Management´s Analysis

2012

The following report should be considered in conjunction with the Letter to the Shareholders, Audited Financial Statements and Complementary Information. Unless otherwise indicated, figures in the 2011 and 2012 information are expressed in millions of nominal Mexican pesos. Additionally, certain figures are expressed in millions of dollars (US$), reflecting the considerable dollarization of Alpek’s revenues. Percentage variations are presented in nominal terms and the information is presented on the basis of International Financial Reporting Standards.

ECONOMIC ENVIRONMENT

During the second half of 2011, the economic environment continued to deteriorate because of debt-related issues in several peripheral European countries. Since the situation remained unresolved in 2012, the United States and Europe continued facing problems. Despite this backdrop, the Mexican economy posted healthy growth, significantly above that of Europe and the United States.

The figures below describe the economic environment that prevailed during 2012:

As of the date of this report, 2012 growth in Mexico’s Gross Domestic Product (GDP) is estimated at 3.9%, the same as in 2011. The consumer price index rose 3.6%(b) in 2012, a rate below the 3.8%(b) posted in 2011. The Mexican peso appreciated 6.9%(c) in nominal terms during the year, compared to a 13.1%(c) depreciation in 2011. The average annual overvaluation of the Mexican peso vis-à-vis the US dollar was 14.2%(d) in real terms in 2012 and 16.1%(d) in 2011.

With regard to interest rates in Mexico, the TIIE was 4.8%(b) in nominal terms in 2012, unchanged from 2011. In real terms, this rate grew, from an annual accumulated rate of 1.1% in 2011 to 1.3% in 2012.

The average annualized nominal 3-month LIBOR rate in dollars was 0.4%(e) in 2012, similar to the 0.3%(e) of 2011. If the nominal appreciation of the Mexican peso vis-à-vis the US dollar is included in this figure, the LIBOR rate in constant pesos declined from 9.3%(a) in 2011 to -9.7%(a) in 2012.

INDUSTRY

Global prices of petrochemical products fell in 2012 compared to 2011, partly reflecting the decline in oil prices during the first half of the year. There were pressures on the polyester industry in Asia during 2012 because of the recent increase in installed capacity in the region and a decline in demand in a number of markets, such as Europe. Additionally, caprolactam imports into China were under pressure during the year because of incremental Chinese production capacity compared to the previous year. However, the North American market showed a sustained growth in demand and more stable margins.

VOLUME - (Thousands of Tons) 2011 2012 VAR. %
Polyester and Polyester Products 3,084 3,263
6
Plastics and Chemicals 790 823 4
TOTAL VOLUME 3,874 4,086 5
SALES - (Millions of Pesos) 2011 2012 VAR. %
Polyester and Polyester Products 70,050 75,249
7
Plastics and Chemicals 20,781 21,068 1
Eliminations (164) (154) (7)
TOTAL SALES 90,667 96,163 6
SALES - (US$ Millions) 2011 2012 VAR. %
Polyester and Polyester Products 5,686 5,695
0
Plastics and Chemicals 1,683 1,594 5
Eliminations (14) (12) (14)
TOTAL SALES 7,356 7,277 (1)

SALES

In 2012, Alpek’s net sales totaled $96,163 million (US$7,277 million), 6% more than the $90,667 million (US$7,356 million) posted in 2011. The sales volume grew 5%, largely reflecting the integration of acquisitions made in 2011 and an increase in polypropylene volume. The growth in volume was offset by a generalized reduction in prices, because of a decline in the prices of petrochemical raw materials and an adjustment in the PTA price formula in North America. Figures in pesos were benefited by the foreign exchange rate so that, when figures are compared in dollars, there was a 1% decline in sales.

SALES BY BUSINESS SEGMENT

In 2012, net sales of Polyester and Polyester Products totaled $75,249 million (US$5,695 million), 7% above the $70,050 million (US$5,686 million) of 2011. The sales volume grew 6%, largely reflecting the integration of acquisitions made in 2011 and stable demand for Alpek products in the North American region. The growth in volume was offset by a generalized reduction in prices and by non-recurring events related to the climate and to the interruption of an important customer’s production during 3Q12. Figures in pesos were benefited by the foreign exchange rate so that, when figures are compared in dollars, there was no significant variation in sales.

In 2012, net sales of Plastics and Chemicals totaled $21,068 million (US$1,594 million), 1% more than the $20,781 million (US$1,683 million) of 2011. Volume rose 4%, largely reflecting an increase in polypropylene volume because of growth in propylene supply, offset by a generalized decline in prices. Figures in pesos were benefited by the exchange rate, so that, when figures are compared in dollars, there was a 5% reduction in sales.

OPERATING INCOME AND OPERATING CASH FLOW (EBITDA)

In 2012, operating income totaled $7,476 million (US$566 million), 1% less than the $7,589 million (US$616 million) of 2011. Figures in pesos were benefited by the foreign exchange rate, so that, when figures are compared in dollars, there was an 8% reduction in operating income. The decline largely reflects the contraction in margins of caprolactam and other export products, the adjustment in the PTA price formula in North America and certain non-recurring events, such as Hurricane Isaac. However, it is important to note the increase in the incomes of expandable polystyrene, polyurethane, industrial chemicals and specialty chemicals. In 2012, EBITDA totaled $9,610 million (US$728 million), 1% more than the $9,545 million (US$771 million) of 2011. Figures in pesos were benefited by the exchange rate, so that, when figures are compared in dollars, there was a 6% reduction in EBITDA.

