Vitro, S.A.B. de C.V. is the leading glass manufacturer in Mexico
Founded in 1909, Vitro, S.A.B. de C.V. is the leading glass manufacturer in Mexico, and one of the largest in the world, backed by more than 100 years of experience in the industry.
Headquartered in Monterrey, Mexico, the company has subsidiaries in Europe and the Americas, through which it offers high quality products and reliable services that address the needs of two distinct businesses: glass containers and flat glass.
Vitro’s manufacturing facilities manufacture, process, distribute
and sell a wide range of glass products that form an important part of millions of people’s everyday lives. The company also provides solutions to a variety of industries, including: food, beverages, wines and spirits, cosmetics, and pharmaceutical, as well as the automotive and architectural markets. Vitro is also a supplier of raw materials, machinery, and industrial equipment.
As part of its culture of corporate responsibility, the company continues to create new initiatives to improve the wellbeing of its employees, support the communities in which it conducts business, preserves the environment, and manages its business with the highest ethical standards and in complete transparency.
Vitro Envases - containers
Vitro Envases manufactures glass containers for the food, beverage, cosmetic, beer, pharmaceutical, and wine and liquor segments.
Vitro Envases has six production facilities in Mexico, two in Central America, and one in South America, all certified under the ISO-9001 standards. Thr...
Headquartered in Monterrey, Mexico, the company has subsidiaries in Europe and the Americas, through which it offers high quality products and reliable services that address the needs of two distinct businesses: glass containers and flat glass.
Vitro’s manufacturing facilities manufacture, process, distribute
and sell a wide range of glass products that form an important part of millions of people’s everyday lives. The company also provides solutions to a variety of industries, including: food, beverages, wines and spirits, cosmetics, and pharmaceutical, as well as the automotive and architectural markets. Vitro is also a supplier of raw materials, machinery, and industrial equipment.
As part of its culture of corporate responsibility, the company continues to create new initiatives to improve the wellbeing of its employees, support the communities in which it conducts business, preserves the environment, and manages its business with the highest ethical standards and in complete transparency.
Vitro Envases - containers
Vitro Envases manufactures glass containers for the food, beverage, cosmetic, beer, pharmaceutical, and wine and liquor segments.
Vitro Envases has six production facilities in Mexico, two in Central America, and one in South America, all certified under the ISO-9001 standards. Thr...
Founded in 1909, Vitro, S.A.B. de C.V. is the leading glass manufacturer in Mexico, and one of the largest in the world, backed by more than 100 years of experience in the industry.
Headquartered in Monterrey, Mexico, the company has subsidiaries in Europe and the Americas, through which it offers high quality products and reliable services that address the needs of two distinct businesses: glass containers and flat glass.
Vitro’s manufacturing facilities manufacture, process, distribute
and sell a wide range of glass products that form an important part of millions of people’s everyday lives. The company also provides solutions to a variety of industries, including: food, beverages, wines and spirits, cosmetics, and pharmaceutical, as well as the automotive and architectural markets. Vitro is also a supplier of raw materials, machinery, and industrial equipment.
As part of its culture of corporate responsibility, the company continues to create new initiatives to improve the wellbeing of its employees, support the communities in which it conducts business, preserves the environment, and manages its business with the highest ethical standards and in complete transparency.
Vitro Envases - containers
Vitro Envases manufactures glass containers for the food, beverage, cosmetic, beer, pharmaceutical, and wine and liquor segments.
Vitro Envases has six production facilities in Mexico, two in Central America, and one in South America, all certified under the ISO-9001 standards. Through its subsidiary in the United States, Vitro Envases Packaging Inc., the company serves the US market through a main distribution centre in Laredo, Texas, and more than 20 satellite warehouses and sales offices throughout the country.
Production
Vitro Envases has a large standard product line, as well as many options for glass colours and decorating. In addition, Envases creates products that satisfy each and every customer’s needs and, for that reason, Vitro Envases has specialized areas, which include:
• food and beverages, where Vitro Envases provides the beverage market with glass containers;
• the pharmaceutical industry, supplying glass containers to meet the needs and specific requirements;
• wine and liquor, with an alcoholic beverages division that scopes diverse markets;
• cosmetics, fragrances and toiletries.
Complete services
In these different market sectors, Vitro Envases offers complete services for new product development of each of the different stages in the process: attending to customer needs, translating them into practical designs with rapid mock-ups of the container and its consequent production.
At its five specialized design centres (two in Mexico City; one in Monterrey, Mexico; one in Guadalajara, Mexico; one in Dallas, Texas, United States; and one in New York, United States), Vitro Envases develops concepts and designs future products in collaboration with its customers. They are then translated into photo-realities and engineering plans. Each design is carefully reviewed and verified by experts to assure its manufacturability and function on customers’ bottling lines, following ISO 9001 total quality model.
Starting with the electronic design of the container previously approved by the customer, electronic drawings are developed using the moulds that will later be manufactured at Grupo Vitro’s modern production installations. During this first stage of the mould process, a test product is manufactured to provide physical samples for customers and assure the manufacturability of the product. The samples provided to customers are verified by Vitro’s quality laboratories and may be used for verification of measurements, publicity, bottling tests, etc.
