2017 ANNUAL REPORT - ALFA · Negocios · 2017 ALFA annual report 1 EBITDA = operating income +...

2 0 1 7 A N N U A L R E P O R T

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ALFA is a holding company that manages a portfolio of diversified subsidiaries:

Sigma, a leading multinational refrigerated food company, focused on the production, marketing and distribution of quality foods through recognized brands in Mexico, Europe, United States and Latin America.

Alpek, one of the world’s largest producers of polyester (PTA, PET and fibers), and the leader in the Mexican market for polypropylene, expandable polystyrene (EPS) and caprolactam.

Nemak, a leading provider of innovative lightweighting solutions for the global automotive industry, specializing in the development and manufacturing of aluminum components for powertrain, structural components and for electric vehicles.

Axtel, a provider of Information Technology (IT) and Communication services for the enterprise, government and mass market in Mexico.

Newpek, an oil and gas exploration and production company with operations in Mexico and the United States.

In 2017, ALFA reported revenues of Ps. 317,627 million (U.S. $16.8 billion), and EBITDA1 of Ps. 38,312 million (U.S. $2.0 billion). ALFA’s shares are quoted on the Mexican Stock Exchange and on Latibex, the market for Latin American shares of the Madrid Stock Exchange.

Negocios · 2017 ALFA annual report

1 EBITDA = operating income + depreciation andamortization + non-recurring items.

NOTE: In this annual report, monetary figures are expressed in nominal Mexican pesos (Ps.), and in nominal dollars (U.S. $) unless otherwise specified. Conversions from pesos to dollars were made using the average rate of the month in which the revenues or disbursements were made. The percentages of variation between 2017 and 2016 are expressed in nominal terms.

CONTENTS

3 Financial Highlights4 Business Groups5 Letter to Shareholders9 Sigma11 Alpek13 Nemak15 Axtel17 Newpek19 Board of Directors20 Management Team21 Corporate Governance22 Consolidated Financial Statements106 Glossary

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ASSETSU.S. $ Millions

EBITDAU.S. $ Millions

REVENUESU.S. $ Millions

ALFA AND SUBSIDIARIES MILLIONS OF PS. U.S. $ MILLIONS(4)

2017 2016 % chg. 2017 2016 % chg.

Income Statement

Net Sales 317,627 293,782 8 16,804 15,756 7

Operating Income 11,195 24,214 (54) 557 1,313 (58)

Majority Net Income (2,051) 2,325 (188) (134) 142 (194)

Majority Net Income per Share (1) (Ps. & U.S. $) (0.40) 0.45 (189) (0.03) 0.02 (250)

EBITDA (2) 38,312 43,254 (11) 2,018 2,322 (13)

Balance Sheet

Total Assets 358,968 348,563 3 18,189 16,868 8

Total Liabilities 266,542 247,950 7 13,506 11,999 13

Stockholders’ Equity 92,426 100,613 (8) 4,683 4,869 (4)

Majority Interest 69,436 75,776 (8) 3,518 3,667 (4)

Book Value per Share (3) (Ps. & U.S. $) 13.7 14.8 (7) 0.69 0.72 (4)

(1) Based on the weighted average number of outstanding shares (5'087,743 in 2017 and 5‘120,500 in 2016).(2) EBITDA = operating income + depreciation and amortization + impairments.(3) Based on the number of outstanding shares (5' 055,111 at the end of 2017 and 5‘120,500 at the end of 2016).(4) Due to the dollarization of its revenues, which is higher than 75%, and because of the holding of shares by foreign investors, ALFA provides equivalent U.S. $ amountsfor some of its most important financial data.

FINANCIAL HIGHLIGHTS

Financial Highlights · 2017 ALFA annual report

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SIGMABelgium, Costa Rica, Dominican Republic, Ecuador, El Salvador, France, Italy, Mexico, Netherlands, Peru, Portugal, Romania, Spain, U.S.A.,

ALPEKArgentina, Brazil, Canada, Chile, Mexico, U.S.A.

NEMAKArgentina, Austria, Brazil, Canada, China, Czech Republic, Germany, Hungary, India, Mexico, Poland, Russia, Slovakia, Spain, Turkey, U.S.A.

BUSINESS GROUPS

REVENUES

· Sigma 36%· Alpek 31%· Nemak 27%· Axtel 5%· Newpek 1%

EBITDA


ASSETS


Sigma www.sigma-alimentos.comMain products• Cooked and cured meats: Ham, sausages, bacon.• Dairy products: Cheese, yogurt, cream, butter.• Other refrigerated and frozen foods.

