Mexichem has grown through strategic acquisitions, enabling us to consolidate and expand our leadership across our value chain and maintain a presence in international markets, closer to our customers around the world. Mexichem is driving a global growth model that will help consolidate the global competitiveness of our Fluor and Vinyl Business Groups and boost our Fluent Business Group through sector-driven specialization in Building and Infrastructure (Fluent Europe and Fluent LatAm -Wavin and Amanco-), Datacom (Dura-Line) and Precision Agriculture (Netafim). Our intent is to maximize capacity to improve margins and boost organic growth, as well as develop new markets.
With an emphasis on driving collaborative developments and synergies across our businesses, optimizing the way we utilize our resources, including recent acquisitions, we expect to be in a stronger position to establish stronger, long-term relationships with strategic customers and meet their product needs effectively.
In 2018, Mexichem started its transformation to become a more customer-centric organization. This shift will be an important component of Mexichem’s business operations in 2019.
Throughout 2018, Mexichem’s 22,000 employees have collaborated with our customers to address some of the world’s most pressing challenges. We continue to seek new opportunities to deliver business growth while helping improve the quality of life for millions of people around the world.
We recently celebrated the anniversary of Mexichem’s game-changing acquisition of Netafim and continue to appreciate the value this new business brings to our group. Today, Netafim is an integral part of Mexichem’s Precision Agriculture Business, helping farmers maximize crop yields while reducing the consumption of resources with its digital farming solutions. Mexichem’s Precision Agriculture business also partners with governments to help improve the livelihoods of rural farmers with the latest in smart drip and micro-irrigation technologies.
Mexichem’s EBITDA grew by 26% in 2018, fulfilling our commitment to secure EBITDA growth between 25-30% at year-end on a reported basis.
We remain strongly committed to our investment-grade rating, and through a continued effort to strengthen our balance sheet, have been executing our deleveraging strategy, reaching 2.05x net debt to EBITDA ratio at the end of Q4 2018.
During 2018, Mexichem’s Fluent Europe (Building and Infrastructure - Wavin), and U.S. & Canada (Datacom - Dura-Line) divisions exceeded expectations, and although Fluent LATAM faced market challenges - mainly in Colombia - we have been seeing signs of recovery in Brazil and Mexico, at a time when we continue to
successfully integrate Netafim. In early 2019, Mexichem’s Vinyl business is expected to continue working in an environment with a constrained ethane supply and an excess supply of caustic soda, while year-to-date PVC prices have been increasing. Mexichem’s Fluor business expects a moderate growth path after an extraordinary 2018. During 2019, Mexichem Fluor will experience a more challenging year, with the stabilization of the refrigerant markets in Europe associated with difficult market conditions, affecting the supply-demand dynamics of the F-gas quota system, and better market conditions in our upstream businesses.
In 2018, consolidated sales increased by 24% compared to 2017, to $7.2 billion. This increase was mainly the result of (1) integration of Netafim into the consolidated results, (2) higher prices of refrigerant gases and (3) healthy sales growth in the Fluent Business Group in the U.S. and Canada.
COST OF SALES
Our cost of sales increased by 20%, from $4.4 billion in 2017, to $5.3 billion in 2018. This increase was mainly the result of the integration of Netafim in the consolidated results of Mexichem, as well as higher volumes of sales in our Fluor Business Group and Fluent U.S. and Canada (Datacom) and Fluent Europe (Building and Infrastructure - Wavin-) business units.
Our gross profit increased by 33% from $1.5 billion in 2017, to $1.9 billion in 2018. Our gross margin, which is calculated by dividing gross profit by net sales, increased from 25% in 2017, to 27% in 2018. This expansion was mainly generated in our Fluor Downstream Business Unit.
Our operating expenses increased by 35% from $745 million in 2017, to $1 billion in 2018. This increase is the result of (1) integration of Netafim in the consolidated numbers of Mexichem, (2) provision of CADE and (3) expenses related to the acquisition of Netafim Ltd. Our operating expenses represented 14% of our net sales during 2018, compared to 13% in 2017.
NET FINANCIAL EXPENSES AND VARIATION IN THE EXCHANGE RATE
Our net financial expenses and variation in the exchange rate increased by 62%, from $176 million in 2017, to $284 million in 2018. The increase is due to (1) an increase in interest expenses mainly related to the issuance of the $1 billion bond in September 2017 to finance the acquisition of Netafim, as well as consolidated interest in 2018, (2) integration of Netafim in the consolidated numbers of Mexichem, (3) a negative effect on the monetary position from our Venezuelan operation, and (4) an impact related to the valuation at market prices of a financial instrument associated with the acquisition of Netafim.
