A N N U A L R E P O R T

Transcription

1 2017 ANNUAL REPORT

2 ALFA is a holding company that manages a portfolio of diversified subsidiaries: Sigma, a leading multinational refrigerated food company, focused on the production, marketing and distribution of quality foods through recognized brands in Mexico, Europe, United States and Latin America. Alpek, one of the world s largest producers of polyester (PTA, PET and fibers), and the leader in the Mexican market for polypropylene, expandable polystyrene (EPS) and caprolactam. Nemak, a leading provider of innovative lightweighting solutions for the global automotive industry, specializing in the development and manufacturing of aluminum components for powertrain, structural components and for electric vehicles. Axtel, a provider of Information Technology (IT) and Communication services for the enterprise, government and mass market in Mexico. Newpek, an oil and gas exploration and production company with operations in Mexico and the United States. In 2017, ALFA reported revenues of Ps. 317,627 million (U.S. $16.8 billion), and EBITDA 1 of Ps. 38,312 million (U.S. $2.0 billion). ALFA s shares are quoted on the Mexican Stock Exchange and on Latibex, the market for Latin American shares of the Madrid Stock Exchange. 1 EBITDA = operating income + depreciation and amortization + non-recurring items. NOTE: In this annual report, monetary figures are expressed in nominal Mexican pesos (Ps.), and in nominal dollars (U.S. $) unless otherwise specified. Conversions from pesos to dollars were made using the average rate of the month in which the revenues or disbursements were made. The percentages of variation between 2017 and 2016 are expressed in nominal terms. CONTENTS 3 Financial Highlights 4 Business Groups 5 Letter to Shareholders 9 Sigma 11 Alpek 13 Nemak 15 Axtel 17 Newpek 19 Board of Directors 20 Management Team 21 Corporate Governance 22 Consolidated Financial Statements 106 Glossary Negocios 2017 ALFA annual report 2

3 FINANCIAL HIGHLIGHTS ALFA AND SUBSIDIARIES MILLIONS OF PS. U.S. $ MILLIONS (4) % chg % chg. Income Statement Net Sales 317, , ,804 15,756 7 Operating Income 11,195 24,214 (54) 557 1,313 (58) Majority Net Income (2,051) 2,325 (188) (134) 142 (194) Majority Net Income per Share (1) (Ps. & U.S. $) (0.40) 0.45 (189) (0.03) 0.02 (250) EBITDA (2) 38,312 43,254 (11) 2,018 2,322 (13) Balance Sheet Total Assets 358, , ,189 16,868 8 Total Liabilities 266, , ,506 11, Stockholders Equity 92, ,613 (8) 4,683 4,869 (4) Majority Interest 69,436 75,776 (8) 3,518 3,667 (4) Book Value per Share (3) (Ps. & U.S. $) (7) (4) (1) Based on the weighted average number of outstanding shares (5'087,743 in 2017 and 5 120,500 in 2016). (2) EBITDA = operating income + depreciation and amortization + impairments. (3) Based on the number of outstanding shares (5' 055,111 at the end of 2017 and 5 120,500 at the end of 2016). (4) Due to the dollarization of its revenues, which is higher than 75%, and because of the holding of shares by foreign investors, ALFA provides equivalent U.S. $ amounts for some of its most important financial data. 15,879 17,224 16,315 15,756 16,804 1,915 2,040 2,420 2,322 2,018 12,648 15,773 15,501 16,868 18, REVENUES U.S. $ Millions EBITDA U.S. $ Millions ASSETS U.S. $ Millions Financial Highlights 2017 ALFA annual report 3

4 BUSINESS GROUPS SIGMA Belgium, Costa Rica, Dominican Republic, Ecuador, El Salvador, France, Italy, Mexico, Netherlands, Peru, Portugal, Romania, Spain, U.S.A., ALPEK Argentina, Brazil, Canada, Chile, Mexico, U.S.A. AXTEL Mexico NEWPEK Mexico, U.S.A. Sigma Main products Cooked and cured meats: Ham, sausages, bacon. Dairy products: Cheese, yogurt, cream, butter. Other refrigerated and frozen foods. Markets: Food Revenues: U.S. $6.1 billion Plants: 70, in 14 countries Employees: 45,443 NEMAK Argentina, Austria, Brazil, Canada, China, Czech Republic, Germany, Hungary, India, Mexico, Poland, Russia, Slovakia, Spain, Turkey, U.S.A. ASSETS Sigma 31% Alpek 28% Nemak 28% Axtel 9% Newpek 4% Alpek Nemak Main products Polyester: PTA, PET, polyester fibers. Plastics and chemicals: Polypropylene, EPS, Caprolactam, chemical specialties and industrial chemicals. Main products Aluminum heads and blocks for internal combustion engines. Transmission cases. Structural components. Components for electric vehicles. Markets: Containers for beverages, food and consumer products, packaging for electronic or appliances, textiles, construction and automotive Revenues: U.S. $5.2 billion Plants: 23, in 6 countries Employees: 5,290 Markets: Automotive Revenues: U.S. $4.5 billion Plants: 38, in 16 countries Employees: 23,647 REVENUES Sigma 36% Alpek 31% Nemak 27% Axtel 5% Newpek 1% EBITDA Sigma 33% Alpek 19% Nemak 34% Axtel 14% Newpek 0% Axtel Main services Data centers. Security. Networks management. Systems integration. Cloud services. Collaborative services. VPN and Ethernet. Internet. Pay-TV. Voice service. Markets: Enterprise, Government and Mass market Revenues: U.S. $822 million Employees: 7,044 Newpek Main products Hydrocarbons. Oil and gas services. Markets: Energy, oil and gas Revenues: U.S. $107 million Employees: 64 Business Groups 2017 ALFA annual report 4

5 LETTER TO SHAREHOLDERS To our shareholders: In 2017, ALFA operated in a complex economic environment, characterized by exchange rate volatility and wide swings in commodity prices, as well as slower growth in some markets. Additionally, ALFA faced uncertainty caused by the potential negotiation of the free trade agreement in North America (NAFTA). Despite these challenges, ALFA s Food and IT & Communication businesses performed well during the year, reporting better than expected results. The auto parts business was able to capitalize on the growth in Europe and Asia, offsetting, in part, a sluggish US auto industry. By contrast, the petrochemicals business was impacted by financial problems at one of its main customer. ALFA continued to make progress as it implemented its investment program, focusing on improving operating efficiencies, increasing value-added products and services, and expanding its operating capacity. Key achievements during the year included: the opening and increased operation of the new food plant in Spain; acquisition of two refrigerated food companies, in Peru and Romania; expansion of the expandable polystyrene plant in Mexico; operation of two propylene storage spheres; startup of two auto parts plants, in Mexico and Slovakia, and the second Data Center in Querétaro. Further progress was also made on building a power cogeneration plant in Tamaulipas. Campofrio plant in Burgos, Spain. BUSINESS PERFORMANCE SIGMA Stronger performance, mainly in Mexico s market, operation of the new plant in Spain, acquisition of two refrigerated food companies and further development of its innovation strategy underpinned the better results for Sigma last year, and provided a solid base to support future growth. During the year, the company gradually expanded operations at the Burgos Campofrio plant, which aims to further meet growing demand in Spain and Europe. This plant, which started at the end of 2016, is a benchmark for the industry. Armando Garza Sada Chairman of the Board of Directors Álvaro Fernández Garza President ALFA continued to make progress as it implemented its investment program, focusing on improving operating efficiencies. 5

6 As part of its growth strategy, Sigma acquired two companies that produce luncheon meats: Caroli in Romania and Supemsa in Peru. The former provided Sigma with a foothold in Eastern Europe and the latter propelled Sigma into a leadership position in the South American country. Sigma also undertook two critical initiatives to better position the company for the future. The first targeted global processes, the goal being to identify synergies and best practices and capitalize on them in all the regions where the company operates. The second focuses on innovation processes, with the goal of expediting the development of new products that are increasingly aligned with the latest consumer trends. ALPEK For Alpek, the external environment has been challenging and was characterized by volatile prices of crude oil and byproducts, which affected prices and product margins. Then, in the second half of the year, its main customer, Mossi & Ghisolfi (M&G) encountered liquidity constraints that forced it to temporarily halt operations in Mexico and the U.S. Alpek was able to maintain sales volume and revenues to projected levels, but EBITDA was negatively impacted by the M&G shutdown, which resulted in the recording of non-recurring provisions against accounts receivable and impairment of other intangible and financial assets, as well as the temporary suspension of PTA supply for two of that company s plants. Alpek has played an important role in M&G s restructuring in order to protect its interests, both in the payment of accounts receivable and in its supply capacity rights with the plant that M&G was building in Corpus Christi, Texas. During the year, Alpek increased the capacity of its expandable polystyrene plant in Mexico and the operation of two propylene spheres. It also continued work on the second cogeneration plant, which is planned for startup in Furthermore, in February 2018, Alpek obtained the approval from the Administrative Council of Economic Defense (CADE) of Brazil to acquire 100% of PetroquímicaSuape and Citepe, in that country, expecting to close the transaction by mid As a means to finance the aforementioned transaction, Alpek began the formal process of selling two power cogeneration plants in Mexico. To this end, it selected a purchase offer from an international company dedicated to power generation, with whom is currently in advanced negotiations. Nemak further expanded its production capacity to meet the demand from recently obtained programs. EPS plant in Tamaulipas, Mexico. NEMAK The company further expanded its production capacity to meet the demand from recently obtained programs, and to add value to its products and continue supporting its main clients initiatives in the areas of fuel efficiency, lightweighting and the development of electric vehicles. This involved investment in human capital, technology and infrastructure, including greater machining capacity, the startup of a new auto parts plant in Mexico and another in Slovakia, both equipped to produce structural components and parts for electrical vehicles, and expanded capacity in Poland. It also created a new organizational structure aimed at accelerating execution of its strategy to grow in the production of structural components and parts for electrical vehicles. Letter to shareholders 2017 ALFA annual report 6

