/ 2000 Second Quarter Results
TMM
August 10, 2000


TMM posted mixed results, with revenue growth at all of its divisions, except ground operations. Standing out was the ports business, which is currently TMM’s most important business unit, as it accounts for 53.0% of the company’s consolidated gross profit. This business posted a gross margin of 57.2%, partially offsetting the decline in profitability of TMM’s other business. Despite intense fixed asset sales (including liner services), leverage was still high, as EBITDA and financial income were barely enough to cover interest payments, even though debt declined 9%. For its part, TFM (railway) posted outstanding results and surprisingly achieved an EBITDA margin of 43.9%. Year to date, TFM has paid down US$ 45.2 million in debt, ending the quarter with interest coverage of 2.8x. It is important to note that TMM does not consolidate TFM’s results, and TMM’s equity stake in TFM is recorded under the non-consolidated subsidiaries line.

TMM’s operations are a function of Mexico’s performance in international trade and the company is thus sensitive to a slowdown in the Mexican economy and that of our trade partners. However, as long as TMM attacks the appropriate sectors, such trade exchange could be inelastic to worldwide growth, given Mexico’s comparative advantages. According to our calculations, TMM could raise a total of US$ 201.6 million, which would be more than enough to cover next October’s maturity of US$ 143 million. After subtracting TMM’s current cash levels, out of the total amount of US$ 113.5 million that is still pending, we are concerned about a US$ 45.4 million account receivable from PEMEX. Once this bond is paid, leverage could drop to 273.9%. However, TMM still faces other maturities of US$ 176.7 million and US$ 199.5 million in 2003 and 2006, respectively. Due to TMM’s high leverage, rich valuation and the stock’s illiquidity, we believe that for the time being, TMM is not an attractive investment.

Operating Results

Specialized maritime services, and particularly tankers and supply vessels, will benefit from the new navigational laws that restrict coastal trading to vessels bearing the Mexican flag. Higher revenues were due to stronger activity in supply vessels and automobile carriers. However, supplying vessel rates remained under pressure and posted low occupancy rates, explaining the 5.0pp contraction in gross margin to 11.1%. Ground operations were affected by the transference of certain activities derived from TMM’s agreement with Americana Ships. Company management expects to replace lost revenues with new contracts, such as the ones recently obtained with Ford (US$ 3.3 million per year) and Carrefour (US$ 2.8 million per year). The above led to lower cost absorption, in turn causing a 5.6pp drop in gross margin vs. 2Q99. Ports grew as a reflection of the coming on line of the Manzanillo port expansion, for a current capacity of 100 cargoes per hour, and simultaneously operating three cranes. The ports segment not only accounts for 53.0% of TMM’s total gross profit, but also boasts the highest gross margin of all of TMM’s operations. As such, the ports segment posted a 57.2% margin, up 12.3pp vs. 2Q99. Tex-Mex, the short railway line in Texas, has shown good volume growth, but gross margin was affected by costs associated to the restructuring of this subsidiary (US$ 1.6 million), as certain functions will be absorbed by TFM’s personnel at its Monterrey offices. In addition, increased diesel prices also contributed to the contraction in gross margin. The restructuring implemented as of last year has allowed TMM to cut operating expenses, although most of these reductions have seemingly occurred in depreciation and amortization, as EBITDA grew by only 1.8%, while operating profit rose 10.0%. TFM* posted a record high EBITDA margin, as a result of higher occupancy rates and intensive utilization of more efficient locomotives, both of which more than offset higher diesel prices. However, company management expects slight margin contractions, as PEMEX’ prices are still lagging international prices, and also due to a slight slowdown in railway activities in 2H00 as compared to 1H00.

Financing Activities

Despite intense fixed asset sales, TMM’s balance sheet is still highly leveraged. As compared to 2Q99, debt dropped 9%, while leverage was down from 440.8% to 308.5%, explaining the decline in interest expense. Net debt to equity ended at 208.3%, while interest coverage stood at only 1.1x for the quarter. It is important to note that once the bond maturing next October is paid and net of accounts receivable securitization, leverage will drop to around 274% and interest coverage will rise to 2.4x. Also important to note is that the company’s equity stake in TFM is recorded under the non-consolidated subsidiaries line item.

Outlook

As mentioned in our previous analysis, after the sale of liner services, TMM’s outlook will vary as a function of international trade needs to and from Mexico. As a result, any factor that leads to a slowdown in international trade will affect TMM’s operation. This will be less of a factor, however, as TMM starts attacking the appropriate sectors, as trade flows are relatively more inelastic to worldwide economic cycles, given Mexico’s comparative advantages in certain sectors. Strong performance in ports is good news for TMM, as dynamics in cargo transportation have a stronger potential than tourism transportation, at least in the medium term.

As recorded in 1999 audited statements, TMM will receive approximately US$ 113.5 million from an account receivable from PEMEX (US$ 45.4 million), its accounts receivable securitization program (US$ 60 million) and tax returns (US$ 8.2 million). If we add cash holdings of US$ 88.1 million, the total would be US$ 201.6 million, allowing TMM to be perfectly able to cover the US$ 143 million bond maturing next October. As regards the securitization program, already half has been subscribed and everything seems to indicate that TMM will obtain the full amount. The account receivable from PEMEX is therefore the riskiest part. This account receivable is associated with TMM’s joint venture with Bufete Industrial to install oil field platforms at Cantarell. Although TMM will most likely raise the necessary funds to cover next October’s maturity, the company still faces two substantial debt maturities of US$ 176.7 million and US$ 199.5 million in 2003 and 2006, respectively. After the bond is paid in October, TMM will focus its efforts on acquiring, along with its partners, the equity stake held by the government in TFM. As such, TMM could possibly start receiving dividend payments or resources via other mechanisms from TFM. For the time being, the stock’s illiquidity and rich valuation, as well as the company’s high leverage, all make TMM a high-risk bet.

Francisco Suárez

The information contained herein has been obtained from sources that we believe to be reliable, but we make no representation as to its accuracy or completeness. Neither CASA DE BOLSA BANORTE, S.A. DE C.V. nor AFIN SECURITIES INTERNATIONAL accepts any liability for any losses arising from any use of this report or its contents.

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