Message from the Chairman
of the Board of Directors

Message from the Chairman of the Board of Directors

102-7, 102-11, 102-14

Dear shareholders:

During 2018, we recorded good results in Mexico and Brazil compared to the previous year. Despite the fourth quarter drop in oil prices, for the year we achieved 2.1% growth in sales, 14.2% in operating profit, and 6.6% in EBITDA. The price of oil had trended higher throughout the first three quarters of the year, climbing an accumulated 21%

In 2018 sales increased 2.1%, totaling $6,463 million pesos

EBITDA grew 6.6%, totaling $361 million pesos

Net Debt /EBITDA continues below 2.0x

by the end of September. But after peaking in early October, crude prices had fallen 41% by the end of the year. Such a decrease in a short time devalued our inventories and pressured our margins during the final quarter of 2018.

Despite difficulties in the oil markets of Mexico and Brazil, we have managed to consolidate our sales and profitability growth. The Brazilian economy continued to experience a slight recovery between the second half of 2017 and the third quarter of 2018, however it only grew 0.1% in the fourth quarter of 2018. For the full year, Brazil’s GDP expanded 1.1% compared to 2017. In Mexico, GDP increased an annual 2.0%.

Coremal’s results improved continuously on a year-on-year basis between the third quarter of 2017 and the fourth quarter of 2018. During 2018, EBITDA grew 46.1% above 2017 levels. These results have brought us greater clarity, and we are convinced that this business will continue to grow EBITDA during 2019. The gross margin expanded 50 basis points compared to the previous year to reach 18.7%. Accumulated operating income totaled Ps 267 million, a 14.2% increase over 2017.

During 2018, we achieved a Ps 310 million cash flow before taxes and CAPEX, interest, amortization, acquisitions, and contributions to the stock repurchase fund for a 0.81 ratio of EBITDA conversion to cash.

This allowed us to decrease our debt by Ps 185 million during the year, repurchase Ps 48 million in Company shares, and still close the year with a Ps 138 million cash balance.

Working capital improved over year end levels of both 2016 and 2017, as we decreased our days of working capital from 31 days in December 2016 to 22 days in December 2017 and 18 days in December 2018. We accomplished this through continuous improvement in days receivable and days payable compared to 2017.

One of the year’s most relevant events was the great progress achieved in the design, construction and development of the new Guadalajara facility. Work is at an advanced stage and the plant is expected to begin operations in mid 2019, allowing us to significantly expand our product reception by rail, and grow our installed and logistic capacity. With this plant we expect to bolster our market penetration and distribution in Guadalajara and Western Mexico, and thus broaden the business. We are convinced that we will have one of the best rail installations in the State of Jalisco.

These results and stability could not have been achieved without the support and commitment of employees, customers, suppliers, shareholders and financial institutions, to whom we express our deepest thanks.

Armando Santacruz González