Finally, once the samples are approved by the customer, the complete model is produced.
Through Vitro’s customer service centre (COPAC), customer orders are electronically processed and programmed for manufacture by one of its plants based on required dates. Daily manufacturing programmes are systematically transferred to each plant for production and shipment.
Additionally, a representative from Vitro’s Customer Technical Service Department is in permanent contact with customers to assure the correct function of the containers on customer bottling lines.
Packaging
One of the services offered by Grupo Vitro is packaging and crating. This is designed so that customers’ products are handled safely until they reach their destination.
The variety of packaging includes: bulk, boxes, shrink wrapping, trays, etc., fulfilling national and international requirements and standards.
Vitro has specialized personnel to assess and establish mechanisms and types of packaging to aid in creating better processes.
Market Trends
Customers confirm that glass improves product equity
According to the market studies carried out among consumers in Mexico and the United States, glass is not only preferred over other packaging but it also adds value to the product.
Industries
In a study of beverage uses and habits in Mexico, five out of every eight consumers consider glass to be the best packaging in existence, pointing out reasons such as hygiene, visibility of the content and preservation of a product’s flavour. Furthermore, the same consumers recognize that glass is the ideal material for quality products and that it is not a material used for cheap products.
In another study carried out independent of the previously mentioned study, an Identification of Product Test (IPT) carried out on a dairy product gave results which are largely in favour of glass. The IPT methodology is the following: a product sample is left with a housewife for a pre-determined period of time and the container is returned at the end of this period. When the first sample is picked up, a second sample is left for use during the same period of time. The container from the second sample is returned and a complete evaluation of both products is carried out and specific attributes are also evaluated. The test product is identified since it states the original product’s brand and it is usually carried out between products competing on the market.
Some special aspects of this test were that the two products had the same brand (one of the products was found in the plastic container in which it is presently sold while the other was in a glass container). The key point is that the two containers contained the exact same dairy product and the consumer was not informed of this.
As previously commented, the result was significantly favourable for the product bottled in glass since this was preferred over the plastic container by a difference of 20 percentage points. This tendency was also shown for almost all specific attributes, including the following:
• the best flavour (difference of 11 percentage points);
• keeps the product fresher (difference of 48 percentage points);
• more hygienic (difference of 55 percentage points);
• better motivates the purchase (difference of 34 percentage points);
• better quality (difference of 42 percentage points).
Remember that the same product under the same brand was bottled and that all of these differences are values added solely by the glass container, thus affirming that glass increases a product’s equity.
Similarly and exactly as studies by the Glass Packaging Institute reveal, American consumers’ feelings towards glass reflect connotations similar to those expressed here. It has even been perceived that companies pack their premium products in glass containers because they appreciate the content, leaving other packages for products that are not first-class or top-of-the-line. For that reason, the image of a product packed in glass is better because it is perceived to be a select product.
An example is that Anheuser-Busch announced that it would end the market test of its beer bottled in plastic since consumers in Dallas and Phoenix showed little interest in purchasing Budweiser and Bud Light in 16 ounce PET bottles. Another PET bottle, for the Miller Brewing Co., was protested against by defenders of the environment because the labels and caps are against regulations issued by the Association of Organizations for Recycling Plastic Disposed by Consumers.
Market studies carried out by Demptos Glass on the market for American table wine have shown that if two wines have similar characteristics as far as type and quality are concerned, 40 per cent of consumers base their decision on the container. If the bottle of wine is to be used as a present, this percentage increases to up to 67 per cent. Moreover, they discovered that close to 90 per cent of consumers are able to give amazingly detailed descriptions of the bottle they usually buy. If we add on the fact that almost 72 per cent of purchases in this category are made on impulse, the impression on the shelf can be decisive in causing a consumer to put the bottle in his shopping cart or for this bottle to continue collecting dust on exhibit stands.
Demptos Glass has also observed that the container improves the equity of wines since there are certain perceptions concerning colour, weight and bottle shape, such as:
• dark bottles with heavy weight reflect quality;
• light coloured, lightweight bottles with thin walls and completely flat bottoms do not protect contents;
• consumers have the idea that bottles with straight, symmetrical shapes and high shoulders are the most adequate for wine.
Colours and shapes are also associated with different varieties of table wine.
Vitro – 3Q’11 results
increase of 10% in sales and 11% in EBITDA
Year-over-year consolidated net sales increased 10 per cent mostly benefited by temporary increased sales volume in Glass Containers and a 1.8 per cent peso appreciation YoY (quarterly average). Consolidated EBITDA increased 11 per cent YoY, benefited by the higher sales and production volumes, which translates into improved fixed cost absorption, coupled with a 4 per cent decrease in energy prices.
Hugo Lara, Chief Executive Officer, commented: “Vitro’s debt restructuring process continues to progress successfully, despite ongoing disruptive actions from dissident bondholders. Now the last stage of the conciliation process is taking place.
