Consorcio G. Grupo Dina, S.A. de C.V. (“DINA”), (NYSE: DIN, DIN.l), a leading Latin American producer of trucks today released financial results for its second quarter ended June 30, 2000.
Due both to the earlier divestiture of a 61% equity stake in its former subsidiary, MCII Holdings, whose results are no longer consolidated with those of Grupo Dina, and weakness in the North American truck market, Dina recorded a substantial decline in sales and a net loss of 296 million Mexican pesos.
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RELEVANT INFORMATION
1. BACKGROUND AND MARKET OVERVIEW
* In June 1999 Dina carried out a financial restructuring that led to the sale of 61% of its ownership in MCII Holdings. This enabled the company to improve its financial position and to initiate operations of Mexicana de Manufacturas Especiales, S.A. de C.V. (MME), a manufacturer of truck bodies and metal parts. Through MME Dina achieved greater vertical integration of its operations.
* In October 1999, Dina signed a 10-year agreement with Western Star Trucks Holdings (Amex: WSH), a leading Canadian producer of class 8 trucks. Under the terms of this agreement, Dina, utilizing its proprietary technology, contracted to produce class 6 and 7 units for distribution in the United States, Canada, and Australia.
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By GlobalData* Throughout 2000, Dina’s markets were adversely impacted by important changes arising from both external and internal factors, which are reflected in this year’s second quarter financial results.
* The U.S. truck market has experienced a significant slump in sales volume this year. The principal market factors were higher fuel prices, more used units becoming available from expiring financial leases, and higher financing costs for new units because of rising interest rates.
* The South American market also experienced a significant business slowdown, mainly as a consequence of the deterioration in the Brazilian economy since 1998. As a result, Dina International in Argentina has not achieved its budgeted sales level for the first quarter of 2000.
* In March this year Western Star Trucks expressed to Dina its interest in carrying out a series of complementary actions aimed at strengthening its marketing strategy for the sale of class 7 units in the United States. Western Star trucks entered this market niche on signing the agreement with Dina. As a market newcomer, Western Star was forced to reduce truck orders planned for the second quarter by 55 percent and to reprogram deliveries for the third quarter.
* As an indirect consequence of sluggish demand in the North American market many Mexican produced units originally bound for the export market (especially the United States) have been redirected to the domestic market. Generally, the sale of units for the domestic market depends upon the availability of financing from the financing arms of the OEMs and third party financing. Recent consolidation within the financing sector has contributed to the more difficult market conditions for smaller and independent producers.
INTERNAL ADJUSTMENTS
* Dina’s financial results also reflect a series of decisions that management made based upon the current situation. In late 1999, when creating its 2000 budget, management changed the accounting treatment for the depreciation of plant assets from the traditional straight-line method to one more closely related to actual production volume.
* Nevertheless, by the middle of the second quarter, as a consequence of prospectively lower production and sales levels for the rest of the year, Dina was advised by its outside accountants to revert to the straight-line depreciation method used in 1999. It was concluded that this method would present results in a more conservative manner and more closely correspond to the prevailing operating situation.
* Because of the change in delivery schedules required by Western Star Trucks during June this year, Dina decided to scale back production at its Dina Camiones (Dina Trucks) plant as of June 12, 2000. This decision mandated a reduction in the number of employee working hours. This decision was supported by the automotive industry union (Sindicato de Trabajadores de la Industria Automotriz, Similares y Conexas) who recognized the importance of taking steps to protect the financial health of Dina Camiones and its workers.
* Furthermore, as previously announced, Dina is currently exploring opportunities to sell certain assets, in order to have adequate financial liquidity for the operation of the company and to meet outstanding obligations. As a result, management decided to make certain adjustments to its financial accounts in order to reflect the new operating conditions, and to clearly reflect the current condition of each business unit.
FINANCIAL POSITION
* Dina’s financial results for the second quarter and first half of 2000 are those reported per report B-15, and include the results of MCII and its subsidiary Dina Autobuses prior to June 16, 1999.
