Mensaje - 2020 Annual Report

We want to thank the professionalism and commitment of the work teams, who managed to keep business continuity.

This year has been by far the most complex in KUO’s modern history. COVID-19 pandemic caused an unprecedented global crisis, which not only had an economic impact, but also a devastating effect on health. It simultaneously affected all regions of the world, at all socioeconomic levels, and with negative consequences in most productive sectors.

Since the beginning of the year, KUO implemented preventive measures and health protocols to ensure our people´s health and operations safety. Beginning on the second quarter and as part of these actions, the infrastructure of facilities, offices and personnel transportation was modified to maintain the proper social distance. Additionally, shifts were rescheduled to prevent overcrowding in workspaces, and a significant investment was made in protective equipment.

Furthermore, 500 sanitary filters with continued functionality were installed, a large number of PCR tests and medical examinations were applied, a vaccination campaign against the influenza virus was promoted, a 24-hour psychological support line was activated, and more than 20,000 medical consultations on respiratory illness to our employees and their families were provided.

It is important to highlight the creation of an emergency committee of approximately 50 physicians certified in pandemic care, established in six states of Mexico to provide first-line care for KUO´s employees.

Starting March, Information Technology department reinforced digital platforms for administrative areas to work remotely, developing new tools to maintain timely and effective institutional communication, with a major focus on cybersecurity.

Likewise, we would like to acknowledge the medical personnel who continue to lead the health crisis, because of their dedication and generosity, the number of infections in our operations has been limited. Finally, we extend our sincere condolences to the families of the employees who died in 2020 from COVID-19.

Among financial measures implemented to strengthen liquidity, it is worth highlighting working capital optimization; the divestment of the tuna business in Herdez Del Fuerte; investment in productive assets (CAPEX) to minimum required; strict cost and expenses control; in addition to increased dividends from JV’s.

We finished the year with a high level of Cash and a substantial improvement in leverage, with available committed lines of nearly US$250 million. With these actions we were able to maintain operational continuity, especially since KUO’s activities in Mexico were classified as essential.

In the second quarter of the year, we experienced an extremely unfortunate event, when one of the processing plants in the Pork Meat Business suffered a severe fire, affecting around 80% of the machinery, building, equipment, and inventories. This plant addressed domestic and export markets and represented nearly 30% of pork processing capacity.

From the first week after the event, mitigation measures were taken to minimize the impact on the operation. Among these actions, additional shifts were implemented at the processing plants in Umán, Yucatán and Irapuato, Guanajuato, in addition to production in third-party facilities in limited volume.

The plant was covered for Property Damage, Extraordinary Expenses and Consequential Losses. At the end of December, an amount of $1,025 million pesos was recorded corresponding to the first installments of insurance recovery, and we expect to conclude this process in the next few months.

This advance payment was used to begin the reconstruction of the processing plant at the same location, which will be fully financed with the proceeds from the insurance and should be completed by the end of 2021.

51%
Total revenues
Consumer sector

During the second quarter of the year, the escalation of the sanitary emergency in Mexico and the markets where we operate had a significant impact on the results of the Automotive and Chemical businesses, exacerbated by the temporary shutdown of operations, in addition to the contraction in demand for some products in different regions of the world.

In the first semester, Transmissions business was significantly affected by the temporary closure of its operations, as well as those of suppliers and customers. This caused a substantive delay in the production and mass sale of DCT’s (“Dual Clutch Transmissions”), and therefore, in the recovery of the project investment.

This was partially offset by the performance of the Consumer sector, with an increase in demand from the Herdez Del Fuerte and Pork Meat Business.

By the third quarter of the year, we noticed a positive change in KUO’s results, with sequential improvements in Revenue and EBITDA, which once again demonstrated the viability and success of our business model. Diversification in industries, currencies and geographies was key to our annual results, maximizing returns and mitigating risks, balancing cycles, changing trends, temporary shutdown of customers and suppliers, as well as the recovery of different industries.

This enhanced our exports, closing the year with approximately 60% of sales coming from other countries, driven by Transmissions, Pork Meat and Chemical businesses. The high quality of our processes and products was once more recognized.

The focus on sustainability, as a key mechanism for creating value for our shareholders and stakeholders, has been part of KUO’s DNA since its foundation. It continues to be reflected in our commitment to the well-being, health and safety of our people and the communities where we are located, as well as our actions to care for and improve the environment and natural resources. It also drives the optimization of processes and products for customers and suppliers, with a solid responsibility in terms of Transparency, Integrity and Corporate Governance.

