advancing 2013 Annual Report 1
our company Vitro, S.A.B. de C.V. (BMV: VITROA) is the leading glass manufacturer in Mexico and one of the world s major companies in its industry, backed by more than 100 years of experience. Founded in 1909 in Monterrey, Mexico, the Company has subsidiaries in the Americas, offering quality products and reliable services to meet the needs of two businesses: glass containers and flat glass. Companies of Vitro produce, process, distribute, and market a wide range of glass articles, which are part of the daily life of thousands of people. Vitro offers solutions for multiple markets, including food, beverage, wine, liquor, beer, cosmetic, and pharmaceutical, as well as architectural and automotive. The Company is also a supplier of raw material, machinery, and equipment for industrial use. As a socially responsible organization, Vitro works on several initiatives aligned to its Sustainability Model, aiming to create a positive influence in the economic, social, and environmental aspects relevant to its stakeholders, in a responsible corporate management framework. Content 2 Global Presence 4 Financial Highlights 6 Message from the Chairman of the Board 10 Message from the Chief Executive Officer 14 Board of Directors 18 Glass Conteiners 26 Flat Glass 34 Sustainable Development 42 Operating and Financial Analysis 49 Management s Financial Responsibility 50 Financial Statements
Vitro philosophy Vision To become a leading company in the glass industry, in terms of profitability, efficiency, quality, and service. Mission Vitro is a customer-committed organization dedicated to provide value-added products and services in profitable and growing markets. Values Customer Orientation: The customer as the source and ultimate goal of our business. Quality: Constantly meet and exceed customer s expectations. Creativity and Innovation: Permanently seek new ideas to create and improve our value-added products and services. Integrity: Meet and exceed expected ethical behavior. Teamwork: Connect efforts and talents across colleagues. 1
global presence Vitro has advanced for over 100 years to become the leading glass manufacturer in Mexico and one of the world s major companies in its industry. Subsidiaries Glass Containers Vitro Envases Norteamérica Industria del Álcali Comercializadora Álcali Servicios Industria del Álcali Vidrio Lux Vitro Packaging de México Vitro Packaging Servicios Integrales de Acabados Fabricación de Máquinas Vidriera Guadalajara Vidriera Los Reyes Vidriera Monterrey Vidriera Querétaro Vidriera Toluca Flat Glass Viméxico Vitro Vidrio y Cristal Vitro Automotriz Vitro Flex Vidrio Plano de Mexicali Vidrio y Cristal del Noroeste Vitrocar Vitro Colombia Cristales Inastillables de México Vitro Flotado Cubiertas Vidrio Plano de México Lan Cristales Automotrices In a joint-venture with the Posselt family, who owns 49%) Vitro Do Brasil Industria E Comercio Productos de Valor Agregado en Cristal 2
Our products are common in the daily life of millions of people who buy products in glass containers, use vehicles with automotive glass, and live in dwellings that have the best architectural glass, just to mention some examples. Vitro has operations and direct distribution in 8 countries of the Americas. Furthermore, through solid business relations with the leading corporations in each of the markets we serve, our products reach over 30 countries around the world. Our facilities Mexico Bolivia Brazil Colombia Costa Rica United States Guatemala Panama Our products Argentina Barbados Bolivia Brazil Canada Chile Colombia Costa Rica Cuba Ecuador El Salvador France Germany Greece Guatemala Honduras Italy Japan Mexico Nicaragua Panama Peru Philippines Poland Puerto Rico Russia South Korea Spain Switzerland Trinidad and Tobago United Kingdom United States Uruguay Venezuela 3
Vitro, S.A.B de C.V. and Subsidiaries financial highlights (In millions of mexican pesos under IFRS, except where indicated otherwise; dollar figures are in millions of US dollars). US $ (1) % Ps (2) % 2013 2012 change (3) 2013 2012 change (3) Income Statement Consolidated net sales $1,675 $1,759 (4.8) $ 21,538 $23,112 (6.8) Domestic 1,062 1,118 (5.0) 13,657 14,599 (6.5) Export 560 588 (4.7) 7,205 7,822 (7.9) Foreign subsidiaries 52 53 (0.3) 676 691 (2.3) Operating income before other (EBIT) 210 179 16.8 2,680 2,363 13.4 Net income 49 208 576 2,605 Net income of majority interest 50 211 582 2,651 Net income of majority interest earnings per common share (4) 0.14 0.61 1.68 7.65 EBITDA (5) 355 341 4.3 4,553 4,481 1.6 Balance Sheet Total assets 2,555 2,705 (5.5) 33,434 35,074 (4.7) Total liabilities 2,067 2,308 (10.4) 27,047 29,926 (9.6) Stockholders equity 488 397 23.1 6,387 5,148 24.1 Stockholders equity of majority interest 390 300 29.9 5,099 3,895 30.9 Financial Indicators Debt / EBITDA (times) 3.6 3.4 3.6 3.3 Net Debt (7) / EBITDA (times) 3.0 2.8 3.1 2.7 Interest Coverage (times) 2.7 1.8 2.6 1.8 (EBITDA / total net financial expense) EBIT Margin (%) 12.5 10.2 12.4 10.2 EBITDA Margin (%) 21.2 19.4 21.1 19.4 Personnel 15,279 16,229 (5.9) 15,279 16,229 (5.9) Capital expenditures (6) 139 85 62.4 1,782 1,118 59.4 (1) Dollar figures reported herein are in nominal dollars resulting from dividing each month s nominal pesos by that month s ending exchange rate. (2) Financial data is presented in nominal pesos. (3) Change from 2012 to 2013. (4) Based on the weighted average shares outstanding. (5) EBITDA = earning before other, interest, taxes plus depreciation and amortization, and provision for employee retirement obligations. (6) Represents the capital expeditures carried out during the year, for which differs of the investments presented in the cash flow. (7) Debt net to cash and equivalents Financial statements were prepared according to International Financial Reporting Standards (IFRS). 4
Consolidated net sales Dollars Pesos 1,321 1,500 1,684 1,759 1,675 09 10 11 12 13 138 139 157 179 210 09 10 11 12 13 262 281 338 341 355 3,553 3,558 4,220 4,481 4,553 1,874 1,766 1,969 2,363 2,680 17,885 18,954 20,951 23,112 21,538 09 10 11 12 13 Operating income (EBIT) Dollars Pesos 09 10 11 12 13 EBITDA Dollars Pesos 09 10 11 12 13 09 10 11 12 13 La The información financial information financiera for the years de los 2009 años and 2009 2010 is y prepared 2010 está under preparada Mexican Financial bajo Reporting Normas Standards Mexicanas (MFRS); de the Información one corresponding Financiera to 2011, (NIFS); 2012, la and correspondiente 2013 is prepared under a 2011, International 2012 Financial y 2013 Reporting está preparada Standards (IFRS). bajo IFRS. 5