7 The new Axtel has a strong competitive position in IT and communication services, as well as innovative initiatives and infrastructure with cutting-edge technology that constitute its main support to continue growing and creating value. In addition, the participation in the Altan consortium will provide a new avenue of growth. Axtel reported satisfactory results supported by the business and government segments. NEWPEK Despite an upturn in 2017, oil and gas prices remained at levels below those of mid-2014, when due to oversupply, energy prices began to decline, affecting the global oil industry. The lower price environment, combined with the normal production decline, negatively impacted Newpek s results. Nemak s auto parts plant in Nuevo Leon, Mexico. On the operating side, the global automotive industry grew 2.5% last year thanks to the performance of European, Asian and South American markets, which offset some of the sluggishness seen in North America, despite the record year it had in This resulted in a slight decrease in Nemak s sales volume. Furthermore, although higher aluminum prices boosted revenues, the lag in transmitting these to clients, lower volumes in North America and higher expenses related to new programs, resulted in lower EBITDA. AXTEL The Information Technology (IT) and Communication services company further expanded its portfolio of services, improving its infrastructure and consolidating its platform for innovation as it continues to implement its growth strategy. Axtel reported satisfactory results for 2017, supported by the business and government segments, including a growing penetration in cloud services and others aimed at the financial sector and information security. The sale of the telecommunication towers also contributed to results. On the operating side, the merger between Alestra and Axtel reduced expenses and optimized functions and infrastructure. During the year, the company increased investment in providing last-mile access to connect clients, deploying IT infrastructure, and adding more square footage capacity at the second Querétaro Data Center. Over the course of the year, the company continued to work on improving operations and on selective exploration, drilling and well activation activities, particularly in South Texas, where it connected 20 new wells to sales, bringing the total number of operating wells to 648. Newpek will continue to analyze the price environment in its exploration and production programs. In Mexico, the company continued to operate two mature oil fields in Veracruz under service contracts signed with PEMEX, reporting an increase in production. Also during the year, Newpek entered and won two public bids for blocks of acreage in Northeast Mexico, auctioned by the National Hydrocarbons Commission, where it expects to extract gas and condensates. The company will continue to evaluate participating in other bidding opportunities for conventional and non-conventional onshore blocks as well as shallow-water fields. Second Axtel Data Center in Querétaro, Mexico. Letter to shareholders 2017 ALFA annual report 7

8 U.S. $1.1 billion invested in fixed assets and acquisitions. Drilling of well in Texas. CONSOLIDATED FINANCIAL RESULTS ALFA s revenues totaled U.S. $16.8 billion, 7% higher than in 2016, while EBITDA was U.S. $2.0 billion, a reduction of 13%. A strong performance by Sigma and Axtel was not enough to offset weaker results at Alpek and, to a lesser extent, Nemak. Majority Net Loss came to U.S. $134 million, compared to a profit of U.S. $142 million in The reduction is due primarily to non-cash extraordinary items including asset impairment and provisions relating to M&G, as previously discussed. During the year, ALFA invested U.S. $1.1 billion in fixed assets and acquisitions, as detailed in the earlier part of this document. In 2017, Sigma and Nemak completed successful bond placements for amounts of 600 million Euros and 500 million Euros, respectively, while Axtel placed bonds for U.S. $500 million and refinanced bank debt of $6.0 billion pesos, improving the rate and term conditions in all cases. The company s financial condition remained solid as evident in the the following indicators: Net Debt to EBITDA, 3.12 times and Interest Coverage, 4.6 times. As we have become accustomed, ALFA will likely face substantial challenges in Complex economic and market conditions in some countries where we operate, as well as volatile commodity prices, will continue to be present. Adding to this will be the ongoing uncertainty over the process of renegotiating the NAFTA, and Mexico s upcoming presidential election. Despite these challenges, ALFA has important fundamentals, including its financial strength, a strong market position in each of its businesses, growth potential in the industries in which they participate, modern facilities, cutting-edge technologies, innovative products and services, as well as the commitment and talent of our employees. These are the best tools ALFA has for the strengthening of its finances and the coordination of efforts to face uncertainty. Sigma will continue to capitalize on synergies among its diverse operations and promote the development of new products to meet the needs of its markets. Alpek will continue the process of selling its two power cogeneration plants and acquiring plants in Brazil, along with its ongoing negotiations with M&G, all of which are anticipated to help improve the company s operating performance. Nemak will continue to develop products to adapt to new trends in the automotive industry. Axtel will maintain its focus on IT markets for the enterprise and government segments, which are its core markets, while Newpek is on solid footing to take advantage of opportunities as they arise in the areas where it is present. On behalf of the Board of Directors, we are grateful to all of you, our shareholders, for the support and trust placed in us. We also extend our gratitude and recognition to our clients, suppliers, financial community, and particularly the team of 86,200 employees that comprise the ALFA family in 28 countries, for their valuable contribution to our results. San Pedro Garza García, Nuevo León, Mexico, February 15, Armando Garza Sada Chairman of the Board of Directors Álvaro Fernández Garza President Letter to shareholders 2017 ALFA annual report 8

9 Sigma The company completed its purchase of Supemsa, a Peruvian producer of luncheon meats, which together with Braedt make Sigma a leader in that country s refrigerated food market. It also bought the remaining 51% of Caroli, which makes luncheon meats in Romania and which was already 49% owned by Sigma, giving the company a foothold in Eastern Europe Mexico 41% Europe 36% United States 16% Latin America 7% EBITDA U.S. $ Millions REVENUE BREAKDOWN Sigma 2017 ALFA annual report 9

10 Revenues grew 6%, supported mainly by its operations in Mexico and expansion in South America and Eastern Europe. Sigma introduced an innovation strategy encompassing new products in its Health and Nutrition, Sustainability, Indulgence, Convenience, Accessibility and Heritage platforms. The plant in Burgos, Spain continued to increase its production, becoming more efficient and taking advantage of state-ofthe-art facilities and processes, making it an industry benchmark. The plant produces cooked and cured meats, primarily for the Spanish and European markets. In 2017, Sigma s performance got a boost mainly from the strength of Mexico s markets. Its revenues totaled U.S. $6.1 billion, 6% more than in 2016, while EBITDA was U.S. $676 million, 2% higher than in Innovation remains a very important factor in Sigma s growth. In 2017, it created a process for accelerating new product development. It also introduced a strategy encompassing new products in its Health and Nutrition, Sustainability, Indulgence, Convenience, Accessibility and Heritage platforms. This initiative will keep the company in tune with consumer trends and guide its continuing investment in brands and products in the countries where it operates. For example, under the health and Nutrition platform, which includes healthier product options, Sigma introduced the Libre and Vegalia lines in Europe, both from Campofrio, the latter of vegetarian products, while in Mexico it launched a line called Cuída-t + from FUD. In the yogurt segment it continued to create value to the category, introducing Greek yogurt with no sugar added. In other platforms it introduced Navidul brand cheese and new lines of sausages under Campofrio and Nobre brands in Europe. In Mexico it launched the Deli cheese line for the Nochebuena brand, with products like extra-aged cheeses with fruit and the Disfruta Beber line of yogurt. It also launched lines of chicken ham, grated cheese and ham-and-cheese rolls, all under the FUD brand. In the US, meanwhile, it introduced Grill Mates beef franks, and in Latin America, San Rafael brand chorizo for grilling. In line with its commitment to the environment, Sigma began receiving electrical energy from the Tres Mesas wind farm in Tamaulipas at 76 sites in Mexico, avoiding the emission of 43,000 metric tons of CO 2 a year, equivalent to what 9,000 cars would have produced in the same period. Early in the year, Sigma issued a 600-million Euro bond at seven years and a rate of 2.625%, the lowest in ALFA s history. This will strengthen its financial position, reducing costs and extending the average maturity of its debt. In 2018, Sigma plans to continue capitalizing on the benefits of the Burgos plant. In pursuit of its innovation strategy, it will develop products that meet the needs of an ever-widening number of consumers, while working to optimize synergies, introduce best practices to the regions where it operates, consolidate recent acquisitions, and explore opportunities for acquisitions that generate value. Sigma 2017 ALFA annual report 10

