Mexico: Grupo Modelo posted strong results for Q1 2005: exports boosted 23.6%

Mexican beer maker, Grupo Modelo S.A. de C.V., the brewer of Corona beer brand, announced on April 28 that during the first quarter of the year, as of March 31, 2005, total beer sales volume grew 12.0% compared to the same period of 2004, reaching 10.1 million hl. Grupo Modelo said it accounted for 62.5% total market share (including domestic and export markets) as of December 31, 2004.

Domestic volumes registered an increase of 7.6% boosted by the solid demand observed along the quarter; this result includes the positive performance of the Holy Week. Likewise, export volumes showed an increase of 23.6% due to strong demand in the United States, Europe and Oceania. This allowed the exports to represent a higher percentage in the sales mix, moving from 27.6% in 2004 to 30.4% in 2005.

"Good results," Scotia Inverlat brokerage analyst Marco Reyes said in a note. "The financial situation of the company continues to be very solid given the strong cash generation."

Domestic volumes outstripped those of Modelo's local rival, Femsa, which earlier on Thursday said domestic sales volumes rose 4 percent. Between them, the two brewers have a near duopoly on beer sales in Mexico. Imports amount to a trickle and the only other local beer makers are small breweries. Modelo's higher domestic volumes in the quarter means it took market share from Femsa.

At the end of February of 2005, Grupo Modelo, half-owned by U.S.-based Anheuser-Busch Cos. Inc. raised prices in the domestic market by region, channel, brand and presentation, continuing with the effort of product segmentation initiated last year. This increase was in line with expected inflation. Regarding exports, the average price in dollars was up 0.9%, reflecting the shift mix by region, as well as stability in the sales price in the US.

Net sales grew 12.2% compared to the same period of 2004, reaching 10,757 million pesos. This figure reflects positive results in the domestic and export sales, which increased 5.6% and 21.2%, respectively. Furthermore, total export revenues amounted to 275 million dollars, 24.7% higher than the previous year.

The cost of goods sold grew 15.9% due to higher share of exports in the sales mix. Gross profit totalled 5,970 million pesos, showing an increase of 9.4% compared to the same quarter of the prior year.

Operating expenses increased 5.0%, a lower percentage than the change in net sales, reflecting the benefits obtained from the restructure carried out in the domestic distribution network. Consequently, the SG&A expenses per domestic hectoliter declined 2.4% compared to 2004. The operating profit was 3,025 million pesos, which means an increase of 14.0%. Thus, the operating margin reached in the quarter was 28.1%, representing an expansion of 40 basis points.

Depreciation and amortization amounted to 567 million pesos, representing 5.3% over net sales, similar percentage compared to that posted in 2004. EBITDA (Operating income + Depreciation – Equity income of Associates included in COGS) stood at 3,510 million pesos, which represented a year over year growth of 13.1%. Consequently, the EBITDA margin stood at 32.6%.

The integral cost of financing, registered a favorable result of 220 million pesos, mainly due to higher interest rates and lower inflation during the quarter. The effective tax rate (including profit sharing) was 41.1%, below the 46.9% obtained in the first quarter of the previous year. The tax reduction was mainly due to the lower corporate tax rate official in January 2005 as well as movements in deferred taxes.

The net majority income was 1,522 million pesos ($136 million), 31.4% above the prior year. Therefore, the net margin was benefited by the 210 basis points expansion, reaching 14.2%. The earnings per share stood at 0.47, above the 0.36 registered in 2004.

As of March 31, 2005, Grupo Modelo’s cash and short-term investments represented 22.9% of total assets, which totalled 76,358 million pesos, representing a growth of 10.1% over the last twelve months. Furthermore, the Company’s strong financial position has been maintained through a long-term debt free capital structure, and short-term operational liabilities of 4,875 million pesos. Majority shareholder’s equity reached 48,638 million pesos, representing a 12.6% growth compared to 2004.

During the first quarter of 2005, Grupo Modelo invested 1,209 million pesos of its own resources. The funds were allocated in several areas of the organization as follow: In April 18th the Stockholders’ Meeting declared a dividend of 3,414 million pesos, which corresponds to 1.05 pesos per share to each of the 3,251’759,632 outstanding shares. The amount of the dividend increased 18% in real terms compared to the previous year and the payout ratio reached 55%. The dividend was paid in one exhibition as of April 25th, 2005. In addition to the amount that Grupo Modelo paid, Diblo declared a cash dividend to Anheuser-Busch of 1,080 million pesos on its 23.25% participation in that company. Therefore, Grupo Modelo’s consolidated cash and short-term investments were reduced by 4,494 million pesos in April, 2005.

Modelo shares ended about flat, rising just 0.06 percent to 31.28 pesos as the wider market fell, according to Reuters. The stock of Modelo, considered a defensive play because of the company's conservative management, is up just 3 percent so far this year. Modelo has no long-term debt.

Grupo Modelo, founded in 1925, is the leader in the production and marketing of beer in Mexico with 62.5% total market share (including domestic and export markets) as of December 31, 2004. It has seven brewing plants in the country, with a total annual installed capacity of 52.0 million hectoliters. Currently, it brews and distributes ten brands; Corona Extra, the number one Mexican beer sold in the world, Modelo Especial, Victoria, Pacífico, Negra Modelo and other regional brands. It exports five brands with presence in more than 150 countries and is the exclusive importer of Anheuser-Busch’s products in Mexico, including the brands Budweiser and Bud Light. Grupo Modelo trades in the Mexican Stock Exchange since 1994 with the ticker symbol GMODELOC.

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