Revenue growth reflects a temporary increase in sales volumes at Glass Containers, a slight gain in automotive glass sales volumes and higher supply of float glass. A better price mix and a 1.8 per cent peso appreciation also contributed to this performance. EBITDA growth benefited from higher fixed cost absorption from increased production, a 4 per cent decline in natural gas prices, and the positive impact from the peso appreciation. Despite favorable year-on-year results, the challenging global economic climate threatens the ongoing recovery in the short- and mid-term,” Lara continued.
“Domestic Glass Containers sales volumes rose 19 per cent YoY, still aided by a temporary increase in volume demand from one client in the beer segment as well as new orders placed by another customer in the same segment. Volume growth in the beer, CFT (Cosmetics, Fragrances & Toiletries), soft drinks and wine & liquor segments more than offset a decline in the food segment. Slightly higher domestic prices reflect a better mix, mainly at the soft drinks segment. Export volumes remained flat during the quarter, as growth in the beer and CFT segments, was offset by lower sales volumes in the food and soft drinks segments. The price mix also remained stable YoY. Higher domestic sales volume and production levels, together with the peso appreciation and lower energy prices, resulted in a 13.6 per cent increase in Glass Containers EBITDA”.
“Net Free Cash Flow for the quarter decreased to USD 14 million from USD 49 million in 3Q’10, reflecting a USD 22 million investment in working capital compared with a USD 10 million recovery in the year-ago quarter. While an investment in working capital is unusual for a third quarter, we increased Glass Containers inventory to keep up with our service levels to the export market and a scheduled furnace repair. Lower accounts payable also contributed to a higher working capital.
Cash Flow was also used to fund a CapEx investment of USD 26 million for scheduled furnace repairs and capacity expansion to service our CFT market. This compares to an investment of USD 16 million in 3Q’10,” continued Lara.
In terms of Vitro’s natural gas hedges, Lara said: “We continue to maintain our natural gas hedges with PEMEX, 18 per cent of our annual estimated consumption at USD 7.3/mmbtu for 2011, with no margin call requirements.”
Consolidated results
As a result of the sale of Vitro America Group, and according to MFRS, for comparative purposes, historical figures of such company are shown as discontinued operation in every period, except where indicated otherwise.
Sales
Consolidated net sales for 3Q’11 increased 10 per cent YoY, from USD 411 million in 3Q’10 to USD 452 million in 3Q’11, primarily driven by the temporary sales growth in the Glass Containers started last quarter, a 1.8 per cent peso appreciation versus the dollar YoY (quarterly average) and a recovered supply capacity once lost as a consequence of hurricane Alex in 3Q’10. For LTM 3Q’11, consolidated net sales increased 14 per cent to USD 1,762 million from USD 1,545 million during the same period last year.
Glass Containers sales for the quarter increased 9.9 per cent Yoy, while Flat Glass sales increased 8.7 per cent over the same period. During the quarter, domestic and export sales increased 22 per cent and 0.2 per cent YoY, respectively, while foreign subsidiaries’ sales decreased 23 per cent YoY.
EBIT and EBITDA
Consolidated EBIT for the quarter increased 11.9 per cent YoY, from USD 38 million in 3Q’10 to USD 43 million during 3Q’11. EBIT margin increased 0.2 per centage points, from 9.3 per cent to 9.5 per cent. For LTM 3Q’11, consolidated EBIT increased 21 per cent from USD 128 million in LTM 3Q’10 to USD 155 million in LTM 3Q’11. During this same period, EBIT margin increased 0.5 percentage points, from 8.3 per cent to 8.8 per cent.
EBIT for the quarter at Glass Containers increased by 17 per cent YoY, from USD 41 million to USD 48 million, while at Flat Glass, EBIT reduced its loss, from USD 5 million in 3Q’10 to a loss of USD 3 million in 3Q’11.
Consolidated EBITDA for the quarter increased 11 per cent, from USD 74 million in 3Q’10 to USD 83 million in 3Q’11, mainly driven by higher production levels both in Glass Containers and Flat Glass, which translates into improved fixed cost absorption, a 4 per cent decrease in energy prices and a 1.8 per cent peso appreciation, YoY (quarterly average). EBITDA margin increased 0.2 per centage points, from 18.1 per cent to 18.3 per cent, YoY.
For LTM 3Q’11, consolidated EBITDA increased 13.6 per cent, from USD 271 million in 3Q’10 to USD 308 million in this period.
During the quarter, EBITDA at Glass Containers increased 13.6 per cent, YoY, from USD 63 million in 3Q’10 to USD 72 million in 3Q’11, while EBITDA at Flat Glass increased from USD 6 million in 3Q’10 to USD 10 million in 3Q’11.
Total financing result
On 8 April 2011 Vitro SAB was declared in Concurso Mercantil, therefore according to Mexican law, all of its debt, including Senior Notes, was converted to Unidades de Inversion (“UDIS”) and stopped accruing interest. Under Mexican FRS, the fluctuation in the value of the UDIS is considered as an interest expense. For reporting purposes, UDIS figures were reconverted at the dollar exchange rate of the closing period.