message from the chairman of the board 2013 was crucial in our company s history. Based on the satisfactory progress of our various agreements with creditors and partners to conclude the financial restructuring process, Vitro positioned itself in the ideal conditions to advance with firm steps towards profitability and sustainable growth. Dear Shareholders: Reaching agreements helped to eliminate the last uncertainty barriers that diverted us from the road towards future growth. The goal was reached and it was time to advance, to concentrate our efforts in the business operation, and to prove to our stakeholders that our daily actions are aimed at turning Vitro into the best option to work with and do business. On March 2013, the Board of Directors appointed Adrián Sada Cueva as Chief Executive Officer. Based on an assessment of his profile and experience, it was determined that he is the appropriate candidate to lead the organization in this new stage. This consideration had the favorable opinion of the Corporate Practices Committee, composed in its entirety of Independent Directors. Likewise, Mr. David M. Martínez Guzmán and Mr. Ricardo Guajardo Touché were elected to the Board of Directors and other Directors were also ratified in the General Ordinary Shareholders Meeting held on April 29, 2013. In 2013, we carried out several actions that enabled us to strengthen the financial position required by the organization to capitalize the opportunities that arise. Our goal is to continue and reinforce a tight collaboration with our clients to comply with their needs and work as a team with them to meet the expectations of consumers in all the markets where they participate. On September 5, 2013, the Company held a Special General Shareholders Meeting in which it was authorized to amend its bylaws to include the participation of foreigners in Vitro, as well as the merger of its subsidiaries FIC Regiomontano, S.A.P.I. de C.V. ( FIC ) and Compañía Vidriera, S.A. de C.V. ( COVISA ) into Vitro, S.A.B. de C.V., process considered when our restructuring plan concluded. With the foregoing, the corporate statutes of Vitro were adjusted so that it can also carry out the activities performed by said companies. The purpose of the merger is to optimize financial and administrative resources, while covering the debt service more efficiently without affecting operations or the stakeholders involved in its value chain. Additionally, one of the agreements entered into by Vitro and its financial partner Fintech is complied with. Said merger became effective on January 1, 2014, as determined by the Special General 6
7
Shareholders Meeting held on December 11, 2013. As a result of the merger, the capital stock of Vitro increased 20 percent, same that subsequently became property of Fintech in compliance with the agreements reached on March 2013. Another element that supports our commitment to ensuring the viability of the organization as a business and to strengthening its financial position was the prepayment on the Mandatory Convertible Debentures ( MCDs ) that otherwise would have matured on December 2015. The aggregate unpaid balance, including accrued interest and discount for the advance payment, was $123 million dollars. This action provides our shareholders with the certainty that the contingency of a possible conversion of this instrument into shares of the Company has been eliminated. Furthermore, by making the advance payment we obtained a 5 percent discount and eliminated a debt that had an annual cost of 12 percent. Consistent with directing Vitro to a consolidated level of financial stability, a new issuance program was successfully completed on November 2013, guaranteed by the trade receivable of four of our subsidiaries. The issuance, with a face value of $1,200 million pesos, a three-year maturity, and an interbank equilibrium interest rate plus 1.7 percent, has two AAA ratings granted by Standard & Poor s and HR Ratings. These instruments have a great financial strength resulting from the diversification of the portfolio in the markets served by Vitro and from the large number of clients, leaders in their sectors. Consequently, Vitro s total debt closed at $1,262 million dollars at December 31, 2013. The implementation of the agreements and their duties, as well as the outstanding performance of the organization, has been reflected in the confidence of the capital market in our Company. I am pleased to inform that the share price at December 31, 2013 quoted at $33.50 pesos, practically double its value on December 2012, which was $16.27 pesos at that time. All these efforts plus the cost and expense reduction programs, directed at resource optimization; the selective investment in our trasactions; and the disinvestment on non-strategic assets, have maintained the Company in the right path, without changing the attention of our operations and with the firm conviction of creating value for our shareholders and stakeholders. Even within these positive advances, 2013 presented challenging conditions to our company. The late establishment of governmental reforms in our country slowed down the growth dynamics in some sectors where we participate and markets evolved with great caution. According to data of the International Monetary Fund ( IMF ), Mexico s gross domestic product at the closing of the year was merely 1.2 percent above the one recorded in 2012. This as a result of the downward adjustments made throughout the year on projections that were originally more positive. The performance of economies in other countries where we participate also reflected little growth. Under these circumstances, at Vitro we seek to implement the financial and business strategies that will enable us to continue in the direction we have set. Also in 2013, we made investments of $139 million dollars, therewith ensuring that our production plants, machinery, and equipment are in optimal conditions to properly and timely meet our clients demands. This provides the Company with competitive advantages to timely respond to market requirements and under high quality and specialization standards. 8
