the comparative performance index along with other
Mexican companies listed on the Mexican stock exchange (BMV).
Instrument
Performance last 12 months
Mexchem*
112%
Alfa A
-5.93%
America Móvil
28.39%
GCarso A1
9.55%
The share price during 2007 had a yield of greater than 130% and closed the year at 43.61 pesos per share; the enterprise value /
EBITDA (EV/EBITDA) ratio closed at 8.82.
2006
2007
450
400
350
300
250
200
150
100
300
250
200
150
100
Mexichem share price
BMV IPyC
7.0 8.8
8.8
IPC
MEXICHEM
Average
8.1
GCARSO
DESC
Mexichem
Average
2.6 2.9
ALFA
6.0 6.9
International
3.5 1.8
United States
19.8 13.7 16.8 11.8
Mexichem
EV/EBITDA
Average
Price / Book Value
International
Price / Net Profit
United States
20
Differential
Mexichem,
Mexichem, S.A.B.
S.A.B.dedeC.V.
C.V.
Per-share
information:
Pesos
of de
purchasing
power as of
31, 2007de 2007
Información
por acción:
Pesos
poder adquisitivo
delDecember
31 de diciembre
2007
2007
2006
2006
2005
2005
2004
2004
2003
2003
3.45
2.43 $
0.95
0.82 $
0.29
Utilidad neta por
Net
income continuas
operaciones
$
from
continuing
Utilidad
(pérdida) operations
neta
Net
income (loss)discontinuas
de operaciones
from
Efectodiscontinued
al inicio poroperations
cambios
$
$
3.45
$
2.43
$
-$
0.01 -$
0.01
-$
0.01 $
0.01
$
-$
$
0.95
$
0.65 -$
0.65 -$
0.82
$
0.29
0.10 $
0.10
$
0.07
0.07
Effect
at the start
due to changes $
en principios
de contabilidad
0.00 $
0.00 -$
0.08 -$
0.15 $
0.00
in accounting principles
$
0.00
$
0.00
-$
0.08 -$
0.15
$
0.00
Utilidad neta
$
3.44 $
2.42 $
1.52 $
0.57 $
0.36
Net income
$
3.44
$
2.42
$
1.52 $
0.57
$ 0.36
Capital contable
Stockholders’ equity
(participación mayoritaria)
$
14.80 $
9.86 $
7.85 $
6.37 $
5.96
(majority participation)
$
14.75 $
9.83 $
7.85 $
6.37 $
5.96
(**)
$
1.02 $
0.44 $
0.61 $
0.17 $
0.15
Dividendos Dividends (**)
$
1.01 $
0.44 $
0.61 $
0.17 $ 0.15
(a)
$
43.61 $
18.85 $
12.49 $
5.90 $
4.50
Precio al cierre $
43.61 $
18.85 $ 12.49 $
5.90 $
4.50
Closing price (a)
Precio al cierre/utilidad neta
12.68
8.39
8.82
11.13
13.34
Closing price / net income
12.68
8.39
8.82
11.13
13.34
Precio al cierre/capital contable
2.95
1.91
1.59
0.93
0.76
Closing price / stockholders’ equity
2.96
1.92
1.59
0.93
0.76
Número de acciones
Number of outstanding
(b)
en circulación
(b) 547,119,442
548,800,000488,581,550
490,000,000490,000,000
490,000,000 426,489,016
426,489,016 415,789,416
415,789,416
shares
Promedioshares
de acciones
Average
527,606,810488,581,550
488,581,550437,238,046
437,238,046 422,922,483
422,922,483 415,789,416
415,789,416
in
encirculation
circulación(c)(c
) 527,606,810
Otros indicadores
Other
Razón indicators
circulante total
1.11 1.13 1.12 1.09
1.50
1.13 53.68%
1.12 60.26%
1.09
77.34%
1.50
48.86%
53.68%
1.20 60.26%
1.51 77.34%
3.41
48.86%
1.00
1.51 3.41
Consolidated
income
a activo total net
promedio
10.16%
11.64%
6.41%
to average total assets
10.16%
11.64%
6.41%
Utilidad neta consolidada
Consolidated net income
a capital contable promedio
28.24%
27.43%
21.19%
to average stockholders’ equity
28.24%
27.43%
21.19%
Pasivo con costo, neto de caja
Debt at cost, net from cash to cash flow
(d)
a flujocontinuing
de efectivo
de
1.64
0.41
0.45
from
operations
operaciones
continuas (d)
1.64 0.41
0.45
2.45
Interest
coverage,
(e)
7.01
18.61
7.86
continuing
operations
Cobertura de
intereses de
2.12%
2.12%
3.25%
3.25%
9.79%
9.79%
6.35%
6.35%
Liquidity
ratio
Pasivo a activo
total
1.11 67.45%
Liabilities
to totalcontable
assets
Pasivo a capital
total
67.45%
2.09
Liabilities
to stockholders’
Utilidad neta
consolidada equity
2.09 operaciones continuas (e)
(a) Market price quoted on the Mexican stock exchange.
7.01 18.61
1.20 7.86
8.45
2.45
1.55
8.45
1.00
1.55
17.00
17.00
(b) Equivalent to the number of shares outstanding as of December 31 of each year.
(a ) Precio de mercado según cotización de la bolsa Mexicana de Valores, S.A. de C.V.
(c) Average number of shares outstanding during the year.
(b ) Equivalente al número de acciones en circulación al 31 de diciembre de cada año.
(d) Cash flow is defined as operating income plus depreciation and amortization.
(c ) Promedio ponderado de acciones en circulación durante el año.
(e) Cash flow / financial cost, net.
(d ) El flujo de efectivo se define como: utilidad de operación más depreciación y amortización
(**) Figures in nominal pesos on the date they were declared.
(e ) Flujo de efectivo/gastos financieros, neto.
(**) Cifras en pesos nominales de la fecha de decreto.
En Mexichem tenemos una política de dividendos muy atractiva, conforme a la cual se paga como dividendo hasta 10% del EBITDA
del año anterior.
Histórico
dividendos
pesos por
acción,policy,
a pesos
de poder
adquisitivo
31 de
diciembre
de 2007
Mexichemdehas
a very attractive
dividend
which
pays up
to 10% ofalthe
EBITDA
from the
previous year.
Dividend history in pesos per share, at pesos of purchasing power as of December 31, 2007
2002 2003
2003 2004
2004 2005
2005 2006
2006 20072007
0.31 $ 0.18
0.155
0.175
0.61
$ 0.19
$ 0.66
$ 0.460.44
$ 1.011.02
21
Board of Directors
Chairman of the Board
Secretary
Juan Pablo del Río Benítez
Prosecretary
Andrés Eduardo Capdepon A.
Directors
Related
Adolfo del Valle Ruiz
Ignacio del Valle Ruiz
Alain Jean Marie de Metz Simart
Ricardo Gutiérrez Muñoz
Jaime Ruiz Sacristán
Juan Pablo del Valle Perochena
Independent
Divo Milán Haddad
Fernando Ruiz Sahagún
Jorge Corvera Gibsone
Juan Francisco Beckmann Vidal
Armando Santacruz Baca
Valentín Diez Morodo
Eugenio Clariond Reyes Retana
Alternate Related
Antonio del Valle Perochena
Adolfo del Valle Toca
José Ignacio del Valle Espinosa
Francisco Javier del Valle Perochena
María Blanca del Valle Perochena
Gerardo del Valle Toca
Guadalupe del Valle Perochena
Alternate Independent
José Luis Fernández Fernández
René Rivial León
Juan Domingo Beckmann Legorreta
Eugenio Clariond Rangel
22
Audit Committee
Fernando Ruiz Sahagún. Presidente
Divo Milán Haddad
Corporate Practices Committee
Fernando Ruiz Sahagún. Presidente
Divo Milán Haddad
Officers
Chief Executive Officer
Ricardo Gutiérrez Muñoz
Chief Corporate Development Officer
Jaime Morales Vázquez
Chief Financial Officer
Armando Vallejo Gómez
Director Fluorine Chain
Héctor Valle Martín
Director of Strategic Planning and
Investor Relations
Corporate Governance
Our principles of corporate governance provide a framework
for the operation of our company; at the same time, we work
in the best interests of our stockholders. We are subject to
Mexican legislation, which is the basis for our corporate
governance practices. Our shares are listed on the BMV. For
this reason, we meet the standards of corporate governance
established in the Securities Market Law. In addition, our
standards of corporate governance meet the principles
established in the Code of Best Corporate Practices, backed by
the Business Coordinating Council.
The board of directors heads our corporate governance system
and is responsible for determining corporate strategy; defining
and supervising the implementation of the values and vision
that define us; and approving transactions between related
parties and transactions that are not part of the ordinary course
of our business.
Our social statutes call for the existence of an audit committee
and a corporate practices committee to assist the board of
directors in the performance of its duties.
Audit Committee
The audit committee is responsible for evaluating the internal
control and internal audit system of the company; identifying
any important deficiency discovered; monitoring any
corrective or preventive measure taken due to noncompliance
with operational and accounting guidelines and policies;
evaluating the performance of the external auditors;
describing and evaluating non-audit services performed
by the external auditors; reviewing the company financial
statements; evaluating the effects of any modification to
the accounting policies approved during the tax period;
monitoring the measures taken regarding the observations
by shareholders, directors, executive officers, employees,
or third parties regarding accounting, internal control
systems, and internal and external audits, as well as any
claim related to irregularities in administration, including
anonymous and confidential methods for handling reports
expressed by employees; and overseeing compliance with
the decision of the general shareholders meeting and the
board of directors.
Corporate Practices Committee
The corporate practices committee is responsible for
evaluating the performance of the executive officers;
reviewing transactions between related parties; reviewing
directors’ compensation; evaluating any dispensation granted
to the directors or executive officers so that they may take
advantage of business opportunities; and performing activities
as required by the securities laws. According to our statutes,
all members of the audit and corporate practices committee,
including each chairman, shall be independent directors.
Information for Investors
One area of our organization is specifically responsible for
communication with our shareholders and investors. Our
fundamental objective is to ensure that our shareholders
and investors receive necessary and sufficient information to
evaluate the performance and progress of the organization.
