LETTER TO OUR

High degree of client and product diversification

At Pochteca we regard risk diversification as a top priority. We attend to more than 19,000 customers in more than 40 industrial sectors, offering them more than 5,500 products. Our goal is to maintain low levels of dependence on both clients and products.

No client accounted for more than 2% of sales in 2015 (our five biggest clients jointly represented less than 6%), and no product accounted for more than 2.0% of revenues (less than 7% of sales consisted of our five most popular products).

We believe that this high degree of diversification has proven to be highly beneficial for the company over the years, and even more so in periods of high volatility and when multiple sectors of the economy experience a deceleration of activity.

One-stop-shop proposal and diversification into mixes

We offer a broad portfolio in a single channel, developing products tailored to meet our clients’ needs, and with professional technical support at both the pre- and post-sales level. We are convinced that this one-stop-shop approach greatly aided our 2015 results, mitigating the negative effects of sharp price decreases and allowing us to grow our gross margins.

Another factor that has helped us to boost profitability in an adverse environment is our increasing diversification into higher-margin and less-volatile products such as blends and sales of packaged products. Both product categories have played an important role in improving our profitability despite the complex environment we were faced with.

Financial Position

At the end of 2015, net debt totaled Ps 554 million, 9% or Ps 57 million less than at the end of 2014. It is important to note that we concluded our refinancing of a Ps 610 million, syndicated credit on December 4, 2014. The original credit had been scheduled to mature in June 2015 while the new loan is for four years with a one-year grace period.

We enjoy a strong financial position as reflected in our debt metrics. The solid results we achieved in the year allowed us to lower our net debt to EBITDA to 1.6 times from 2.0 times at the end of 2014, a level in line with our policy of keeping it to a maximum of 2 times. We should also note that net debt to EBITDA rose to a record high of 2.8 times in 1Q13, following the acquisition of Coremal.

2016 Outlook G4-EC2

We do not expect the environment to improve substantially during 2016. More specifically, we do not anticipate a sudden reactivation of economic activity or of the oil industry. However, we do expect continuing growth in demand for the products we distribute. Moreover, we expect the prices of most of our products to remain depressed. Nevertheless, we are confident that our one-stop-shop proposal will continue to help us penetrate new businesses and expand market share.

However, consumption in other sectors such as lubricants, food and chemicals will continue to stoke demand for the products we distribute. We believe that product prices have finally bottomed and will continue to gradually recover. Our one-stop-shop proposal will continue to serve as an important mitigating factor. We believe that this strategy will assist us in our quest to continue penetrating businesses and expanding market share.

We continue to view export manufacturing and Mexico’s energy reform as growth drivers in Mexico. Our exposure to the export manufacturing industry is a source of strength. We expect Mexico’s energy reform to further bolster manufacturing albeit in a less pronounced way than what was anticipated when the reform was first adopted in 2013. We reiterate our confidence that the competitive gap relative to China will continue to shift in Mexico’s favor, thereby encouraging more foreign firms to move operations to Mexico in order to better supply the US market.

Our operations in Brazil face major hurdles due to the complex environment the country is experiencing. However, we believe that Pochteca enjoys major growth opportunities in that market.

We will continue to harmonize our processes in both countries while expanding the sale of Pochteca products that were not in Coremal’s pre acquisition portfolio such as chemicals for the food industry, for oil exploration and drilling and lubricants.

 

Sustainability

At Pochteca we are making efficient use of natural, economic and social resources in ways that conform with our commitment to sustainability.

Our Integrated Management System (IMS) is the basis for assuring the successful realization of our financial objectives and growth targets while complying with the national and international standards that we have voluntarily adopted. Similarly, our secure and worldclass chain of custody adds value to the producers of raw materials (our suppliers) and of chemical products (our clients).

We will also continue to endeavor to establish performance indicators that allow us to measure and control product safety, occupational health, quality and safety risks and environmental impact risks.

Pochteca is well prepared to continue handling challenges such as those we encountered in 2015 and we will do so in 2016. We have capable personnel, solid cash generation and a strong financial position. Those are the factors that underpin our optimism regarding the business’ future prospects.

We wish to recognize and thank our shareholders, colleagues, clients, suppliers, and financial institutions for the support they gave us during 2015.