Vitro has the necessary basis to be the best option in all aspects for its stakeholders. We have great human talent, financial strategies to cover debt according to payment capacity, continuous improvement programs in operations and product innovation, and, most importantly, the trust and loyalty of our clients. The sum of all initiatives that we have undertaken has improved our financial condition. The creation of greater certainty has favored our clients to turn to us to form part of their new projects. After several strategic actions and decisions taken during the year, some of them difficult, it gratifies me to inform that the mandate of the Board of Directors has been complied with by focusing Vitro on the development of its business lines with a sound financial structure that creates value for you on the long term. Creating value is not limited to having a sound financial condition and operations functioning correctly. Both are just a part of the process. Therefore, we assume our social responsibility and work for the sustainable development of our communities. I am pleased to announce that, for the sixth consecutive year, our company received the CSR Seal that, among other things, recognizes that the Company operates with the highest standards on responsible and commitment corporate management. The company also holds the Sustainable Company Seal endorsed by the Mexican Stock Exchange ( BMV ), which recognizes the initiatives in favor of the environment, social action, and corporate governance. Our adherence to the strictest applicable corporate governance practices is congruent with our duty to deliver value in the long term to our shareholders and stakeholders. As a result, the Self-Evaluation System of the Board of Directors and its Committees was implemented in 2013, hence guaranteeing that the strategic decisions of the Company are taken objectively and for your benefit. During 2014, the results of the evaluation will be submitted to the Corporate Practices Committee in order to define an action plan to handle the results produced. The implementation, which is anonymous and digital, is intended to be made on an annual basis. Moreover, the Finance and Planning Committee turned into the new Chairmanship Committee, responsible for advising and monitoring certain strategic projects of the Chief Executive Office. With this, the expertise of the Directors is capitalized through a flexible and dynamic integration to the emerging needs of the organization. In summary, during 2013 we were not only capable of advancing and performing the financial and operating agreements following the conclusion of the restructuring process; we also concluded its implementation satisfactorily. This is an example of the seriousness, commitment, and responsibility of the executive team and all collaborators for making Vitro an organization whose presence will continue to transcend in time. Vitro has the necessary basis to be the best option in all aspects for its stakeholders. We have great human talent, financial strategies to cover debt according to payment capacity, continuous improvement programs in operations and product innovation, and, most importantly, the trust and loyalty of our clients. Dear shareholders, on behalf of the Board of Directors, I thank you for your support in the resolutions taken. We reiterate our commitment to always act for the benefit of the Company so it can consolidate as a profitable and sustainable organization within a transparency and corporate ethics framework. Sincerely, Adrián Sada González Chairman of the Board Vitro, S.A.B. de C.V. March 11, 2014 9
message from the chief executive officer 2013 was a year that meant closing cycles and also opening new horizons, a transition and progress period in which decisions were made to strengthen the operational and financial bases of our business. Dear shareholders: It is very satisfactory to me to share with you several of the most outstanding events of 2013 and the actions implemented to lead the Company to a profitable and sustainable growth, on a solid and reliable financial condition. During the first quarter of 2013, corresponding transactions were carried out to definitively conclude the financial restructuring process. The agreements published at that time, granted Vitro the necessary flexibility to advance on its operational performance and in configuring a debt level according to the Company s payment capabilities. Last April, a change in the organizational structure was implemented with the purpose of accelerating decision-making and focusing activities towards our businesses. This reconfiguration modified an organizational level, providing important operational and economic benefits to Vitro. Furthermore, on July we completed the prepayment of Mandatory Convertible Debentures ( MCDs ) amounting to $123 million dollars. As a result, we eliminated the possibility of such notes being converted to 20 percent of Vitro s capital stock, significantly reducing any uncertainty for our shareholders. It is important to note that this payment was possible given the Company s good liquidity position, due both to the positive performance of the business and to the sale of corporate property. At the beginning of the year, it was evident that 2013 would be challenging for our operations from a commercial point of view. On one part, the demand volume for containers in the beer segment was perceived as weak. In addition, some automotive clients of the original equipment segment decided to reassign their platforms with other suppliers at the final phase of our restructuring process. Moreover, the political environment and uncertainty, linked to the recently approved reforms, caused a weak economic growth in Mexico. The increase recorded in the price of natural gas was another factor that had a strong impact on our operations. Given the circumstances, we embraced the task of implementing a series of initiatives to mitigate a potential negative impact. Consequently, we launched a cost reduction program that contributed $38 million dollars. Likewise, we managed to increase our sales 7 percent on all segments of the Containers business, beer excluded, thus reducing the effects resulting from the change in demand in said market. 10
