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Nemak 2018 Annual Report 2018 ANNUAL REPORT For more information about Nemak, visit www.nemak.com GRI Standards: 102-1, 102-7 Nemak is a leading provider of innovative lightweighting solutions for the global automotive CONTENT industry, specializing in the development and manufacturing of aluminum components for Nemak at a glance 3 powertrain and body structure applications. As of 2018, the company employed more than Product portfolio 4 Financial highlights 5 22,000 people at 38 facilities worldwide and generated revenues of US $4.7 billion. Letter to shareholders 6 Lightweighting developments 9 Sustainability 12 Operating summary 19 Board of directors 21 Management team 22 Corporate governance 23 Consolidated fnancial statements 24 NEMAK 2018 ANNUAL REPORT 2 NEMAK AT LETTER TO LIGHTWEIGHTING OPERATING BOARD MANAGEMENT CORPORATE FINANCIAL A GLANCE SHAREHOLDERS DEVELOPMENTS SUSTAINABILITY SUMMARY OF DIRECTORS TEAM GOVERNANCE SECTION Nemak at a glance GRI Standards: 102-4, 102-6 SLOVAKIA GERMANY POLAND RUSSIA CANADA CZECH REPUBLIC AUSTRIA UNITED STATES SPAIN CHINA MEXICO HUNGARY TURKEY INDIA BRAZIL ARGENTINA 3% 14% HEADS 56% BLOCKS North America 35% SEGMENT REVENUE Europe 49% TRANSMISSIONS AND OTHER REVENUE STRUCTURAL & EV 9% 34% Rest of World NEMAK 2018 ANNUAL REPORT 3 NEMAK AT LETTER TO LIGHTWEIGHTING OPERATING BOARD MANAGEMENT CORPORATE FINANCIAL A GLANCE SHAREHOLDERS DEVELOPMENTS SUSTAINABILITY SUMMARY OF DIRECTORS TEAM GOVERNANCE SECTION GRI Standard: 102-2 Product portfolio POWERTRAIN • Cylinder Heads • Engine Blocks • Transmission Cases VEHICLE STRUCTURES • Longitudinal Members • Shock Towers • Subframes • Other E-MOBILITY COMPONENTS • E-Motor Housings • Battery Housings • Other NEMAK 2018 ANNUAL REPORT 4 NEMAK AT LETTER TO LIGHTWEIGHTING OPERATING BOARD MANAGEMENT CORPORATE FINANCIAL A GLANCE SHAREHOLDERS DEVELOPMENTS SUSTAINABILITY SUMMARY OF DIRECTORS TEAM GOVERNANCE SECTION GRI Standard: 201-1 Volume Financial highlights millions of equivalent units 2015 50.7 2016 50.1 EXPRESSED IN MILLIONS OF U.S. DOLLARS 2018 2017 CHANGE % 2017 Volume (million equivalent units) 50 49.9 0.2 49.9 Total revenues 4,704 4,481 5.0 2018 50.0 Gross profit 699 685 2.0 Sales & administrative expenses (300) (308) (2.6) Other income (expenses) net 7 (7) N/A Operating income 406 370 9.7 Total revenues millions of U.S. dollars Interest expenses (98) (82) 19.5 Interest income 6 22 (72.7) 2015 4,482 Foreign exchange (loss) (24) (43) (44.2) 2016 4,257 Financing expenses net (116) (103) 12.6 2017 4,481 Participation in associates results 7 3 N/A 2018 4,704 Income tax (117) (78) 50.0 Net income 180 192 (6.3) EBITDA1 734 715 2.7 EBITDA millions of U.S. dollars CAPEX 433 N/A 403 2015 759 Net debt 1,251 1,271 (1.6) 2016 798 (1) EBITDA = Operating income + depreciation and amortization + non-recurring items 2017 715 2018 734 NEMAK 2018 ANNUAL REPORT 5 NEMAK AT LETTER TO LIGHTWEIGHTING OPERATING BOARD MANAGEMENT CORPORATE FINANCIAL A GLANCE SHAREHOLDERS DEVELOPMENTS SUSTAINABILITY SUMMARY OF DIRECTORS TEAM GOVERNANCE SECTION GRI Standards: 102-14, 102-15 Letter to Shareholders DEAR SHAREHOLDERS: In 2018, Nemak posted improved In North America, there was a small results while leveraging its increase in U.S. light vehicle sales, technological capabilities to support surpassing analysts´ expectations its customers’ increasing focus on on the back of a strong economy. developing sustainable mobility Vehicle sales in the European market solutions. It made further progress fnished at the same level as the with the ramp-up of recently awarded previous year, as a positive frst half business, enhancing its product mix of the year ofset the impact of lower and earning industry recognition for sales in the second half associated innovation and quality performance. with delays in the implementation And, it won new contracts that are of stricter emissions testing expected to serve as a catalyst for procedures. strong growth in its structural and electric vehicle components (SC/EV) Nemak’s other main markets, segment in the coming years. China and South America, showed contrasting trends: in China auto Furthermore, the company continued sales were afected by a slowing to improve on its customer value economy in that country, but the proposition, providing solutions to Brazilian automotive industry support prototype development improved thanks to better and design engineering processes macroeconomic conditions. for propulsion and body structure applications. Nemak sold 50 million equivalent units in total in 2018, similar to Overall, the global automotive the total in 2017. Revenues were industry had a stable performance US$4,704 million, up 5% vis-a-vis compared to 2017, although 2017 mainly on the back of higher conditions varied among the regions aluminum prices. EBITDA