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/Analysis of Results

Analysis of Results

Chief Executive Officer’s Report for full year 2014

2014 Report highlights

Sales +35% year on year to Ps 6.032 billion

Gross margin +60 basis points, expanding from 16.8% to 17.4% despite sharp price drops on the prices of petroleum derivatives and, to a lesser extent, on most of the other products in our portfolio

EBITDA +40%, to Ps 303 million, including the acquisition of Coremal in Brazil

EBITDA margin +20bp above 2013 levels to 5.0%

Organic EBITDA, excluding Coremal, +14% to Ps247 million

Organic EBITDA margin (net Coremal) widened 70bp from 2013 to 5.5%

Cash position expanded Ps 143 million or 79% in 2014, growing from Ps 181 million at the end of 2013 to Ps 324 million at the end of 2014

Net Debt to EBITDA returned to 2.0 times at year’s end, in line with our internal policy of not surpassing 2 times. This indicator had risen from 1.8 times prior to the Coremal acquisition to a 2Q14 peak of 2.8 times in 2Q14

The successful integration of Coremal, which we acquired on December 31, 2013, is evident in the strength of our 2014 results


2014: A year of challenges surpassed by Pochteca

In 2014 we faced various challenges that we successfully overcame

Falling prices for oil and its derivatives

We are extremely satisfied with how Pochteca successfully navigated the effects of a pronounced drop in oil prices. The price of West Texas Intermediate (WTI) fell 46% between December 31 of 2013 and 2014. But the drop in WTI was an even steeper 51% from a 2014 peak of USD107.95 per barrel on June 20, 2014 to the year-end close of USD53.45 per barrel. As a result the prices of petroleum derivatives we sell fell by between 10% and 30% in pesos during 2014, reductions that were less pronounced due to the extent to which the peso weakened against the dollar.

Organic EBITDA increased 14% despite the adverse environment

Despite the adverse environment, we managed to improve our operating profitability. Our “one stop shop” service proposal offers clients an extensive product portfolio through a single channel, backed by our professional pre-and post-sales technical support, which has contributed to help us limit the negative impact of falling sales prices and achieving better gross margins. The introduction of a number of initiatives over the course of the year also affected our profitability in a positive way. Our growing emphasis on greater value added blends and packaging tailor made to fit our customers’ needs, as well as the broader diversification of our product lines along with our one “one stop shop” approach made it possible to achieve 14% organic EBITDA growth (excluding the acquisition of Coremal in Brazil) during 2014. In addition to the plunge in the price of oil and of some products we distribute, economic activity remained depressed in sectors that are key for Pochteca such as mining and construction. Despite such adversity, we managed a 14% increase in organic EBITDA, an achievement that strengthens our confidence in the resilience and strength of our business model.

Successful integration of Coremal

During 2014 we successfully achieved the integration of Coremal operations. We formally acquired 100% of Coremal shares on December 31, 2013. Grupo Pochteca initially paid 51% of Coremal shares and will make payments on 9.8% of shares each year over a period of five years. The same valuation formula applied to the original payment, substituting EBITDA for 2013 in successive years with that of the immediately preceding year. This scheme assures that the interests of the managing shareholders of both Coremal and Grupo Pochteca are aligned for the next five years.

We believe that with Coremal, Grupo Pochteca will be able to 1) consolidate a Latin American presence, 2) penetrate the chemicals market in Brazil, which is considerably larger than that of Mexico and much more fragmented, and 3) promote cross sales of products between both countries in order to complement each company’s respective product portfolios.

On a consolidated basis, Coremal accounted for 26% of sales and 19% of EBITDA during 2014. We believe Coremal’s contribution can grow in the future. Out priority is to implant Pochteca’s management model and harmonize processes in both countries.

Solid financial position

We should also mention that thanks to our successful integration of the Brazilian company we acquired, we managed to bring our net debt to EBITDA back to 2.0 times by the end of 2014, which is our internal policy. That indicator had risen to 2.8 times in 2Q14, a more than two-year high, up from 1.8 times at the end of 3Q13, prior to our acquisition of Coremal.

Selected Financial Information

(millions of pesos)

Consolidated
in million pesos


2014


2013

(%) 2014
vs 2013

Sales

6,032

4,473

35%

Gross Profit

1,051

749

40%

Gross Margin (%)

17.4%

16.8%

60pb

Operating Profit

195

156

25%

Operating Margin (%)

3.2%

3.5%

-24pb

Depreciation

108

60

78%

EBITDA

303

216

40%

EBITDA Margin (%)

5.0%

4.8%

20pb

Interest Expense

101

60

68%

Foreign Exchange Loss

77

30

160%

Income Before Tax

18

66

-73%

Net Income (Loss)

5

40

-88%

Net Debt / EBITDA

2.0x

2.2x

EBITDA / Interest

2.7x

2.6x

EBITDA = operating income before depreciation and amortization; NC = non comparable
Pochteca San Juan