11
Dear shareholders: Vitro is an organization with proven experience and a solid financial condition. The enthusiasm of our team, added to the capacity and efficiency of our processes, compel me to confirm that we are in the right road to strengthen the leadership of our business in the markets we service. Also, we attained an increase of 32 percent on the exports of the Flat Glass business related to the construction market, lessening the decline in the consumption of float glass by our automotive subsidiary. As a result of the aforementioned efforts and notwithstanding the decline in sales, from $1,759 million dollars in 2012 to $1,675 million in 2013 due to the demand contraction, our Operating income before other ( EBIT ) reflects an increase of 17 percent, year-over-year, with $210 million dollars in 2013 to $179 million at the previous closing. In this same regard, the Operating Flow ( EBITDA ) closed at $355 million dollars, an increase of 4 percent, year-over-year, in relation to 2012 when it reached $341 million dollars. Also, our Net Operating Flow rose 28 percent, from $293 million dollars in 2012 to $375 million in 2013. The foregoing enabled us to invest in operations in a total amount of $139 million dollars throughout the year, which helps to position Vitro more competitively in the markets where we participate. We have been capable to face adversity once again. We view problems as opportunities and use creativity to find solutions, all to comply with our main purpose: create value for you and for the rest of our stakeholders. At the year s closing, we can conclude that we had favorable results despite the highly challenging environment. Even when our sales had a slight decrease, the initiatives we undertook in the financial field, as well as operating initiatives, have created a solid base for a stronger and more stable Vitro. Awards Our Company also received different recognitions and certificates that confirm us as an organization committed to innovation, quality, social responsibility, and creation of value. For third consecutive year, Vitro is among the best companies to work for in Mexico according to the list of Super Companies prepared by the magazine Expansion. Accordingly, our plants of Vidrio y Cristal Mexicali, Vidrio Plano de Mexico Lan, and Vidriera Los Reyes were recognized by the Great Place to Work Institute ( GPTWI ) in its 2013 ranking. Among the awards we received is the one granted by the World Packaging Organisation ( WPO ) to the container for the fragrance Diviníssima No.1. Also, we obtained 47 awards in the 28th Annual Contest Envase y Embalaje Estelar organized by the Asociación Mexicana de Envase y Embalaje ( AMEE, Mexican Containers and Packaging Association). Additionally, two more containers were awarded by the Glass Packaging Institute ( GPI ). One of them stands out for having received the President s Choice Award, given for the first time. Regarding ecological matters, the Secretaría de Medio Ambiente y Recursos Naturales ( SEMARNAT, Ministry of Environment and Natural Resources of Mexico) recognized Vitro for its project for mitigating greenhouse gas emissions obtaining level GEI3, which is the highest recognition level of the Greenhouse Gas Emissions Program ( GEI, for its acronym in Spanish). 12
Also, the Company received for a sixth consecutive time the CSR Seal ( ESR, for its acronym in Spanish) granted by the Centro Mexicano para la Filantropía ( Cemefi ). We also preserved for a third year the Sustainable Company Seal endorsed by the Mexican Stock Exchange. With the conclusion of the transition period, we are at a new stage where we advance with the necessary vitality to lead our company to success and commendable recognition of over 100 years of experience. Forecasts As every year, forecasts for 2014 entail big challenges and opportunities. We view as an opportunity the prospect of an increment in the production of the automotive industry in Mexico in the medium and long term. Similarly, we expect a growing demand in the construction market in the United States. Without a doubt, the energy reform implemented in Mexico will position our industry in a more attractive manner in the medium term, as a result of the economic growth expectation estimated for Mexico. Furthermore, we expect it will create greater natural gas availability at competitive costs in the future. Challenges related to a greater inflationary pressure, attributed to the cost of natural gas and other energy products, are among the main challenges for 2014. Likewise, we have anticipated that we will work very closely with our clients in the beverage segment to face the effects of the special tax on sugary beverages for such products in Mexico. In the Flat Glass business we will encounter greater pressure resulting from more competition in the automotive market, where an increase in the production capacity of our competitors is foreseen. Dear shareholders: Vitro is an organization with proven experience and a solid financial condition. The enthusiasm of our team, added to the capacity and efficiency of our processes, compel me to confirm that we are in the right road to strengthen the leadership of our business in the markets we service. Lastly, on behalf of all of us that form part of this company, I express our gratitude and acknowledgment to all shareholders, clients, suppliers, and creditors for their confidence. We ratify our commitment to continue working arduously, making our company your best option. Sincerely, Adrián Sada Cueva Chief Executive Officer Vitro, S.A.B. de C.V. March 11, 2014 13
