Es

Operating
performance

Operating
performance

GRI 201: 103-1, 103-2, 103-3

102-4, 102-7, 102-11, 102-15, 201-1

Our 2018 results reaffirm the growth of our Company and its profitability.

Brazil

Operating performance

Operating performance

Throughout the first nine months of the year, oil prices trended higher, climbing an accumulated 21% as of September. However, after peaking in mid October, oil prices had fallen 41% by year’s end. Such significantly drop in so short time devalued our inventory, reducing margins during the final quarter of 2018.

Despite difficulties experienced in the oil markets of Mexico and Brazil, we have managed to consolidate our sales and profitability growth.

During 2018, oil prices decreased 24.8% from USD 60.42 at the end of 2017 to USD 45.41 per barrel at December 31, 2018, as the following graph indicates.

2En dec 13 dec 14 dec 15 dec 16 jun 14 jun 15 jun 16 jun 17 mar 14 mar 15 mar 16 mar 17 sep 14 sep 15 sep 16 sep 17 dec 17 sep 13 110 100 90 80 70 60 50 40 20 30 WEST TEXAS INTERMEDIATE (WTI) CRUDE PRICES (USD) (September 2013 = 100) jun 18 mar 18 sep 18 dec 18
Diversification: An important risk mitigation factor

Diversification of our customer and product portfolios constitutes a key part of our commercial strategy. It has allowed us to grow sales and margins despite the loss of an important part of the business we previously maintained in the oil, gas and mining sectors, in which activity remains greatly diminished. At present, the Company manages more than 7,100 products and more than 301,000 orders, delivering 313,000 tons to more than 20,500 customers per year. Our 5 main clients account for 6% of sales, our 5 leading products represent less than 5%, and no product or customer accounts for 3% of revenues.

2018 results reaffirmed the Company’s strengthening and profitability growth.
  • Sales grew +2.1% during 2018 compared to 2017.
  • Gross income increased +4.9%, gross margin in Mexico and Brazil (+50 bp), operating profit +14.5%, and EBITDA results Ps 385 million equal to +6.6%.
  • We have yet to see signs of a recovery in mining nor in oil exploration and drilling in Mexico. However, diversification toward other sectors has compensated for the contraction in these segments, which until recently were Pochteca’s two main ones.

Brazil

Mexico - Monterrey

  • Industrial production recovered slightly in Brazil during the second half of 2017 and the first six months of 2018, but fell once again during the third quarter of 2018. Industrial production slightly increased between October and December, snapping a three-month streak of sequential monthly declines and closed 2018 with a +1.1% growth compared to 2017; and despite the prolonged weakness of industrial activity, we have managed to keep our operation in that country on a road to recovery.
  • In Mexico, GDP grew 2.0% during 2018 compared to 2017. That performance was adversely affected by uncertainty surrounding: (i) negotiations over the North American Free Trade Agreement (NAFTA) and the signing of a new agreement (T-MEC/ USMCA) that is intended to supersede it; (ii) tariffs decisions by the United States, the European Union and China; (iii) the 2018 elections; and (iv) the decision to cancel construction of the New Mexico City International Airport (NAIM). These developments affected the performance of, and investment in economic sectors in Mexico.
  • Focus on strategies to strengthen our profit margins, promoting our competitiveness and bolstering our cash position:
  • - Customer stratification as part of a commercial strategy for growing our gross margin.

    - Strengthening our portfolio of high-specialty products through the incorporation of Conjunto LAR.

    - Increased diversification toward higher-margin and higher-unit-value products.

    - Continuing to reduce days of working capital in order to reduce demand on resources and improve operational liquidity.

oil AND gas SECTOR IN MEXICO REMAINED LETHARGIC IN 2018
  • The oil industry has experienced a recovery in the United States and moderate growth in Mexico, although based on a very low comparison. In Brazil, this sector remains in deep recession.
  • The number of active rigs in the United States increased 17% throughout 2018.
  • The number of active rigs in Mexico rose from 15 to 31 in 2018 (+107%). However, 2018 also saw a drop in onshore exploratory and development drilling, so demand for chemicals used in such operations also declined.
  • In Brazil, the rigs count fell 29% during that same period.
  • The number of active rigs in Mexico has declined 74% from the 120 rig peak at the start of 2013, with only 31 active at the close of 2018. During that same period Brazil’s rigs count decreased 86%.
  • Despite these challenges, we managed to grow sales and profitability during 2018.
5En ACTIVE OIL RIGS (June 2012 = 100) sep 12 sep 13 sep 14 sep 16 sep 15 sep 17 mar 13 mar 14 mar 15 mar 17 mar 16 dec 12 dec 13 dec 14 dec 16 dec 15 dec 17 jun 13 jun 14 jun 15 jun 17 jun 16 jun 12 110 100 90 80 70 60 50 40 20 10 0 30 Brazil Mexico USA sep 18 mar 18 dec 18 jun 18