11 Alpek Polyester products 71% Plastics & Chemicals 29% In the petrochemical industry, prices of crude oil and byproducts remained highly volatile last year, causing temporary disruptions in demand and margins. EBITDA U.S. $ Millions REVENUE BREAKDOWN Alpek 2017 ALFA annual report 11

12 A 75,000-metric-ton-a-year capacity expansion at the EPS plant in Mexico, made it the fifth largest in the world. Alpek s performance remained in line with expectations. In the second half of the year, however, Mossi & Ghisolfi (M&G), its main customer, encountered financial difficulties that forced it to temporarily shut down its operations in Mexico and in the U.S., and begin a restructuring process. This resulted in the entry of non-recurring items and provisions that impacted Alpek s financial results. Alpek played an important role in that process, with actions aimed at supporting the resumption of PTA supply to M&G; maximizing the recovery of accounts receivable from the M&G s plants in Mexico and Brazil, and reaffirming Alpek s capacity rights in the plant M&G was building in Corpus Christi. After two months, the supply of PTA was restored to M&G Mexico, under a PET tolling contract, as well as an agreement to provide financing to M&G Mexico during its restructuring process. PTA supply to M&G Brazil was also resumed through an agreement of cash payments. From the operating standpoint, Alpek s sales volume remained close to estimates, growing by 2%, while revenues increased 8%, supported by higher prices on certain commodities, mainly paraxylene and propylene. The M&G effect resulted in a decline of 43% in EBITDA for the polyester segment. In contrast, EBITDA from Plastics and Chemicals declined less than expected, due primarily to higher margins in polypropylene, EPS and caprolactam. During 2017, Alpek invested U.S. $238 million in strategic projects, including capacity expansions and initiatives involving vertical integration and operating efficiency. At Altamira, Tamaulipas, a 75,000-metricton-a-year capacity expansion was completed at the EPS plant, making it the fifth largest in the world. Two propylene storage spheres were also commissioned, with a combined capacity of 5,000 metric tons, strengthening the propylene supply chain. Alpek continued building the second electricity and steam cogeneration plant, which was 80% complete at the close of the year. Startup of this facility is programmed for Some progress was made in PET antidumping petitions in the US, with investigations begun against imports from Asia and South America, while Canada set preliminary import duties of up to 77% against some Asian countries. The process of selling two power cogeneration plants is well under way, entering in exclusive negotiations with a firm specializing in power generation. Meanwhile, in February 2018, Alpek obtained the approval from the Administrative Council of Economic Defense (CADE) of Brazil to acquire 100% of Petroquímica- Suape and Citepe, owned by Petrobras, in the amount of U.S. $385 million. The closure of the transaction still depends on the fullfilment of certain conditions. The outlook for both of Alpek s business segments in 2018 is positive. Margins in the polyester business are expected to recover, helped by a better balance of supply and demand in Asia, and more favorable conditions in North America, where rulings in the anti-dumping cases are expected to be favorable. In Plastics and Chemicals, the company estimates stable margins on all the main products. Finally, the sale of the cogeneration plants should help Alpek to bolster its financial position and capitalize on opportunities to improve performance. 5,000 metric tons of combined capacity of the two spheres of propylene storage. Propylene storage spheres, Altamira, Mexico. Alpek 2017 ALFA annual report 12

13 Nemak In 2017, the global automotive industry grew by 2.5% over 2016, fueled by the performance of markets in Europe, Asia and South America. Sales in North America were slightly lower, falling back from record levels in North America 55% Europe 35% Rest of the world 10% EBITDA U.S. $ Millions REVENUE BREAKDOWN Nemak 2017 ALFA annual report 13

14 Nemak launched seven new SC and EV programs, generating revenues of U.S. $100 million. Nemak made further headway in its strategy of growth by investing in human capital, technology and infrastructure. Nemak s sales volume was 49.9 million equivalent units, 0.4% lower than in 2016, influenced by the performance in North America, where volume dropped 5.6%, in contrast to Europe and the Rest of the World, where volume grew by 5.9% and 13%, respectively. The rising price of aluminum, Nemak s main raw material, affected its revenues and EBITDA. While the former grew by 5.3% to U.S. $4.5 billion, the latter shrank by 10.4% to U.S. $715 million, due to the normal lag in the transfer of new metal prices to customers. Expenses associated with new product launches also affected EBITDA. Leading automakers continued to place a priority on lightening their vehicles. Nemak believes this trend represents a very strong source of future demand for lightweight aluminum structural components (SC), which have become key in carmakers pursuit of reducing overall vehicle weight and improving the efficiency of propulsion systems. The ongoing advancement in the electrification of vehicles also opens new opportunities to increase the content of Nemak products. For electric vehicles (EV), Nemak supplies components for hybrid transmissions as well as cases for batteries and electric motors, among others. The advantages provided by aluminum from its low weight and good mechanical properties, reaffirm its position as the preferred material to produce these components. During the year, Nemak launched seven new SC and EV programs, generating revenues of U.S. $100 million. Moreover, it won new contracts for producing engine heads and blocks, transmission cases and SC and for EV totaling U.S. $830 million in annual revenues. Nemak strengthened its growth strategy by investing in human capital, technology and infrastructure, to offer more products that improve vehicle efficiency and help carmakers meet their goals on emissions and fuel economy. In 2017, the company started up two new plants (Mexico and Slovakia), equipped with high-pressure die casting technology and created a new organization dedicated to CE and EV business. To date it has established collaboration agreements with more than 30 customers to develop lightweighting solutions targeting this new segment. Furthermore, to continue adding value to its products, Nemak expanded its machining capacity, now providing this process to 56% of its production, advancing towards its goal of machining 70% by Nemak remains at the cutting edge of innovation. During the year it won the prestigious R&D 100 Award for developing a new lightweight high-temperature aluminum alloy in conjunction with its client FCA and the Oak Ridge National Laboratory in the U.S. It was also selected as a finalist for the 2018 Automotive News Pace Awards for its development of Rotacast for engine blocks, a proprietary aluminum casting process. On financial matters, Nemak successfully placed a 500 million Euro bond at seven years, with an annual coupon of 3.25%. The proceeds were used to refinance shorter-term obligations, improving its debt maturity profile. In 2018, Nemak will again face challenges in some of its markets. In response, the company will continue leaning on efficiency initiatives underway, in strengthening its power train business and attracting new opportunities in SC and EV business. Nemak 2017 ALFA annual report 14

15 Axtel Enterprise 64% Goverment 17% Mass market 19% Axtel has earned a position as the technological partner of choice for Mexican companies, through Information Technology (IT) and Communication services to support its customers in having more efficient operations and using technology as a key factor in the development and transformation of their businesses. REVENUE BREAKDOWN EBITDA U.S. $ Millions Axtel 2017 ALFA annual report 15

16 Axtel is a pioneer in IT services in Mexico. It has the most innovative Data Centers in Latin America. Querétaro Data Center 600 m 2 new space at Axtel s second Querétaro Data Center. Axtel is a pioneer in IT services in Mexico. It has the most innovative Data Centers in Latin America and a portfolio of services that are in step with global technology trends. In the mass consumer market, Axtel remains a leader, offering the best highspeed Internet experience. In 2017, it increased the penetration of cloud based services with a double digit growth in this segment, and it also broadened its coverage of financial sector and data security services. During the year it extended and upgraded its infrastructure, technological and service platform, including the opening a 600 m 2 area at its second Queretaro Data Center. The company signed agreements with two of the world s largest public cloud operators, seeking to become Mexico s first MultiCloud Service Provider, by offering integrated solutions using the cloud hosted on Axtel Data Centers, through dedicated telecommunications links between these and the two public clouds. It also continued to expand its portfolio of cloud services, with Cisco as its technology partner, earning the prestigious Cloud and Managed Services Partner of the Year distinction. As a member of the Altán consortium, which won the public tender for Mexico s Red Compartida project, Axtel signed contracts to supply metropolitan ring connectivity, fiber capacity and colocation services, as well as services based on data centers for the consortium. It advanced in its plan for interconnection requirements, which are key for designing and implementation of its mobility strategy. For Axtel, innovation is at the heart of the design and development of solutions that generate value for its customers, and over the course of the year it released new services to satisfy companies digital transformation needs. Also during the year, it launched the second generation of NAVE, its business accelerator, receiving 150 applications from which it pre-selected 10 enterprising projects in Big Data, Internet of Things, Social Networks, Security, Mobility and Artificial Intelligence technologies, concluding with three selected companies to collaborate with Axtel. In 2017, revenues and EBITDA totaled U.S. $822 million and U.S. $290 million, respectively, which were 12% and 29% higher than in In peso terms, the growth rates were 13% and 30%, respectively. Axtel s 2017 results reflect its commitment to continuously strengthen its capital structure and creating value through innovation and client focus, through an extensive portfolio of Information Technologies and Communication services. To improve its financial structure, Axtel signed a contract to sell 142 telecommunications towers to MATC, a subsidiary of American Tower Corporation, for U.S. $56 million. It also successfully placed a U.S. $500 million bond, using the proceeds to refinance existing debt and extend its average maturity. The placement was a sign of investor confidence in the company s performance and the benefits of the Axtel-Alestra merger. Axtel 2017 ALFA annual report 16