board of directors Adrián Sada González 1944 Member since 1984 Chairman of the Board Board Member of Alfa, Gruma, Cydsa, Consejo Mexicano de Hombres de Negocios ( CMHN ), and Grupo de Industriales de Nuevo León. Álvaro Fernández Garza 1968 Member since 2011 Chief Executive Officer of Alfa and Board Member of Alfa and Cydsa. He is also a Board Member of the Executive Committee of Universidad de Monterrey, Museo de Arte Contemporáneo de Monterrey ( MARCO ), and Georgetown University Tomás González Sada 1943 Member since 1980 Chairman of the Board and Chief Executive Officer of Cydsa, Vice President of Instituto Mexicano para la Competitividad ( IMCO ), Honorary Consul of Japan at Monterrey, Mexico, as well as Treasurer of the Martínez Sada Foundation and Member of the Regional Board of Banco de México. He is also a Board Member of Consejo Mexicano de Hombres de Negocios ( CMHN ) and Member of the Patronage of Cáritas de Monterrey. Ricardo Guajardo Touché 1948 Member since 2013 Chairman of Solfi and Board Member of BBVA Bancomer, Valores de Monterrey, Bimbo, Liverpool, Alfa, Grupo Aeroportuario del Sureste, Coppel, and Coca-Cola Femsa. He has served in various executive positions for companies such as BBVA Bancomer, Valores de Monterrey, Femsa, and Grupo AXA. Mario Laborín Gómez 1952 Member since 2010 Chairman of ABC Holding, Chief Executive Officer of Bacomext (2006-2008), Chief Executive Officer of Nacional Financiera (2000-2008), Chief Executive Officer of Bancomer and Chairman of its brokerage firm (1991-2000), as well as Chairman and Founder of Mexder (1998-2000) and Co-Founder and Chief Executive Officer of Grupo Vector (1986-1990). He served as Board Member of TV Azteca, Cervecería Cuauhtémoc, Transportación Marítima Mexicana, Bancomer, Bolsa Mexicana de Valores, Mexder, Indeval, Xignux, Megacable, Cydsa, and Gruma. 14
Ricardo Martín Bringas 1960 Member since 2007 President of the Corporate Practices Committee Chief Executive Officer and Board Member of Organización Soriana, as well as Board Member of Teléfonos de México, Aeroméxico, Grupo Financiero Banamex, Grupo Senda, Madisa, Consejo Mexicano de Hombres de Negocios ( CMHN ), Grupo de Empresarios de Nuevo León, and Asociación Nacional de Tiendas de Autoservicio y Departamentales ( ANTAD ). He has also served as Chairman of the Patronage for Hospital Regional Materno Infantil. David Martínez Guzmán 1957 Member since 2013 Managing Director of Fintech Advisory Limited and Board Member of Alfa. Guillermo Ortiz Martínez 1948 Member since 2010 Chairman of Grupo Financiero Banorte, as well as Founder and President of Guillermo Ortiz y Asociados. He is Member of the Group of Thirty and Board Member of Bombardier, Grupo Aeroportuario del Sureste, Mexichem, Grupo Comercial Chedraui, and Weatherford International Ltd., as well as Member of the International Board of Zurich Insurance Group. He served as Chairman of the Bank for International Settlements (2009); Governor of Banco de México (1998-2009), and Secretary of Finance and Public Credit in the Mexican Federal Government (1994-1997). At the International Monetary Fund, he chaired the External Panel for the Review of the Fund s Risk Management Framework (2010-2011) and also served as Managing Director (1984-1988). Jaime Rico Garza 1957 Member since 2008 Chief Executive Officer and Chairman of the Board of Vitro Europa and Vitro Global, as well as Board Member and Vice-President of Vitro Cristalglass (2007-2012). Adrián G. Sada Cueva 1975 Member since 2010 Chief Executive Officer Board Member of Empresas Comegua, Club Industrial de Monterrey, Confederación Patronal de la República Mexicana ( COPARMEX ) Nuevo León, Grupo Financiero Banorte, and Banco Mercantil del Norte, as well as Member of the General Board of Universidad de Monterrey and Board Member of Cámara de la Industria de Transformación ( CAINTRA ) 15
Nuevo León. He is also a Board Member of civil organizations such as Pronatura Noreste, Organización Vida Silvestre, Salinas del Pacífico, and Club Deportivo Cazadores Monterrey. At Vitro, he has held the executive positions of President of the Glass Containers business unit (2012-2013), Chief Operating Officer of Glass Containers (2011), Vice President of Administration and Finance of Vitro s Glass Containers business unit (2009-2010), Chief Executive Officer of Vitro Automotriz (2006-2008), and President of Vitro Cristalglass (2003-2005). Federico Sada Melo 1979 Member since 2009 Director of Exports & Value-Added Products of Vitro s Flat Glass business unit. He is also a Board Member of Instituto de Empresa Alumni. Jaime Serra Puche 1951 Member since 1998 President of SAI Consultores, Founder of Aklara (Electronic Auctions), Centro de Arbitraje de México ( CAM ), and the Mexico NAFTA Fund (Private Capital Fund). He has served as Board Member of Fondo México, Tenaris, Grupo Modelo, and Alpek, as well as Member of Yale University s Patronage (1994-2001). He held several positions in the Mexican Federal Government (1986-1994), as Undersecretary of Revenue, Secretary of Trade, and Secretary of Finance. Currently, he co-chairs the President s Council on International Activities of Yale University and he is a Trustee for the Trilateral Commission. Joaquín Vargas Guajardo 1954 Member since 2000 President of the Audit Committee Chairman of the Board of Grupo MVS Comunicaciones and Grupo CMR. He is also Board Member of Grupo Financiero Santander, Grupo Costamex, El Universal, Consejo Superior de la Universidad Panamericana, Grupo Aeroportuario del Pacífico, and Médica Sur. He served as Chairman of Cámara Nacional de la Industria de Radio y Televisión (2000-2001), Chairman of Asociación Mexicana de Restaurantes (1985-1987), and Chairman of Asociación de Directores de Cadenas de Restaurantes (1989). Alejandro F. Sánchez Mújica 1954 Secretary of the Board since 2007 Board Member of several Mexican and foreign companies and associations, such as Empresas Comegua and The University of Texas Lady Bird Johnson Wildflower Center. Currently, he is a Senior Partner of Rivera Gaxiola, Carrasco y Barrera y Sánchez Mújica, as well as Secretary of the Parque Ecológico Chipinques s Patronage. He served as Vitro s Executive Vice President and General Counsel (2005-2013), Senior Partner at Thompson & Knight (2003-2005), General Counsel of Grupo Pulsar/Savia (1982-2003), General Counsel of Grupo Kuo s Petrochemical business unit (1975-1981) and Legal Manager of Indeval (1973-1975). 16
committees of the board of directors Audit Committee Chairman Joaquín Vargas Guajardo * Guillermo Ortiz Martínez * Jaime Serra Puche * Jonathan Davis Arzac** Secretary Claudio L. Del Valle Cabello *** Corporate Practices Committee Chairman Ricardo Martín Bringas * Joaquín Vargas Guajardo* Guillermo Ortiz Martínez * Secretary Alejandro F. Sánchez Mújica*** Chairmanship Committee Chairman Adrián Sada González Adrián Sada Cueva Secretary Claudio L. Del Valle Cabello *** * Independent Director ** Financial Expert, not a Member *** Secretary, not a Member 17
