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Article Excerpt
OPERATOR: Good afternoon, and welcome to Alfa's Fourth Quarter 2008 Earnings Conference Call. (Operator Instructions). As a reminder, today's conference call is being recorded.
Now I'd like to turn the conference over to Mr. Alejandro Elizondo, Chief Financial Officer. Mr. Elizondo, you may begin.
ALEJANDRO ELIZONDO, CFO, ALFA, S.A.B. DE CV: Good afternoon, everybody, and thank you for your participation in this conference call, where we will discuss our Company's recent performance. As in the past, I will make some introductory remarks and then open the conference to your questions on a company-by-company basis.
In the second half of 2008, we faced a challenging environment with demand for some products coming down, along with the price of commodities in general. And, at the same time, we suffered a peso devaluation. Some of our businesses, Sigma and Alestra in particular, were less affected by these conditions and continued to show a strong performance. Alpek and Nemak, on the other hand, faced lower demand, in part because of inventory reductions on our clients' part, and also suffered from some important nonrecurring events. However, going forward, the weaker peso makes both Alpek and Nemak even more competitive and capable of generating additional value.
We ended the year generating $964 million in EBITDA, the same as in 2007. However, the fourth quarter shows a negative impact of $68 million because of lost production and higher costs due to Hurricane Ike and the markdown of inventories resulting from the drop in price of raw materials. The fourth quarter EBITDA will have shown only a modest 6% decline in the absence of these one-time effects.
Something that deserves further explanation is the abnormally high level of consolidated net loss we reported, which amounted to $823 million for the year as a whole. The chart we included in our report is pretty much self-explanatory, but there are various comments that I would like to add.
The global nature of our business makes it logical to finance them with foreign currency debt. Sometimes we accomplish this by raising peso debt and converting it via derivatives. The exchange losses, which, by the way, are mostly noncash, are offset with the increasing value of our foreign-origin assets, which, in our case, this figure is $462 million, although, on the current Mexican accounting rules, we're not allowed to show that increase in the value of our foreign-origin and Mexican assets in our balance sheet. We reported losses on FX derivatives of a level similar to the one we had disclosed earlier.
Also, we canceled or neutralized substantially all the FX derivative positions during October and November. Furthermore, as we explained in the report, we have reinforced the decision-making process requiring authorization on a higher level - all the way up to the Board and issued new guidelines that will prevent this situation from happening again.
We also reported accounting losses on interest rate, natural gas, and other commodity derivatives. As interest rates and energy prices came down, these instruments showed a loss. That is compensated with lower interest payments and energy bills; the net economic effect being close to zero. There is, however, a mismatch in timing because the benefits lay beyond 2008; but accounting rules, again, force us to recognize the loss of this negative impact ahead of time.
Finally, we have used equity swaps to repurchase our own stock. We reported losses on equity swaps because the market value of the shares has gone down. But we believe the intrinsic value is higher, and we're confident that these losses will eventually revert. Also, we have the cash needed to terminate the equity swap contracts and take possession of the shares if we so decide.
Despite (inaudible) accounting losses we had, our financial condition remains healthy. Our net debt to EBITDA is 2.4 times and interest coverage is 4.5 times, within our target levels. Furthermore, our debt repayments are well spread out in the following years.
Finally, we believe we have important strengths to face the challenging environment in front of us; namely, a strong competitive position in all our businesses, market leadership, state-of-the-art technology, and the talent and dedication of our personnel. That, we're sure, will allow us to continue being successful.
We, as most of you know, will have our annual conference next Tuesday, February 10 in Mexico City. At that time, we will share with you guidance on our expected results for 2009. For the time being, our preliminary estimates show a 2009 EBITDA of at least $900 million.
With this, I conclude my opening remarks. We'll now start the Q&A section. First, we would like to take questions on financial aspects and questions for Alfa as a whole.
OPERATOR: Thank you. (Operator Instructions). Vanesa Quiroga.
VANESA QUIROGA, ANALYST, CREDIT SUISSE: I have a question regarding the debt level of Alfa. It increased substantially from one quarter to the fourth quarter, especially more than what you have commented in the previous results conference call - that debt would be increasing. So I was wondering why was that.
And another question is - Given that the leverage levels increased, if...
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