17 Newpek Although the prices of hycrocarbons recovered in 2017, the decline in oil and gas prices that began in mid-2014 continued affecting operating and financial performance in Newpek during Oil & Condensates 67% Dry Gas 33% REVENUE BREAKDOWN EBITDA U.S. $ Millions Newpek 2017 ALFA annual report 17

18 Newpek will continue analyzing the environment price in its exploration and development programs. 648 production wells in the U.S. To contend with this situation, the company focused on lowering operating costs and concentrating its investment in exploration, drilling and finishing wells. Accordingly, in the US, production was concentrated at the Eagle Ford Shale play in Southern Texas, where 11 wells were drilled and 20 were completed and connected to sales, raising the total amount of producing wells to 648. Sales volume was 4,900 barrels of oil equivalent per day (BOEPD), a reduction of 32% due to the normal decline of operating wells. Production of liquids and oil accounted for 67% of total volume, compared to 64% reported in Newpek will continue monitoring the price environment in its exploration and development programs. In Mexico, the company continued operating the mature oil fields at San Andrés and Tierra Blanca in Veracruz, both under service contracts signed with PEMEX in Production at these fields increased slightly in At the close of the year these fields had 137 wells in operation. Average production was 3,600 (BOEPD), an increase of 3% compared to In 2017, Newpek reported total revenues of U.S. $107 million and EBITDA of U.S. $2.9 million, declines of 1% and 70%, respectively. During the year, the company participated in public tenders organized by the Mexican National Hydrocarbons Commission. Newpek submitted the winning bid on two blocks of land located on the Burgos Basin in Northern Mexico, where it expects to extract natural gas and condensates. Newpek s technical team has extensive experience in exploration and production of shale hydrocarbons as well as in conventional mature fields and shallow waters. It also has world-class capacity for geological and geophysical analysis to continue exploring and capitalizing on growth opportunities in the future. Newpek 2017 ALFA annual report 18

19 BOARD OF DIRECTORS José Calderón Rojas (2A) Chairman of the Board and Chief Executive Officer of Franca Industrias, S.A. de C.V. and Franca Servicios, S.A. de C.V. Board member since April, Member of the Boards of FEMSA, BBVA Bancomer (Regional Board), ITESM and UDEM. President of Asociación Amigos del Museo del Obispado, member of Fundación UANL and founder of Centro Integral Down. Enrique Castillo Sánchez Mejorada (1A) Managing Partner of Ventura Capital Privado, S.A. de C.V. Board member since March, Chairman of the Board of Maxcom Telecomunicaciones and of Banco Nacional de México. Board member of Southern Copper Corporation, Grupo Herdez and Médica Sur. Senior Advisor of General Atlantic. Alternate Board member of Grupo Gigante. Francisco Javier Fernández Carbajal (1C) President of Servicios Administrativos Contry, S.A. de C.V. Board member since March, President of ALFA s Planning and Finance Committee. Member of the Boards of VISA Inc., FEMSA and CEMEX. Álvaro Fernández Garza (3C) President of ALFA, S.A.B. de C.V. Board member since April, Chairman of the Board of Universidad de Monterrey. Member of the Boards of Grupo Citibanamex, Cydsa, Grupo Aeroportuario del Pacífico, Vitro and Museo de Arte Contemporáneo de Monterrey. Armando Garza Sada (3C) Chairman of the Board of ALFA, S.A.B. de C.V. Board member since April, Chairman of the Boards of Alpek and Nemak. Member of the Boards of Axtel, CEMEX, FEMSA, Grupo Lamosa, Liverpool, Proeza and ITESM. Claudio X. González Laporte (1B) Chairman of the Board of Kimberly-Clark de México, S.A.B. de C.V. Board member since December, Member of the Boards of Fondo México, Grupo México and Bolsa Mexicana de Valores. Advisor to Capital Group. Ricardo Guajardo Touché (1B) Board member since March, Member of the Boards of Liverpool, Grupo Aeroportuario del Sureste, Grupo Bimbo, FEMSA, Coca-Cola FEMSA, Grupo Coppel, Vitro and ITESM. David Martínez Guzmán (1C) Chairman of the Board and Special Advisor of Fintech Advisory Inc. Board member since March, Member of the Boards of CEMEX, Vitro and Banco Sabadell. Adrián Sada González (1B) Chairman of the Board of Vitro, S.A.B. de C.V. Board member since April, President of ALFA s Corporate Practices Committee. Member of the Board of Cydsa. Member of Consejo Mexicano de Negocios. Federico Toussaint Elosúa (1A) Chairman of the Board and Chief Executive Officer of Grupo Lamosa, S.A.B. de C.V. Board member since April, President of ALFA s Audit Committee. Member of the Boards of Xignux, Grupo Iconn, Banco de México (Regional Board), UDEM and Centro Roberto Garza Sada of the UDEM. Member of Consejo Mexicano de Negocios. Guillermo F. Vogel Hinojosa (1C) Chairman of the Board of Grupo Collado, S.A.B. de C.V., and of Exportaciones IM Promoción, S.A. de C.V. Board member since April, Member of the Boards of Tenaris, SanLuis Corporación, Corporación Mexicana de Inversiones de Capital, Innovare, Novopharm and Universidad Panamericana-IPADE. Member of the Trilateral Commission and of the International Council of the Manhattan School of Music. Carlos Jiménez Barrera Secretary of the Board Keys: 1 Independent Board Member 2 Independent Proprietary Board Member 3 Related Proprietary Board Member A Audit Committee B Corporate Practices Committee C Planning and Finance Committee Board of Directors 2017 ALFA annual report 19

20 MANAGEMENT TEAM Armando Garza Sada Chairman of the Board Joined ALFA in Undergraduate degree from MIT. Master s degree from Stanford University. Álvaro Fernández Garza President Joined ALFA in Undergraduate degree from Notre Dame University. Master s degrees from ITESM and Georgetown University. Mario H. Páez González President of Sigma Joined ALFA in Undergraduate degree from ITESM. Master s degrees from ITESM and Tulane University. José de Jesús Valdez Simancas President of Alpek Joined ALFA in Undergraduate degree from ITESM. Master s degrees from ITESM and Stanford University. Armando Tamez Martínez President of Nemak Joined ALFA in Undergraduate degree from ITESM. Master s degree from George Washington University. Rolando Zubirán Shetler President of Axtel Joined ALFA in Undergraduate degree from UNAM. Master s degree from USC. Ph.D. from UANL. Alejandro M. Elizondo Barragán Senior Vice President, Development Joined ALFA in Undergraduate degree from ITESM. Master s degree from Harvard University. Carlos Jiménez Barrera Senior Vice President, Legal, Audit and Corporate Affairs Joined ALFA in Undergraduate degree from UDEM. Master s degree from New York University. Ramón A. Leal Chapa Chief Financial Officer Joined ALFA in Undergraduate degree from UDEM. Master s degrees from ITESM and Harvard University. Paulino J. Rodríguez Mendívil Senior Vice President, Human Capital and Services Joined ALFA in Undergraduate degree and Master s degree from the University of the Basque Country, Spain. Management Team 2017 ALFA annual report 20

21 CORPORATE GOVERNANCE ALFA adheres to Mexico s current Code of Best Corporate Practices in place in Mexico since This Code was developed at the initiative of the securities authorities of Mexico and its purpose is to establish corporate governance principles to increase investor confidence in Mexican companies. Companies whose stocks trade on the Mexican Stock Exchange must disclose the extent to which they adhere to the Code of Best Corporate Practices. This is done annually by responding to a questionnaire, which is available to the public through the Mexican Stock Exchange s web site. The following is a summary of ALFA s corporate governance as stated in the June, 2016 questionnaire, with any pertinent information updated: A. The Board of Directors comprises eleven proprietary members who have no alternates. Of this number, eight are Independent and one is Independent Proprietary Board Member. This annual report provides information on all of the Board s members, identifying those who are independent and the Committees in which they participate. B. Three Committees assist the Board of Directors in carrying out its duties: Audit, Corporate Practices, and Planning and Finance. Board members participate in at least one committee each. All three committees are headed by an independent board member. The Audit and Corporate Practices Committees are formed by independent members only. C. The Board of Directors meets six times by year. Meetings of the Board can be called by the Chairman of the Board, the President of the Audit Committee, the President of the Corporate Practices Committee, the Secretary of the Board or by at least 25% of its members. At least one of these meetings is dedicated to defining the company s medium and long term strategy. D. Members must inform the Chairman of any conflicts of interest that may arise, and abstain from participating in the corresponding deliberations. Average attendance at Board meetings was 93% during E. The Audit Committee studies and issues recommendations to the Board on matters such as the selection and determination of fees to the independent auditor, coordinating with the internal audit area of the company, and studying accounting policies, among others. F. The company has internal control systems with general guidelines. These are submitted to the Audit Committee for its opinion. In addition, the independent auditor validates the effectiveness of the internal control system and issues the corresponding reports. G. The Planning and Finance Committee evaluates all matters relating to its particular area and issues recommendations to the Board on matters such as feasibility of investments, strategic positioning of the company, alignment of investment and financing policies, and review of investment projects. H. The Corporate Practices Committee is responsible for issuing recommendations to the Board on such matters as employment conditions and severance payments for senior executives, and compensation policies, among others. I. There is a department dedicated to maintaining an open line of communication between the company and its shareholders and investors. This ensures that investors have the financial and general information they require in order to evaluate the company s development and progress. Corporate Governance 2017 ALFA annual report 21