Markets: FoodRevenues: U.S. $6.1 billionPlants: 70, in 14 countriesEmployees: 45,443

Alpek www.alpek.comMain products• Polyester: PTA, PET, polyester fibers.• Plastics and chemicals: Polypropylene, EPS, Caprolactam, chemical specialties and industrial chemicals.

Markets: Containers for beverages, food and consumer products, packaging for electronic or appliances, textiles, construction and automotiveRevenues: U.S. $5.2 billionPlants: 23, in 6 countriesEmployees: 5,290

Nemak www.nemak.comMain products• Aluminum heads and blocks for internal combustion engines.• Transmission cases.• Structural components.• Components for electric vehicles.

Markets: AutomotiveRevenues: U.S. $4.5 billionPlants: 38, in 16 countriesEmployees: 23,647

Axtel www.axtelcorp.mxMain services• Data centers. • Security.• Networks management.• Systems integration.• Cloud services.• Collaborative services.• VPN and Ethernet. • Internet.• Pay-TV.• Voice service.

Markets: Enterprise, Government and Mass marketRevenues: U.S. $822 millionEmployees: 7,044

Newpek Main products• Hydrocarbons.• Oil and gas services.

Markets: Energy, oil and gasRevenues: U.S. $107 millionEmployees: 64

AXTELMexico

NEWPEKMexico, U.S.A.

Business Groups · 2017 ALFA annual report

http://www.sigma-alimentos.com/

http://www.alpek.com/

http://www.nemak.com/

www.axtelcorp.mx

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To our shareholders:

In 2017, ALFA operated in a complex economic environment, characterized by exchange rate volatility and wide swings in commodity prices, as well as slower growth in some markets. Additionally, ALFA faced uncertainty caused by the potential negotiation of the free trade agreement in North America (NAFTA).

Despite these challenges, ALFA’s Food and IT & Communication businesses performed well during the year, reporting better than expect-ed results. The auto parts business was able to capitalize on the growth in Europe and Asia, offsetting, in part, a sluggish US auto industry. By contrast, the petrochemicals business was impacted by financial problems at one of its main customer.

ALFA continued to make progress as it im-plemented its investment program, focusing on improving operating efficiencies, increas-ing value-added products and services, and expanding its operating capacity. Key achievements during the year included: the opening and increased operation of the new food plant in Spain; acquisition of two re-frigerated food companies, in Peru and Ro-mania; expansion of the expandable poly-styrene plant in Mexico; operation of two propylene storage spheres; startup of two auto parts plants, in Mexico and Slovakia, and the second Data Center in Querétaro. Further progress was also made on building a power cogeneration plant in Tamaulipas.

LETTER TO SHAREHOLDERS

Armando Garza SadaChairman of the Board of DirectorsÁlvaro Fernández GarzaPresident

Campofrio plant in Burgos, Spain.

ALFA continued to make progress as it implemented

its investment program, focusing on improving operating efficiencies.

BUSINESS PERFORMANCESIGMA Stronger performance, mainly in Mexico’s market, operation of the new plant in Spain, acquisition of two refrigerated food compa-nies and further development of its innova-tion strategy underpinned the better results for Sigma last year, and provided a solid base to support future growth.

During the year, the company gradually ex-panded operations at the Burgos Campof-rio plant, which aims to further meet growing demand in Spain and Europe. This plant, which started at the end of 2016, is a benchmark for the industry.

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As part of its growth strategy, Sigma ac-quired two companies that produce lun-cheon meats: Caroli in Romania and Supem-sa in Peru. The former provided Sigma with a foothold in Eastern Europe and the latter propelled Sigma into a leadership position in the South American country.

Sigma also undertook two critical initiatives to better position the company for the fu-ture. The first targeted global processes, the goal being to identify synergies and best practices and capitalize on them in all the regions where the company operates. The second focuses on innovation process-es, with the goal of expediting the develop-ment of new products that are increasingly aligned with the latest consumer trends.

ALPEKFor Alpek, the external environment has been challenging and was characterized by volatile prices of crude oil and byproducts, which affected prices and product margins. Then, in the second half of the year, its main customer, Mossi & Ghisolfi (M&G) encoun-tered liquidity constraints that forced it to temporarily halt operations in Mexico and the U.S.