23
Financial statements 2007
Contents
25 Report of the Independent Auditors
26 Consolidated Balance Sheets
27 Consolidated Statements of Income
28 Consolidated Statement of Changes in Stockholders’ Equity
30 Consolidated Statements of Changes in Financial Position
31 Notes to Consolidated Financial Statements
48 Report of the Chief Executive Officer
51 Report of the Corporate Practices and Audit Committees
24
Independent Auditors’ Report
Independent Auditors’ Report
to the Board of Directors and Stockholders of Mexichem, S.A.B. de C.V.:
We have audited the accompanying consolidated balance sheets of Mexichem, S.A.B. de C.V. and Subsidiaries (the “Company”
or “Mexichem”) as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in
stockholders’ equity and 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.
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
misstatement and that they are prepared in accordance with Mexican Financial Reporting Standards. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the financial reporting standards 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.
As discussed in Note 2, in February and March 2007, the Company acquired all the shares of the entities denominated Amanco
and Petco, which are engaged in the manufacture and sale of solutions for the conduction of fluids, primarily water, and
the production of PVC resins, respectively. These businesses are mainly active on Latin American markets and operate in 14
countries. These acquisitions had a total value of approximately US$ 736 million, which doubled the Company’s size, thereby
affecting the comparability of the accompanying consolidated financial statements.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Mexichem,
S.A.B. de C.V. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations, changes in their
stockholders’ equity and changes in their financial position for the years then ended in conformity with Mexican Financial
Reporting Standards.
Galaz, Yamazaki, Ruiz Urquiza, S. C.
C.P.C. Carlos Moya Vallejo
March 18, 2008
(April 2, 2008 with respect to Note 25)
25
Consolidated Balance Sheets
Mexichem, S.A.B. de C.V. and Subsidiaries (A Subsidiary of Grupo Empresarial Kaluz, S.A. de C.V.)
As of December 31, 2007 and 2006
(Thousands of Mexican Pesos of purchasing power of December 31, 2007)
Assets
Current assets:
Cash and cash equivalents
$
Accounts receivable, net
Due from related parties
Inventories, net
Prepaid expenses
Property, plant and equipment available for sale
Total current assets
2007
1,551,469
$
4,722,856
126,569
2,652,625
118,265
151,144
–
9,322,928
2006
437,412
1,930,744
–
850,208
11,355
–
962,676
4,192,395
Property, plant and equipment, net
9,741,726
4,135,767
Other assets, net
230,144
71,892
Investment in shares of associated companies
121,325
32,156
Intangible assets from employee benefits
109,537
188,795
Intangible assets, net
2,842,295
1,052,401
Goodwill 2,709,899
672,330
–
465,490
Total
$ 25,077,854
$ 10,811,226
Liabilities and stockholders’ equity
Current liabilities:
Bank loans and current portion of long-term debt
$ 1,629,129
$
314,662
Accounts payable to suppliers
4,601,840
1,872,778
Due to related parties
174,237
140,435
Other accounts payable, provisions and accrued liabilities
1,679,655
313,609
Income tax and employee profit sharing payable
296,294
109,500
Derivative financial instruments
–
15,466
–
938,715
Total current liabilities
8,381,155
3,705,165
Bank loans and long-term debt
7,054,495
1,152,558
Other liabilities
457,381
38,779
Deferred income taxes
826,426
803,879
Employee retirement benefits and workers’ compensation
195,941
87,517
–
16,025
Total liabilities 16,915,398
5,803,923
Stockholders’ equity:
Paid-in capital Capital stock
Nominal
2,136,740
454,683
Additional paid-in capital
1,279,668
1,283,444
Cumulative effect of restatement
826,100
768,333
4,242,508
2,506,460
Earned capital Retained earnings
4,392,573
3,133,682
Cumulative effect of deferred income taxes
(341,582)
(341,582)
Reserve for reacquisition of shares
491,445
448,769
Cumulative effect of restatement
(690,718)
(919,517)
Valuation of financial instruments
1,164
(9,879)
3,852,882
2,311,473
Total majority stockholders’ equity
8,095,390
4,817,933
Total minority interest
67,066
189,370
Total stockholders’ equity
8,162,456
5,007,303
Total
$ 25,077,854
$ 10,811,226
See accompanying notes to consolidated financial statements.
26
Consolidated Statements of Income
For the years ended December 31, 2007 and 2006
(Thousands of Mexican pesos of purchasing power of December 31, 2007)
(Except earnings per share expressed in pesos)
2007
2006
Net sales
$ 23,017,321
$ 10,417,127
Cost of sales
15,557,351
7,335,523
Gross profit
7,459,970
3,081,604
Operating expenses
4,189,873
1,083,565
Operating income
3,270,097
1,998,039
Other expenses, net
(299,849)
(131,022)
Comprehensive financing (cost)
(371,679)
(150,356)
Income before income taxes
2,598,569
1,716,661
Income taxes 746,511
525,445
Income from continuing operations
1,852,058
1,191,216
Discontinued operations, net
(10,354)
(5,486)
Consolidated net income
$
Allocation of consolidated net income:
Majority stockholders
$
Minority stockholders
$
Majority earnings (loss) per share:
From continuing operations
From discontinued operations
Basic majority earnings per common share
$
$
1,841,704
$
1,185,730
1,823,191
$
18,513
1,841,704
$
1,188,242
(2,512)
1,185,730
3.45
$
(0.01)
3.44
$
2.43
(0.01)
2.42
Weighted average common shares outstanding 527,606,810 488,581,550
27
Consolidated Statements of Changes in Stockholders’ Equity
Paid-in capital
Additional
Cumulative
Common Stock
paid-in
effect of
Retained
Nominal
In trust
capital
restatement
earnings
Balances as of January 1, 2006
$ 466,823
$
–
$1,283,444
$ 768,333
$2,164,071
Dividends declared
–
–
–
–
(224,008)
Additional capital contribution
due to increase of minority
stockholders’ participation
–
–
–
–
5,377
Shares in trust
–
(12,140)
–
–
–
Comprehensive income (loss)-
Net income for the year
–
–
–
– 1,188,242
Restatement effect
–
–
–
–
–
Valuation of financial instruments
–
–
–
–
–
Adjustment of additional employee
retirement liability
–
–
–
–
–
Comprehensive income
–
–
–
– 1,188,242
Balances as of December 31, 2006
466,823
(12,140) 1,283,444
768,333 3,133,682
Dividends declared
–
–
–
–
(286,954)
Declaration of dividend
payable in kind
–
–
(3,776)
–
(277,346)
Additional capital contribution
due to increase of minority
stockholders’ participation
–
–
–
–
–
Capital increase 1,705,200
–
–
57,767
–
Shares in trust
(23,143)
–
–
–
Comprehensive income-
–
–
–
–
– 1,823,191
Restatement effect
–
–
–
–
–
Valuation of financial
instruments
–
–
–
–
–
Translation effect of
foreign subsidiaries
–
–
–
–
–
–
–
–
– 1,823,191
Comprehensive income
Balances as of December 31, 2007
$2,172,023
28
$ (35,283)
$1,279,668
$ 826,100
$4,392,573
Earned capital
Cumulative effect of
deferred
income taxes
Reserve
for
Cumulative
Valuation of
reacquisition
effect of
financial
of shares
restatement
instruments
$(341,582)
$ 341,381
$ (940,358)
$ 109,421
Total
majority
stockholders’
equity
Total
Minority
interest
Total
stockholders’
equity
$3,851,533
$ (26,606)
$3,824,927
–
–
–
–
(224,008)
–
107,388
–
–
112,765
218,488
331,253
–
–
–
–
(12,140)
–
(12,140)
–
–
–
– 1,188,242
–
–
21,321
–
21,321
–
–
–
(119,300)
(119,300)
–
–
(480)
–
(480)
–
–
20,841
(119,300) 1,089,783
(2,512) 1,087,271
448,769 (919,517)
(9,879) 4,817,933
189,370 5,007,303
(341,582)
– (224,008)
(2,512) 1,185,730
–
21,321
– (119,300)
–
(480)
–
–
–
–
(286,954)
– (286,954)
–
–
–
–
(281,122)
– (281,122)
–
42,676
–
–
–
–
–
– 1,762,967
42,676 (189,370) (146,694)
– 1,762,967
–
–
–
–
–
(23,143)
–
–
–
–
–
36,128
–
36,129
–
36,129
–
–
–
11,043
11,043
–
11,043
–
–
192,670
–
192,670
48,553
241,223
–
–
228,799
$(341,582)
$ 491,445
$ (690,718)
$
– 1,823,191
(23,143)
11,043 2,063,033
1,164
$8,095,390
$
18,513 1,841,704
67,066 2,130,099
67,066
$8,162,456
29
Consolidated Statements of Changes in Financial Position
2007
Operating activities:
Income from continuing operations
$
Add (less) items that did not require (generate) resources Depreciation and amortization
Employee retirement obligations, net
Net resources generated by results
1,852,058
2006
$
1,191,216
1,083,958
17,554
28,990
2,982,560
487,452
(14,290)
40,364
1,704,742
Net changes in working capital, except treasury, before other effects
Net resources generated by operating activities before other effects
511,769
3,494,329
(229,230)
1,475,512
(Loss) gain from discontinued operations
463,075
(216,017)
3,957,404
1,259,495
4,516,595
(153,585)
42,676
143,201
11,043
–
(23,143)
1,762,967
(568,076)
5,885,263
331,253
(39,289)
(119,300)
(480)
(12,140)
–
(224,008)
(217,549)
(1,177,457)
(6,215,880)
(1,335,273)
(8,728,610)
(1,055,623)
(176,631)
(68,946)
(1,301,200)
1,114,057
(259,254)
Net resources generated by operating activities
Financing activities:
Banks loans and long-term debt Additional capital contribution due to increase of minority
stockholders’ participation Other long-term liabilities
Financial instruments
Adjustment of additional employee retirement liability
Shares in trust
Capital increase
Dividends declared
Net resources generated by (used in) financing activities
Investing activities:
Additions to property, plant and equipment, net
Acquisition of subsidiaries
Other assets, net
Net resources used in investing activities
Net changes in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
30
$
437,412
1,551,469
696,666
$
437,412
Notes to Consolidated Financial Statements
1. Nature of business
Mexichem, S.A.B. de C.V. and Subsidiaries (the “Company” or “Mexichem”) is a Mexican entity that holds the shares of
a group of companies engaged in the manufacture and sale of chemical and petrochemical products including; chlorine,
caustic soda, polyvinyl chloride resins, fluorhidric acid, also PVC components and fluid conduction systems based on PVC.