EBITDA
(Millions of Pesos)
2011 2012 VAR. %
Polyester and Polyester Products 6,732 7,008
4
Plastics and Chemicals 2,813 2,606 (7)
Eliminations and Others 0 (4) N/A
TOTAL OPERATING CASH FLOW 9,545 9,610 1
EBITDA
(US$ Millions)
2011 2012 VAR. %
Polyester and Polyester Products 544 531
(3)
Plastics and Chemicals 227 197 (13)
Eliminations and Others 0 0 N/A
TOTAL OPERATING CASH FLOW 771 728 (6)

COMPREHENSIVE FINANCING INCOME (EXPENSE) (CFI/E)

In 2012, the comprehensive financing expense totaled $1,331 million, 12% above the $1,190 million of 2011. This rise largely reflects an increase in financial expense related to the prepayment of Grupo Petrotemex debt, offset by growth in financial income, a foreign exchange gain and an increase in the valuation of financial derivative instruments.

CFI/E - (Millions of Pesos) 2011 2012 VAR. %
Financial expense (1,323) (1,897) 43
Financial income 221 356 61
Foreign exchange gain (loss) (92) 141 254
Valuation of financial derivative instruments 4 69 1,698
CFI/E (1,190)
(1,331) 12

TAXES

In 2012, income taxes totaled $1,723 million, 12% below the $1,948 million of 2011. This reduction largely reflects the recognition of certain losses that reduced the tax amount.

NET INCOME

The 2012 net income totaled $4,383 million (US$332 million), 1% less than the $4,428 million (US$362 million) of 2011. This decline largely reflects the reduction in operating income and increased comprehensive financing expense, offset by the reduction in income taxes. Figures in pesos were benefited by the exchange rate, so that, when figures are compared in dollars, there was an 8% reduction in net income.

CAPITAL EXPENDITURES

In 2012, capital expenditures amounted to $1,522 million (US$115 million), 159% more than the $588 million (US$46 million) of 2011. This increase largely reflects the construction of the cogeneration plant at the PTA-PET complex in Cosoleacaque, Veracruz. Capital expenditures during the year also included the elimination of bottlenecks at the PET plant in Columbia, other smaller projects and the replacement of certain assets.

NET DEBT1

2012 net debt amounted to $8,011 million (US$616 million), 52% less than the $16,601 million (US$1,188 million) of 2011. The reduction largely reflects a 22% decline in the balance of gross debt in 2012, combined with an increase in cash because of the resources obtained from the Initial Public Offering of Shares in April 2012. As a result, the ratio of Net Debt to EBITDA fell from 1.5 to 0.8 times during the course of the year.

FINANCIAL INDICATORS - (TIMES) 2011 2012
Net debt / EBITDA (US$) 1.5 0.8
Interest coverage (US$) 8.7 6.2
Total liabilities / Capital 2.3 1.1

(1)  Net Debt = Current Debt plus Non-Current Debt excluding debt issuance costs, plus accrued Interest Payable less (Cash and Cash Equivalents plus Restricted Cash and Cash Equivalents).

2012 HIGHLIGHTS


Initial Public Offering of Shares

On April 26, 2012, the Company concluded an Initial Public Offering of Shares in Mexico and a Private Offering of Shares in international markets. A total of 379,298,220 shares (including the overallotment option) were issued at an offering price of $27.50 per share, resulting in resources amounting to $10,431 million. Because of its high level of capitalization and trading volume, the Mexican Stock Exchange included Alpek in its Stock Market Index (IPC) as of September 3, 2012.

Issue of a US$650 million 144A/Reg. S Bond

On November 20, 2012, the Company concluded an issue of Senior Notes for a nominal amount of US$650 million with a single maturity in 2022. The interest on the Senior Notes will be paid every six months at a rate of 4.5% annually starting on May 20, 2013. The Senior Notes were placed through a private issue in accordance with Rule 144A, Regulation S of the 1933 Securities Act of the United States of America. The net resources obtained from the issue of Senior Notes were mainly used to prepay the debt of certain of the Company’s subsidiaries.

Cogeneration Project

In 2012, ground was broken for the construction of an electricity and steam cogeneration project in which the Company plans to invest approximately US$130 million through its subsidiary Grupo Petrotemex, S.A. de C.V. The new plant will generate approximately 95 megawatts of electricity, as well as steam, to cover the requirements of the PTA-PET complex in Cosoleacaque, Veracruz.

Tender Offer

On August 13, 2012, Grupo Petrotemex made a Tender Offer for approximately US$154 million of the principal amount of the 144A/Reg. S Senior Notes it had issued in 2009. As of December 31, 2012, a balance of approximately US$121 million with a single maturity in 2014 remained. In addition, Grupo Petrotemex, S.A. de C.V. obtained the approval of the majority of the holders of its Senior Notes to amend certain related contractual conditions.

Dividends

The Ordinary Stockholders’ Assembly of August 30, 2012 approved the payment of Alpek’s first dividend as a publicly traded company. The total amount of the dividend was $911 million, equivalent to $0.43 pesos per share.

Sources:
(a) Consultores Económicos Especializados, S. A. de C. V. (CEE).
(b) Banco de México (Banxico).
(c) Banxico. Tipo de cambio para solventar obligaciones denominadas en moneda extranjera pagaderas en la República Mexicana. (Exchange rate to meet foreign currency denominated obligations payable in Mexico)
(d) CEE. Base 1990. Bilateral with the United States, taking into consideration consumer prices
(e) British Bankers Association.