Alpek was able to maintain sales volume and revenues to projected levels, but EBITDA was negatively impacted by the M&G shut-down, which resulted in the recording of non-recurring provisions against accounts receivable and impairment of other intangi-ble and financial assets, as well as the tem-porary suspension of PTA supply for two of that company’s plants.

Alpek has played an important role in M&G’s restructuring in order to protect its interests, both in the payment of accounts receivable and in its supply capacity rights with the plant that M&G was building in Corpus Christi, Texas.

During the year, Alpek increased the capacity of its expandable polystyrene plant in Mexico and the operation of two propylene spheres. It also continued work on the second cogeneration plant, which is planned for startup in 2018.

Furthermore, in February 2018, Alpek obtained the approval from the Administrative Council of Economic Defense (CADE) of Brazil to ac-quire 100% of PetroquímicaSuape and Citepe, in that country, expecting to close the transac-tion by mid-2018. As a means to finance the aforementioned transaction, Alpek began the formal process of selling two power cogenera-tion plants in Mexico. To this end, it selected a purchase offer from an international company dedicated to power generation, with whom is currently in advanced negotiations.

NEMAKThe company further expanded its production capacity to meet the demand from recently ob-tained programs, and to add value to its products and continue supporting its main clients’ initia-tives in the areas of fuel efficiency, lightweight-ing and the development of electric vehicles.

This involved investment in human capital, technology and infrastructure, including great-er machining capacity, the startup of a new auto parts plant in Mexico and another in Slova-kia, both equipped to produce structural com-ponents and parts for electrical vehicles, and expanded capacity in Poland. It also created a new organizational structure aimed at ac-celerating execution of its strategy to grow in the production of structural components and parts for electrical vehicles.

Nemak further expanded its production capacity to meet the demand from recentlyobtained programs.

Letter to shareholders · 2017 ALFA annual report

EPS plant in Tamaulipas, Mexico.

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On the operating side, the global automotive industry grew 2.5% last year thanks to the performance of European, Asian and South American markets, which offset some of the sluggishness seen in North America, despite the record year it had in 2016. This resulted in a slight decrease in Nemak’s sales volume.

Furthermore, although higher aluminum prices boosted revenues, the lag in trans-mitting these to clients, lower volumes in North America and higher expenses related to new programs, resulted in lower EBITDA.

AXTELThe Information Technology (IT) and Com-munication services company further ex-panded its portfolio of services, improving its infrastructure and consolidating its plat-form for innovation as it continues to imple-ment its growth strategy.

Axtel reported satisfactory results for 2017, supported by the business and gov-ernment segments, including a growing penetration in cloud services and others aimed at the financial sector and informa-tion security. The sale of the telecommuni-cation towers also contributed to results.

On the operating side, the merger between Alestra and Axtel reduced expenses and opti-mized functions and infrastructure.

During the year, the company increased in-vestment in providing last-mile access to connect clients, deploying IT infrastructure, and adding more square footage capacity at the second Querétaro Data Center.


Axtel reported satisfactory results

supported by the business and

government segments.

The new Axtel has a strong competitive po-sition in IT and communication services, as well as innovative initiatives and infrastruc-ture with cutting-edge technology that con-stitute its main support to continue growing and creating value. In addition, the partici-pation in the Altan consortium will provide a new avenue of growth.

NEWPEKDespite an upturn in 2017, oil and gas prices remained at levels below those of mid-2014, when due to oversupply, energy prices began to decline, affecting the global oil industry. The lower price environment, combined with the normal production decline, negatively im-pacted Newpek’s results.

Over the course of the year, the company continued to work on improving operations and on selective exploration, drilling and well activation activities, particularly in South Texas, where it connected 20 new wells to sales, bringing the total number of operating wells to 648. Newpek will continue to ana-lyze the price environment in its exploration and production programs.

In Mexico, the company continued to operate two mature oil fields in Veracruz under ser-vice contracts signed with PEMEX, report-ing an increase in production. Also during the year, Newpek entered and won two public bids for blocks of acreage in Northeast Mex-ico, auctioned by the National Hydrocarbons Commission, where it expects to extract gas and condensates. The company will contin-ue to evaluate participating in other bidding opportunities for conventional and non-con-ventional onshore blocks as well as shal-low-water fields.

Nemak’s auto parts plant in Nuevo Leon, Mexico.