These products have their markets in the construction, housing, infrastructure, drinking water and urban drainage sectors
in Mexico, the United States and Latin America.
The Company’s strategic position currently focuses on the chemical sector based on three productive chains: the chlorinevinyl chain, the fluorite chain and, in 2007, following the acquisition of Mexichem Amanco Holding, S.A. de C.V. (formerly
Amanco Holding, Inc.), the Fluid Conduction chain was created.
2. Significant events
a. Acquisition of subsidiaries - During 2007, Mexichem purchased certain companies, the acquisition of which was recorded
according to the purchase method. The results of the acquired operations have been included in the consolidated financial
statements since the acquisition date. Consequently, the 2007 consolidated financial statements are not comparable
with those of the prior year. The consolidated statement of changes in financial position presents the incorporation of
the operations acquired by Mexichem in a single line item under investing activities. The Company’s acquisitions are as
follows:
i.
On February 22, 2007, Mexichem executed a share purchase-sale contract to acquire 100% of the outstanding shares
of Mexichem Amanco Holding, S.A. de C.V. (formerly Amanco Holding, Inc.) (“Amanco”), which is engaged in the
production and sale of fluid conduction solutions, primarily water, and is an industry leader in Latin America.
ii. On March 23, 2007, Mexichem Resinas Vinílicas, S.A. de C.V., a subsidiary of Mexichem, executed a share purchasesale contract to acquire 100% of the shares of Mexichem Resinas Colombia, S.A. (formerly Petroquimica Colombiana,
S.A.) (“Petco”), a company engaged in the production and sale of polyvinyl chloride (PVC) resins.
In order to finance most of these acquisitions, in February 2007, Mexichem contracted a bridge loan with Citibank,
N.A. for the amount of US$ 700 million.
The businesses of Amanco and Petco primarily focus on the Latin American markets and currently operate in 14
countries. The above transactions were performed for the approximate amount of US$ 736 million, thereby doubling
the Company’s size and affecting the comparability of the accompanying financial statements. Note 21 shows the pro
forma financial position of both businesses based on 12 months’ operations from 2006 to 2007.
The main headings of the condensed financial statements (unaudited) are shown in thousands of nominal pesos for
each business at the acquisition date:
Petco
Amanco
Total assets
$ 3,068,558
$7,486,205
Total liabilities
$ 1,902,438
$4,672,904
Stockholders’ equity
$ 1,166,120
$2,813,301
iii. On June 29, 2007, through the subsidiary Mexichem Compuestos, S.A. de C.V., a share purchase-sale contract was
executed to acquire 50% of the outstanding shares of C.I. Geon Polímeros Andinos, S.A., a Colombian company
engaged in the manufacture of compounds. At December 31, 2007, the financial results of this entity have not been
consolidated in the financial statements of Mexichem, because the latter does not have effective control over its
management.
iv. On August 31, 2007, Frigocel Mexicana, S.A. de C.V., a Mexican company engaged in the transformation of
expandable polystyrene and the main competitor of Mexichem in the central area of the country, was acquired
through the subsidiary Mexichem Estireno, S.A. de C.V. Expandable polystyrene products are mainly used in the
construction industry and for thermal insulation purposes.
Through these acquisitions, Mexichem has continued its strategy of generating increased added value for its basic raw
materials to strengthen its position in Latin America and become a global entity with operations throughout almost the
entire American continent.
31
b. Divestment of subsidiaries - The Board of Directors decided to divest the distribution business of Dermet de México,
S.A. de C.V. (“Dermet”); accordingly, the stockholders’ ordinary meeting of July 9, 2007, resolved to pay a dividend of
$270 million (face value), payable in kind through the delivery of shares representing the common stock of Dermet.
Consequently, at December 31, 2006, the assets, liabilities and results of this business are presented as a discontinued
operation in the current consolidated financial statements.
c. Syndicated loan - On August 22, 2007, Mexichem and several of its subsidiaries executed a loan contract with a syndicate
of 14 international banks headed by Citibank, N.A. for the amount of US$ 635 million, for a five-year period, with a one
year grace period and semiannual principal payments thereafter. The loan was used to settle the aforementioned bridge
loan.
d. Plant modernization - On August 30, 2007, Mexichem began the operation of the new plant located at Santa Clara in
Mexico State, with an investment of US$ 75 million, and which was intended to modernize and update the technology
used to manufacture Chlorine-Caustic Soda with significant energy and maintenance reductions. This investment was
recognized for the amount of $132,505 in the consolidated statement of income under the heading of other expenses,
which represents the cost of eliminating the machinery and equipment of the preceding plant and a soil remediation
reserve.
3. Basis of presentation
a. Consolidation of the financial statements - The consolidated financial statements include those of Mexichem, S.A.B. de
C.V. and its subsidiaries. The Company’s shareholding in these entities at December 31, 2007, is detailed below. Significant
intercompany balances and transactions have been eliminated from these consolidated financial statements.
Subsidiary
% Ownership
Mexichem Resinas Vinílicas, S.A. de C.V. and Subsidiaries
100
Mexichem Resinas Colombia, S.A. 100
Mexichem Derivados, S.A. de C.V.
100
Mexichem Colombia, S.A. 100
Mexichem Compuestos, S.A. de C.V. and Subsidiaries
100
Unión Minera del Sur, S.A. de C.V.
100
Mexichem Flúor, S.A. de C.V. and Subsidiary
100
Mexichem Cid, S.A. de C.V.
100
Mexichem Marcas, S.A. de C.V.
100
Mexichem Servicios Administrativos, S.A. de C.V.
100
Mexichem Amanco Holding, S.A. de C.V. and Subsidiaries
100
Amanco Tubosistemas Panamá, S.A.
100
Construsistemas Amanco Panamá, S.A.
100
Pavco Investment Inc, and Subsidiaries
100
Mexichem Plastigama, S.A. de C.V.
100
Production Chain
Vinyl/ Chlorine
Vinyl/ Chlorine
Vinyl/ Chlorine
Vinyl/ Chlorine
Vinyl/ Chlorine
Vinyl/ Chlorine
Fluorspar
Investigation and
development
Trademarks
Services
Fluid Conduction
Fluid Conduction
Fluid Conduction
Fluid Conduction
Fluid Conduction
The equity in net income (loss) and changes in stockholders’ equity of those subsidiaries that were acquired or sold, has
been included in the consolidated financial statements as of or up to the date on which the transactions took place and
are restated at constant currency of the latest year presented.
b. Translation of the financial statements of foreign subsidiaries - The accounting records of foreign subsidiaries are
prepared in the local currency of their country of origin and according to the main accounting principles applicable in each
country. In order to include the individual balance sheets of each foreign subsidiary in the consolidated financial statements
of Mexichem, they have been converted based on Mexican Financial Reporting Standards (“NIF”) and restated according
to Mexican pesos of purchasing power by applying the inflation rate of the country of origin and translating this amount
into Mexican pesos by using the exchange rate in effect at each year-end close. The variance of the net investment in
foreign subsidiaries generated by the exchange rate fluctuation is included in the accrued conversion result and recorded
in stockholders’ equity as part of net comprehensive income.
c. Comprehensive income - The comprehensive income shown in the accompanying consolidated statement of changes
in stockholders’ equity represents the modification of stockholders’ equity during the year for items not comprised by
contributed capital distributions and movements. This figure is composed by a net profit of the year, together with other
items representing gains or losses during the same period, which are presented directly in stockholders’ equity without
affecting the consolidated statements of income. In 2007 and 2006, other comprehensive income items are represented
by the excess (insufficiency) of restated stockholders’ equity, the effect of derivative financial instruments with the
characteristics of cash flow hedges, the translation effects of foreign entities and the adjustment of an additional liability
recorded for labor obligations.
32
d. Operating income - The operating income is presented because it enhances the understanding of the Company’s
economic and financial performance.
e. Reclassifications - Certain amounts in the consolidated financial statements as of December 31, 2006 have been
reclassified in order to conform to the same presentation of the consolidated financial statements as of December 31,
2007.
4. Summary of significant accounting policies
The accompanying consolidated financial statements have been prepared in conformity with NIF, which require that
management make certain estimates and use certain assumptions that affect the amounts reported in the financial
statements and their related disclosures; however, actual results may differ from such estimates. The Company’s
management, upon applying professional judgment, considers that estimates made and assumptions used were adequate
under the circumstances. The significant accounting policies of the Company are as follows:
a. Accounting changes - As of January 1, 2007, the Company adopted the following NIF, which took effect as of that
date:
Statement of income - NIF B-3, which now classifies revenues, costs and expenses into ordinary and non-ordinary.
Ordinary items are derived from primary activities representing an entity’s main source of revenues. Non-ordinary items are
derived from activities other than those representing an entity’s main source of revenues. Consequently, the classification
of certain transactions as special and extraordinary was eliminated; these items are now part of other income and expenses
and non-ordinary items, respectively. Statutory employee profit sharing (“PTU”) should now be presented as an ordinary
expense and no longer presented as a tax on income. The main effect of adopting this NIF was the reclassification of current
and deferred PTU for fiscal 2007 and 2006 of $127,157 and $101,280, respectively, to other income and expenses.
Events subsequent to the date of the financial statements - NIF B-13 which requires that asset and liability restructurings
and waivers by creditors of their right to demand payment in the event an entity defaults on contractual obligations that
occur in the period between the date of the consolidated financial statements and the date of their issuance only be
disclosed in a note to the consolidated financial statements and be recognized in the financial statements of the period in
which such events actually take place. Through 2006, the effect was recognized retroactively when agreements or waivers
were obtained in a subsequent period.
Related Parties - NIF C-13 which broadens the concept “related parties” to include a) the overall business in which the
reporting entity participates; b) close family members of key management or prominent executives; and c) any fund created
in connection with a labor-related compensation plan. NIF C-13 also requires the following disclosures: 1) that the terms
and conditions of consideration paid or received in transactions carried out between related parties be equivalent to those
of similar transactions carried out between independent parties and the reporting entity, only if sufficient evidence exists;
2) benefits granted to the entity’s key management or prominent executives. Notes to the 2006 consolidated financial
statements were amended to comply with the new provisions.
