Chihuahua, Mexico, Jan. 28--Interceramic's consolidated sales for 2003 were $306.4 million, up 2.14% from sales of $300.0 million in 2002--a new record high for the company.
The growth in sales was largely offset by increases in certain components of the cost of goods sold, as well as by lower price levels mainly the result of the growth of imported product in the firm's sales mix.
Its gross margin for 2003 of 34.70% was 2.30 points lower than gross margin of 37.00% in 2002. There are several reasons why costs were higher than expected this year.
Primary among them was the continuing slide of the Peso, which devalued another 8% against the dollar over the course of 2003 on top of the almost 13% reduction in 2002. The firm pays for many of its raw materials in dollars, including natural gas--a significant factor in the cost of production both in its Mexican facilities and in the Garland, TX plant. Also, the tile that the firm imported during the year from Europe and South America to round out its product selection as well as to free up production capacity at its own plants for higher margin products, is all paid for in dollars. The decrease in the value of the Peso made all of these components more expensive during the year.
The firm is taking steps to lower the cost of production in more meaningful ways. During 2003, it installed a new, state of the art kiln in one of its Chihuahua, Mexico plants, and another new kiln is set to come on line during the first quarter of the year. The firm also implemented a fully automated tile selection process in its plants, reducing labor costs and improving accuracy. The firm also improved its glazing process.
Sales in Mexico grew 1.56% over sales in 2002, hitting $171.8 million. Measured in constant pesos, however, a perhaps more meaningful yardstick for revenues entirely in Mexico, sales were Ps 1,920.5 million an increase of 4.27% over sales in 2002. Another plus was the growth in unit sales of 17.54% more square meters of product in 2003 than the firm sold in 2002, indicating greater market penetration in a Mexican ceramic tile market that only about 4% overall last year.
In the international markets, primarily the U.S., sales grew to $134.6 million in 2003 from $130.9 million in 2002, a 2.88% increase. At the same time, volume of product sold decreased by 7.70%, sending a mixed message of decreased market penetration yet better overall prices.
As was the case during 2002, costs attributed to improving the firm's sales infrastructure and an extremely competitive world market led to decline in operating income. At $20.5 million, operating income in 2003 was 28.08% lower than operating income of $28.5 million in 2002.
Lower operating income suppressed earnings before interest, taxes, depreciation and amortization ("EBITDA"), which at $36.2 million for the year represented a 16.14% drop over EBITDA of $43.2 million in 2002. On the other hand lower interest rates have improved the firm's debt service coverage ratio, which at the end of the last quarter of 2003 stood at 5.7 times compared to 4.4 times at the end of last year.
On the sales side the firm took some significant steps in both Mexico and the U.S. during 2003 in order to improve its distribution and deepen its market penetration in 2004.