Total Financing Result for the quarter resulted in an expense of USD 10 million compared to an expense of USD 40 million during 3Q’10. This result was mainly driven by a decrease of our interest expense from USD 42 million in 3Q’10 to USD 18 million in 3Q’11 which reflected a small variation in UDIS, related to our UDIS denominated debt, and accrued interest on our debt not subject to restructuring. Also, due to our debt conversion to UDIS, our monetary assets in this quarter were higher than our monetary liabilities, which paired with a 13.4 per cent peso depreciation, QoQ, yielded a Foreign Exchange Gain of USD 25 million, compared to a gain of USD 15 million in 3Q’10 due to a 1.2 per cent peso appreciation in that period. This was partially offset by higher restructuring expenses, accounted for in Other Financial Expenses.
For LTM 3Q’11, Total Financing Result decreased 71.9 per cent to an expense of USD 40 million from an expense of USD 141 million in LTM 3Q’10, mainly benefited by a net interest expense of USD 101 million from a net interest expense of USD 170 million in LTM 3Q’10, due to our debt conversion to UDIS on April 8, 2011, and from a non-cash foreign exchange gain of USD 119 million compared to a gain of USD 84 million for the same period last year, due to the above mentioned factors.
For 3Q’11, Net Debt, which is calculated by deducting cash and cash equivalents classified in short and long term assets, decreased QoQ by USD 184 million to USD 1,361 million mainly driven by debt conversion into UDIS and the 13.4 per cent peso depreciation for the quarter. On a YoY comparison, Net Debt decreased by USD 130 million, mainly due to debt conversion to UDIS, and 7.4 per cent peso depreciation, LTM 3Q’11.
As of 30 September 2011 the company had a cash balance of USD 158 million, of which USD 2 million are classified as other long-term assets and USD 43 million are restricted cash collateralizing lease payments, cash on our accounts receivable financing programmes and cash related to payments associated to Consent and Restructuring Fee. Therefore, unrestricted cash balance as of 30 September 2011 was USD 115 million.
Consolidated gross debt as of 30 September 2011 totalled USD 1,519 million, which represent a USD 184 million decrease QoQ; YoY debt decreased USD 172 million.
Taxes
Total Income Tax increased from a gain of USD 3 million in 3Q’10 to a loss of USD 21 million during this quarter. This was mainly due to an increase in Accrued Income Tax, which presented an expense of USD 34 million compared to a gain of USD 10 million on the same period last year but partially offset by a gain in Deferred Income Taxes of USD 13 million in this quarter compared to an expense of USD 7 million in 3Q’10.
For LTM 3Q’11, Total Income Tax decreased to an expense of USD 41 million from a gain of USD 65 million in LTM 3Q’10.
Consolidated net income
During 3Q’11 the Company recorded a Consolidated Net Income of USD 9 million compared to a Consolidated Net Loss of USD 14 million during the same period last year. This variation is principally explained by the increase in the Operating income of USD 43 million compared with an operating income of USD 38 million in 3Q’10, a Total Income Tax loss of USD 21 million compared to a gain of USD 3 million on the same period last year and a loss from discontinued operations of USD 6 million in 3Q’10, due to the sale of Vitro America which according to accounting principles and for comparative purposes, is shown as discontinued operation in every period.
Capital expenditures (CapEx)
Capital expenditures for the quarter totalled USD 26 million, compared with USD 16 million in 3Q’10. Glass Containers represented 66 per cent of total CapEx, mainly invested in capacity expansion to service CFT segment, furnace repairs, moulds and maintenance. Flat Glass accounted for 34 per cent, which was mainly invested in furnace repairs due to damages from last year’s Hurricane Alex, maintenance, repairs and capacity expansion for the auto segment glass.
Cash flow
Net Free Cash Flow decreased from USD 49 million in 3Q’10 to USD 14 million in 3Q’11. This was mainly the result of an investment in Working Capital of USD 22 million in 3Q’11 compared to a USD 10 million recovery in 3Q’10. This investment was mainly driven by an increasing inventory in Glass Containers in order to keep our service levels and due to a scheduled furnace repair coupled with a reduction of our accounts payable. Operating Cash Flow was also used to fund the USD 26 million CapEx investment this quarter, which is a 66 per cent increase, when compared with USD 16 million in 3Q’10.
For the LTM 3Q’11, the Company recorded a Net Free Cash Flow of USD 35 million compared to USD 136 million during the previous year. This change was mainly due to a higher working capital investment for this period and an increase in CapEx which responds to furnace repairs in both our business divisions, and partially compensated by a higher EBITDA figure.
Key developments
During the last two years, Vitro has worked diligently to resolve its financial situation by seeking to achieve a consensual restructuring on terms that would provide Vitro’s creditors a fair recovery in light of the Company’s financial capacity and permit the Company to regain its financial footing. To that end, Vitro has engaged in active negotiations with various groups of creditors, including an ad hoc group of holders of Old Notes (the “Ad Hoc Bondholders Group”), as well as Fintech, the company’s largest creditor.
Glass Containers
(64 per cent of LTM 3Q’11 Consolidated Sales)
Sales
Sales for the quarter increased 9.9 per cent YoY, from USD 262 million in 3Q’10 to USD 288 million.