Capitalization of comprehensive financing result - NIF D-6 which establishes general capitalization standards. Some
of these standards include: a) mandatory capitalization of comprehensive financing cost (“CFC”) directly attributable to
the acquisition of qualifying assets; b) when financing in domestic currency is used to acquire assets, yields obtained from
temporary investments before the capital expenditure is made are excluded from the amount capitalized; c) a methodology
to calculate capitalizable CFC relating to funds from generic financing; d) regarding land, CFC may be capitalized if land
is developed, and e) conditions that must be met to capitalize CFC and rules indicating when CFC should no longer be
capitalized. During 2007, no effects were generated by adopting this standard.
b. Recognition of the effects of inflation - The Company restates its consolidated financial statements to Mexican peso
purchasing power of the most recent balance sheet date presented. Accordingly, the consolidated financial statements
of the prior year, that are presented for comparative purposes, have also been restated to Mexican pesos of the same
purchasing power and, therefore, differ from those originally reported in the prior year. Recognition of the effects of
inflation results mainly in inflationary gains or losses on nonmonetary and monetary items that are presented in the
consolidated financial statements under the following two line items:
Cumulative effect of restatement - Represents the accumulated monetary position result through the initial
restatement of the financial statements and the gain (loss) from holding nonmonetary assets which resulted from
restating certain nonmonetary assets above (below) inflation.
Monetary position result - Monetary position result, which represents the erosion of purchasing power of monetary
items caused by inflation, is calculated by applying National Consumer Price Index (NCPI) factors to monthly net
monetary position. Gains (losses) result from maintaining a net monetary liability (asset) position, respectively.
33
c. Cash and cash equivalents - This line item consists mainly of bank deposits in checking accounts and readily available
daily investments of cash surpluses. It is stated at nominal value, yields are recognized in results as they are accrued.
d. Inventories and cost of sales - Inventories are recorded at direct acquisition or production cost and are restated to
replacement cost based on the latest purchase, production or extraction cost, without exceeding net realizable value,
except for those which are slow moving. Cost of sales is determined at restated values using the replacement cost or the
latest extraction price at the time of sale.
e. Property, plant and equipment - Property, plant and equipment are initially recorded at acquisition cost and restated
using the NCPI. For fixed assets of foreign origin, restated acquisition cost expressed in the currency of the country of origin
is converted into Mexican pesos at the market exchange rate in effect at the balance sheet date. Depreciation is calculated
by applying the straight-line method, based on the estimated useful lives of each asset.
The average useful lives used by the Company were as follows:
Useful lives in years
Buildings and construction
Machinery and equipment
Vehicles
Furniture and fixtures
40
10 and 20
5
10
f. Investments in associated companies - Are recorded according to the equity method based on the audited financial
statements.
g. Property, plant and equipment available- for- sale - Primarily represent the property, plant and equipment of the
subsidiaries that are available for sale in the short term and which are recorded at their likely recovery value.
h. Intangible assets - This item refers to non - compete contracts, material supply contract, usufruct of real estate property,
use of trademarks and customer portfolio, which are amortized over the useful life of each asset. These assets are restated
using factors derived from the NCPI.
i.
Goodwill - Goodwill represents the excess of purchase cost over the fair value of subsidiary shares, as of the date of
acquisition. It is restated using the NCPI and at least once a year is subject to impairment tests.
j.
Impairment of long-lived assets in use - The Company reviews the carrying amounts of long-lived assets in use for an
impairment indicator suggests that such amounts might not be recoverable, considering the greater of the present value
of future net cash flows or the net sales price upon disposal. Impairment is recorded when the carrying amounts exceed
the greater of the amounts mentioned above.
k. Derivative financial instruments - The Company recognizes all assets or liabilities that arise from transactions with
derivative financial instruments at fair value in the balance sheet, regardless of its intent for holding them. Fair value is
determined using prices quoted on recognized markets. If such instruments are not traded, fair value is determined by
applying recognized valuation techniques. The decision to contract an economic or accounting hedge is based on market
conditions and expectations regarding the national and international economic context.
l.
Embedded derivatives - The Company reviews executed contracts to identify embedded derivatives that must be separated
from the host contract for valuation and accounting recording purposes. When an embedded derivative is identified, it is
valued at fair value and classified as negotiable or designated as a hedge. In the case of embedded derivatives designated
as hedges and recorded at fair value, the valuation fluctuation of the derivative instruments and opened risk position are
recognized during the period in which this occurs. In the case of a cash flow hedge, the effective portion is temporarily
recognized in the comprehensive result within stockholders’ equity and subsequently classified to results when affected by
the hedged item. The ineffective portion is immediately recognized in results of the period.
m. Provisions - Provisions are recognized for obligations that result from a past event, that are probable to result in the use
of economic resources and that can be reasonably estimated. Such provisions are recorded at net present values when the
effect of the discount is significant.
n. Reserve for reacquisition of shares - Share reacquisition are recorded directly in the stock repurchase reserve at acquisition
cost. Upon resale, if there is a difference between the selling price and the acquisition cost, any such difference is recorded
as a share issue/purchase surplus or deficit.
34
o. Statutory employee profit sharing - PTU is recorded in the results of the year in which it is incurred and presented
under other income and expenses in the accompanying consolidated statements of income. Deferred PTU is derived from
temporary differences between the accounting result and income for PTU purposes and is recognized only when it can be
reasonably assumed that such difference will generate a liability or benefit, and there is no indication that circumstances
will change in such a way that the liabilities will not be paid or benefits will not be realized.
p. Income taxes - Income taxes are recorded in the results of the year in which they are incurred. Deferred taxes are
calculated by applying the corresponding tax rate to the applicable temporary differences resulting from comparing the
accounting and tax bases of assets and liabilities and including, if any, future benefits from tax loss carryforwards and
certain tax credits. Deferred tax assets are recorded only when there is a high probability of recovery.
In Mexico, beginning October 2007, based on its financial projections, the Company must determine whether it will incur
regular income tax (“ISR”) or the new Business Flat Tax (“IETU”) and, accordingly, recognize deferred taxes based on the
tax it will pay.
Tax on assets (“IMPAC”) paid that is expected to be recoverable is recorded as an advance payment of ISR and is presented
in the balance sheet reducing deferred ISR.
q. Employee retirement obligations - Liabilities from seniority premiums, pension plans and severance payments are
recognized as they accrue and are calculated by independent actuaries using the projected unit credit method at net
discount rates. Accordingly, the liability is being accrued which, at present value, will cover the obligation from benefits
projected to the estimated retirement date of the Company’s employees.
r.
Foreign currency transactions - Foreign currency transactions are recorded at the applicable exchange rate in effect at
the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into Mexican pesos at
the applicable exchange rate in effect at the balance sheet date. Exchange fluctuations are recorded as a component of
net comprehensive financing cost in the consolidated statements of income.
s. Revenue recognition - Revenues are recognized in the period in which the risk and rewards of ownership of the inventories
are transferred to the customers, which is generally when the inventories are delivered or shipped to customers and the
customer assumes responsibility for them.
t. Earnings (loss) per share - (i) The basic earnings from each ordinary share is calculated by dividing the majority net income
by the weighted average of ordinary outstanding shares during the year; (ii) basic earnings (losses) per ordinary share by
discontinued operations is calculated by dividing the net income by discontinued operations by the weighted average
number of ordinary shares outstanding during the year.
5. Cash and cash equivalents
2007
Cash
Cash equivalents
$
763,787
$
787,682
$ 1,551,469
$
2006
207,859
229,553
437,412
6. Accounts receivable
2007
2006
Customers
$ 4,764,518
$ 1,931,010
Allowance for doubtful accounts
(215,811) (54,710)
4,548,707 1,876,300
Others
174,149
54,444
$ 4,722,856
$ 1,930,744
7. Inventories
2007
Finished products
$
Raw materials
Goods in-transit
Spare parts and paid in advanced
Less- Allowance for obsolete and slow-moving inventory
$
1,625,426
$
1,131,986
248,562
177,794
3,183,768
(531,143) 2,652,625
$
2006
456,890
341,476
13,213
72,169
883,748
(33,540)
850,208
35
8. Derivative financial instruments
During 2006, several of the Company’s subsidiaries contracted hedges to guarantee the fixed price of gas with Pemex Gas
y Petroquímica Básica to protect themselves from the volatility of natural gas prices. At the 2006 close, these natural gas
hedges represent a liability of $15,466, which was recorded under stockholders’ equity, net of the deferred tax effect. At
the 2007 close, the Company has no derivative financial instruments.
Furthermore, although certain subsidiaries have executed contracts with the characteristics of embedded derivatives, they
do not meet the criteria for their separation from the host contract; accordingly, they were not valued or recorded.
9. Property, plant and equipment
2007
2006
Buildings and construction
$ 3,350,819
$ 1,745,541
Machinery and equipment
15,674,485 8,199,754
Vehicles
34,616
80,955
Furniture and fixtures
695,986
179,200
19,755,906 10,205,450
Less- accumulated depreciation
(12,019,209) (7,402,231)
7,736,697 2,803,219
Land
1,517,426
641,610
Construction in-progress
487,603
690,938
$ 9,741,726
$ 4,135,767
10. Intangible assets
36
Years of
Amortization
2007
2006
Non – compete contract
5
$
834,164
Materials supply contract
–
–
Customer portfolio
12
518,767
Use of trademark
20
1,433,881
Goods usufruct contract
17
55,483
$ 2,842,295
$ 149,372
43,774
562,156
244,507
52,592
$ 1,052,401
11. Bank loans and current portion of long-term debt
As of December 31, bank loans and long-term debt consist of the following:
2007
Loans in foreign currency:
The Bank of Nova Scotia, Bhd.
Loan of US$ 41 million, documented through promissory notes that incur
interest at the LIBOR rate plus 1.5 points payable quarterly. Principal will
be paid through 20 quarterly payments of US$ 2,050,000 beginning
September 29, 2006, with maturity on June 30, 2011.
$
Syndicated loan of US$ 635 million documented through promissory notes
that incur interest at the LIBOR rate plus .875 payable quarterly. Principal
will be settled through semiannual payments of US$ 70,555,555 beginning
August 22, 2007, with maturity on August 22, 2012. During November 2007,
The Company made a prepayment on the principal of US$ 34 million.
–
6,560,336
2006
$
408,014
–
Comerica Bank, S.A.