(Amounts in Million Mexican Pesos)
Apr-June Apr-June Jan-June Jan-June
2000 1999 2000 1999
2Q 2Q Six Months Six Months
Sales 276 2,427 794 5,244
Cost of Sales 328 1,933 734 4,227
Gross Profit/Loss (52) 494 60 1,017
Operating expenses 160 392 271 767
Operating profit (212) 102 (211) 250
C.I.F. 72 187 68 88
Other expenses (income) (11) 53 (10) 132
Extraordinary items 0 (965) 0 (965)
Taxes 4 70 8 160
MCII participation (19) (1) (4) (10)
Majority shareholder
Income/Loss (296) 756 (281) 825
EBITDA (165) 213 (161) 506
Because of the financial restructuring of Grupo Dina on June 16, 1999, pursuant to which 61% of the capital of MCII Holdings was transferred, the company’s results of operations after June 16, 1999 do not show any operations of MCII Holdings. In order to make it easier to compare the figures, the amounts of the results of the second half of 1999 are presented so as to reflect the corresponding percentage of the profit of MCII and DINA Autobuses under the caption of MCII participation.
As previously announced, the Board of Directors of MCII Holdings had agreed to increase the company’s capital by US$81.9 million, of which US$31.9 million would be contributed by Dina. Due to the financial condition of Dina, it was determined that Dina would not contribute for the time being. Based on that, it is considered that Dina’s shareholding in MCII decreased from 39% to 31.4%. Due to the fact that the deadline for Dina to make its pro rata equity contribution is September 28, 2000, the probability of recovering the share lost in that company will be analyzed in due time.
(Amounts in Million Mexican Pesos)
Jan-Jun 2000 Jan-Jun 1999 Variance
Six Months Six Months
Sales 794 1,014 (220)
Cost of Sales 734 875 141
Gross Profit/Loss 60 139 (79)
Operating expenses 271 354 83
Operating profit (211) (215) 4
C.I.F. 68 (87) (155)
Other expenses (income) (10) 22 32
Extraordinary items 0 (965) (965)
Taxes 8 47 39
MCII participation (4) 30 (34)
Majority shareholder
income/loss (281) 798 (1,079)
EBITDA (161) (58) (103)
NET SALES
Total sales of Dina during the second quarter 2000 reached 276 million Mexican Pesos, a decrease of 88.6% when compared to the same quarter of 1999. Considering the pro forma results, in which the 1999 fiscal year is adjusted in order to deconsolidate the operations of MCII Holdings, this decrease is 55.3%.
DINA CAMIONES
During the first half of 2000, it marketed 1,458 units, of which 907 were for the domestic market and 551 for export; 10.5% and 188.5% higher sales, respectively, as compared to the same period of the previous year.
With the availability of class 7 and class super 7 units for the second quarter, there was a slight rebound in the domestic market share of this line. As regards the export market, it underwent a significant decrease, mainly due to the modification in the shipping of units according to the agreement with Western Star Trucks and the ongoing business slowdown in South America.
As of June 30, 2000 order backlog is 1,312 units, of which 191 are for export. As of June 30, 1999, the backlog was 1,151 units.
Sales distribution between domestic market and exports is presented in the following table:
Information in units
1Q 2Q 1999 1Q 2Q 2000 Var Var
1999 1999 to-date 2000 2000 to-date Unit %
Domestic Trucks 228 296 524 296 236 532 8 1.5
% Share 6.6 6.7 6.7 5.6 3.9 4.7 2.0 --
Domestic
Passenger
Vehicles 169 128 297 229 146 375 78 26.3
% Share 18.0 12.2 14.9 9.5 6.6 8.1 (6.8) --
Total domestic 397 424 821 525 382 907 86 10.5
% Share 9.1 7.8 8.4 6.8 4.7 5.7 (2.7) --
Export 92 99 191 478 73 551 360 188.5
Grand Total 489 523 1012 1003 455 1458 446 44.0
Backlog 1,042 1,151 1,151 2,776 1,312 1,312 161 14.0
Dina Camiones sales for the first six months of the current year amounted to 466 million Mexican Pesos, which represents a 4 million Mexican Pesos decrease relative to the same period in 1999. Despite an increase in number of units sold, sales distribution this year had a lower added value. Among the factors that had influenced this condition were units sold by Dina to WST, due to the fact that only the body and the cabin are invoiced by Dina, and the rest of the unit components, such as the drive-train and engine, were sent by WST for assembly at Dina’s plant. As a consequence, the price of the units invoiced to WST was on average 40 percent of the price of a unit manufactured with components manufactured or acquired by Dina.
DINA INTERNATIONAL
During the first half of 2000, Dina International marketed 140 units in Argentina, an amount lower by 118 units as compared to the same period of the previous year, when it invoiced 258 units. The resulting sales amount for the first half of this year is 60 million Mexican Pesos, which reflects a decrease of 44.1% compared to the first half of 1999.