22 CONSOLIDATED FINANCIAL STATEMENTS Management s Discussion & Analysis 23 Report of Independent Auditors 37 Consolidated Financial Statements: Consolidated Statements of Financial Position 42 Consolidated Statements of Income 43 Consolidated Statements of Comprehensive Income 44 Consolidated Statements of Changes in Stockholders Equity 45 Consolidated Statements of Cash Flows 46 Notes to Consolidated Financial Statements 47 Consolidated Financial Statements 2017 ALFA annual report 22

23 MANAGEMENT S DISCUSSION & ANALYSIS 2017 The following report should be considered jointly with the Stockholders Letter (pages 5 8) and the Audited Consolidated Financial Statements (pages ). Unless otherwise indicated, figures are expressed in millions of Mexican pesos for information corresponding to the period between 2015 and Percentage variations are shown in nominal terms. Additionally, some figures are expressed in millions of US dollars (US$) and millions of euros ( ). The financial information included in this Management Discussion and Analysis corresponds to the previous three-year period (2015, 2016 and 2017), and is presented in compliance with International Financial Reporting Standards (IFRS). This information has also been expanded in some chapters to include three years in compliance with the General Provisions applicable to Security Issuing Companies and other Participants of the Securities Market, as issued by the National Banking and Securities Commission (CNBV for its Spanish initials) through December 31, San Pedro Garza García, N. L., January 31, ECONOMIC ENVIRONMENT In 2017, the world economy growth continued to expand. The volatility of financial markets persisted due to the uncertainty of the economic policy in leading countries, geopolitical risks, and the standardization of the monetary policy by central banks such as the US Federal Reserve (Fed). On the other hand, the Mexican peso slightly appreciated with respect to the US dollar, despite the adverse environment of the Mexican economy. Lastly, the international price of oil continued to increase after OPEP upheld the agreement to reduce production. Changes in the GDP and other variables in Mexico that are critical to better understand ALFA s results, are described in the following paragraphs: Mexico s GDP had similar performance 2.3% in 2016 and 2.3% (estimated) in Consumer inflation was 6.8% (b) in 2017, higher than the 3.4% (b) recorded in The Mexican peso experienced annual nominal appreciation of 4.6% (c) in 2016, as compared to depreciation of 19.5% (c) in In real terms, the annual average overvaluation of the Mexican peso with respect to the US dollar went from 6.3% (d) in 2016 to 3.1 (d) in With respect to the interest rates in Mexico, the average TIIE for the year was 7.5 (b) in 2017 in nominal terms, as compared to 4.5% in In real terms, there was a cumulative annual increase of 0.5% in 2016 to 7.3% in This increase is maintained in line with the decisions of the Fed. The nominal 3-month LIBOR rate in US dollars (annual average) was 1.3% (b) in 2017, above the 0.7% (b) observed in If the nominal depreciation of the Mexican peso is incorporated vis-a-vis the US dollar, the LIBOR rate in constant pesos went from 16.5% (a) in 2016 to 1.3% (a) in Sources: (a) National Statistics, Geography and Information Institute (INEGI). (b) Bank of Mexico (Banxico). (c) Banxico. Exchange rate to settle liabilities in foreign currency payable in Mexico. (d) Own calculations with information from INEGI, bilateral with the United States, considering consumer prices. MD&A 2017 ALFA annual report 23

24 ALFA continues expanding worldwide, successfully facing macroeconomic challenges In 2017, ALFA operated with strength in its various businesses around the world. The Company has been exposed to macroeconomic challenges, to the uncertainty generated by the renegotiations of NAFTA in North America, as well as a decrease in the growth of certain markets. An environment characterized by volatility in the peso-dollar exchange rate continued to be experienced, with an increase in international oil prices. Despite these situations, there were significant achievements in our businesses and ALFA continued demonstrating it is a financially sound, healthy and well positioned Company to capture growth opportunities, while also being able to face potential challenges. RESULTS REVENUES The following chart provides information of ALFA s revenues in 2017, 2016, and 2015, breaking down its volume and price components (indexes are calculated using the 2012=100 basis): Concept Var (%) Var (%) Consolidated revenues 317, , , Volume index Price index in Mexican pesos Price index in US dollars (1) (13) Additionally, consolidated revenues are broken down per ALFA s principal subsidiaries: Concept Var Var Alpek 98,998 90,192 83,590 8,806 6,602 Sigma 114, ,341 93,568 7,881 12,773 Nemak 84,779 79,244 70,891 5,535 8,353 Axtel 15,513 13,744 6,163 1,769 7,581 Newpek 2,036 1,991 2, (189) Other 2,079 2,270 1,908 (191) 362 Consolidated total 317, , ,300 23,845 35,482 Note: In this document, Axtel 2016 figures include results of Alestra for 12 months and of Axtel for 10.5 months figures only include Alestra. REVENUE INDEXES (2012=100) PRICES Pesos Dollars VOLUMES Pesos

25 Revenue trends are explained below: : Consolidated revenues in 2017 totaled $317,627 (US$16,804), 8% above the amounts recognized in 2016 (increase of 7% in US dollars). Following is an explanation of the performance during the year of each primary ALFA subsidiary: Alpek reported revenue volume according to its plan. Revenues totaled US$5,231, 8% higher than in 2016 as a result of an increase in prices of raw materials, mainly paraxylene and propylene. In 2017, the petrochemical industry continued to face high volatility in prices of crude oil and its derivatives, causing temporary distortions in demand. In the case of polyester, in the second half of the year, a recovery was observed for a better balance of supply/demand in Asia and more favorable conditions in North America due to the expectation of favorable resolutions in anti-dumping cases. On the other hand, the Plastics and Chemical industries benefited from better profit margins in the polypropylene business. Sigma s revenues totaled US$6,054, which is 6% higher than the result for the preceding period, mainly due to a better performance in Mexico and Europe. The sales volume was 1,727 million tons of food, 3% above in relation to the previous period. In 2017, the Company continued to innovate as a growth factor, establishing a process to speed up the development of new products and drive platforms that allowed the Company to get even closer to the consumer trends. Additionally, it acquired two cold meat companies, in Peru (Supemsa) and Romania (Caroli) (acquisition of remaining 51%), and also initiated the start-up of its plant in Burgos, Spain, improving its efficiency, which has state-of-the-art processes and facilities making it a benchmark in the industry. In 2017, the automotive industry had a contrasting performance, showing a contraction in North America and growth in Europe and other regions. Nemak continued aligned with the auto assembly plants plans with structural component trends, whose benefit brings lightening in the weight of vehicles. On the other hand, development in the electrification of vehicles opens up new opportunities in Nemak, seeking to grow in the supply of structural components and for electric vehicles, such as hybrid, battery casings and electric motors. Nemak s revenues totaled 49.9 million of equivalent units in 2017, 0.4% below Revenue for the period was $84,779, a 7% increase in relation to Revenue measured in US dollars showed a 5% improvement resulting from an increase in the price of aluminum, its main raw matrial, which directly affected the sales price. Axtel reached revenues of US$822 in 2017, 12% higher in dollars and 13% in Mexican pesos with respect to This increase is driven mainly by the business and government segments, and includes greater penetration in cloud services in the financial services industry and IT security requirements. To accomplish this growth, it made investments in infrastructure and the opening of the first section of the second Data Center in Queretaro, with 600 meters of white floor. Axtel also strengthened agreements with two of Mexico s largest public clouds, seeking to become the first MultiCloud Service Provider in Mexico, where comprehensive solutions are offered using the cloud hosted in its Data Center. It also continued to expand its service portfolio with Cisco as a technology partner. Lastly, at Newpek, notwithstanding a slight increase in the prices of hydrocarbons, operating and financial performance in 2017 was affected by lower prices of oil and gas from mid In response, the Company continued focusing its activities on reducing operating costs in its assets without jeopardizing the operation thereof, and on its investment in exploration, drilling, and completion of wells. In the US, drilling in Eagle Ford Shaire (EFS) was resumed with 20 new wells, increasing the total of producing wells to 648. In Mexico, it continued operating mature oil wells in San Andrés and Tierra Blanca, located in Veracruz, reaching 137 wells with an average production of 3.6 thousand equivalent oil barrels per day (MBPED). The sales volume was 4.8 thousand of equivalent oil barrels per day (MBPED), which represents a decrease of 34%. In 2017, Newpek revenues reached US$107, a figure very similar to that of the preceding year. 25

