To our Shareholders:
In 2014, ALFA successfully executed its investment program, which included acquisitions that marked its entrance into new geographic regions, expanded its production capacity and created value added to its existing product offerings. The company faced a difficult environment of price and margin volatility in petrochemicals, as well as low demand in the consumer foods market. Despite this, all of ALFA’s companies, except Alpek, were able to deliver improved results over 2013, resulting in consolidated revenues and EBITDA increasing 9% and 7%, respectively.
New legislation paved the way for private investment in developing the Mexican energy industry. Because of the imminent opening and the attractiveness of this opportunity, ALFA decided it needed to strengthen its operating capabilities in the oil industry. It did so by purchasing shares of Pacific Rubiales Energy (PRE), a company with proven expertise in the field, to utilize it as a vehicle to invest in Mexico. In total, ALFA bought almost 19% of PRE’s capital stock.
Despite a thorough risk analysis preceding the PRE investment, the possibility of an abrupt drop in oil prices, which occurred in the second half of the year, was underestimated. This reduction caused a steep decline in the price of PRE shares, causing large mark-to-market losses on the valuation of the shares acquired by ALFA, which amounted to approximately U.S. $600 million at the end of 2014.
Performance of ALFA’s business groups
Alpek’s results were impacted by the volatility of prices and margins for petrochemical feedstock, which was caused by excess capacity in Asia and the dramatic drop in oil prices. These factors largely affected the polyester business, while plastics and chemicals reported revenue growth of 3%.
Market conditions are accelerating Alpek’s cost-saving initiatives. Major progress was made, including the startup of a 95 megawatts (MW) power cogeneration plant in Veracruz, Mexico, which will produce estimated savings of U.S. $40 million per year; the technological upgrade at the caprolactam plant, which allows it to operate more efficiently; and the signing of a tolling agreement with Huntsman Petrochemical, to secure the supply of 150,000 tons of monoethyleneglycol (MEG) per year, at a price based on ethylene as the feedstock.
Alpek also signed an agreement with BASF to acquire its expandable polystyrene (EPS) business in the Americas, making Alpek the largest producer in this region. Additionally, the company acquired CabelmaPET, an Argentinian company, to integrate recycled food-grade PET resins into its virgin resin feedstock and thus strengthen the value offering for its clients.
With respect to other projects, the construction of Gruppo M&G’s PTA/PET plant in Corpus Christi, Texas, continued as planned. Alpek owns rights to 40% of the PET production of this facility. Furthermore, Alpek approved the building of a new 300 MW cogeneration plant in Altamira, Tamaulipas, Mexico, with startup expected in 2017.
The company continued its strategy of reinforcing its position in high-growth areas of the auto industry. To continue to promptly respond to demand and increase the value added of its products, Nemak expanded its production and machining capacity. It established a new Product Development Center in Poland to support the launch of new products, and announced the construction of a new plant in Nuevo León, Mexico with High-Pressure Die Casting technology, which will be producing engine blocks, structural and transmission components and will open in 2016.
North America and Europe, Nemak’s main automotive markets, grew by 5% and 3% in 2014, respectively. The company benefitted from this growth and increased sales and EBITDA by 6% and 17% in the year, respectively. Operating improvements at the plant level also contributed to this achievement.
Nemak’s future growth was buttressed by the addition of 60 new contracts during the year, equivalent to U.S. $1.7 billion in annual revenues. Among these were five contracts to produce structural components for the first time.
The company continued its internationalization strategy in 2014, by acquiring 62% of the equity of Campofrio in Europe and all of the capital stock of Fábrica Juris, a processed meats company in Ecuador. With these acquisitions, Sigma increased scale and geographic footprint.
Sigma’s raw materials costs increased during the year, while the consumer products market remained weak. The company was able to offset these factors through higher volume and sales prices, as well as operating efficiencies, introduction of new products, expanded distribution and enhanced brand awareness, like the FUD® brand, which celebrated its 60th anniversary in the Mexican market.
Sigma’s focus on innovation continued to produce results. Among its achievements were the new individual packaging for processed meats and cheeses, and the ongoing transformation of the yogurt category. The Foodservice business was also strengthened by capitalizing on synergies resulting from the 2013 acquisition of ComNor.
In November, a fire consumed one of Campofrio’s main plants in Spain. Today, production has normalized by utilizing capacity at other plants in Campofrio’s system. However, there is still work to be done to recover shelf space. Meanwhile, the plan to identify and capture synergies in operations, marketing and product development is under way.
The company continued to execute its strategy of focusing on information and communications technology services for the business market in Mexico. At the beginning of 2014, Alestra opened its fifth Data Center in Querétaro, Mexico, doubling its service capacity. This facility has state-of-the-art technology, and is environmentally friendly. Alestra also acquired S&C Constructores de Sistemas, broadening its offer of specialized technological solutions.
Alestra’s focus on offering value-added services (VAS) to customers continued. Services offered include managed networks, data, Internet and local services, as well as IT solutions, including hosting, systems integration, cloud applications and data security. VAS accounted for 85% of the company’s total revenues in 2014.
In 2014, Newpek continued operating in the U.S. oil and gas industry while accelerating the pace of positioning itself to participate in the opening of the Mexican energy industry to private investment.
During 2014, 122 new wells were connected to sales at the Eagle Ford Shale (EFS) play in southeast Texas, where Newpek owns mineral rights. The company also continued conducting geological tests in other areas in the U.S., including northern Texas, Kansas and Oklahoma, in order to identify future drilling sites.
In Mexico, Newpek continued to operate mature oilfields in Veracruz, increasing average production per day by 33% over the amount of oil extracted at those fields before Newpek took over operations.
The reduction in oil prices in 2014 has prompted Newpek to take a more cautious approach toward new investments in the U.S. The production plan for 2015 now provides for the drilling of only 80 new wells at the EFS, down from the more than 100 wells drilled per year on average in the recent past.
Newpek continues to prepare itself for future opportunities in Mexico that will come from the opening of the oil and gas industry to private investment. One such measure was an alliance created toward the end of the year with PRE, under which the two companies will create a 50-50 joint venture to develop energy projects in Mexico.