Loans of US$ 16 million documented through promissory notes that accrue
quarterly interest at the LIBOR rate plus .875 payable quarterly. Principal will
be paid through 15 quarterly payments of US$ 1,000,000 as of June 30, 2007,
with maturity on March 30, 2011.
130,988
179,732
Banco de Bogotá, S.A., Bancolombia, S.A., Exim Bank
Loans of US$ 35 million documented in promissory notes that accrue interest at
different rates. Principal payments of varying amounts begin as of July 26, 2007,
with maturity on December 28, 2016.
365,068
–
Citibank Colombia, S.A.
Loan of 4,500 million Colombian pesos that accrues interest at the DTF rate
plus 3.6%. Principal will be paid through 12 quarterly payments of 350
million Colombian pesos and one payment of 300 million Colombian pesos,
with maturity in 2009.
9,481
15,805
Banco do Brasil, S.A., Bancolombia, S.A., Banco Bice,
Banco Itaú BBA, Santander Rio, among others.
Revolving loans of 77 million Brazilian reales documented through several
promissory notes that accrue interest at different rates, with maturity
in December 2013.
477,959
–
Banco Patagonia, S.A., Galicia, S.A., Banco Industrial,
Banco Itaú BBA , Citibank, Santander Río, among others.
Revolving loans of 33 million Argentinean pesos documented through several
promissory notes that accrue interest at different rates, with maturity
in February 2008.
115,682
–
Bank Colombia, S.A.
Loan of 42,914 million Colombian pesos that accrues annual interest at the
LIBOR rate plus 2.98%, with maturity in December 2010.
232,504
–
Banco Itaú BBA
Revolving loans of US$ 5 million documented through several promissory notes
that accrue half-yearly interest at the LIBOR rate plus 2.6%, with maturity in
May 2011.
55,477
–
Others
Loan in Mexican pesos:
Banco Inbursa, S.A.
Unsecured loans documented through promissory notes that accrue quarterly
interest at the TIIE rate plus 1.75 points. Principal will be paid through 23
quarterly payments of $43,750, with maturity on September 5, 2011.
6,879
–
729,250
8,683,624
863,669
1,467,220
Less – Bank loans and current portion of short-term debt 1,629,129
314,662
$ 7,054,495
$ 1,152,558
37
Long-term debt matures as follows:
Payable during2008
2009
2010
2011
2012
$
$
1,629,129
2,463,507
1,758,989
1,647,319
1,184,680
8,683,624
At December 31, 2007, the financing contracted with Citibank, Comerica Bank and Banco Inbursa, S.A. establishes certain
restrictions calculated according to the Company’s consolidated figures, the most significant of which are as follows:
a. Certain restrictions regarding the application of new liens
b. Allows payment of dividends of up to 10% of operating profit plus the depreciation and amortization of the prior
year.
c. Maintain a consolidated interest hedge ratio of at least between 3.0 and 1.0
d. Maintain stockholders’ equity of at least $7,291,977
e. Maintain a leverage ratio with regard to EBITDA not exceeding 3.5 to 1.0 until June 2008, after which this ratio must
be 3.0 to 1.0
f.
Maintain long-term liabilities within a maximum stockholders’ equity of 1.50
g. Insure and maintain property and equipment in good working condition
h. Comply with all applicable laws, rules, regulations and provisions
i.
Obtain the Bank’s prior authorization before acquiring other companies, shares, business interests or assets with a
value in excess of US$ 50 million
At the date of issuance of these consolidated financial statements, the Company has complied with all established
restrictions and conditions.
12. Employee retirement obligations
Prepaid employee retirement obligations result from the trust funds for employee retirement obligations, which cover
pension, seniority premiums and severance payments. The amount due resulting from independent actuarial calculations is
calculated using the projected unit credit method. The prepaid employee retirement obligations are analyzed as follows:
2007
Projected benefit obligation (“PBO”)
$
Fund assets
(Insufficiency) excess of funds assets
Unamortized transition asset
Variation in unamortized actuarial loss
Projected net (liability) asset
$
2006
(181,716)
239,195
57,479
19,976
23,823
101,278
The net periodic (income) cost consists of:
2007
Labor cost
$
Financial cost
Return on fund assets
Amortization of transition asset
Effect of personnel reduction and early termination
Effect of reduction and extinction of debentures
Net cost (income) for the year
$
38
(407,395) $
292,081
(115,314)
13,366
15,544
(86,404) $
14,467
$
11,201
(16,365) 3,112
(8,192) 3,080
7,303
$
2006
10,695
10,807
(18,892)
2,111
(20,195)
628
(14,846)
The rates used in the actuarial calculations were as follows:
%
Yield on plan assets
Interest rate
Salary increase
5.0
5.5
1.5
The average amortization period of unamortized items is as follows:
Years remaining
Transition asset
Unrecognized actuarial loss
2007
2006
2 to 22
8 to 19
2 to 15
7 to 18
13. Shares in trust
At December 31, 2007 and 2006, the Company has 1,680,558 and 1,418,450 Class II shares, respectively, of Mexichem,
S.A.B. de C.V. in trust for assignment and sale to executives and employees. A committee is responsible for granting
purchase rights and assigning the number of shares to each executive and employee. A sales price is determined based on
the market value of the shares at the date of their assignment to executives and employees. At December 31, 2007, the
cost of shares in trust is $35,283 (at face value) and is presented in the financial statements as shares in trust.
14. Stockholders’ equity
Paid-in capital –
At December 31, 2007 and 2006, common stock consists of 548,800,000 and 490,000,000 shares comprised, respectively,
of Class I nominative, ordinary shares, at no par value, fully subscribed and paid. Variable capital consists of Class II
nominative shares, at no par value, which may not exceed 10 times minimum fixed capital without right for withdrawal.
Subscribed common stock is as follows:
Number of shares
2007
Subscribed Capital Class I
Class II
Less Shares in trust
2006
Amount
2007
2006
426,752,256
122,047,744
548,800,000
426,752,256
$ 422,423
$ 406,567
63,247,744 1,749,600
60,256
490,000,000
2,172,023 466,823
1,680,558
547,119,442
1,418,450
35,283
12,140
488,581,550
$ 2,136,740
$ 454,683
The Stockholders’ Ordinary General Meeting of April 19, 2007, approved a capital increase consisting of 58,800,000 Class
II shares at the price of 29 Mexican pesos per share.
Earned capital –
The Stockholders’ Ordinary General Meeting of July 9, 2007, approved the declaration of dividends for the amount of
$277,346 ($270,000 at face value) applied to the Net Tax Income Account (CUFIN), payable in kind through the delivery of
shares representing the common stock Dermet, equal to 5.07 Mexican pesos per share.
The Stockholders’ Ordinary General Meeting of November 7, 2007, approved the declaration of cash dividends with a
charge to the CUFIN balance for the amount of $286,954 ($285,376 at face value), equal to $0.52 for each outstanding
share. This dividend will be paid through four equal payments in January, March, May and July 2008.
At the Stockholders’ Ordinary General Meeting held on December 6, 2006, the stockholders, approved a declaration of
dividends for $224,008 ($215,000 at face value) applied to the CUFIN. Such dividend was settled in four payments made
during January, April, July, and October 2007.
Stockholders’ equity, except restated paid-in capital and tax retained earnings will be subject to income taxes payable by
the Company at the rate in effect upon distribution. Any tax paid on such distribution may be credited against annual and
estimated income taxes of the year in which the tax on dividends is paid and the following two fiscal years.
Retained earnings include the statutory legal reserve. The General Corporate Law requires that at least 5% of net income
of the year be transferred to the legal reserve until the reserve equals 20% of capital stock at par value (historical pesos).
The legal reserve may be capitalized but may not be distributed unless the entity is dissolved. The legal reserve must be
replenished if it is reduced for any reason. At December 31, 2007 and 2006, the legal reserve, at historical pesos, was
$93,364 and $57,016, respectively.
39
15. Comprehensive financing cost
2007
Interest income
$
Interest expense
Exchange gain (loss), net
Monetary position gain
$
54,233
(675,219)
147,830
101,477
(371,679)
2006
$
$
17,669
(151,243)
(23,694)
6,912
(150,356)
16. Foreign currency balances and transactions
At December 31, 2007 and 2006, assets, liabilities and transactions denominated in foreign currency other than the
functional currencies of each reported unit converted to US dollars, are as follows:
Thousands of U.S. dollars
2007
Current assets
Liabilities Current
Long-term
Total
Net monetary liability position 106,230
(369,685) (573,942) (943,627)
(741,992) (174,176)
(32,449)
(206,625)
(100,395)
The principal transactions carried out by the Mexican companies in foreign currency, excluding purchases of machinery and
equipment, are:
Thousands of U.S. dollars
2007
Sales
Purchases
Net
201,635
2006
700,749
(547,608) 153,141
2006
406,020
(347,965)
58,055
The prices of the main products of the companies are based on conditions in the international market.
17. Transactions and balances with related parties
Balances due from and to related parties are as follows:
40
2007
2006
Due from related parties Grupo Dermet, S.A. de C.V.
$
Mexalit, S.A. de C.V.
C. I. Geon Polimeros Andinos, S.A.
Banco Ve por Más, S.A.
Others
$
9,085
$
2,213
110,531
4,558
182
126,569
$
–
–
–
–
–
–
Due to related parties Grupo Empresarial Kaluz, S.A. de C.V.
$
Servicios Kaluz, S.A. de C.V.
Aerokaluz, S.A. de C.V.
Others
$
170,481
$
–
3,756
–
174,237
$
137,985
1,360
–
1,090
140,435
The Company carried out the following transactions with related parties:
2007
2006
Revenues from Sales
$
Administrative services
Interest
$
–
$
977
3,276
4,253
$
4,346
1,786
1,396
7,528
Expenses from Administrative services
$
Donations
Other
$
159,439
$
13,583
2,123
175,145
$
109,800
10,209
2,718
122,727
Furthermore, the Company has performed transactions with Banco Ve por Más, S.A. and Casa de Bolsa Arka, S.A. mainly
involving loans, interest, investments and corporate banking services. These transactions have been performed according
to market conditions and values.