24 EBIT GROWTH Increase in million dollars. 5 CERTIFIED PLANTS After the implementations of the food safety program in 2013, under FSSC. 18
Containers advances consistently and provides comprehensive services to our clients in the beverage, beer, wine and liquor, perfume, cosmetics, and pharmaceutical industries. We have a history and a vocation of service that validate our undoubted leadership in the production of glass containers in Mexico. glass containers 1,148 SALES USD$ Consolidated net sales for 2013, in million dollars. 19
24 NEW PRODUCTS Percentage growth in new products, excluding the beer segment. Overview of 2013 An important year filled with challenges and opportunities, especially in the container business. Notwithstanding the challenging economic and operating environment, the results at the closing of the year were favorable. The economic downturn caused by the delay in approving important structural reforms in Mexico, in addition to two strong natural disasters that impacted the country and affected our logistics network during the third quarter, were a true challenge. Likewise and as we had anticipated, the beer segment was not as dynamic as it was in 2012, when the launch of new presentations by our clients in that industry resulted in an atypical sales volume. However, in 2013 we had a good general performance in the rest of the segments. Furthermore, there was an important spike in the price of natural gas, one of our most important supplies. Despite this increase that affected our results, we were able to counteract the adverse effect through the strict cost reduction programs that our collaborators have successfully implemented. We have always seen obstacles as areas of opportunity. As a result, once again, our innovative capacity greatly helped our products go into previously unexplored lines of business. In 2013, new product development amounted to an 11 percent share in sales for this business, which meant 24 percent more new proposals compared to 2012, if we exclude 20
In line with our vision of staying in the leadership of the glass industry, we permanently analyze the trends and needs of the market. the beer segment that had an atypical behavior, as we have already mentioned. Another remarkable success was our increased market share in the juice line of business, as well as the growing volume of returnable containers and the progressive spike in the nostalgia market in the United States, both for the soft drink industry. With regard to the perfume, cosmetics, and pharmaceutical containers segment, we had moderate growth, particularly as a result of a contraction in such industry, which has caused a good part of our clients to reduce volumes visà-vis this situation; this is not the case in the nail polish and pharmaceutical containers subdivision, which showed an excellent performance. On this regard, in 2013 we consolidated important projects that allow us to produce small orders, while at the same time having the capacity to combine them with larger production From the technological point of view, our machines and equipment are designed to fulfill large volume demands and they likewise have the flexibility to produce small orders. Thus, we have the capacity to service clients whose container orders are smaller, or more specialized. On this regard, in 2013 we consolidated important projects that allow us to produce small orders, while at the same time having the capacity to combine them with larger production, therefore, we provide our services to clients with diverse requirements. In line with our vision of staying in the leadership of the glass industry, we permanently analyze the trends and needs of the market. We place special care on efficiency, 21
quality, and service, with the firm conviction of reducing flaws in our operations, business dynamics and internal development. Last June, we completed the renovation of one of the furnaces at Vidriera Querétaro, one of our plants in the central region of Mexico. This improvement represents an increase in the capacity and useful life of the furnace, which now has more advanced technology to monitor each stage of the process, guaranteeing consistency in the quality and shape of all the containers being produced. With its startup, Vitro strengthens the competitive advantage that distinguishes us, having the capacity to fulfill the strictest market requests and to adequately respond to the most diverse needs for containers of all kinds. At our facilities in Bolivia, we also started a major maintenance and expansion program with which Vidrio Lux will be prepared to service not only the local market but the glass container industry for the whole region. Our expectation is to complete this project during the first quarter of 2014. For the purpose of advancing in our commitment to protect consumer health and to guarantee the safety of our products during their life cycle, all the container plants in Mexico were certified under the Food Safety System Certification ( FSSC ) 22000. This international platform guarantees compliance with the highest quality and safety standards for our products. 22
In the glass container business, creativity, originality, and functionality are qualities that jointly provide greater added value to the product they will contain. Thus, our marketing, commercial, and design departments work in synchronization to offer tailor made strategies for the different categories and clients. In the glass container business, creativity, originality, and functionality are qualities that jointly provide greater added value to the product they will contain. Thus, our marketing, commercial, and design departments work in synchronization to offer tailor made strategies for the different categories and clients. From the coordinated efforts and the creative minds of our design team, the Asociación Mexicana de Envase y Embalaje ( AMEE ) granted us 47 awards in recognition of our quality, safety, service, and innovation. One of our containers for the food segment was especially distinguished for obtaining the highest rating issued by the jury. At the international level, the Glass Packaging Institute ( GPI ), in its annual Clear Choice Awards event, presented awards for two containers designed and produced by Vitro: one in the cosmetics and perfume category, where our containers have been undisputed leaders for over a decade, and another one