Grupo Minsa is today one of the main players in the Mexican, Central American and US food markets. You have two plants in the USA; you have 6 plants here in Mexico, would you say that the company achieved what it had in mind back in 1953 when its first plant was established here?
Well, absolutely. When the first plant was built in 1953, the concept of masa flour was something that was not very clear where it was going to go. I think that today 50% of the tortillas in the country are made of masa flour, so it certainly has come a long way since 1953. The industry has grown a lot and I certainly think that today it plays a very significant role in the food market in Mexico. Tortilla is the main staple of the Mexican market, everybody eats them in large amounts. The average consumption is about 280 grams per day, so that's quite a bit. As an average, more than half the calories that the Mexicans consume come from tortilla. We bought the company in 1993. Initially the Mexican government owned this plant and the whole company. At that time it was Miconsa (Maíz Industrializado Conasupo), it was part of the Conasupo structure that was privatized in 1993 and we took it over in October 1993.
And that was a very good year, you expanded to the USA by establishing the first plant.
First we bought 5 plants from the Mexican government. The first plant in the USA was established in 1994 in Iowa. Then in 1995, we built another plant in Saltillo, Coahuila. After that, in 1996, we bought the second plant in Texas. After that we expanded to Central America and after that we expanded to consumer products. We have two plants that make packaged tortilla and tortilla chips, one is here in Mexico City, the other one is in Monterrey. And then we also built a plant that makes tortilla ovens and processing equipment for the tortilla shops. So, in general we've been growing quite fast since we started. In 1993, the company had about 9% market share when we took it over from the Mexican government, currently we have 28-28½ percent market share of the masa flour domestic market. In the USA we have around 22% of the flour market. And in Central America we just started, we must have around 5 to 6%. The plant started operations late 1999, we're just getting started.
You are also supplying a Swedish company that is distributing maze-based food products in Sweden, Norway, Finland and the UK. Is the company interested, now that we witnessed the signing of the free trade agreement with the EU, to open itself even more to Europe?
Absolutely, you see, in Mexico the market grows more or less with the population. Tortilla consumption per capita is more or less stable. I mean, Mexicans are going forward, we don't think they are going to consume more tortillas. The issue here is converting the traditional method corn by corn flour. So the growth is by modernizing the industry and making sure that they consume more corn flour and less flour. So that's the situation in Mexico, the situation in the USA is completely different. In the USA what is happening is that more and more people are consuming corn in addition to wheat as a basic staple. Bread is certainly the main staple in the USA but corn is also becoming mainstream in the form of tortillas, nachos, tostadas, totopos, all these types of Mexican foods are really catching on.
Due to the expanding Hispanic population in the USA?
Yes. The Hispanic population was very good to get it started. They certainly introduced their eating habits to the US market. But right now, not only the Mexican population consumes corn, the Anglo population is beginning to consume significant amounts of tortilla and tortilla chips. And in fact, right now, that's what's driving the market in the USA, not the Hispanic population for they will consume the amount that they want to consume. So, in that sense, the US market is growing quite nicely, doubling the amount year by year. Central America is a market that is just starting. The per capita consumption of tortilla in Central America is similar to Mexico, at least in Guatemala, Honduras, Salvador and Nicaragua, but it's mostly corn. What we have to do there is to start converting corn to flour from the ground floor. It's kind of a conversion process and an education process for the market and that's what we are engaged in. In Europe it's the same situation we had in the US maybe 15, 20 years ago. Now you're having a certain taste for the Mexican products as an alternative to the traditional foods, it's not that Mexican foods are going to replace the European food habits or eating habits. But we are seeing more people eating wheat flour tortillas and corn tortillas, tortilla chips and all the Mexican food. So, that's growing, from a small base, but it's certainly growing. And yes, we have an alliance with a Swedish company that does chips and we provide them the technology and the equipment and the flour so they could introduce the product. Although it's in Sweden they sell to a significant market in the EU. We also sell flour to the UK that's probably the most developed Mexican food market in Europe today, believe it or not. And the other companies will follow, you'll see it's going to develop and the per capita consumption of corn based products in Europe will grow significantly an we believe that will be the next wave of growth within our industry. The international markets for us show a lot of dynamic growth and certainly represent a significant potential. Right now it's a small base and it doesn't yet make economic sense for us to establish a plant to produce flour in Europe but it's a few years away. It's certainly developing and it will happen eventually and we'll have an eye on it, that's for sure.