Employee benefits granted to Company key management (and/or prominent executives) were as follows:
2007
Direct benefits
$
Severance benefits
Postretirement benefits
75,360
$
1,061
25,651
2006
59,107
513
18,827
18. Tax Issues
a) ISR
ISR is calculated based on the tax result and primarily differs from the accounting profit due to the treatment of
comprehensive financing cost, provisions created for labor obligations, depreciation and other accounting provisions. Tax
losses can be applied against the tax income of future periods.
The ISR rates applicable in 2007 in the countries where the Company operates are as follows:
ISR
rates
%
Argentina
Brasil
Chile
Colombia
Costa Rica
Ecuador
El Salvador
United States of America
Guatemala
Honduras
México
Nicaragua
Panamá
Perú
Venezuela
35
34
17
34
30
25
25
34
31
25
28
30
30
30
34
41
b) Asset tax
In certain countries where Mexichem operates, such as Mexico, Guatemala, Nicaragua, Argentina, Colombia and Perú,
asset tax is payable, although it is generally only paid on the amount by which it exceeds ISR of the year. However, tax can
be credited against ISR and is calculated according to the local laws of each country by applying the following rates to the
majority of net assets:
Asset
tax rates
%
México
Guatemala
Nicaragua
Argentina
Colombia
Perú
1.25
1.00
1.00
1.00
6.00
1.00
c) Business flat tax in Mexico:
The 2008 tax reform was approved on September 14, 2007. The most significant amendment was the creation of a new tax
in Mexico. Business Flat Tax (IETU) will replace Asset Tax and will reflect the application whereby tax was calculated based on
the lowest consolidated rate, except for amounts paid that could not be credited to future ISR payments. Payable tax is the
highest amount obtained after comparing IETU or ISR, calculated according to the provisions of the Income Tax Law. IETU
is applicable at the 17.5% rate after 2009. In 2008 and 2009, the applicable rates will be 16.5% and 17%, respectively.
As IETU is calculated based on cash flows, the tax calculation basis will be determined depending on the origin of cash and
after applying certain deductions and credits. In the case of revenues derived from export sales in which cash has not been
collected in the last 12 months, revenues will be considered as collected at the end of this 12-month period.
Based on its financial projections, the Company determined that it will basically pay only ISR. Therefore, the enactment of
IETU did not have any effects on its financial information, since it only recognizes deferred ISR.
Taxes on income are as follows:
2007
ISR:
Current
Deferred
$
$
717,521
$
28,990
746,511
$
2006
485,081
40,364
525,445
The Company files consolidated ISR and IMPAC tax returns, including its Mexican subsidiaries in the percentage that it
holds the voting stock of the subsidiaries at the close of the year. Income tax for the foreign subsidiaries is incurred in
accordance with the rules of the respective income tax law in such countries.
Effective tax rate is different from legal tax rate due to certain permanent differences, such as non deductible expenses and
inflation effects.
At December 31, 2007 and 2006, the main items comprising the (asset) liability balance of deferred income tax are as
follows:
2007
Property, plant and equipment
$ 1,091,585
$
Inventories, net
(82,828)
Accrued liabilities which will be deductible when paid
(102,706) Tax loss carryforwards
(1,347,234) Recoverable asset tax
(22,528) Financial instruments
–
Estimate allowance for tax loss carryforwards and asset tax 1,130,568
Employee profit sharing
(20,518) Others
180,087
Net deferred tax liability
$
826,426
$
42
2006
746,289
74,679
(68,530)
(3,492)
(10,102)
(4,331)
–
(27,327)
96,693
803,879
Movements of deferred tax liabilities during the year were as follows:
2007
Beginning balance
$
Deferred income tax provision applied to results
Accumulated deficit from restatement
Deferred effect of assets and liabilities of acquired companies
Financial instruments
Others
$
803,879
$
28,990
–
(19,851)
–
13,408
826,426
$
2006
777,613
40,364
10,628
–
(47,219)
22,493
803,879
Tax loss carryforwards and recoverable IMPAC for which the deferred ISR asset and prepaid ISR, respectively, of the individual
entities, have been recognized can be recovered subject to certain conditions. Restated amounts as of December 31, 2007
and expiration dates are:
Year of
Expiration
Tax Loss
Carry forwards
2008
$
7,521
$
2009
–
2010
–
2012
–
2013
–
2014
30,681
2015
11,611
2016
–
2017
595,217
Without maturity 2,744,140
$ 3,389,170
$
Recoverable
IMPAC
6,356
3,425
5,984
3,290
16,595
16,246
12,208
12,822
3,537
–
80,463
In Brazil and Peru, tax losses are not restated and do not expire, only in Brazil can be applied for up to 30% of the taxable
profit of the year.
When determining deferred ISR according to the preceding paragraphs, the Company included the effects of tax loss
carryforwards and recoverable IMPAC of $1,108,040 and $22,528, respectively; however, these amounts were reserved
because their recovery is not likely.
19. Discontinued operations
As discussed in Note 2 (b), in July 2007, a dividend to be paid in kind to the stockholders of Mexichem was approved,
which was recorded in accounting as the sale of the Distribution segment.
The financial information of the distribution segment (Dermet) at the sale date is summarized as follows:
Revenues from discontinued operations
$1,126,996
Costs and expenses (1,114,410)
(21,897)
Other expenses (7,151)
Income tax
(752)
Minority interest
6,860
Net loss of discontinued operations $ (10,354)
43
20. Contingencies and commitments
a. Lawsuits
The Company is involved in commercial, tax and labor lawsuits. These processes have arisen during the normal course
of business and are common in the industry in which the companies operate. The estimated amount of these lawsuits is
$380,000, for which a liability has been recorded for the amount of $300,000, which includes other long-term liabilities
presented on the consolidated balance sheet. With regard to the difference of $80,000 and in the opinion of the Company’s
internal and external attorneys, the possibility that these contingencies will result in unfavorable verdicts has a risk level
of less than probable, but higher than remote. In any case, the Company considers that these lawsuits will not have an
adverse material effect on its consolidated financial position. Most of these contingencies have been recorded as a result
of recent business acquisitions.
Since before its acquisition, Amanco Brasil, Ltda. has been involved in a lawsuit for the approximate amount of US$ 13.5
million, which centers on the termination and eventual compensation for the distribution relationship with a contractor.
b. Commitments
At December 31, 2007, the Company has contractual machinery and equipment capital lease commitments and real
property operating lease commitments for the amount of $716,904.
Maturities of contractual commitments expressed in Mexican pesos at December 31, 2007, are as follows:
Years
Mexican Pesos
2008
$ 319,470
2009 292,335
2010
87,618
2011 and subsequent years
17,481
$ 716,904
The rental expense was $156,474 for the year ended December 31, 2007.
In July 2007, the Company executed an agreement with Dow Chemical, Inc. for the amount of US$ 10 million to guarantee
the supply of raw materials during three years, which will be applied to cost of sales according to the straight-line method
during that period.
On September 14, 2007, a ruling was obtained from the Superintendence of Industry and Commerce of Colombia
whereby the Company agreed to sell all the property plant and equipment of its subsidiary Celta, S.A. within a maximum
nine-month period as of the ruling date. Consequently, these assets have been valued at their estimated realizable value
without exceeding their restated acquisition cost.
The subsidiary Amanco México, S.A. de C.V. is in the process of selling the land and building of one of its plants which, at
December 31, 2007, had a net accounting value of $52,914, which was classified as assets available-for-sale within current
assets.
44
21. Pro forma financial statements
Consolidated pro forma financial information (unaudited) is presented as though reflecting events at December 31, 2007
and 2006. This pro forma information does not necessarily present the figures that would have been obtained had the
acquisition been performed as of January 1, 2006.
2007
2006
(Unaudited
Condensed balance sheet
figures)
Cash and cash equivalents
$ 1,551,469
$ 1,114,766
Accounts receivable 4,722,856 4,804,419
Due from related parties
126,569
–
Inventories 2,652,625 2,723,965
Other current assets
269,409
67,909
Property, plant and equipment, net 9,741,726 7,582,464
Intangible assets, net 2,842,295
1,827,739
Goodwill 2,709,899 3,291,295
Other assets, net
461,006
1,051,468
Total
$ 25,077,854
$22,464,025
Bank loans
$ 1,629,129
$ 9,171,884
Accounts payable to suppliers 4,601,840 3,841,670
Due to related parties
174,237
–
Other accounts payable, provisions and accrued liabilities 1,975,949 1,135,467
Bank loans and long-term debt 7,054,495 2,444,602
826,426
837,802
Other liabilities
653,322
328,628
Total liabilities 16,915,398
17,760,053
Stockholders’ equity 8,162,456
4,703,972
Total
$ 25,077,854
$22,464,025
2007
Condensed statement of income
Net sales
Cost of sales
Operating expenses
Other expenses, net
Income taxes Consolidated net income
(Unaudited
figures)
2006
(Unaudited
figures)
$ 25,649,359
$21,545,861
(17,525,471) (16,210,995)
(4,693,782) (2,663,194)
(366,127)
(106,278)
(346,238)
(395,947)
(751,794) (729,970)
$ 1,965,947
$ 1,439,477
45
22. Information by industry segment
The Company has three business chains in different geographical areas of Mexico and Latin America. A summary of the
most important financial statement headings by operating chain at December 31, 2007 and 2006, is detailed below:
2007
Vinyl/ Chlorine
Fluorine
Fluid Conduction
Holding company
Total
Total assets
$ 11,854,447
$ 1,919,653
$ 8,113,650
$ 3,190,104
$25,077,854
Net sales
$ 11,188,496
$ 2,086,758
$ 9,727,616
$
14,451
$23,017,321
Operating income (loss)
$ 1,443,754
$
780,885
$ 1,375,259
$
(329,801)
$ 3,270,097
$
382,250
$
362,982
$
951,717
$
144,755
$ 1,841,704
EBITDA
$ 1,880,404
$
920,251
$ 1,687,800
$
(134,400)
$ 4,354,055
EBITDA per share
$
$
1.68
$
$
3.43
3.08
(0.26)
$
7.93
2006
Vinyl/ Chlorine
Fluorine
Distribution
(discontinued
operations)
Holding company
Total
Total assets
$ 7,255,661
$ 1,776,721
$ 1,440,993
$
337,851
$10,811,226
Net sales
$ 8,539,471
$ 1,858,947
$
–
$
18,709
$10,417,127
Operating income (loss)
$ 1,514,469
$
707,808
$
–
$
(224,238)
$ 1,998,039
$
647,333
$
426,633
$
1,896
$
109,868
$ 1,185,730
EBITDA
$ 1,771,009
$
843,247
$
–
$
(128,765)
$ 2,485,491
EBITDA per share
$
$
1.72
$
–
$
(0.26)
3.59
$
5.05
23. Subsequent event
a. On January 23, 2008, Amanco Brasil, Ltda., a subsidiary of Mexichem acquired 70% of the shares of DVG Industria
e Comercio de Plásticos Limitada (Plastubos). Furthermore, Amanco Brasil, Ltda. also has the option of acquiring the
remaining 30% in a period of between three to five years. Plastubos is a Brazilian entity specializing in the production
of rigid PVC pipes used for drinking water and drainage and primarily serves the housing, infrastructure, irrigation and
electricity markets.