MEXICANA DE MANUFACTURAS ESPECIALES (MME)
Sales in this business unit, opened during 1999, reached a total of 54.5 million Mexican Pesos in the first half of June 2000. The plant located in Zapopan, Jalisco is still in the pre-operating stage, due to the fact that production levels have not attained this year’s projections, as a consequence of the circumstances Dina is experiencing. Additionally, the decline in the overall US market seriously affected bus sales and caused MCII to significantly reduce its orders to MME.
OPERATING PROFIT
The cost of sales for the second quarter 2000 includes adjustments related to the change in depreciation policy mentioned above. This change was evaluated with the advice of Dina’s external auditors. Factors taken into consideration were the company’s current condition, and the outlook for the balance of the year which will not correspond to that budgeted at the end of 1999, when the decision to change the depreciation method was made. Uncertainty as to the second half of the year relates to the lack of assurance that the agreement executed with Western Star Trucks will be fulfilled.
As regards management costs, there is a saving, due to the fact that significant indebtedness was repaid as part of the 1999 financial restructuring, and reflected as an extraordinary item.
Furthermore, starting in fiscal year 2000, Dina initiated actions with the purpose of decreasing its operating expenses. Despite the decrease in sales during this fiscal year, the percentage of operating expenses has decreased as compared to the same period of the previous year, declining from 35% of sales to 34%. This reflects a lower level of operating loss of 3 million Mexican Pesos.
Additionally, and despite Dina’s difficult sales condition, the company has the support of the Sindicato de Trabajadores de la Industria Automotriz, Similares y Conexas, for a reduction in man-hours. This is one of the measures aimed at protecting the financial health of the operation of Dina Camiones, through modification of production schedules and employment arrangements.
The change in man-hours was instituted on June 12. It means the work force will work exclusively on current orders, and be available as required to work on new orders during the rest of the year.
During the period of partial unemployment, every unemployed worker will receive 62% of his current salary, and monthly benefits amounting to four workdays. If during this time Dina Camiones receives new orders and the production schedule is increased, the workers are committed to be available to fulfill these orders.
OTHER
Dina, as an export company whose products are priced in U.S. dollars, saw its financial results affected by fluctuation in the value of the peso.
In the first half of the year the Mexican peso gained strength against the dollar. Dina’s export vehicles are priced in dollars but their production costs are in pesos and increase with inflation, a situation that caused a reduction in Dina’s income that is reflected in the company’s results.
From March 31, 2000 to June 30, 2000, the peso suffered a devaluation of 5.8%, resulting in an exchange loss of approximately 50 million Mexican Pesos in the second quarter.
In addition, Dina increased its reserve for doubtful accounts by 30 million pesos.
LIQUIDITY
As previously mentioned, during the current fiscal year there has been a series of factors that have caused the operations of Dina to deteriorate, significantly decreasing its sales levels and altering its financial condition. Specifically, the liquidity of the company has been reduced due to required investments in fixed assets and working capital during the January-June period, associated with commitments and the original outlook for year 2000. The funds from Dina’s financial restructuring in June 1999 were used to prepare the company for previously anticipated unit demand, and making scheduled interest payments on its subordinated convertible bonds due in 2004. Furthermore, pending accounts payable as of the June 1999 restructuring date, such as suppliers and taxes, were also settled. The following table shows the main uses of the US$71 million obtained from the restructuring.
Uses Amount
(In million dollars)
Accounts Payable 14.5
Taxes 8.0
Payments to Affiliates 7.6
Interest Payments 13.1
Other Payments 2.8
Investment in Trabajo Dina Camiones 25.4
TOTAL 71.4
Likewise, as previously announced, a series of operational investments were made. Following is a list of the main fixed or working capital investments made by Grupo Dina during this period.
* In connection with the WST agreement the company was required to make a deposit of US$2.2 million to guarantee the delivery of units. Dina initiated negotiations with Bancomext (Mexican Foreign Trade Bank) to open a financing line for export units. Nevertheless, as a result of changes proposed by WST in the delivery of units, this financing has not been obtained.
* Investment in materials and spare parts inventory was also required to meet the WST agreement, as well as in engineering to enable the company to meet the requirements of the contract.
* As regards Dina’s share in the domestic market, in early 2000 it started negotiations with development banks to obtain financing for Arrendadora Financiera Dina (AFD) in order to compete more effectively within the domestic market. The company decided to prepare for future demand derived from this operation and started acquiring inventories that would allow the production of required units. To date, Dina has not obtained funding for AFD, and the financing program has not yet started.
* The MME business unit, which started operations during 1999, also required investments in fixed assets and work force of 23 million Mexican Pesos. These investments took place during the period when Dina was preparing itself to provide performance bonds required by WST.