"Surfing" on the Mexican food and drinks wave, as Corona, for example.
Yes, beer and nachos, that's our calling card!
But this started just a few years ago, and as you said, there is a huge potential. Do you see any possibilities of a merger with this Swedish company?
At this point of time I don't know what shape or form our presence in the EU will have, but it's certainly a possibility among many others. I mean, from having a direct presence to having a strategic alliance or partnerships, at this time is a little early to talk about it because, as I said, only 2% of our sales go to Europe. We'll have to see. We'll have to help develop it and send the product, and so forth, and see where the market goes.
Last year, 1999, was an outstanding year for maze production here in Mexico. It was the first time production was held in a free market environment, without government subsidies. So, what has been the impact on the national maze production in Mexico?
1999 was a very significant year in our industry because, as you say, tortilla prices were liberalized and brought tremendous benefits, and there were also hiccups we had to go through. In addition to that, Conasupo disappeared. Conasupo was a government owned company that supplied subsidized corn to the corn mills, to the traditional corn processing industry here in Mexico. So, small corn mills, the ones that made traditional masa, depended on Conasupo for the supply of corn. That is no longer the case, Conasupo disappeared early 1999. There are currently no subsidies in the chain, everybody buys the corn in the local market or the imported market directly from farmers or through traders and flour has market prizes, corn has market prices and so forth. I think that the major impact that has had has been in two areas. As in the grain trading is concerned, right now the efficiency of grain trading has increased dramatically. Today, the corn cost corn millers have in Mexico is lower than in the past, first because the international markets have come down and commodity prices at least in corn have been decreasing during the last year but also because the efficiency of distribution logistics and the origination of corn really has improved a lot. So, in that sense I think that the lack of Conasupo has really generated efficiency in the industry. And on the other hand it has also created a more efficient flour industry and a more competitive market. Currently, the tortilla shops have no longer official prices they have to go by and in Mexico you could find tortilla prices ranging from $3 pesos to $5 pesos per kilo. In that sense, the industry has begun to be more competitive. There are new tortilla shops being opened so that one of the effects of liberalization is that there are new entries in the market, although in our industry they are relatively small, so it has become a more dynamic market. So the industry has created a tremendous potential for people who do thing right and are efficient and do good marketing and procure their flour or corn in the best possible way. They really now have earning margins they probably never had during the regulated years. All in all, I think the consumer has won because during the last year tortilla prices have been more or less flat, certainly trailing inflation. All those changes are never trouble free nor smooth but we did have a good year in 1999. The supply was uneven, we had some corn imports and some Conasupo inventories dumped into the market at low prices. We had some problems in the offer and the price of corn was very volatile last year and that affected our industry, it had a less than good year because volume went down versus the years of regulation. This year is coming back to a more normal scenario but 1999 was a year of a lot of adjustments, uncertainty, confusion and changes but now the system has been worked out. I always thought that regulation was very good for everybody: the farmer, the consumer and the processor but not everyone will be a World Investment News Ltdr. The ones who adapt and invest and develop will do very well in this new environment. Whoever still thinks he is still under the deregulated environment and that the government is going to fix prices or get them out of trouble will suffer a lot in the next few years.
I think efficiency is going to be the key factor that makes the difference. For example, Maseca, one of your biggest competitors (your largest competitor in Mexico as a matter of fact), share price decreased 30% while Minsa lost 18%. At the same time, your profits increased more than 120% and your assets decreased 13%. Are those figures proving that the key difference in the under the new circumstances is efficiency?
Yes. You have been in Mexico for a few months, I suppose. Certainly the stock price has something to do with the structure of the capital markets in Mexico and they issue for small capitalization companies and so forth. But, as it relates with the operation of the company itself, you are absolutely correct. For us, efficiency is the critical issue going forward because you need to compete. You see, we are in a process as a substitute versus the traditional method, which is corn. Our competitor happens to be our main raw material also, corn. So we have to compete with corn mill that use corn to process to make masa. Then, what we offer is an alternative which is masa flour, a product that is already processed and that is simpler, it's cleaner, environmentally more friendly, more economic, etc., but at the end of the day we have to compete with corn. If we are not efficient in doing so and our cost benefit versus the traditional method is not there, then our growth slows down, and then certainly that's something that affects our future. And there are opportunities to improve efficiency significantly. You look at our numbers versus last year and our fixed cost, our overhead, has been reduced almost 20% in real terms. That's mostly due to the fact that we operate in a different way. Right now we try to be more efficient in logistics, administration, in the way we go to market, in how we service our customers and we'll have to continue to do so in order to have the margins we want in this industry. In our case, our competitor is also our raw material and this presents interesting situations.