b. Mexichem acquired the Argentinian company Dripsa, S.R.L., which is engaged in the design, sale and installation of
irrigation equipment, water management solutions, significant projects in the area of biofuels and foods, sectors that
demand state-of-the-art technology and excellent services throughout Latin America.
c. Mexichem announced that it executed an outline agreement to acquire the entity denominated Productos Derivados
de la Sal, S.A. (Prodesal), which is subject to the approval of the Colombian government. Prodesal is located in Cali,
Colombia, and produces and markets salt derivatives ranging from salt for human and industrial use to chlorinated
derivatives including chlorine, caustic soda, sodium hypochlorite, clorohydric acid and iron chloride.
d. Amanco México, S.A. de C.V., a subsidiary of Mexichem, has reached a preliminary agreement to acquire 100%
of the shares of Tubos Flexibles, S.A. de C.V., which is subject to the approval of the respective authorities and the
subscription of definitive documentation to the full satisfaction of the parties.
46
Tubos Flexibles, S.A. de C.V. is a company located in Mexico that produces and markets PVC, CPVC, polythene and
poly-propylene pipes and connections.
e. Mexichem Derivados, S.A. de C.V., a subsidiary of Mexichem, has reached a preliminary agreement to acquire 100% of
the shares of Quimir, S.A. de C.V., a chemical sector company specializing in the phosphate business. This transaction
is subject to the approval of the respective authorities.
f.
In January and February 2008, Mexichem contracted derivative financial instruments for purposes other than hedging
that were valued and recorded at fair value. The difference between the initial value of these derivative financial
instruments and their fair value was recorded in the statement of income. At February 29, 2008, the fair value of
these financial instruments is $94,885, which represents a liability for Mexichem.
g. On March 14, 2008, an agreement was reached through a public auction with Tuvinil, S.A., a Colombian entity, for
the sale of the assets described in Note 20 (b). Consequently, at December 31, 2007, the net amount of $98,230 was
classified on the accompanying balance sheet as fixed assets available for sale within current assets.
24. New accounting principles
In 2007, the Mexican Board for Research and Development of Financial Information Standards (CINIF) issued the following
NIFs and Interpretations of Financial Reporting Standards (“INIF”), which became effective for fiscal years beginning on
January 1, 2008:
NIF B-2, Statement of Cash Flows.
NIF B-10, Effects of Inflation.
NIF B-15, Translation of Foreign Currencies.
NIF D-3, Employee Benefits.
NIF D-4, Taxes on Income.
INIF 5, Recognition of the Additional Consideration Agreed To at the Inception of a Derivative Financial Instrument to
Adjust It to Fair Value.
INIF 6, Timing of Formal Hedge Designation.
INIF 7, Application of Comprehensive Income or Loss Resulting From a Cash Flow Hedge on a Forecasted Purchase of a
Non-Financial Asset.
At the date of issuance of these consolidated financial statements, the Company has not fully assessed the effects of
adopting these new standards on its financial information.
25. Financial statements issuance authorization
The consolidated financial statements for the year ended December 31, 2006, were approved by the Stockholders’ General
Meeting of April 18, 2007. The issuance of the consolidated financial statements for the year ended December 31, 2007,
was approved on April 2, 2008, by the Company’s Audit Committee and is subject to the approval of the Board of Directors
and Stockholders’ General Meeting, which could require their modification according to the General Corporate Law.
47
Report from the Chief Executive Officer 2007
MEXICHEM, S.A.B. AND SUBSIDIARIES • (Subsidiary of Grupo Empresarial Kaluz, S.A. de C.V.)
The Mexichem strategy
In addition to defining our general strategy, to add value to our basic raw materials, salt and fluorite, we have established
a corporate strategy that focuses on growth and efficiency in the chemical and petrochemical sectors. To achieve this, we
are undertaking a series of steps that will permit us to achieve growth through the vertical integration of three productive
chains: Chlorine-Vinyl, Fluorine, and Fluid Conduction Transformed Products, ensuring that each of these links will generate
important synergies and economies of scale and the long-term viability of our business. Therefore, when defining our
strategies, one of our priorities has been to reduce the effects of cyclicality and volatility inherent in the products closest to
our raw materials.
In an industry such as ours, cost reduction presents a constant challenge. We have established research and development
programs and have created the Mexichem research and development center (CID), which has allowed us to achieve
significant cost reductions thanks to both our proprietary technologies and our ability to develop and implement third-party
technologies. Each year, we direct 3.5% of sales to the Mexichem CID. Information technology also plays a very important
role in our operational efficiency. This is why we have implemented the SAP platform, which provides real-time operational
and financial information, and have created an internal task force that permits us to install this system within less than four
months in each company that we acquire. In addition, our people play a prominent role in the definition, implementation,
and execution of our strategy. As a result, we convert intellectual capital into structural capital and promote the valuable
human talents of creativity and innovation.
Because we understand that construction is the principal driver of Mexichem’s growth—nearly 70% of sales are related to
this segment—and that the primary axis of development is Latin America, we have focused our strategy on this region. This
focus has enabled us to maintain our vertical integration strategy and, at the same time, increase our geographic coverage
in the regions and countries with the highest potential for growth and profitability. Today we have a broad presence
throughout the Americas, with production installations in 15 countries and a presence in 30 countries. This strategy has
permitted us to consolidate our markets and better distribute risk and has given us a competitive advantage and a better
perspective, especially in the face of a possible recession in the United States.
We have established as annual growth objectives 20% in sales, 20% in EBITDA, and 20% in ROE; we have defined these
goals as our 20/20/20 vision. Likewise, we seek to maintain our strategic definition of growth and efficiency with sufficient
cash flow to maintain sustainable and conservative growth. We have established a target net-debt-toEBITDA ratio of two
times; if for any reason we need to increase this ratio, our commitment is to return to our target level within 12 months.
With these strategic definitions, we have positioned Mexichem as the leading company in Latin America in the market
sectors and products in which we participate. We will continue to exploit the opportunities this market offers, consolidating
the industry and integrating productive chains that are balanced at each link, in order to make Mexichem the leader in Latin
America’s chemical and petrochemical sector.
Results
Sales
The accumulated sales at the end of the year totaled MXN23,017 million, 121% higher than in 2006. The increase is due
primarily to the Group expansion strategy, with the acquisition in February and March 2007 of Amanco and Petroquímica
Colombiana (Petco), which reported ten and nine-month sales of MXN9,728 and MXN2,512 million, respectively.
Efficiency and productivity
Operating income in 2007 was MXN3,270 million, 64% higher than that of the previous year. Operating income plus
depreciation and amortization (EBITDA) was MXN4,354 million, 75% higher than in 2006. The growth is due to the MXN1,688
million of EBITDA in Amanco and MXN561 million in Petco. We maintained full plant utilization capacity and achieved cost
savings thanks to greater efficiency in plant operation and fixed-cost reduction by exploiting synergies throughout the
subsidiary companies. All of the above allows us to manufacture products having greater added value.
Profit sharing
Profit sharing was MXN127 million, 29% greater than the figure for the previous year.
At the end of 2007, the integrated financial cost reflected an increase of 147% versus 2006, due mainly to the net effect
of higher interest paid of MXN675 million, a net foreign-exchange gain of MXN148 million, and net monetary position gain
of MXN101 million.
48
Income tax
Income tax rose to MXN746 million, 42% more than the previous year.
Net earnings
Consolidated net majority income of 2007 was MXN1,823 million, 53% greater than that of the same period of the previous
year.
General balance sheet
Financial debt
Financial debt increased by MXN7,216 million due to the fact that we secured bank financing of approximately USD736
million for the acquisition of Amanco and Petco, and to the recognition of internal debt of both companies. In August, we
restructured our debt for an amount of USD635 million over a five-year period, with a preferential rate of LIBOR + 0.875,
a one-year grace period, and capital amortization twice per year. In addition, we prepaid approximately USD93 million in
certain financing during the fourth quarter of 2007.
With this, Mexichem concludes the renegotiation stage of its recent acquisitions, confirming its commitment to a net-debtto-EBITDA ratio of less than two times at the end of the current year. This gives us greater financial flexibility to exploit
opportunities for future growth.
Deferred taxes
Deferred tax liability is MXN826 million, generated primarily by the impact of fixed assets.
Accounting capital
The increase in accounting capital is due primarily to net income of MXN1,823 million for the period, as well as the issue
of 58,800,000 class II shares in May 2007, which allowed Mexichem, S.A.B. de C.V., to increase the nominal value of its
common stock by MXN1,705 million.
At the ordinary general stockholders meeting on November 7, 2007, Mexichem agreed to payment of a cash dividend to its
stockholders equivalent to MXN0.52, payable in four payments of MXN0.13 each.
Divestment of subsidiaries
The board of directors evaluated and decided to divest its distribution business, Dermet de Mexico, S.A. de C.V. (Dermet),
and, at the ordinary stockholders meeting on July 9, 2007, approved payment of a dividend in the amount of MXN270
million (nominal value), payable in kind by way of the delivery of representative shares of Dermet common stock. Therefore,
the assets, liabilities, and results of this business as of December 31, 2006, are shown as a discontinued operation and
caused a net loss of MXN10 million in the results.
Foreign currency position
The foreign currency liability position on the balance sheet is USD742 million.
Sales by chain
Sales totaled MXN11,188 million, 31% more than in 2006. Sales volume was 1.593 million tonnes, 21% more than in
2006. EBITDA was MXN1,880 million, 6% higher than in 2006. Pemex’s chlorine consumption during the year was 133,746
tonnes, 5% more than in the previous year.