Domestic sales increased 17.4 per cent, mainly as a result of a temporary increased demand from one of our beer producer clients, which started last quarter and has extended into 3Q’11, as well as new orders placed by another one in this segment. Sales also benefit by increase in CFT, Wine & Liquors segments and a peso appreciation. These factors more than offset a decline in volume for the food segment. Prices remained stable overall, YoY.
Export sales remained stable, with increasing volumes in beer and CFT segments but offset by lower sale volumes in food and soft drinks segments.
Sales from Glass Containers’ foreign subsidiaries decreased to USD 3.7 million from USD 4.4 million on a YoY basis.
EBIT and EBITDA
EBIT for the quarter increased 17 per cent YoY, from USD 41 million in 3Q’10 to USD 48 million in 3Q’11. EBITDA for the same period increased 13.6 per cent, from USD 63 million to USD 72 million. During this quarter, EBIT and EBITDA were benefited by higher sales volume and increased production levels which, aided to a better fix cost absorption a 1.8 peso appreciation as well as a 4 per cent decrease in natural gas prices.
EBITDA from Mexican glass containers operations, which is Glass Container’s core business and represents approximately 82 per cent of total EBITDA, increased 15 per cent YoY due to the above mentioned factors.
Headquartered in Monterrey, Mexico, the company has subsidiaries in Europe and the Americas, through which it offers high quality products and reliable services that address the needs of two distinct businesses: glass containers and flat glass.
Vitro’s manufacturing facilities manufacture, process, distribute
and sell a wide range of glass products that form an important part of millions of people’s everyday lives. The company also provides solutions to a variety of industries, including: food, beverages, wines and spirits, cosmetics, and pharmaceutical, as well as the automotive and architectural markets. Vitro is also a supplier of raw materials, machinery, and industrial equipment.
As part of its culture of corporate responsibility, the company continues to create new initiatives to improve the wellbeing of its employees, support the communities in which it conducts business, preserves the environment, and manages its business with the highest ethical standards and in complete transparency.
Vitro Envases - containers
Vitro Envases manufactures glass containers for the food, beverage, cosmetic, beer, pharmaceutical, and wine and liquor segments.
Vitro Envases has six production facilities in Mexico, two in Central America, and one in South America, all certified under the ISO-9001 standards. Through its subsidiary in the United States, Vitro Envases Packaging Inc., the company serves the US market through a main distribution centre in Laredo, Texas, and more than 20 satellite warehouses and sales offices throughout the country.
Production
Vitro Envases has a large standard product line, as well as many options for glass colours and decorating. In addition, Envases creates products that satisfy each and every customer’s needs and, for that reason, Vitro Envases has specialized areas, which include:
• food and beverages, where Vitro Envases provides the beverage market with glass containers;
• the pharmaceutical industry, supplying glass containers to meet the needs and specific requirements;
• wine and liquor, with an alcoholic beverages division that scopes diverse markets;
• cosmetics, fragrances and toiletries.
Complete services
In these different market sectors, Vitro Envases offers complete services for new product development of each of the different stages in the process: attending to customer needs, translating them into practical designs with rapid mock-ups of the container and its consequent production.
At its five specialized design centres (two in Mexico City; one in Monterrey, Mexico; one in Guadalajara, Mexico; one in Dallas, Texas, United States; and one in New York, United States), Vitro Envases develops concepts and designs future products in collaboration with its customers. They are then translated into photo-realities and engineering plans. Each design is carefully reviewed and verified by experts to assure its manufacturability and function on customers’ bottling lines, following ISO 9001 total quality model.
Starting with the electronic design of the container previously approved by the customer, electronic drawings are developed using the moulds that will later be manufactured at Grupo Vitro’s modern production installations. During this first stage of the mould process, a test product is manufactured to provide physical samples for customers and assure the manufacturability of the product. The samples provided to customers are verified by Vitro’s quality laboratories and may be used for verification of measurements, publicity, bottling tests, etc.
Finally, once the samples are approved by the customer, the complete model is produced.
Through Vitro’s customer service centre (COPAC), customer orders are electronically processed and programmed for manufacture by one of its plants based on required dates. Daily manufacturing programmes are systematically transferred to each plant for production and shipment.
Additionally, a representative from Vitro’s Customer Technical Service Department is in permanent contact with customers to assure the correct function of the containers on customer bottling lines.
Packaging
One of the services offered by Grupo Vitro is packaging and crating. This is designed so that customers’ products are handled safely until they reach their destination.
The variety of packaging includes: bulk, boxes, shrink wrapping, trays, etc., fulfilling national and international requirements and standards.
Vitro has specialized personnel to assess and establish mechanisms and types of packaging to aid in creating better processes.
Market Trends
Customers confirm that glass improves product equity
According to the market studies carried out among consumers in Mexico and the United States, glass is not only preferred over other packaging but it also adds value to the product.
Industries
In a study of beverage uses and habits in Mexico, five out of every eight consumers consider glass to be the best packaging in existence, pointing out reasons such as hygiene, visibility of the content and preservation of a product’s flavour. Furthermore, the same consumers recognize that glass is the ideal material for quality products and that it is not a material used for cheap products.