* The above-mentioned factors significantly damaged the company’s financial liquidity, and forced it, on July 14, 2000, to announce that the company would use the thirty-day grace period stipulated to allow the company to search for alternative ways to pay interest on the 8% Subordinated Convertible bonds due in 2004. As of the publication of this report, Dina cannot state with certainty whether it will obtain the required funds, or negotiate an acceptable restructuring before the August 14, 2000 expiration of its grace period.
ADDITIONAL ADJUSTMENTS
Due to the current market environment within which the company is now operating, the management decided to work on a series of additional adjustments to present the results of the company in light of these developments. These adjustments include both changes in accounting policies and measures to keep a conservative position as to the immediate future of the company.
* Derived from the sale of Arrendadora Financiera Dina, S.A. de C.V. (“AF Dina”), and based on that budgeted late 1999, the company recorded in its results for the first quarter of 2000 revenue in the amount of 30 million Mexican Pesos, relating to the use of the AF Dina brand. The calculation of this revenue was determined based on this company’s revenue projections as a result of the financing program, with which AF Dina would start operations. Currently, and because it has not been possible to achieve the financing of the program, Dina’s management has decided to reverse the revenue recorded during the first quarter of the year and to more accurately present the financial position of Dina.
* As a result of the sale of 61% of MCII Holdings, starting in the third quarter of 1999 Dina’s financial statements do not consolidate MCII. Instead, MCII’s results are reflected pursuant to the equity method of accounting. Furthermore, as previously mentioned, Dina decided to defer participating in the capitalization increase of MCII, therefore decreasing its share from 39% to 31.4%. The reported first quarter 2000 results included a profit of 38 million Mexican Pesos: and the amount corresponding to Dina’s 39% ownership was 15 million Mexican Pesos.
* According to the financial results reported by MCII, there was a loss of 12.4 million Mexican Pesos for the first half of 2000. Dina is including in this report a 3.9 million Mexican Pesos loss on its pro rata ownership share of MCII. The net effect is a variation of 18.9 million Mexican Pesos as compared to that reported in the first quarter of 2000.
Relevant Events During Second Quarter 2000
* Dina announced a change in the structure of its American Depositary Receipts (ADRs) that are traded on the New York Stock Exchange. This change took place as a reverse split at a ratio of 10 to 1, to ensure that the ADRs would continue to meet the criteria for listing by the NYSE.
* On October 29, 1999 Dina Camiones executed a 10-year contract with Western Star Trucks (“WST”) to export its HTQ technology units to the United States, and market them under the WST brand name through its wide distribution network. Approximately 2,500 units were scheduled for shipment during the first year. In March Dina received notice that WST was entering a transition stage, in which it would implement a strategy to strengthen its market position. WST and Dina agreed to temporarily defer shipments. This action caused WST to reduce 55% of its near-term scheduled deliveries. In turn, Dina Camiones had to slow down its production. After a thorough review and a series of meetings with union representatives, both parties agreed upon a strategy that would protect the financial health of the operation, and at the same time would avoid laying off 150 workers. The scaling back of the work force started on June 12, and means that for the immediate future the work force will work exclusively to meet current orders.
* Dina recently received official notice from Western Star Trucks that due to its recent acquisition by Freightliner there must be a review in the next few weeks of the contract signed between Dina and WST. Dina is currently analyzing with its lawyers the procedure it should follow under different scenarios, including a possible suspension or cancellation of this contract.
* It has not been management’s practice to specifically identify and allocate corporate administrative and overhead costs to each business unit. A decision has been made to apply the expenses of each business unit to accurately reflect its financial situation. Thus if one of the business units were to require an individual review of its business or a valuation of its results, it would be feasible to individually assess each business unit. This procedural change should have no effect on Dina’s consolidated results.
* The combination of all the factors analyzed in this quarterly report demonstrates that both the context of the operation and the internal conditions of Dina have drastically changed its business outlook for this year. This fact has pushed Dina executives to reconsider the company’s objectives for the immediate future and in the short term. The company is currently considering the possibility of restructuring its costs and spending to fit the new circumstances the company is facing, with respect to its market participation and its commitments and obligations. This redesign will allow Dina to look for development alternatives that exploit its competitive advantages, in an effort to generate better results in the future.
Grupo Dina has manufacturing operations in Mexico and Argentina, and markets its products through North and South America. It is a 100-percent Mexican company that has invested more than US$50 million in proprietary technology since its privatization in 1989. Currently, Grupo Dina is one of the few companies in the world manufacturing its products with its own proprietary technology.
