Insperia

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Strategy and Analysis | Statement from the most senior decision-maker of the organization | FULLY

Strategy and Analysis | Description of key impacts, risks, and opportunities | FULLY

Organizational Profile | Significant changes during the reporting period regarding size, structure, or ownership | FULLY

Letter to Shareholders

Dear Shareholders:

This last year was particularly challenging for our industry due to falling oil prices and sustained pressure on polyester and caprolactam margins. However, 2014 was also a significant investment year for Alpek with the completion of numerous integration, efficiency and expansion projects which further enhance our competitiveness.

In markets outside North America, polyester (PTA/PET) and caprolactam (CPL) margins reached historically low levels. Margin pressure began in 2012 with the entry of new production capacity in China, which increased at estimated annualized rates of 26% and 53% for PTA and CPL, respectively, over the two-year period.

Events during the year which are supportive for gradual margin recovery include: a call from major Chinese PTA producers for greater market discipline, the slowing growth rate of new capacity, and announced plant closures in Asia and around the world.

However, these encouraging developments were overshadowed by the fall in oil and feedstock prices. After posting an average price of US $108 per barrel between January and June 2014, Brent crude dropped 48% to US $56 per barrel at the close of the year, reaching its lowest level in five years and driving down prices of petroleum derivatives.

The price of paraxylene, our main feedstock, fell 34% during the year from US $1,543 per ton to US $1,014 per ton. This decline caused temporary distortions in margins and demand which negatively impacted results despite our position as a low-cost producer and “cost-plus” product pricing.

Consolidated sales in 2014 fell 8% year-on-year, to US $6.5 billion. The year’s 1% sales volume increase was more than offset by a 9% drop in average prices, reflecting the lower price of oil.

Consolidated EBITDA was US $434 million, 24% less than in 2013. This reduction mainly reflects a US $71 million non-cash inventory devaluation charge that was recognized as a result of the decline in paraxylene prices.

The Polyester segment posted sales of US $4.8 billion in 2014, 11% lower than the previous year due to the 13% drop in average prices. However, volume grew 2% year-on-year despite the unfavorable demand environment.

Polyester EBITDA fell 30% to US $270 million. This segment was the most affected by the falling crude price, with an estimated total impact of US $87 million, including inventory devaluation.

The Plastics and Chemicals segment posted sales of US $1.7 billion, 3% above 2013. The rise is attributable to increases of 1% in volume and 2% in average prices.

Plastics and Chemicals EBITDA decreased by 12%, pressured mainly by lower margins in expandable polystyrene (EPS) and polypropylene (PP). EPS and PP margins normalized after reaching record highs in 2013 as a result of favorable market dynamics. In addition, the highly volatile price of benzene and Chinese production further reduced CPL margins in 2014.

While our results for the year were affected by external market factors, we maintain a healthy financial position with solid leverage and coverage ratios based on a robust free cash flow. At the close of the year, net debt declined 7% compared to 2013, the net debt to EBITDA ratio was 1.6 times and interest coverage 6.5 times. Other key financial elements are our long-term debt profile, 86% of which matures as of 2022 with fixed interest rate, and a high dollarization of cash flow that mitigates our exposure to exchange rate volatility.

Our strong financial position, coupled with a philosophy of disciplined growth, support the development of investment projects even at the bottom of the cycle in order to maximize the benefits of the eventual recovery.

Capital expenditures (Capex) in 2014 increased by 79% to US $320 million. The majority of these funds were allocated to a number of integration, operating efficiency and expansion projects that further enhance our competitiveness.

The startup of our cogeneration plant in Cosoleacaque, Veracruz, marks the culmination of the first major integration project since we became a public company. With a total investment of US $137 million and a 95 megawatt capacity, the new plant is expected to generate annual savings of approximately US $40 million. In addition to the economic benefit, this project has given us valuable experience for the construction of a second cogeneration plant in Altamira, Tamaulipas, with three times the capacity of Cosoleacaque. We expect to break ground for the new facility in 2015.

Our main integration project, for the production of monoethyleneglycol (MEG), advanced on several fronts, including ethane supply, technology selection and site evaluation. Supported by the region’s competitive natural gas and ethane prices, we estimate that Alpek could achieve the lowest polyester conversion cost in the world through its investments in MEG integration and power cogeneration.

2014 Capex was largely dedicated to further enhancing our operating efficiency. The most important of these investments was the construction of the integrated PTA/PET plant in Corpus Christi, Texas, which is being developed under the agreements signed with Gruppo M&G in 2013. This facility will use Alpek’s IntegRex® PTA technology.

In addition, the technology upgrade of our CPL plant was successfully completed. By year-end, the facility had achieved the expected improvements in production and raw material consumption, which will generate estimated annual savings of US $8 million.

In 2014 we also leveraged selected expansion opportunities. One was the agreement signed with BASF to acquire its EPS business in the Americas and 100% of Polioles’ EPS business, while BASF acquired Polioles’ polyurethane business. Besides positioning Alpek as the leading EPS producer in the Americas, the transaction will give us full control over this business unit in order to boost its growth. We expect to close the agreement with BASF during the first quarter of 2015.

Furthermore, we acquired CabelmaPET, S.A., which operates the only food-grade recycled PET (r-PET) facility in Argentina. The plant’s 16 thousand ton r-PET capacity will complement Alpek’s virgin PET resin production in the country, and will enable us to offer PET resin that incorporates virgin and recycled material in a single pellet. Along with contributing to improved sustainability and environmental well-being, PET resin products with integrated recycled content will allow our customers to streamline their operations by eliminating unnecessary feed and blending processes.

In 2014 we continued to reinforce our sustainability strategy under a model that involves interaction with all our stakeholders, based on four pillars: i) Internal Well-being, ii) Community, iii) Environment, and iv) Sustainable Economic Value Creation. We are committed to generating economic, environmental and social benefits through our operations.

One of the most significant developments of the year was to establish the medium-term objective to intensify our community engagement programs, working alongside the communities that are closest to our operations. In 2014, for example, we helped more than 7,000 students from 53 neighboring schools, and more than 130 students completed their internships at our companies.

Although we faced challenges in 2014, there are signs that point to a bright future for Alpek. Among these we can highlight the following: the start-up of our first cogeneration project; healthy cash flow generation and a strong balance sheet that assure the continuity of our investments in integration, efficiency and expansion; the slowdown in Asian production capacity growth combined with greater discipline from Chinese producers; and the energy reform being implemented in Mexico, which will increase feedstock and energy availability at competitive prices in our country.

On behalf of the Board of Directors, we would like to thank our employees, customers, suppliers, creditors, community and, in particular, our shareholders who put their trust in us year after year.

Sincerely,

Armando Garza Sada

Chairman of the Board

José de Jesús Valdez Simancas

Chief Executive Officer


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