26 : Consolidated revenues in 2016 amounted to $293,782 (US$15,756), 14% higher than in 2015 (a reduction of 3% in US dollars). Below is an explanation of the performance of each principal subsidiary of the ALFA group: Alpek revenues were similar in volumen to those of the preceding year. Revenues totaled US$4,838, 8% lower than in 2015 as a result of lower average prices caused by a drop in prices of raw materials. The polyester business experienced a year of contrasts: It generated savings resulting from the operation of the energy cogeneration plant starting in late 2015, although it was affected by the prices of low oil and raw materials, as well as shut-downs of PET plants in the Eastern USA due to damages caused by hurricane Matthew. On the other hand, the Plastics and Chemical industries benefited from better profit margins from polypropylene and the acquisition of plants in South America in Sigma revenues totaled US$5,698, this figure is 3% lower than that of the preceding year, mainly due to the depreciation of the Mexican peso that occurred in the year. The volume of sales reached a total of 1,679 million tons of food, 1% higher than in the preceding year. In 2016, the Company continued implementing a strategy to strengthen its brands. In Mexico, it introduced to the market a selection of Campofrío products and continued enhancing the yogurt category; in the U.S., it advertised its Bar-S and Fud brands and integrated the operations that Campofrío had in that country. In Latin America, it continued incorporating best practices in the marketing and business area. In Europe, it launched the new cold meat plant in Burgos, Spain, with capacity to process 100,000 tons per year. In 2016, the environment was favorable for the automotive industry in North America and Europe. In U.S., consumer trust, low gasoline prices and low credit rates offered made it possible for car sales to reach a record of 17.6 million units, slightly higher than in In Europe, the demand in Germany, France and Spain made up for market weakness in Eastern countries. Nevertheless, the performance of Nemak main markets, the discontinuation in the the production of a compact model for a major customer affected Nemak s sales volume, which totaled 50.1 million equivalent units, 1% less than in Revenues for the year totaled $79,244, an increase of 12% compared to 2015, reflecting the effect of the depreciation of the Mexican peso. Measured in US dollars, revenues showed a reduction of 5% as a result of the contraction of aluminum price, its main raw material, which affected the selling price. The merger of Alestra and Axtel in February 2016, resulted in the creation of a new company with a more competitive position in the IT and telecommunications service market in Mexico, resulting in revenues of US$736, which is 89% greater in US dollars and 123% in Mexican pesos with respect to This increase is mainly due to the merger, but it was also caused by a more solid infrastructure, including a optical fiber network of 40,400 km and the expansion of the Data Center in Querétaro, which covers a surface of 1,800 m 2. However, federal expense cuts in 2016 affected the Company s income from the government sector. Lastly, during the 2016 Newpek continued operating in an environment of low oil and gas prices from mid In the USA, the production focused on the formation of EFS and Wilcox, connecting 18 wells to sales, which increased the total number of wells in production to 628. Sales volume was 7.2 million barrels of equivalent oil per day (MBPED), a reduction of 29% due to the normal decline of wells in operation. In 2016, Newpek revenues totaled US$107, 23% lower than in

27 OPERATING INCOME ALFA s operating income in 2017, 2016, and 2015 is explained below: : Operating income Variation by Group Var. Alpek Sigma Nemak Axtel Newpek Other Revenues 317, ,782 23,845 8,806 7,881 5,535 1, (191) Operating income 11,195 24,214 (13,019) (12,717) 72 (1,669) 921 1,246 (872) Consolidated operating margin (%) Alpek (%) (2.9) 10.9 Sigma (%) Nemak (%) Axtel (%) Newpek (%) (34.3) (97.7) The decrease of 54% in consolidated operating income in 2017 compared to 2016 is explained by the individual performance of ALFA s principal subsidiaries, as detailed below: In Alpek, although higher margins in polyester supported the good performance of the business, especially in the second half of the year, operating income was affected by the adverse financial situation impacting Mossi & Ghisolfi (M&G), its main customer, which resulted in the recognition of non-recurring impairments of receivables, intangible and financial assets, as well as the temporary suspension of PTA supply to two of the Company s plants. Regarding plastics and chemicals, the decrease in operating income in the chemical and plastics segment was lower than expected due to improved margins in polypropylene, polystyrene and caprolactam. In the case of Sigma, the operating income had a slight improvement of 1% in comparison with the preceding year, mainly because in 2017, the Company had better performance in Europe and Mexico. Another factor that contributed to the growth was the acquisition of two companies engaged in the production of cold meats: Caroli in Romania (acquisition of remaining 51%) and Supemsa in Peru, allowing it to venture into to Eastern Europe and assume a position of market leadership in the South American country. Nemak had a decrease in its operating income of 19% measured in Mexican pesos in the year. This was mainly due to reductions in North America, which was only partially offset by the automotive market in Europe and China, as well as to the time-lag required to pass increases in aluminum prices to customers and incremental costs of launching new programs. Expressed in US dollars, the decrease is 21%. In 2017, Axtel had a favorable development. Operationally, the merger of Axtel and Alestra allowed for cost cutting iniciatives and synergies of infrastructure and functions. It was also benefited by better performance in the business and government segment. The sale of its telecommunication towers also benefited the results of the year. All these factors contributed to an operating income increase of 190% in Mexican pesos and 174% in US dollars. In Newpek, the operating income continued to be influenced by a challenging environment of international oil prices, and by the reduced production of hydrocarbons as a result of the natural decrease in wells in operation. It was also impacted by a impairments in its unproven reserves. 27

28 : Operating income Variation per Group Var. Alpek Sigma Nemak Axtel Newpek Other Revenues 293, ,300 35,482 6,602 12,773 8,353 7,581 (189) 362 Operating income 24,214 24, ,273 (2,385) 1,286 (1,130) 223 (111) Consolidated operating margin (%) Alpek (%) Sigma (%) Nemak (%) Axtel (%) Newpek (%) (97.7) (99.4) The 1% increase in consolidated operating income from 2015 to 2016 is explained by the individual performance of ALFA s companies, as detailed below: In the case of Alpek, the increase is due primarily to the following factors. The Plastics and Chemicals business produced solid results due to better polypropylene and EPS margins, which resulted from a positive offer-demand cycle in North America, and from savings arising from the energy cogeneration plant located in Veracruz, Mexico. In the case of polypropylene, the improvement is due basically to an increase in Asia reference prices. In the case of EPS, there was a positive profit margin environment in North and South America, as well as the integration of the plants acquired in North and South America in In Sigma, the operating income decreased in relation to the previous year, mainly because the 2015 operating income included insurance collection due to the fire at the Spain plant. Additionally, it was affected by the severe drepciation of the Mexican peso during the year, which affected the Mexico operating result. Without the favorable effect of the insurance collection in 2015, the variation would be an increase of 20%. In Nemak, the operating income increased by 17% measured in Mexican pesos in the year. This is due to the increase in sales explained above, as well as to a higher proportion of added value products and efficiencies achieved. Measured in US dollars, performance was similar to that of the preceding year. In 2016, although new Axtel covered a wider range of services and infrastructure, its operating income decreased by 70% in Mexican pesos and 73% in US dollars, mainly due to merger-related expenses, a lower performance of the government business, which was affected by federal government budget cuts, and to depreciation of the Mexican peso during the year. Newpek s operating income continued to be negatively affected by a complex environment of low oil prices and reduced production levels. 28

29 REVENUES AND OPERATING INCOME COMPOSITION The percentage of revenues remained consistent between 2017 and 2016, while ALFA s operating income changed in 2017 compared to 2016, mainly due to an increase in the operating income of Sigma and Axtel, and a decrease in Alpek and Nemak, all of which are explained above. The following chart shows these effects: % Data Sales Operating income Alpek (25) Sigma Nemak Axtel Newpek (6) (8) (9) Other (20) (5) (6) Total FINANCE RESULT, NET (FR) In 2017, the FR was influenced by different exchange rates. On the one hand, despite the fact that the Mexican peso against the US dollar had a nominal annual appreciation of 4.6% in 2017, there was a foreign exchange loss because of the volatility in the rest of the currencies with which ALFA operates. Determining factors Overall inflation (Dec.- Dec.) Variation % in the nominal closing exchange rate 4.6 (19.5) Nominal closing exchange rate Real appreciation (depreciation) peso / dollar with respect to the previous year: Closing 8.8 (18.1) Year average 2.5 (14.6) Average interest rate: Nominal LIBOR ALFA debt, nominal implicit LIBOR in real terms ALFA debt, real implicit (4.6) 22.6 Monthly average debt of ALFA in US$ 7,610 7,073 29