Our income taxes amounted to an expense of $195 million in 2018 compared to $178 million in 2017. This increase was mainly due to a change in the mix of Mexichem subsidiaries that generate profits and those that generate fiscal losses. This effect was offset by the deferred tax benefit caused mainly by the reduction in local tax rates in our most relevant markets.
CONSOLIDATED NET INCOME
Consolidated net income increased by 126% from $214 million in 2017, to $483 million in 2018, due to the factors described above. When we adjust for discontinued operations in the PMV operation, net profit grows by 29% from $357 million in 2017, to $460 million in 2018. Majority net income increased by 83%, from $194 million in 2017 to $355 million in 2018, when we adjust for the participation of Mexichem (55.91%) in the discontinued operation in PMV, the majority net profit would have grown 25% from $274 million in 2017 to $342 million in 2018.
VINYL BUSINESS GROUP
In 2018, Vinyl Business Group sales increased by 6% from $2.3 billion in 2017 to $2.5 billion in 2018, reflecting favorable market price conditions during the first nine months of the year in both PVC and caustic soda, mainly due to the increase in oil prices and supply (environmental) restrictions in Europe and Asia, when comparing 2018 to 2017. EBITDA increased 10% to $557 million from the $507 million reported in 2017, with an EBITDA margin growth of 74 bps to 22.6% from 2017’s 21.9%.
FLUENT BUSINESS GROUP
In 2018, sales reached $4.1 billion, an increase of 35% compared to the same period last year. Key factors contributing to this growth include the consolidation of Netafim, double-digit growth in the U.S., Canada and AMEA (Datacom – Dura-Line), and mid-single digit growth in Europe (Building and Infrastructure – Wavin). EBITDA increased by 37% in 2018 to $527 million, with an implied EBITDA margin of 12.9%.
FLUOR BUSINESS GROUP
Net sales increased 23% to $837 million in 2018 compared to $681 million in 2017. This increase was mainly the result of higher prices of refrigerant gases in the U.S. and Europe. EBITDA increased by 40% in 2018 to $362 million, with an implied EBITDA margin of 43.3%.
The core principles that drive our strategic approach are:
PLATFORM FOR VALUE-ADDED GROWTH
We leverage our size and global presence to provide value-added solutions in growing markets.
We understand our clients’ changing needs and priorities, and work together to evolve our range of solutions and capabilities.
Innovation is key to guaranteeing our future growth, maintaining our leadership position in the industry and opening new markets.
Our more than 22,000 employees around the world are our most valuable competitive advantage, and it is through them that the company operates and transforms every day. They make it possible to achieve our objectives, and their professional development is essential for a business that requires a highly qualified workforce, adaptability to change and constant reinvention.
We create value providing a safe and empowering environment for our employees, being good stewards of our products and of shared natural resources, working as a force for good in the communities in which we operate and creating financial returns for our shareholders.
GLOBAL SOCIAL AND ENVIRONMENTAL NEEDS
The United Nations Sustainable Development Goals (SDGs) represent a comprehensive set of global social and environmental challenges we must all address to achieve global, inclusive prosperity by 2030. The SDGs, which were ratified by the UN General Assembly in September 2015, represent a roadmap for action by governments, businesses and communities. At Mexichem, we have identified six out of the 17 goals which we can have the greatest impact in helping achieve, thanks to our global footprint and business expertise.
RESPONSIBLE APPROACH TO BUSINESS
At Mexichem, we have always striven to do business in an ethical and responsible manner. In the second half of this report, we provide examples of activities we undertook in
2018 that were designed to guarantee that this will remain the case. In 2018 we became a signatory to the United Nations Global Compact (UNGC), committing to uphold the Compact’s 10 principles of responsible business. While these principles are not new to Mexichem, our UNGC membership publicly demonstrates our commitment and reinforces our actions.
Our Sustainability Policy* reflects our commitments to lead and support responsible value chains that work together to build a sustainable world. We wish to deliver profitable, long term business performance while optimizing the use of natural resources so we can do more with less, promoting innovation for safe and valuable product development, fostering a customer-centric approach and investing in our people and the communities in which we operate.
We have identified 14 material priority impacts that inform our sustainability approach and provide the basis for our sustainability reporting. These topics were identified through analysis of a range of factors including:
• A review of global priorities expressed in the UN Sustainable Development Goals.
• The 10 United Nations Global Compact Principles.
• Our business strategy and goals.
• The expectations of our primary stakeholders, as expressed in our interactions with them throughout the year.
Following this analysis, the following list of material topics was reviewed and approved by our Senior Executive team.