Last year the sales totaled 217 million Pesos.
No, $280 million pesos, it's about $23 million dollars.
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... What do you expect for this year?
This year will be around $33 or $34 million dollars BPA. That's due to a higher volume because last year our volume dropped around 15%. This year it will recover about 7 or 8% and the rest is efficiency in terms of reduction of raw material cost and also increasing the efficiency of our operations. Historically, they are the highest margins to date.
Is Grupo Minsa planning to expand its production capacity here in Mexico by constructing another plant?
Not in Mexico. You see, in Mexico, we have plenty of capacity, we are running around 68% capacity utilization. We are expanding actively in the USA and Central America. Currently, the international markets for us are a lot more dynamic than the domestic market, volume wise. The domestic market continues to be the bulk of our XXX generation but international markets are growing very fast, so we are currently adding a new line in the Texas plant and we are adding a new line in the Guatemala plant. In capital expenditure, we are more directed towards international markets than to the Mexican market because we have plenty of capacity to grow yet.
As you said right now, the production capacity is now around 70% in the plants in Mexico. Is this an average production capacity rate?
No, in our industry we would like to see an average of 80-90% of plant utilization. What happened was that in 1998 we added some capacity expansion in some plants and in 1999 our volume went down. So, in 1999, what happened was that new plant expansions came up stream and the volume went the other way. The combination of the two is that we now have a lot of capacity to be utilized here. In Mexico we can grow our volume 25-30% without adding any additional capacity and in the international markets, yes, we are expanding continuously.
One of the most important changes in food production is probably the introduction of transgenic food products. Does the company produce either in Mexico or abroad any transgenic products?
That's a very critical issue. Let's go step by step. First of all, in Mexico, GMO material in corn is not allowed. So all the seeds planted in Mexico are not genetically modified and our supply from Mexican grain is 75% of the total. In that sense, just because Mexico does not allow the use of genetically modified grain, that takes care of that part. In addition to that, we import some white corn mostly from the USA. There are very few varieties of genetically modified white corn, the genetic modification was more oriented towards the yellow corn, which is the bulk of the market. The chances that the white corn we import from the USA is genetically modified are minimal because it's white. In that sense, for us the issue has a very low impact in our products. In any case, we have very low levels of genetically modified corn, it would be more by contamination or by cross pollination than because we actually used genetically modified varieties. In Mexico, that's the situation. In the USA, we use some yellow corn and 40-45% of it is genetically modified. The US market has no problem with us using genetically modified corn to make flour. According to FDA regulations, the varieties of corns we use for our production do not require labeling because they are not significantly different from the traditional varieties, therefore, we sell those products and need not do any additional things. Europe is a different situation. It has a very narrow tolerance for that and asks for the flour we ship to Europe to be almost free (because it's hard to have corn free of genetic modification) of genetic modification. The EU has a tolerance of a maximum of 1% genetically modified material that we certainly test before we ship. Certainly, it's not clear, and we haven't seen any evidence that would say that genetically modified varieties of corn that are out there approved for human consumption would have any impact on health, but the consumer seems to have a concern about this and we have to be attentive to that. But in Mexico, as I said, the Mexican government does not allow genetically modified seeds yet. Apparently, there will be some testing done next year and I think that eventually, it will be approved but currently, the varieties we use are traditional.
What is the current situation regarding transgenic food products in Asia?
I have no idea, we don't ship any products to the Far East. I think that there are some countries, especially Japan, with limitations in the percentage of genetically modified products you can process.
You say you are not trading yet with Asian countries but Mexico recently signed a free trade agreement with the EU, it already has already the NAFTA and various FTA with Latin American countries, building a wide free trade agreement network. The next phase is going to be Asia. As a matter of fact, Zedillo stated, that it his intention to sign a free trade agreement with Singapore before the new administration takes power in December.
We expect the whole Pacific Rim to be a free trade zone and we'll certainly support that.