received the President s Choice Award, given for the first time, for having successfully reconverted from another material to glass. Likewise, the World Packaging Organisation ( WPO ) recognized one of our containers in the beauty category. The results in these contests speak for themselves, Vitro has a consolidated position in the industry as a result of its capacity to fulfill the needs of its clients in a specialized manner. A clear example of this was also the application of bi-oriented polypropylene ( BOPP ) film labels in a curvy glass container. Vitro is the first glass company in the world to achieve this, an unprecedented action that places us in front of our competitors. With advances such as these, we reaffirm our leadership and commitment to fulfill our clients requirements in the best possible way. Another specialized market sector in which we strongly participate is Premium Containers, mainly in the wine and liquor segment, focused on a knowledgeable and demanding consumption niche which enjoys exclusive cutting edge products. In these cases, our production capacity with small orders offers an additional competitive advantage that puts us in a favorable position in the market. Vitro Packaging, our subsidiary in the United States entrusted with servicing our container clients in such country, also had an excellent performance. It had monthly sales records during seven periods throughout the year. Focusing on operational excellence, the container plants have started transforming their operations with the Continuous Improvement Model, to have the same work method based on best practices. This is how we seek to increase client satisfaction, elevate quality levels, and increase productivity through control and measurement tools for each process. This Model brings the flexibility of our capabilities to serve our clients in an even better way. Given that we are aware of the multiple unique characteristics of glass containers: they are 100 percent recyclable, do not pollute, do not keep odors, preserve integral tastes and are easy to clean, among other virtues, since 2011, we have made efforts to also promote glass appreciation among consumers in Mexico, through our Movimiento de la Transparencia. Balance A clear and standardized work methodology based on operational discipline, strict cost control programs, solid commercial strategies, and the great capacity of our people are the tools that helped us get through the challenges that Containers faced during 2013. At year s closing, the business reported consolidated sales of $1,148 million dollars, 3 percent less than the $1,188 million dollars achieved in 2012. It is important to restate that during 2012, the beer container segment experienced atypical growth due to one of our clients in such sector having made an important launch of new presentations, which established an extraordinary sales base in 2012. If we isolate such factor, growth when compared to 2012 was 7 percent. In terms of profitability, our EBIT increased from $151 million dollars to $188 million dollars, 24 percent more than 2012, and our EBITDA reflects a 12 percent increase, at $296 million dollars for 2013, in contrast to $265 million dollars in 2012. These results benefited from the strict cost reduction programs, operational efficiency, tax 23
stimuli for job creation, and the cash proceeds from an insurance policy; these last two are nonrecurring events. Forecasts 2014 is expected to be a challenging year for our business. Some of our Mexican clients that produce soft drinks, juice, and food with high caloric content will be affected by the newly implemented tax reform. The foregoing will result in challenges to the growth in sales volume, and will lead us to come up with strategies that will allow us to turn this threat into an opportunity. We expect that the reduced performance in the cosmetics industry will continue, therefore we are ready to open up to new opportunities. We have competitive advantages and will make the most of all the capabilities of our human and material resources. We will continue on the road of innovation and of new product development, venturing into new categories, anticipating our clients needs, and keeping up to date with consumer trends and preferences. With regard to the operations, we will continue reinforcing our capabilities, with continu- 12 EBITDA Increase in million dollars. 24
ous update and maintenance of our equipment and machinery in the plants that so require it. Likewise, our Continuous Improvement Model will continue its maturing process and will help further strengthen our position as a leader in the production of glass containers. We feel confident vis-à-vis an increasingly aggressive competition in the way in which products and services are offered. We trust that we will carry on based on our experience that dates back more than a century in the industry and the profound knowledge we have of the market. Our operational strategies will be the best basis to advance and consolidate Vitro s leadership for the years to come. We will continue on the road of innovation and of new product development, venturing into new categories, anticipating our clients needs, and keeping up to date with consumer trends and preferences. With regard to the operations, we will continue reinforcing our capabilities, with continuous update and maintenance of our equipment and machinery in the plants that so require it. We feel confident vis-à-vis an increasingly aggressive competition in the way in which products and services are offered. We trust that we will carry on based on our experience that dates back more than a century in the industry and the profound knowledge we have of the market. 25
16 PROJECTS We participated in 16 major architectural projects. 26
Flat Glass advances as a leader in added value products by manufacturing, processing, marketing, distributing, and installing glass for the construction and automobile industries, both in the original equipment and the replacement markets, with reliable experience in the Americas and the capacity to service the most demanding clients across the globe. flat glass 525 SALES Consolidated net sales for 2013, in millions dollars. USD$ 27
28 100 CAPACITY Vidrio y Cristal sold its entire scheduled production in spite the decrease in the automotive sector.