30 Expressed in US$, the net financial expenses per year from 2017 to 2015 were $438, $352 and $312, respectively. Variation in net financial expenses in US$ 17/16 16/15 Due to (higher) lower interest rate (54) 6 Due to (higher) lower debt (32) (46) Net variation (86) (40) Net financial expenses in income include bank charges, premiums paid on refinancing transactions and interest expense in 2017, 2016, and Measured in Mexican pesos, the FR is composed as follows: Variation FR /16 16/15 Financial expenses (8,988) (7,196) (5,942) (1,792) (1,254) Financial income 1, Financial expenses, net (7,964) (6,599) (5,367) (1,365) (1,232) Exchange fluctuation result, net (1,264) (7,189) (4,920) 5,925 (2,269) Impairment in the fair value of financial investment available for sale 0 (1,270) (4,203) 1,270 2,933 Impairment of other financial assets (1,694) 0 0 (1,694) 0 Total FR (10,912) (15,058) (14,490) 4,146 (568) The fair value of ALFA s derivative financial instruments at December 31, 2017 and 2016 is as follows: Fair value (Millions of US dollars) Type of derivatives, securities or contracts Dec. 17 Dec. 16 Exchange rate 3 (1) Energy (32) (33) Total (29) (34) 30

31 INCOME TAX Below is a detail of the main factors used to determine income tax expense in each one of the years presented, based on the concept of income tax base, wich is the operating profit less the CFI and other expenses, net. Income tax Variation amount /16 16/15 Income before income tax 375 9,271 9,284 (8,896) (13) Equity in income of associates recognized using the equity method (92) (115) (399) 283 9,156 9,568 (8,873) (412) Statutory rate 30% 30% 30% Taxes at statutory rate (85) (2,747) (2,870) 2, / (-) Income tax effect on: Book to tax FR (782) (1,065) 10 Other permanent differences, net (936) (2,072) (836) (1,236) Income tax total effect on permanent differences (1,718) (1,789) (563) 71 (1,226) Provision for transactions of the year (1,803) (4,536) (3,433) 2,733 (1,103) Total income tax (expense) income (1,803) (4,536) (3,433) 2,733 (1,103) Effective income tax rate 637% 50% 36% Income tax: Current tax expense (5,698) (5,983) (5,420) 189 (563) Deferred tax 3,895 1,447 1,987 2,544 (540) Total income tax (expense) (1,803) (4,536) (3,433) 2,733 (1,103) 2017 NET CONSOLIDATED (LOSS) INCOME In the year, ALFA generated net consolidated loss, as detailed in the chart below, which is the result of the matters explained above regarding operating income, FR and taxes: Variation Statement of Income /16 16/15 Operting income 11,195 24,214 24,058 (13,019) 156 FR (1) (10,912) (15,058) (14,490) 4,146 (568) Equity in income of associates recognized using the equity method (284) (23) 399 Income taxes (2) (1,803) (4,536) (3,433) 2,733 (1,103) Net consolidated (loss) income (1,428) 4,735 5,851 (6,163) (1,116) Net (loss) income from controlling interest (2,051) 2,325 3,778 (4,376) (1,453) (1) Finance result, net. (2) Income tax (current and deferred) 31

32 CONSOLIDATED COMPREHENSIVE (LOSS) INCOME Consolidated comprehensive (loss) income is shown in the statement of changes in stockholders equity and its objective is to show the total effect of the events and transactions affecting capital earned, regardless of whether they are recognized in the statement of income, or directly in the stockholders equity. Transactions between the Company and its stockholders are excluded, mainly regarding dividends paid. Comprehensive income for 2017, 2016 and 2015 was as follows: Consolidated Consolidated comprehensive (loss) income Net (loss) income (1,428) 4,735 5,851 Other comprehensive income items: Translation of foreign entities 1,223 16,058 3,598 Effects of derivative financial instruments (650) Actuarial losses from employee benefits (91) (81) (29) Consolidated comprehensive (loss) income (134) 21,131 8,770 Controlling interest (906) 15,473 4,794 Non-controlling interest 772 5,658 3,976 Comprehensive (loss) income for the year (134) 21,131 8,770 A previous section of this report explains the matters related to net income obtained in 2017, 2016 and The translation effect of foreign entities is the result of using different exchange rates between balance sheet accounts and income statement accounts. During the year, this item was impacted due to the volatility of exchange rates of the currencies in the different countries in which ALFA operates. The effect of derivative instruments represents the effect of energy derivatives that, in accordance with International Financial Reporting Standards are classified as cash flow hedges. The effect of actuarial losses arising from employee benefits is the difference in actuarial estimates. DIVIDENDS DECLARED AND CHANGE IN STOCKHOLDERS EQUITY In 2017, a $3,312 dividend was declared, equal to $0.65 Mexican pesos per share. In 2016, a $3,043 dividend was declared, equal to $0.59 Mexican pesos per share. In 2015, a $2,380 dividend was declared, equal to $0.46 Mexican pesos per share. In 2017, stockholders equity decreased by 9% due to a net loss, the effect of translation of foreign entities and dividends. 32

33 INVESTMENT IN DAYS OF NWC (1) In 2017, at the consolidated level, revenues to NWC decreased, as a result, consolidated NWC days decreased from 21 in 2016 to 13 in NWC days Alpek Sigma (2) 1 0 Nemak Axtel (25) (12) (22) Newpek (124) (58) (59) Consolidated (1) Net Working Capital INVESTMENTS Property, machinery and equipment Total investments per group were as follows: % Variation 17/16 Last 5 years Investment % Alpek 4,431 5,981 (26%) 21, Sigma 3,542 6,298 (44%) 16, Nemak 8,279 10,164 (19%) 35, Axtel 2,192 3,916 (44%) 10, Newpek % 6,311 7 Other (91%) Total 19,139 27,364 (30%) 91, Business acquisitions In 2017, Alfa strategically continued implementing its growth program through acquisitions. Sigma completed the acquisition of two companies of processed meat in Peru (Supemsa) and Romania (Caroli) (acquiring remaining 51%), allowing its incursion into Eastern Europe and assuming a leading position in the South American country. 33

34 CASH FLOWS Cash flows generated by the the main transactions conducted in 2017 and 2016 are shown in the following table Cash flows provided by operating activities 34,403 37,298 Property, machinery and equipment, and other (19,139) (27,364) Business acquisitions, net of cash received (1,697) 372 Increase in bank financing 13,256 (496) Dividends paid by ALFA S. A. B. de C. V. (3,301) (3,043) Dividends paid to non-controlling interest (1,855) (2,834) Repurchase of shares (1,537) 0 Interest paid (8,403) (7,784) Other (3,283) 538 Increase (decrease) in cash 8,444 (3,313) Adjustments in cash flows due to changes in exchange rates (264) 3,094 Cash and cash equivalents at the beginning of the year 24,633 24,852 Total cash at year end 32,813 24,633 The main changes in the net debt of ALFA and its companies were as follows: Changes in debt net of cash US$ Consolidated Alpek Sigma Nemak Axtel Newpek Other Balance as of December 31, ,844 1,042 1,724 1, Long-term financing: Financing 1, (6) Payments (1,543) (236) 0 (472) (834) 0 (2) Short-term financing, net of payments (49) (4) Total financing, net of payments (19) (44) Currency translation effect 265 (5) Debt variation in the statement of cash flows (5) Debt from acquired companies and other Total debt variation (5) Decrease (increase) in cash and restricted cash (533) (343) (28) (82) 5 9 (94) Change in interest payable (1) Increase (decrease) in debt net of cash Balance as of December 31, ,300 1,262 1,936 1,

35 Alpek Sigma Nemak Axtel Other Debt by group, short and long term Debt balance (US$) 1,734 1,174 2,559 2,330 1,490 1,401 1,037 1,043 1,156 1,058 Porcentage of debt balance Short-term debt Long-term 1 year years or more Total Average term of long-term debt (years) Average term of total debt (years) US$ % of total Consolidated debt, short and long term Var Short-term debt Long-term 1 year (515) (602) (158) years or more 6,276 4,369 1, Total 7,976 7, Average term of long-term debt (years) Average term of total debt (years) FINANCIAL RATIOS LIQUIDITY Debt net of cash / Cash flows (Times, US dollars in the last 12 months) Group Alpek Sigma Nemak Axtel Newpek Consolidated

36 Interest hedge (Times, US dollar in the last 12 months)* Variation of /16 Cash Flow Financial Expenses Alpek (5.7) (4.5) (1.2) Sigma (0.8) 0.1 (0.9) Nemak (0.7) (1.2) 0.5 Axtel (2.9) 1.8 (4.7) Newpek (0.8) (1.0) 0.2 Consolidated (2.0) (0.9) (1.1) * Defined as operating income plus asset depreciation, amortization, and impairment, divided by net financial expenses. FINANCIAL POSITION ALFA s financial position indicators improved during 2017, as observed in the following table: Financial indicators Total liabilities / Equity Long-term debt / Total debt (%) Total debt in foreign currency / Total debt (%)