But do you see the capacity, and obviously the willingness, of Minsa to operate in the Asian region?
Asia will eventually become a market for us. I think that the first wave was the US, then Europe and eventually it will be Asia. I think that Asian markets will eventually develop a taste for corn based products. It will take a little longer, but it will happen eventually. There are also some countries, such as the Philippines and India that already have a significant corn per capita consumption, not in the form of tortillas or chips, but they do consume corn in their diet. I think these will be the first to develop the taste in Asia. For our industry, while the potential is certainly enormous, I think it will take a while. It's not an immediate opportunity for us.
As you mentioned, the company is going through a very important period of restruction and expansion at the same time. What financial strategy are you following in order to gather the necessary capital?
First, let me tell you that I think that Mexico is a country where financial strategies have to be conservative. So, basically, what we have done, and in fact last year in November we brought in a partner Higs New York State that acquired around 32% of the company's stock as a way to capitalize and develop. We are also in the Mexican stock exchange, which is not very favorable for medium and small companies. At one time we went to the Mexican stock exchange because we thought we could generate capital at the lowest possible cost. I don't think this is the case today, that's why we went to a private investor. So we have a very conservative debt structure and capital structure, balance sheet.
Now, as it related to debt, yes, we have a certain amount of debt. Half of our debt, about $50 million dollars is long term and that's what we call our structural debt an the rest is short term money due for working capital to buy corn. We try to use a conservative financial structure.
What would be your vision of Grupo Minsa in the future? Can we expect any more partnerships in the near future?
First of all, we are very focused in the tortilla market. We certainly see ourselves in that market, we like it and believe we are very strong in it, and we initially don't have any interest on diversifying in other areas. Secondly, we are certainly growth oriented. We are a company that believes it has significant potential to grow, first because the flour market is growing internationally (not in Mexico but it will) and also we are having around 20% of the market share in Mexico, in the USA around 22% and in Central America it's not even that, so we think we have a lot to grow in terms to grow. In 93, we were running 9% market share, now we are running 28½ and we have expectations to grow year by year, we have all the tools and elements. So in the combination of the growing market and the growing market share, we have significant expectation for growth in the future. Geographically, our growth in the next few years will come from Central America for we are a newcomer in the market. The US will continue to grow. And in Mexico, as corn prices normalize, we will grow at a faster rate than this year. Another important aspect is that we want to lead the industry in terms of market and operational practices that really bring efficiency to the overall operation and expels cost to the overall chain. In the past, we have done it but we still need to do more. The customer, the way that we service him, the way we operate internally and the way we originate grain will have to be a lot more efficient. I think that to the extent that we do that, our earning potential is significant. If we can grow volume, we can increase efficiency because our operating leverage is large, we are operating almost 70% of our capacity. The combination of things is positive, always with a very conservative financial strategy. We want to maintain a debt to equity ratio that is prudent, we want to maintain an interest coverage that's prudent, combine our short and long term debt procuring the financial health that makes us comfortable without putting the company at risk with growth.
What would be your assessment on the transition period Mexico is going through? Is the new administration going to bring the expected changes?
I think so. I've been in this country for about ten years and I can tell you that the country represents a significant opportunity for someone who thinks long term and behaves conservatively. I've seen companies, such as mine or many others, that over the years have been able to grow, develop and prosper because this market has a lot of potential. Mexico has a significant internal market that sometimes is more depressed than other and it's a volatile market. One has to assume this when operating in this country. But having said that, the potential for the domestic market is huge, the export potential and the possibility of really accessing foreign markets is huge, not only for trade but also for investment and expansion. If you look at the last few year, we have certainly had our ups and downs and not at a small price but I insist, if you take a long term conservative approach, this market tends to be very good for companies. Now, we are certainly more democratic and more consolidated politically. Investors will appreciate the country more in the future because now the country has demonstrated that it can have a civilized transition which helps to reduce the risks. And I certainly think that the economic policy will continue to be a very open market and productive internationally. There are some things that have to be done with the labor laws and taxes, but I'm sure they will be addressed in the future. In general, the outlook is quite positive for this country and if you look at it historically, it has been very good for companies that stick to it and contribute to it. I've been in this country for many years, we have had all types of environments but at the end of the day I've been able to grow and prosper, and not only myself: my industry, my competitor, other industries and in general, if one looks at it, it's quite positive. |
Grupo Minsa 