Integrated Annual Report 2019
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INTEGRATED ANNUAL REPORT 2019 Passion for our Customers, Vision for Development Version approved by the Annual General Shareholders Meeting Held on July 30, 2020 Table of Contents 1. Letter from the President 2. We are Ferreycorp 3. Business Area 4. Financial Management and Management Analysis and Discussion of Audited Financial Statements 5. Corporate Governance 6. Organization 7. Sustainable Management 8. Appendices . Appendix 1: General business information . Appendix 2: Share capital and shareholder structure . Appendix 3: Stock market information in the Public Register of the Stock Market . Appendix 4: Sustainability . Appendix A: Report on the Compliance of the Good Corporate Governance Code for Peruvian Companies . Appendix B: Corporate Sustainability Report 2 INTEGRATED ANNUAL REPORT 2019 Declaration of Responsibility The present document contains truthful and complete information regarding the business development of Ferreycorp S.A.A. during the year 2019. Without preconception of the responsibility held by the issuer, the signatories take responsibility for its content in accord with applicable legal mandates. Mariela García Figari de Fabbri Patricia Gastelumendi Lukis General Management Corporate Finance Management Miguel Espinosa Rivas Budget and Accounting Management Lima, July 30, 2020 3 INTEGRATED ANNUAL REPORT 2019 Previous Report to the President's Letter The most recent concluded semester has undoubtedly been the most difficult one we remember in the history of our times. The world crisis resulting from the pandemic has produced disastrous effects on the Peruvian economy, affecting, as can be expected, the company's situation. However, we can inform our shareholders that due to various circumstances and to the adoption of suitable measures taken by the management, we have tried to minimize the economic impact, reactivate the commercial activity, which was never completely interrupted, and ensure that finances, subject to a prudent management, allow us to develop the operations, during the rest of the year, without major emergencies. Although the year 2020 began with an optimistic outlook, foreseeing that we could achieve significant growth in our turnover and therefore in profits, the crisis, which became evident in mid-March, interrupted a successful commercial process in which sales and profits exceeded those of the same period in the previous year. Most of our activities were interrupted after the achievements of the first two months, and by the end of March we had a revenue level of PEN 1,179 million, which is lower than what we reported in the same period of the previous year. The return to operations, authorized in the second half of May, was executed gradually, not only because of the challenges of returning all workers to their positions, especially those assigned to mining operations, but also because our clients had to organize their operations gradually. Thus, second quarter revenues were PEN 805 million, 41% lower than the previous year. These revenue results are closely related to other demand-side indicators from the industries we serve. Mineral production in March, April and May was approximately 50% lower than the previous year, while investments were in the range of US $ 1,559 million, 24% lower than the previous year. An indicator we monitor through the connectivity of Caterpillar equipment is that the large mining transport machinery park was operative in 50%, 60% and 70%, respectively, in April, May and June. Regarding the construction fleet, these percentages were 17%, 23% and 30%, with a greater impact on this sector. Revenue reduction generated a quick reaction from management, which adopted a plan for immediate cost control, with an approximate reduction of 10%, ensuring that it would not affect the return to operations planned for May. Special emphasis was placed on the management of human resources, avoiding collective dismissals of employees, because they constitute the key factor of our success, and by reasons of business ethics, in order not to contribute to further affect the most vulnerable Peruvian families. We must mention the voluntary and staggered reduction of a percentage of their income by the staff of all the Corporation's companies, starting with the executive. 4 INTEGRATED ANNUAL REPORT 2019 In order to guarantee the fulfillment of our obligations, among them the payment to our workers, a strategy was implemented to obtain resources that reached US $ 298 million, a great part of which served as a reserve fund since they were not used, starting its return to the creditors since June. Likewise, we can highlight that the strategy considered improving the average term of the debt, having taken US $ 42 million of medium term funds for up to three years. Finally, as part of an operation which gives prestige to our financial management, on 23rd of this month, in the midst of the crisis, a private issue of seven-year bonds was arranged with Prudential, a leading international insurance company, totalling around US $ 90 million