37 INDEPENDENT AUDITORS REPORT to the Board of Directors and Stockholders of Alfa, S. A. B. de C. V. Opinion We have audited the consolidated financial statements of Alfa, S. A. B. de C. V. and Subsidiaries (the Company ), which comprise the consolidated statement of financial position as of December 31, 2017, and the consolidated statement of income, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and its consolidated financial performance and cash flows for the year then ended, in accordance with International Financial Reporting Standards ( IFRS ), as issued by the International Accounting Standards Board. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing ( ISA ). Our responsibilities under those standards are further described in the Auditor s responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants ( IESBA Code ) together with the Code of Ethics issued by the Mexican Institute of Public Accountants ( IMCP Code ), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code and with the IMCP Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other matter The Company s consolidated financial statements for the year ended December 31, 2016, have been audited by other auditors, who expressed an unqualified opinion on February 20, Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined that the matters described below are the key audit matters which should be communicated in our report. Impairment of assets derived from agreements with various subsidiaries of Mossi & Ghisolfi Group ( M&G ) As disclosed in Note 2b. to the consolidated financial statements, in 2015 Alpek, S. A. B. de C. V. ( Alpek ), subsidiary of the Company, entered into agreements with M&G Resins USA, LLC ( M&G Resins ), one of capacity reserve for a term of 5 years and another of maquila for 20 years, for which the latter agreed to supply with 500 thousand tons of PET (manufactured with 420 thousand tons of PTA) from the start-up of the plant located in Corpus Christi. As a result of these agreements, the Company paid $7,745 million (US$435 million) to M&G Resins, of which $6,410 million (US$360 million) were recognized as an intangible asset, amortizable based on production volumes, and $1,335 million (US$75 million) were recognized as prepayments for the purchase of inventories. In 2017, due to M&G s declared insolvency, its difficulty to obtain additional financing, and its lack of liquidity, which resulted in the inability to complete the construction of the plant, Alpek decided to recognize an impairment for these assets of $7,745 million (net of taxes, $6,087). In addition, due to the aforementioned conditions, Alpek also decided to impair notes and accounts receivable of $3,711 million (net of taxes, $2,634 million). Subsequently, on October 9, 2017, Alpek (transferee) entered into a transfer-of-rights agreement with Banco Inbursa, S. A. (transferor), on an unsecured loan agreement bearing interest and mortgage guarantee with M&G Polímeros México, S. A. de C. V. ( M&G Polímeros México ). The consideration for the transfer of rights that Alpek paid amounts to $1,870 million, which is recognized in the consolidated financial statements as other non-current assets. This contract grants Alpek the right in the first instance over the other creditors of M&G Polímeros México and is guaranteed by a plant in Altamira, Mexico, of which fair value exceeds the amount of the right of collection maintained by Alpek. 37

38 Due to the significant judgments used by management to determine the impairment loss of the assets of Alpek associated with M&G, and the recognition of other non-current assets for the transfer of rights, our audit procedures focused on reviewing elements and significant judgments considered by the Company to recognize the impairment loss of the long-lived assets and the other non-current assets in the consolidated financial statements. Regarding the impairment loss recognized, we obtained and read the contractual agreements of the transaction and performed the following procedures: We obtained the analysis prepared by management, including level of indebtedness of M&G, lack of liquidity and level of insolvency of M&G; we also assessed the current situation of the construction of the plant and the possibility of reactivation. With respect to the accounts receivable of PTA sales and notes receivable, we obtained the aging analysis, management s estimates of recovery and, if applicable, the guarantees granted. We assessed and discussed with management the information and evidence provided to corroborate the considerations for recognizing impairment losses. As part of our audit, regarding the recognition of the long-term notes receivable arising from the transfer of rights, among others, we performed the following procedures: We obtained confirmation from lawyers in relation to the level of the mortgage guarantee. With respect to the mortgaged property, with the support of our expert appraisers, we verified that the models used by management to determine the fair values were used and recognized to value assets with similar characteristics in the industry. We assessed and discussed with management the probability of recovery of the long-term notes receivable, considering the fair value of the mortgage guarantee. The results of our procedures were satisfactory and we agree with the amount of impairment of the assets recorded in the year. In addition, the results of our procedures were satisfactory with respect to the recoverability of the other non-current assets arising from the transfer of rights, considering the guarantee established. Assessment of impairment intangible assets As described in Notes 3j., 3k. and 12 to the consolidated financial statements, the Company performs impairment tests on its intangible assets with indefinite useful lives on an annual basis and for intangible assets with finite useful lives when an impairment indicator exists. We have been focused in the review of the intangible assets, mainly due to the importance of the intangible assets balance in the consolidated financial statements of the Company, which consists of goodwill of $24,848 million, trademarks of $15,051 million, development costs of $4,199 million, exploration costs of $2,100 million, customers relationships of $6,271 million, intellectual property rights of $2,771 million, and others of $2,818 million and because impairment tests on intangible assets involve the application of significant judgments by the Company s management in determining the assumptions related to the estimation of the recoverable value of intangible assets allocated to its cash generating units ( CGUs ). As part of our audit, we focused on the following significant assumptions that the Company considered when estimating future projections to assess the recoverability of intangible assets: growth rate of the industry, new projects and significant customers, estimated revenues, discount rates, expected gross profit margin and projected cash flows. With support from our expert appraisers, our procedures, among others, included: We reviewed the models applied to determine the recoverable value of the assets and methods used and accepted for valuing assets with similar characteristics. We challenged the financial projections by comparing them to the business performance and historical trends, verifying the explanations of the variations with management. In addition, we assessed the internal processes used by management to make projections, including timely monitoring and analysis by the Board of Directors, and if the projections are consistent with the budgets approved by the Board. 38

39 We analyzed the assumptions used in the impairment model, specifically including the cash flow projections, EBITDA multiple and long-term growth plans. The key assumptions used to estimate cash flows in impairment tests of the Company are those related to revenue growth and operating margin. Independent assessment of discount rates used and the methodology used in the preparation of the model of the impairment test. In addition, we tested the integrity and accuracy of the impairment model. We evaluated the factors and variables used to determine the CGUs, among which were considered the analysis of operating cash flows and borrowing policies, analysis of the legal structure, allocation of production and understanding of the operation of the commercial area and sales. We discussed with management the sensitivity calculations for all CGUs, calculating the degree to which the assumptions used will need to be changed, and the likeliness these changes may arise. The results of our procedures were satisfactory, and we believe the assumptions used, including the discount rate, are reasonable. Assessment of the recoverability of deferred income tax assets The Company records deferred income tax assets derived from tax losses. Management performed an assessment of the probability of recovering the tax losses carryforward to support the deferred tax assets recognized on its consolidated financial statements. Due to the significance of the deferred income tax asset balance as of December 31, 2017 amounting to $9,621 million, and the significant judgments and estimates to determine future projections of the Company s taxable income, we focused on this line item, among others, and performed the following procedures: We verified the reasonableness of the projections used to determine future taxable income. We challenged the projections used by comparing them to the business performance and historical trends, verifying the explanations of the variations with management. With the support of internal experts, we assessed the processes used to determine the projected taxable income, and the assumptions used by management in preparing tax projections. We discussed with management the sensitivity analysis and assessed the degree to which the key assumptions used would need to be modified in order for an adjustment to be considered for evaluation. The results of our audit procedures were satisfactory. The Company s accounting policy for the recording of deferred taxes, as well as the detail of their disclosure are included in Notes 3m. and 17, respectively, to the accompanying consolidated financial statements. Information other than the Consolidated Financial Statements and Auditor s Report thereon Management is responsible for the other information presented. The other information includes two documents, the Annual Stock Exchange Filing and the information that will be incorporated in the Annual Report that the Company must prepare pursuant to the General Provisions Applicable to Issuers and other Participants in the Mexican Stock Exchange and file it with the National Banking and Securities Commission ( CNBV for its acronym in Spanish). The Annual Stock Exchange Filing and the Annual Report are expected to be made available to us after the date of this auditors report. Our opinion of the consolidated financial statements does not cover the other information and we do not express any form of assurance over it. In connection with our audit of the consolidated financial statements, our responsibility will be to read the other information, when available, and in doing so, consider whether the other information contained therein is materially inconsistent with the consolidated financial statements or with our knowledge obtained in the audit, or otherwise appears to contain a material error. If based on the work we have performed, we conclude that there is a material misstatement therein, we are required to communicate the matter in a statement in the Annual Report required by the CNBV and those charged with governance in the Company. 39

40 Responsibilities of management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company s consolidated financial reporting process. Auditor s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: - Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. - Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control. - Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. - Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Company to cease to continue as a going concern. - Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. - Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company and subsidiaries to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision, and performance of the Company and subsidiaries audit. We remain solely responsible for our audit opinion. 40

41 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Galaz, Yamazaki, Ruiz Urquiza, S.C. Member of Deloitte Touche Tohmatsu Limited C. P. C. Emeterio Barrón Perales Monterrey, Nuevo León, Mexico January 31, of