The above data includes nine months of operation of Petco, with sales of MXN2,512 million and EBITDA of MXN561 million.
This also includes the operation of Mexichem America Inc. which reported sales of MXN211 million and EBITDA of MXN19
million.
Fluorine Chain
Sales during the period totaled MXN2,087 million, 12% higher than that reported in 2006. The volume was 911 thousand
tonnes, 10% more than in 2006, and EBITDA was MXN920 million, 9% higher than in the previous year. The hydrofluoric
acid purifier was completed In May 2006, enabling us to use fluorite from our mine. This advance ensures a supply of our
principal raw material and enables us to fully integrate this productive chain and generate significant improvement in our
margins. In addition, the increased flotation capacity of the San Luis Potosí mine will give this chain much higher profitability
and establish a more solid platform for growth toward greater-value-added products.
Fluid Conduction Transformed Products
The sales of Amanco between March and December totaled MXN9,728 million, and EBITDA totaled MXN1,688 million. We
expect this acquisition, one of our most recent, to contribute to our strategy of adding greater value to our basic raw material
and thus strengthening our positioning in Latin America. Amanco is a regional leader as both an industrial conglomerate and
a producer and seller of PVC pipe for use in the conduction of fluid, primarily water.
49
Internal control
Our laws call for the existence of an audit committee and a corporate practices committee to assist the board of directors
in the performance of its duties.
The audit committee consists of independent directors. The committee is governed by a rule, established by the board of
directors, that ensures that there are mechanisms that allow the board to determine whether the company complies with
applicable regulations. The committee is supported by the internal control area (internal audit) and by external advisors it
considers appropriate.
The corporate practices committee is responsible for evaluating the performance of the executive officers; reviewing
transactions between related parties; reviewing officers’ compensation; and evaluating any dispensation granted to directors
or executive officers so that they make take advantage of business opportunities.
Recent events
As part of its plan for growth and consolidation in the Latin American market, Mexichem plans to invest approximately
USD300 million within the next 12 months to acquire companies in Mexico and Latin America. We will make these investments
primarily in the Chlorine-Vinyl and Fluid Conduction Transformed Products chains. In addition, to add value to its primary
raw materials, Mexichem plans an investment of USD700 million over the next five years in more than 12 projects that are
currently in the feasibility study stage.
With these investments, Mexichem plans to keeps its sales and EBITDA growth levels at more than 20%, in addition to
preserving the solid financial structure that has permitted it to achieve its current growth and profitability levels.
On January 23, 2008, Amanco Brazil Ltda., a Mexichem subsidiary, acquired 70% of the company DVG Industria e Comercio
de Plásticos Limitada (Plastubos). Amanco Brazil Ltda. has the option to buy the remaining 30% over a period of three to five
years. Plastubos is a Brazilian company that specializes in the production of rigid PVC pipe for potable water and drainage
systems and serves the housing, infrastructure, irrigation, and electrical markets.
In late January 2008, Mexichem acquired the Argentine company Dripsa S.R.L., which is dedicated to the design, sale, and
installation of irrigation equipment and water-handling solutions in major projects in the biofuels and food sectors—both of
which demand excellence in technology and service—throughout Latin America.
Mexichem announced the signing of a draft agreement for the acquisition, subject to the approval of the Colombian
authorities, of the company Productos Derivados de la Sal, S.A. (Prodesal). Prodesal is a company based in Cali, Colombia,
that produces and markets salt derivatives ranging from salt for human and industrial consumption to derived chlorates,
including chlorine, soda, sodium hypochlorite, hydrochloric acid, and ferric chloride.
Amanco Mexico, S.A. de C.V., a Mexichem subsidiary, has reached an agreement in principle to acquire 100% of Tubos
Flexibles, S.A. de C.V. Pending final documentation satisfactory to the parties, the acquisition is subject to approval of the
relevant authorities. Located in Mexico, Tubos Flexibles produces and markets PVC, CPVC, polyethylene, and polypropylene
pipe and fittings.
Mexichem Derivados, S.A. de C.V., a subsidiary of Mexichem, has reached an agreement in principle to acquire 100% of the
shares of Quimir, S.A. de C.V., a company in the chemical sector that specializes in the phosphate business. This transaction
is subject to the approval of the relevant authorities.
Very sincerely,
Ricardo Gutiérrez Muñoz Chief Executive Officer
50
Report of the Corporate Practices and Audit Committees
MEXICHEM, S.A.B. DE C.V., AND SUBSIDIARIES • (Subsidiary of Grupo Empresarial Kaluz, S.A. de C.V.)
Mexico City, April 29, 2008
To the members of the board of directors of
Mexichem, S.A.B. de C.V., and its subsidiaries:
As Chairman of the corporate practices and audit committees of Mexichem, S.A.B. de C.V., and its subsidiaries (Mexichem),
I advise the following:
During the period, five sessions of the committees were held on the following dates: March 21, July 17, and October 17,
2007, and January 16 and April 2, 2008; these meetings were attended by most of the members of the audit committee,
the external and internal auditors, and the Mexichem officials who appeared at the request of the committees. The activities
and resolutions agreed to were approved in respective acts.
In compliance with article 43, sections I and II, paragraphs (a) to (d) and (a) to (h), respectively, of the New Law on the
Securities Market and its internal regulations, I submit the report on activities corresponding to the period ending December
31, 2007.
I.
Remuneration to Officers
The full remunerations packages of the chief executive officer and the executive officers of the Company were reviewed.
II. Transactions with related parties
Transactions with related parties were reviewed, and the committees verified that there were no atypical activities; these
are transcribed in note 17 of the audited financial statements for 2007, and their reasonableness is supported by a study
of transfer prices.
III. Share Purchase Plan by Managers and Employees
The share purchase option plan for managers and employees of the company and its subsidiaries was reviewed and
approved.
IV. Evaluation of the internal control system
These committees, considering the results of the evaluations of the internal control system’s operation issued by the internal
auditor, the external auditor, and the chief executive officer in compliance with the legal conditions applied, considers the
internal accounting control system maintained by Mexichem to meet management objectives for internal control and
offers reasonable security, in all important aspects, that errors or irregularities during the normal course of operations will
be prevented or detected. However, it should be noted that the acquisitions of the last year are being standardized to the
internal control systems of the Company.
V. Evaluation of the internal audit function
The audit committee has remained alert to the needs of the internal audit area in order that it has sufficient human and
material resources for the suitable performance of its function. In this respect, the work programs and activities during the
year 2007 were satisfactorily met, and the work plan for 2008 was approved. Similarly, the members of the committees
have met the director of internal audit outside the presence of other company managers to receive the information that
they have considered appropriate.
VI. Evaluation of the performance of external audit
Galaz, Yamazaki, Ruiz Urquiza, S.C. (Deloitte), was contracted as external auditors of the Company, and the fees
corresponding to the period 2007 were properly reviewed and approved.
The external auditor received the financial statements as of December 31, 2007, with a clean report without observations,
which highlighted the cooperation by all areas of the Company in completing this task. Similarly, the work of the external
auditors Galaz, Yamazaki, Ruiz Urquiza, S.C. (Deloitte), and that of Mr. Carlos Moya Vallejo, the responsible partner, was
evaluated and found to be satisfactory. The external auditors confirmed their independence.
The members of the committees have met the external auditor outside the presence of company managers and obtained
his full cooperation to receive additional information on the subjects discussed, when requested.
51
VII. Financial information
The financial statements of the Company were discussed with the executives responsible for their preparation and review;
there were no observations to the financial information corresponding to the quarters ending in March, June, September,
and December 2007; before their delivery to the Mexican Stock Exchange, the financial statements were approved by the
committees.
For the preparation of this report we have heard from the executive officers of the company, and there was no difference
of opinion among them.
VIII.Accounting policies
The principal accounting policies followed by Mexichem were reviewed and approved in terms of the information received
as a result of the new regulations.
The accounting policies, criteria, and information observed by the Company are adequate, sufficient, and applied on
consistent bases.
IX. Report from the chief executive officer
The report from the chief executive officer on the activities of the year 2007 was received and approved.
X. Legal report
The legal report was received on the status of current matters and litigation.
XI. Proposal
Based on the work performed, it is recommended that the board of directors submit the financial statements of Mexichem
for the fiscal year ending on December 31, 2007, for approval of the stockholders meeting.
Very sincerely,
Fernando Ruiz Sahagún
Chairman of the Audit Committee
52
1,664.6
1,299.4
1,256.6
364.4
8,331.1
6,375.8
MEXCHEM
28.1
%
increase in
operating income
03
04
05
06
07
Sales
Fluorine Chain
04
05
06
07
1,858.9
2,086.7
225.9
367.3
424.6
707.8
780.9
MXN millions
03
04
05
06
07
03
04
05
06
07
%
increase in sales
10.3
Subscription date
September 1978
548.8 million
Independent auditor
Operating income
Fluorine Chain
MXN millions
12.3
03
1,498.3
increase in sales
Fluorine Chain
MXN millions
6,297.4
%
2,535.4
30.7
2,045.0
MXN millions
1,101.2
profit potential.
Operating income
564.8
Sales
234.1
Investor Relations
Tel. 52 (55) 53 66 40 65
Fax. 52 (55) 53 97 88 36
[email protected]
%
increase in
operating income
%
215.0
191.3
34.5
25.9
12,599.5
MXN millions
2,182.4
MXN millions
1,823.4
Operating income
383.4
477.3
Sales
287.5
1,154.3
increase in sales
436.9
%
increase in
operating income
03
04
05
06
07
03
04
05
06
07
Annual Report 2007
than 50 countries.
Latin America.
Sales
MXN23,017 million
55% Transformed
products
36% Chlorine-Vinyl
9% Fluorine
Table of Contents
Corporate Offices
Río San Javier 10
Tel. 52+ (55) 53 66 40 00
Fax. 52+ (55) 53 97 88 36
www.mexichem.com
vision
20/20 20
We make chemistry
01
02 03 04 06 08 10 14 16 17 20 22 23 24 Introduction
Relevant events
Leadership position
Geographic coverage
Market potential
Share information
Board of directors
EBITDA
MXN4,354 million
39%
40%
21%
Transformed
products
Chlorine-Vinyl
Fluorine

PDF(english)

Transcription

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