under very advantageous terms. At the end of July, approximately 70% of our operations were reestablished and the sales curve showed a favorable evolution, ranging from PEN 158 million, PEN 275 million and PEN 374 million from April to June, respectively. It is important to highlight the spirit of commitment shown by the management and our collaborators, which added to a positive vision of the future performance of the international mineral market and of several public investment projects announced by the Government, will allow us to return to operate with a strong boost and recover income levels in the second half of the year. We remain optimistic about the opportunities we will have for the rest of the year, although it is likely to be impossible to fully offset the drop in revenues during the first three months, which could mean lower than expected sales and profits. We thank the shareholders for the confidence shown in this difficult situation we are facing and we reaffirm our commitment to the company. The following letter addressed to the shareholders will be read out, giving an account of the 2019 financial year, which has been available to everyone since 26 February 2020. Some paragraphs may seem outdated or out of date, but I wish to comply faithfully with the statutory mandate to submit a full Report covering the financial year ended, despite the legal and physical impossibility of meeting in the Meeting on 30 March as planned. 5 INTEGRATED ANNUAL REPORT 2019 1. Letter from the President (GRI 102-14) In 2019, the Corporation remained faithful to its mission of operating through several subsidiaries with a high degree of specialization in capital goods and consumables distribution and service businesses, representing prestigious global brands. It did so, as it has done for many years, with a great focus on its business, with high standards of efficiency and profitability, with ambitious development policies for its employees and with a clear vision of sustainability, which largely explains why it is considered a reference of modern and responsible company. Thus, the Corporation progressed one more year towards being a useful instrument to increase its client’s productivity and, indirectly, to contribute with the development in the countries where it operates. It continued to show a solid leadership in the distribution of Caterpillar machinery and engines and at the same time, by complementing its growth, through the diversification of its portfolio based on high quality and prestigious equipment and consumables, as well as services related to them. The expansion of the corporation has led it to be present in several countries in South and Central America, including Guatemala, El Salvador and Belize, where it also represents the Caterpillar brand, as well as Chile, Colombia and Ecuador where it is leading the representation of goods of capital and equipment, which in many cases are similar to those that are commercialized in Peru. The distribution of products from Caterpillar's portfolio and the provision of services around them, including the Central American territory, continued to be the main business of the corporation with a participation of approximately 76% of total revenues. The other businesses that complement the Caterpillar distribution accounted for 24% of revenues, including those related to the Metso construction equipment, the Massey Ferguson and Valtra agricultural trucks, the Paus underground mining equipment, Kenworth and DAF trucks, Iveco dumpers, Terex and Demag cranes, Good Year tires, Chevron lubricants and personal protection equipment of 3M and MSA brands, among others. In Central America, the portfolio includes John Deere agricultural trucks and Mobil lubricants. By geographic area of performance, operations in Peru accounted for 87% of the total, with 13% outside of Peru in the aforementioned countries. ECONOMIC ENVIRONMENT AND COMMERCIAL RESULTS The Corporation's business in Peru was carried out in a low-growth economy where GDP grew only 2%, the lowest rate in recent years. The mining and construction sectors, critical for the Corporation, performed even more critically, with mining decreasing by 1.5% and construction growing by only 1.8% during the year. This situation is partly explained by a low level of total investment, in which private investment had an increase of 4.2%, while public investment decreased in 3.5%. These rates are far from the levels that allowed sustaining the growth of the Corporation in former years, as in 2013 when private and public investment grew in 7.1% and 11.1% respectively. 6 INTEGRATED ANNUAL REPORT 2019 However, in this year's modest scenario, the Corporation's commercial efforts recorded revenues of PEN 5,900 million, representing a 12.4% growth with respect to the previous year. It is worth noting that income in dollars was US $ 1.8 billion. Since no new investment projects were announced during the year, the Corporation's income was obtained through very good market coverage by the Corporation's companies in the market segments in which they participate, meeting the needs of their clients.