In another study carried out independent of the previously mentioned study, an Identification of Product Test (IPT) carried out on a dairy product gave results which are largely in favour of glass. The IPT methodology is the following: a product sample is left with a housewife for a pre-determined period of time and the container is returned at the end of this period. When the first sample is picked up, a second sample is left for use during the same period of time. The container from the second sample is returned and a complete evaluation of both products is carried out and specific attributes are also evaluated. The test product is identified since it states the original product’s brand and it is usually carried out between products competing on the market.
Some special aspects of this test were that the two products had the same brand (one of the products was found in the plastic container in which it is presently sold while the other was in a glass container). The key point is that the two containers contained the exact same dairy product and the consumer was not informed of this.
As previously commented, the result was significantly favourable for the product bottled in glass since this was preferred over the plastic container by a difference of 20 percentage points. This tendency was also shown for almost all specific attributes, including the following:
• the best flavour (difference of 11 percentage points);
• keeps the product fresher (difference of 48 percentage points);
• more hygienic (difference of 55 percentage points);
• better motivates the purchase (difference of 34 percentage points);
• better quality (difference of 42 percentage points).
Remember that the same product under the same brand was bottled and that all of these differences are values added solely by the glass container, thus affirming that glass increases a product’s equity.
Similarly and exactly as studies by the Glass Packaging Institute reveal, American consumers’ feelings towards glass reflect connotations similar to those expressed here. It has even been perceived that companies pack their premium products in glass containers because they appreciate the content, leaving other packages for products that are not first-class or top-of-the-line. For that reason, the image of a product packed in glass is better because it is perceived to be a select product.
An example is that Anheuser-Busch announced that it would end the market test of its beer bottled in plastic since consumers in Dallas and Phoenix showed little interest in purchasing Budweiser and Bud Light in 16 ounce PET bottles. Another PET bottle, for the Miller Brewing Co., was protested against by defenders of the environment because the labels and caps are against regulations issued by the Association of Organizations for Recycling Plastic Disposed by Consumers.
Market studies carried out by Demptos Glass on the market for American table wine have shown that if two wines have similar characteristics as far as type and quality are concerned, 40 per cent of consumers base their decision on the container. If the bottle of wine is to be used as a present, this percentage increases to up to 67 per cent. Moreover, they discovered that close to 90 per cent of consumers are able to give amazingly detailed descriptions of the bottle they usually buy. If we add on the fact that almost 72 per cent of purchases in this category are made on impulse, the impression on the shelf can be decisive in causing a consumer to put the bottle in his shopping cart or for this bottle to continue collecting dust on exhibit stands.
Demptos Glass has also observed that the container improves the equity of wines since there are certain perceptions concerning colour, weight and bottle shape, such as:
• dark bottles with heavy weight reflect quality;
• light coloured, lightweight bottles with thin walls and completely flat bottoms do not protect contents;
• consumers have the idea that bottles with straight, symmetrical shapes and high shoulders are the most adequate for wine.
Colours and shapes are also associated with different varieties of table wine.
Vitro – 3Q’11 results
increase of 10% in sales and 11% in EBITDA
Year-over-year consolidated net sales increased 10 per cent mostly benefited by temporary increased sales volume in Glass Containers and a 1.8 per cent peso appreciation YoY (quarterly average). Consolidated EBITDA increased 11 per cent YoY, benefited by the higher sales and production volumes, which translates into improved fixed cost absorption, coupled with a 4 per cent decrease in energy prices.
Hugo Lara, Chief Executive Officer, commented: “Vitro’s debt restructuring process continues to progress successfully, despite ongoing disruptive actions from dissident bondholders. Now the last stage of the conciliation process is taking place.
Revenue growth reflects a temporary increase in sales volumes at Glass Containers, a slight gain in automotive glass sales volumes and higher supply of float glass. A better price mix and a 1.8 per cent peso appreciation also contributed to this performance. EBITDA growth benefited from higher fixed cost absorption from increased production, a 4 per cent decline in natural gas prices, and the positive impact from the peso appreciation. Despite favorable year-on-year results, the challenging global economic climate threatens the ongoing recovery in the short- and mid-term,” Lara continued.
“Domestic Glass Containers sales volumes rose 19 per cent YoY, still aided by a temporary increase in volume demand from one client in the beer segment as well as new orders placed by another customer in the same segment. Volume growth in the beer, CFT (Cosmetics, Fragrances & Toiletries), soft drinks and wine & liquor segments more than offset a decline in the food segment. Slightly higher domestic prices reflect a better mix, mainly at the soft drinks segment. Export volumes remained flat during the quarter, as growth in the beer and CFT segments, was offset by lower sales volumes in the food and soft drinks segments. The price mix also remained stable YoY. Higher domestic sales volume and production levels, together with the peso appreciation and lower energy prices, resulted in a 13.6 per cent increase in Glass Containers EBITDA”.