Overview of 2013 Flat Glass experienced a year of contrasts, with a combination of internal and external challenges that encouraged us to redouble our efforts, strengthen our business strategies, and communicate even more closely with our clients. Vidrio y Cristal was collaterally affected due to the considerable decrease in sales that the automotive glass sector experienced, given that the former supplies to the latter. Given this context, actions were taken to minimize the impact. The sales department went searching for other external markets, which allowed us to place 100 percent of the scheduled capacity. If we do a year by year comparison, the sales result in 2013 was very similar to 2012, which showed record figures. In the last period we registered a slight increase as a consequence of improvements in efficiency, an area where we have worked hard and whose results are now starting to positively impact in productivity. Facing adversity, we have concentrated in advancing within the businesses where we have a greater added value. In any setback, our collaborators find a powerful reason to further exploit their creativity to the fullest and design commercial and marketing stratetegies that increase our market share, diversifying our portfolio with ever more specialized products. In line with continuous improvement and aiming to maintain us as the frontrunner in the development of architectural glass, this year we launched the Templex and Hydroclean crystals to expand the array of possibilities that we offer to architects, interior designers, and installers. Templex is a product that, in addition to having the capacity to reflect light and thereby controlling the illumination, offers more safety since it may be cooled once it has been processed. Likewise, it helps in esthetic differentiation, especially on crystal facades. In turn, Hydroclean is a solution that may be applied to any of Vitro s crystals to Facing adversity, we have concentrated in advancing within the businesses where we have a greater added value. In any setback, our collaborators find a powerful reason to further exploit their creativity to the fullest and design commercial and marketing stratetegies that increase our market share, diversifying our portfolio with ever more specialized products. avoid the adhesion of water, oil, and other liquids on surfaces. This waterproofing treatment does not alter the appearance of the crystal, it creates surfaces that are easier to clean, reduces the formation of mustiness and bacteria, generates greater resistance to stains and scratches, in addition to reducing the maintenance costs of crystals. The term for penetration and placement in the market is long, but we believe that the selectivity of professionals in this field will facilitate a rapid engagement with users, who continually seek greater comfort and wellbeing in differentiated spaces. Some examples of this are the architectural projects in which we participated this year, which stand out for their great scope. The first corresponds to the remodeling of all the offices of Nacional Monte de Piedad in Mexico, which started in 2013. With this project, more than 300 establishments of that private assistance institution will install a laminated crystal called Sentryglass, which offers maximum safety against impact. The second case is the remodeling of all the light train stations and of line 5 of the Metrobus in Mexico City. Here, Templex and Vitrospan crystals were installed, offering safety and harmony in such spaces due to the sensation of more lighting. Flat Glass is prepared to provide the best products and solutions for our clients requests. Its continuous improvement programs and the optimization of resources are its greatest strength. In spite of the auto industry having grown in Mexico, 2013 was a complex year for us in the segment. Internal activity decreased due 29
100 CERTIFIED All our automotive glass production facilities are certified under the ISO 14000 and ISO/TS 16949 standards. to the loss of platforms that we suffered from some assembly plants throughout the past three years. For this reason we were highly disciplined to adjust to the size of the business, reorganizing the production line pursuant to the agreements reached in advance, we adapted the structure and reduced the cost and expenses budget, limiting it to investments and procurement that were strictly necessary for the operation. In this same period, several assembly plants stated their worries due to the company s financial position and, at the same time, the auto industry rebounded towards 2013, therefore, as was to be expected, demand grew so large that some of our clients opted for different supply alternatives with providers from other countries, particularly those in Asia. Based on our work and after the completion of the company s financial restructuring, almost immediately we recovered participation in new contracts and obtained platforms. For the closing of 2013, we have already completed important transactions that will allow us to advance in this market. Given the dynamics of the auto industry, these achievements will be reflected in 2015 and 2016. Since we are fully aware that the North American region is highly competitive in the auto glass industry, in Vitro we do not lower our guard. Our brands have an excellent reputation thanks to the price, quality and service competitiveness we offer. Proof of this is that, 30