amounted the company serves. to US$734 million in 2018, 3% more than the year before. In turn, Net Income was US$180 million, 6.3% lower than 2017 due to higher fnancial expenses and taxes. NEMAK 6 NEMAK AT LETTER TO LIGHTWEIGHTING OPERATING BOARD MANAGEMENT CORPORATE FINANCIAL A GLANCE SHAREHOLDERS DEVELOPMENTS SUSTAINABILITY SUMMARY OF DIRECTORS TEAM GOVERNANCE SECTION Nemak´s capital expenditures The proceeds were used to total revenue contribution to Fitch Ratings upgraded amounted to US$403 million in redeem existing notes due in approximately US$150 million for Nemak to Investment 2018. The company focused its 2023, extending the average life the year. Additionally, it won new investments on supporting new of its debt and reducing its cost. contracts in SC/EV worth a total Grade, raising its Issuer launches across its product lines. of approximately US$280 million Default Rating on a global In recognition of the company’s in annual revenues. Nemak paid dividends to its fnancial discipline and credit scale to ‘BBB-’ from ‘BB+’. shareholders worth US$170 profle, Fitch Ratings upgraded To date, signed contracts in million in 2018, the same amount Nemak to Investment Grade, SC/EV amount to approximately as in 2017. The company’s debt raising its Issuer Default Rating US$600 million in annual level remained stable as cash on a global scale from ‘BB+’ to revenues, most of which fow generation was sufcient to ‘BBB-’. The other main rating are expected to reach peak cover all outlays during the year. agencies, Moody´s and S&P, production volumes by 2021. Meanwhile, it improved its Net kept Nemak one notch below Moreover, to better capitalize on Debt-to-EBITDA ratio from 1.8 to investment grade, with a stable expected growth of this business 1.7 times, marking 21 consecutive outlook. segment, Nemak strengthened quarters with a Net Debt-to-EBITDA its global engineering, ratio of less than 2.0 times. Regarding strategy execution, product development and the company successfully sales teams, helping it to bid Further reinforcing its fnancial captured market share on new opportunities in this condition, Nemak successfully linked to lightweighting and segment alone worth a total of placed a US$500 million bond electrifcation. It launched high- approximately US$1.8 billion in issue in the international debt volume production programs annual revenues. markets, with a coupon of 4.75% in SC/EV in Europe and North and a maturity period of 7 years. America, bringing the segment’s NEMAK 2018 ANNUAL REPORT 7 NEMAK AT LETTER TO LIGHTWEIGHTING OPERATING BOARD MANAGEMENT CORPORATE FINANCIAL A GLANCE SHAREHOLDERS DEVELOPMENTS SUSTAINABILITY SUMMARY OF DIRECTORS TEAM GOVERNANCE SECTION New contract wins for 2018 totaled US$770 M in annual revenues, approximately 50% of which represented incremental business. Taking into account all product maintained the health and same time, there is confdence lines, new contract wins for 2018 wellness of its employees as Nemak has the full range of totaled US$770 million in annual its top priority by supporting capabilities required to deliver revenues, of which approximately activities and training programs on its long-term growth potential half represented incremental in all its sites worldwide. Also, it while continuing to enhance its business. continued eforts to help facilitate competitive advantage. access to quality education Nemak worked in tandem with among youth from low-income On behalf of the Board of its stakeholders to strengthen backgrounds in communities Directors, we thank you for your its sustainability-related close to its sites. support during the year we are performance. The company reporting. We would also like focused on initiatives to support In summary, Nemak broke new to express special appreciation human capital development, ground in its value creation for our employees, whose thereby improving the employee journey. It applied innovation dedication and commitment experience; fostering increased in its people, processes, and make it all possible. organizational agility and technology, enabling operational Armando Garza Sada efciency; and increasing the use improvements and helping Chairman of the Board of Directors of recycled raw materials and its customers to prepare for San Pedro Garza García, N.L. sands, among others. the mobility of tomorrow. Given evolving industry and January 31, 2019 Towards society, the company macroeconomic conditions, there deepened its engagement in is a potential risk of continued Armando Tamez Martínez community-based health and volatility in the company´s Chief Executive Ofcer education initiatives. Nemak main markets in 2019; at the NEMAK 2018 ANNUAL REPORT 8 NEMAK AT LETTER TO LIGHTWEIGHTING OPERATING BOARD MANAGEMENT CORPORATE FINANCIAL A GLANCE
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