Second Axtel Data Center in Querétaro, Mexico.

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The company’s financial condition remained solid as evident in the the following indica-tors: Net Debt to EBITDA, 3.12 times and Interest Coverage, 4.6 times.

As we have become accustomed, ALFA will likely face substantial challenges in 2018. Complex economic and market conditions in some countries where we operate, as well as volatile commodity prices, will con-tinue to be present. Adding to this will be the ongoing uncertainty over the process of renegotiating the NAFTA, and Mexico’s upcoming presidential election.

Despite these challenges, ALFA has import-ant fundamentals, including its financial strength, a strong market position in each of its businesses, growth potential in the in-dustries in which they participate, modern facilities, cutting-edge technologies, inno-vative products and services, as well as the commitment and talent of our employees. These are the best tools ALFA has for the strengthening of its finances and the coor-dination of efforts to face uncertainty.

Sigma will continue to capitalize on syner-gies among its diverse operations and pro-mote the development of new products to meet the needs of its markets. Alpek will continue the process of selling its two power cogeneration plants and acquiring plants in Brazil, along with its ongoing ne-gotiations with M&G, all of which are an-ticipated to help improve the company’s operating performance.

CONSOLIDATED FINANCIAL RESULTSALFA’s revenues totaled U.S. $16.8 bil-lion, 7% higher than in 2016, while EBITDA was U.S. $2.0 billion, a reduction of 13%. A strong performance by Sigma and Axtel was not enough to offset weaker results at Al-pek and, to a lesser extent, Nemak.

Majority Net Loss came to U.S. $134 mil-lion, compared to a profit of U.S. $142 mil-lion in 2016. The reduction is due primari-ly to non-cash extraordinary items including asset impairment and provisions relating to M&G, as previously discussed.

During the year, ALFA invested U.S. $1.1 billion in fixed assets and acquisitions, as de-tailed in the earlier part of this document. In 2017, Sigma and Nemak completed suc-cessful bond placements for amounts of 600 million Euros and 500 million Euros, re-spectively, while Axtel placed bonds for U.S. $500 million and refinanced bank debt of $6.0 billion pesos, improving the rate and term conditions in all cases.

Nemak will continue to develop products to adapt to new trends in the automotive in-dustry. Axtel will maintain its focus on IT markets for the enterprise and government segments, which are its core markets, while Newpek is on solid footing to take advantage of opportunities as they arise in the areas where it is present.

On behalf of the Board of Directors, we are grateful to all of you, our shareholders, for the support and trust placed in us. We also extend our gratitude and recognition to our clients, suppliers, financial community, and particularly the team of 86,200 employees that comprise the ALFA family in 28 countries, for their valuable contribution to our results.

San Pedro Garza García, Nuevo León, Mexico, February 15, 2018.

Armando Garza SadaChairman of the Board of Directors

Álvaro Fernández GarzaPresident


U.S. $1.1 billion invested in fixed assets and acquisitions.

Drilling of well in Texas.

Sigma

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REVENUE BREAKDOWN

· Mexico 41%· Europe 36%· United States 16%· Latin America 7%

The company completed its purchase of Supemsa, a Peruvian producer of luncheon meats, which together with Braedt make Sigma a leader in that country’s refrigerated food market. It also bought the remaining 51% of Caroli, which makes luncheon meats in Romania and which was already 49% owned by Sigma, giving the company a foothold in Eastern Europe.

Sigma · 2017 ALFA annual report

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This initiative will keep the company in tune with consumer trends and guide its con-tinuing investment in brands and products in the countries where it operates.

For example, under the health and Nutrition platform, which includes healthier product options, Sigma introduced the “Libre” and “Vegalia” lines in Europe, both from Cam-pofrio, the latter of vegetarian products, while in Mexico it launched a line called “Cuída-t +” from FUD. In the yogurt seg-ment it continued to create value to the category, introducing Greek yogurt with no sugar added.

In other platforms it introduced Navidul brand cheese and new lines of sausages un-der Campofrio and Nobre brands in Europe. In Mexico it launched the “Deli” cheese line for the Nochebuena brand, with products like

extra-aged cheeses with fruit and the “Dis-fruta” Beber line of yogurt. It also launched lines of chicken “ham”, grated cheese and ham-and-cheese rolls, all under the FUD brand. In the US, meanwhile, it introduced Grill Mates beef franks, and in Latin America, San Rafael brand chorizo for grilling.