“Net Free Cash Flow for the quarter decreased to USD 14 million from USD 49 million in 3Q’10, reflecting a USD 22 million investment in working capital compared with a USD 10 million recovery in the year-ago quarter. While an investment in working capital is unusual for a third quarter, we increased Glass Containers inventory to keep up with our service levels to the export market and a scheduled furnace repair. Lower accounts payable also contributed to a higher working capital.
Cash Flow was also used to fund a CapEx investment of USD 26 million for scheduled furnace repairs and capacity expansion to service our CFT market. This compares to an investment of USD 16 million in 3Q’10,” continued Lara.
In terms of Vitro’s natural gas hedges, Lara said: “We continue to maintain our natural gas hedges with PEMEX, 18 per cent of our annual estimated consumption at USD 7.3/mmbtu for 2011, with no margin call requirements.”
Consolidated results
As a result of the sale of Vitro America Group, and according to MFRS, for comparative purposes, historical figures of such company are shown as discontinued operation in every period, except where indicated otherwise.
Sales
Consolidated net sales for 3Q’11 increased 10 per cent YoY, from USD 411 million in 3Q’10 to USD 452 million in 3Q’11, primarily driven by the temporary sales growth in the Glass Containers started last quarter, a 1.8 per cent peso appreciation versus the dollar YoY (quarterly average) and a recovered supply capacity once lost as a consequence of hurricane Alex in 3Q’10. For LTM 3Q’11, consolidated net sales increased 14 per cent to USD 1,762 million from USD 1,545 million during the same period last year.
Glass Containers sales for the quarter increased 9.9 per cent Yoy, while Flat Glass sales increased 8.7 per cent over the same period. During the quarter, domestic and export sales increased 22 per cent and 0.2 per cent YoY, respectively, while foreign subsidiaries’ sales decreased 23 per cent YoY.
EBIT and EBITDA
Consolidated EBIT for the quarter increased 11.9 per cent YoY, from USD 38 million in 3Q’10 to USD 43 million during 3Q’11. EBIT margin increased 0.2 per centage points, from 9.3 per cent to 9.5 per cent. For LTM 3Q’11, consolidated EBIT increased 21 per cent from USD 128 million in LTM 3Q’10 to USD 155 million in LTM 3Q’11. During this same period, EBIT margin increased 0.5 percentage points, from 8.3 per cent to 8.8 per cent.
EBIT for the quarter at Glass Containers increased by 17 per cent YoY, from USD 41 million to USD 48 million, while at Flat Glass, EBIT reduced its loss, from USD 5 million in 3Q’10 to a loss of USD 3 million in 3Q’11.
Consolidated EBITDA for the quarter increased 11 per cent, from USD 74 million in 3Q’10 to USD 83 million in 3Q’11, mainly driven by higher production levels both in Glass Containers and Flat Glass, which translates into improved fixed cost absorption, a 4 per cent decrease in energy prices and a 1.8 per cent peso appreciation, YoY (quarterly average). EBITDA margin increased 0.2 per centage points, from 18.1 per cent to 18.3 per cent, YoY.
For LTM 3Q’11, consolidated EBITDA increased 13.6 per cent, from USD 271 million in 3Q’10 to USD 308 million in this period.
During the quarter, EBITDA at Glass Containers increased 13.6 per cent, YoY, from USD 63 million in 3Q’10 to USD 72 million in 3Q’11, while EBITDA at Flat Glass increased from USD 6 million in 3Q’10 to USD 10 million in 3Q’11.
Total financing result
On 8 April 2011 Vitro SAB was declared in Concurso Mercantil, therefore according to Mexican law, all of its debt, including Senior Notes, was converted to Unidades de Inversion (“UDIS”) and stopped accruing interest. Under Mexican FRS, the fluctuation in the value of the UDIS is considered as an interest expense. For reporting purposes, UDIS figures were reconverted at the dollar exchange rate of the closing period.
Total Financing Result for the quarter resulted in an expense of USD 10 million compared to an expense of USD 40 million during 3Q’10. This result was mainly driven by a decrease of our interest expense from USD 42 million in 3Q’10 to USD 18 million in 3Q’11 which reflected a small variation in UDIS, related to our UDIS denominated debt, and accrued interest on our debt not subject to restructuring. Also, due to our debt conversion to UDIS, our monetary assets in this quarter were higher than our monetary liabilities, which paired with a 13.4 per cent peso depreciation, QoQ, yielded a Foreign Exchange Gain of USD 25 million, compared to a gain of USD 15 million in 3Q’10 due to a 1.2 per cent peso appreciation in that period. This was partially offset by higher restructuring expenses, accounted for in Other Financial Expenses.
For LTM 3Q’11, Total Financing Result decreased 71.9 per cent to an expense of USD 40 million from an expense of USD 141 million in LTM 3Q’10, mainly benefited by a net interest expense of USD 101 million from a net interest expense of USD 170 million in LTM 3Q’10, due to our debt conversion to UDIS on April 8, 2011, and from a non-cash foreign exchange gain of USD 119 million compared to a gain of USD 84 million for the same period last year, due to the above mentioned factors.