The challenging and adverse events we experienced during 2020 reinforced the importance of having professional work teams. Our Human Capital continues to be the cornerstone for maintaining the continuity of operations, resolving complex situations, and supporting the Company´s current and future projects. We would like to emphasize our gratitude for their work, their incredible capacity to adapt and react to obstacles, delivering results even in adverse moments, aligned with KUO’s long-term strategy.

OPERATING AND FINANCIAL HIGHLIGHTS

From the third quarter of the year, there was a sequential improvement in the portfolio businesses, which was reflected in a proforma combined annual Revenue growth of 8.4%. This increase is explained by higher sales volume in the export market, which represented 58% of total sales.

At the end of the year, within the portfolio, the Consumer sector accounted for 51% of KUO’s total Revenue, followed by the Chemical sector with 26% and Automotive with 23%.

Revenue growth in the Consumer sector is explained by the performance of both businesses. Pork Meat Business recorded a strong increase in export sales volume to China, while Maxicarne retail channel implemented a home delivery platform, to adapt to new customers needs during the health contingency, ending the year with 491 stores in operation.

In addition to the tuna business divestiture, Herdez Del Fuerte had a solid demand in the domestic market, underscoring tomato puree, salsas, and mole categories, as well as salsas and guacamole in the United States, offsetting the weak performance of the Food Service sector, which began to recover in the fourth quarter of the year. Automotive sector recorded an increase in Revenue when compared to the previous year, mainly derived from the sales of DCT’s to GM’s “2020 Chevrolet Corvette Stingray” and Ford’s “Mustang Shelby GT500” platforms. In addition to greater demand for engine and brake parts in the Aftermarket business.

This offset the lower sales level in Chemical sector, which was affected by a decrease in prices of main raw materials, butadiene and styrene. This was partially mitigated by higher sales volume in both businesses, especially in medical applications, asphalts and adhesives. There was also a recovery in the tire industry towards the end of the year in the Synthetic Rubber business, combined with higher export sales in the Polymers Business, mainly in the disposable segment.

EBITDA declined, mostly due to the expenses associated with the fire in the processing plant of the Pork Meat Business. This was partially offset by a better mix and higher absorption in Transmissions, Herdez Del Fuerte, Synthetic Rubber and Polymers businesses, coupled with a significant working capital improvement, particularly in inventories, combined with strict cost control and strong collection in the second half of the year.

During 2020, we maintained our focus on strengthening our financial structure, reducing net debt by 16% compared to the end of the previous year. Foreign-currency-denominated liabilities and costs were compensated by the generation of dollar-denominated Revenue.

The balance of our business model, as well as the investments in productive assets that we have made in recent years, have been decisive in obtaining positive results. Even in adverse conditions, we have been able to strengthen the positioning of our brands and products in the markets in which we participate.

GOING FORWARD

We anticipate a challenging 2021, however, the expected growth in the United States and Mexico’s economies, as well as total recovery of insurance resources, should have a very favorable impact on KUO’s volumes and results.

We will continue to focus on the competitive advantages that differentiate us from other players, adapting and reacting to new global circumstances.

The health and safety of our people in our operations will continue to be the Company´s top priority, and we will continue to work to enhance prevention and care measures.

We are looking to ensure the operational continuity of all the businesses in our portfolio, focusing on innovation and improvement of processes and products.

We are excited about the reconstruction of the processing plant in the Pork Meat business, which will boost our production capacity, expand our export offering to different countries in Asia and the Americas, and consolidate our position as the largest pork meat producer in the country.

In Herdez Del Fuerte business, we will continue to promote main categories in the local market and in the United States.

Transmissions business should consolidate our investment in DCT technology, making our brand a global benchmark in the high-performance segment.

We will focus our attention on diversification in Chemical businesses, with the strategy of increasing the proportion of value-added applications, while reinforcing the integration of circular economies.

Over the years, we have oriented our sustainability strategy on three main pillars, environment, people, and governance, as the only way to guarantee the Company’s permanence in the future. All the initiatives that we have promoted have resulted in efficiencies in environmental matters and quality control, in greater bonding with the communities, in the strengthening of corporate governance and in the comprehensive development of our people, with special emphasis on the safety of employees and facilities, to continue creating value for our shareholders and stakeholders.

Finally, we recognize the thousands of people who make up KUO, whose work is essential. We also want to thank our partners, customers, suppliers and shareholders for their continued support and trust placed in the Company. We are confident that with our focus on creating value with profitability we will continue writing a success story.