For 3Q’11, Net Debt, which is calculated by deducting cash and cash equivalents classified in short and long term assets, decreased QoQ by USD 184 million to USD 1,361 million mainly driven by debt conversion into UDIS and the 13.4 per cent peso depreciation for the quarter. On a YoY comparison, Net Debt decreased by USD 130 million, mainly due to debt conversion to UDIS, and 7.4 per cent peso depreciation, LTM 3Q’11.
As of 30 September 2011 the company had a cash balance of USD 158 million, of which USD 2 million are classified as other long-term assets and USD 43 million are restricted cash collateralizing lease payments, cash on our accounts receivable financing programmes and cash related to payments associated to Consent and Restructuring Fee. Therefore, unrestricted cash balance as of 30 September 2011 was USD 115 million.
Consolidated gross debt as of 30 September 2011 totalled USD 1,519 million, which represent a USD 184 million decrease QoQ; YoY debt decreased USD 172 million.
Taxes
Total Income Tax increased from a gain of USD 3 million in 3Q’10 to a loss of USD 21 million during this quarter. This was mainly due to an increase in Accrued Income Tax, which presented an expense of USD 34 million compared to a gain of USD 10 million on the same period last year but partially offset by a gain in Deferred Income Taxes of USD 13 million in this quarter compared to an expense of USD 7 million in 3Q’10.
For LTM 3Q’11, Total Income Tax decreased to an expense of USD 41 million from a gain of USD 65 million in LTM 3Q’10.
Consolidated net income
During 3Q’11 the Company recorded a Consolidated Net Income of USD 9 million compared to a Consolidated Net Loss of USD 14 million during the same period last year. This variation is principally explained by the increase in the Operating income of USD 43 million compared with an operating income of USD 38 million in 3Q’10, a Total Income Tax loss of USD 21 million compared to a gain of USD 3 million on the same period last year and a loss from discontinued operations of USD 6 million in 3Q’10, due to the sale of Vitro America which according to accounting principles and for comparative purposes, is shown as discontinued operation in every period.
Capital expenditures (CapEx)
Capital expenditures for the quarter totalled USD 26 million, compared with USD 16 million in 3Q’10. Glass Containers represented 66 per cent of total CapEx, mainly invested in capacity expansion to service CFT segment, furnace repairs, moulds and maintenance. Flat Glass accounted for 34 per cent, which was mainly invested in furnace repairs due to damages from last year’s Hurricane Alex, maintenance, repairs and capacity expansion for the auto segment glass.
Cash flow
Net Free Cash Flow decreased from USD 49 million in 3Q’10 to USD 14 million in 3Q’11. This was mainly the result of an investment in Working Capital of USD 22 million in 3Q’11 compared to a USD 10 million recovery in 3Q’10. This investment was mainly driven by an increasing inventory in Glass Containers in order to keep our service levels and due to a scheduled furnace repair coupled with a reduction of our accounts payable. Operating Cash Flow was also used to fund the USD 26 million CapEx investment this quarter, which is a 66 per cent increase, when compared with USD 16 million in 3Q’10.
For the LTM 3Q’11, the Company recorded a Net Free Cash Flow of USD 35 million compared to USD 136 million during the previous year. This change was mainly due to a higher working capital investment for this period and an increase in CapEx which responds to furnace repairs in both our business divisions, and partially compensated by a higher EBITDA figure.
Key developments
During the last two years, Vitro has worked diligently to resolve its financial situation by seeking to achieve a consensual restructuring on terms that would provide Vitro’s creditors a fair recovery in light of the Company’s financial capacity and permit the Company to regain its financial footing. To that end, Vitro has engaged in active negotiations with various groups of creditors, including an ad hoc group of holders of Old Notes (the “Ad Hoc Bondholders Group”), as well as Fintech, the company’s largest creditor.
Glass Containers
(64 per cent of LTM 3Q’11 Consolidated Sales)
Sales
Sales for the quarter increased 9.9 per cent YoY, from USD 262 million in 3Q’10 to USD 288 million.
Domestic sales increased 17.4 per cent, mainly as a result of a temporary increased demand from one of our beer producer clients, which started last quarter and has extended into 3Q’11, as well as new orders placed by another one in this segment. Sales also benefit by increase in CFT, Wine & Liquors segments and a peso appreciation. These factors more than offset a decline in volume for the food segment. Prices remained stable overall, YoY.
Export sales remained stable, with increasing volumes in beer and CFT segments but offset by lower sale volumes in food and soft drinks segments.
Sales from Glass Containers’ foreign subsidiaries decreased to USD 3.7 million from USD 4.4 million on a YoY basis.
EBIT and EBITDA
EBIT for the quarter increased 17 per cent YoY, from USD 41 million in 3Q’10 to USD 48 million in 3Q’11. EBITDA for the same period increased 13.6 per cent, from USD 63 million to USD 72 million. During this quarter, EBIT and EBITDA were benefited by higher sales volume and increased production levels which, aided to a better fix cost absorption a 1.8 peso appreciation as well as a 4 per cent decrease in natural gas prices.
EBITDA from Mexican glass containers operations, which is Glass Container’s core business and represents approximately 82 per cent of total EBITDA, increased 15 per cent YoY due to the above mentioned factors.
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