In line with its commitment to the envi-ronment, Sigma began receiving electri-cal energy from the Tres Mesas wind farm in Tamaulipas at 76 sites in Mexico, avoiding the emission of 43,000 metric tons of CO2 a year, equivalent to what 9,000 cars would have produced in the same period.

Early in the year, Sigma issued a 600-mil-lion Euro bond at seven years and a rate of 2.625%, the lowest in ALFA’s history. This will strengthen its financial position, reduc-ing costs and extending the average matu-rity of its debt.

In 2018, Sigma plans to continue capitaliz-ing on the benefits of the Burgos plant. In pursuit of its innovation strategy, it will de-velop products that meet the needs of an ever-widening number of consumers, while working to optimize synergies, introduce best practices to the regions where it op-erates, consolidate recent acquisitions, and explore opportunities for acquisitions that generate value.

The plant in Burgos, Spain continued to in-crease its production, becoming more ef-ficient and taking advantage of state-of-the-art facilities and processes, making it an industry benchmark. The plant produces cooked and cured meats, primarily for the Spanish and European markets.

In 2017, Sigma’s performance got a boost mainly from the strength of Mexico´s mar-kets. Its revenues totaled U.S. $6.1 billion, 6% more than in 2016, while EBITDA was U.S. $676 million, 2% higher than in 2016.

Innovation remains a very important fac-tor in Sigma’s growth. In 2017, it created a process for accelerating new product devel-opment. It also introduced a strategy en-compassing new products in its Health and Nutrition, Sustainability, Indulgence, Conve-nience, Accessibility and Heritage platforms.

Sigma introduced an innovation strategy encompassing new products in its Health and Nutrition, Sustainability, Indulgence, Convenience, Accessibility and Heritage platforms.

Revenues grew 6%, supported mainly by its operations in Mexico and expansion in South America and Eastern Europe.

Sigma · 2017 ALFA annual report

Alpek

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11Alpek · 2017 ALFA annual report

REVENUE BREAKDOWN

· Polyester products 71%· Plastics & Chemicals 29%

In the petrochemical industry, prices of crude oil and byproducts remained highly volatile last year, causing temporary disruptions in

demand and margins.EBITDA

U.S. $ Millions

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The M&G effect resulted in a decline of 43% in EBITDA for the polyester segment. In contrast, EBITDA from Plastics and Chem-icals declined less than expected, due pri-marily to higher margins in polypropylene, EPS and caprolactam.

During 2017, Alpek invested U.S. $238 mil-lion in strategic projects, including capacity expansions and initiatives involving vertical integration and operating efficiency.

At Altamira, Tamaulipas, a 75,000-metric-ton-a-year capacity expansion was com-pleted at the EPS plant, making it the fifth largest in the world. Two propylene stor-age spheres were also commissioned, with a combined capacity of 5,000 metric tons, strengthening the propylene supply chain. Alpek continued building the second elec-tricity and steam cogeneration plant, which was 80% complete at the close of the year. Startup of this facility is programmed for 2018.

Some progress was made in PET anti-dumping petitions in the US, with investiga-tions begun against imports from Asia and South America, while Canada set preliminary import duties of up to 77% against some Asian countries.

The process of selling two power cogenera-tion plants is well under way, entering in ex-clusive negotiations with a firm specializing in power generation.

Meanwhile, in February 2018, Alpek ob-tained the approval from the Administra-tive Council of Economic Defense (CADE) of Brazil to acquire 100% of Petroquímica-Suape and Citepe, owned by Petrobras, in the amount of U.S. $385 million. The clo-sure of the transaction still depends on the fullfilment of certain conditions.

The outlook for both of Alpek’s business segments in 2018 is positive.

Margins in the polyester business are ex-pected to recover, helped by a better bal-ance of supply and demand in Asia, and more favorable conditions in North America, where rulings in the anti-dumping cases are expected to be favorable.

In Plastics and Chemicals, the company esti-mates stable margins on all the main products.

Finally, the sale of the cogeneration plants should help Alpek to bolster its financial po-sition and capitalize on opportunities to im-prove performance.

Alpek’s performance remained in line with expectations. In the second half of the year, however, Mossi & Ghisolfi (M&G), its main customer, encountered financial difficulties that forced it to temporarily shut down its operations in Mexico and in the U.S., and be-gin a restructuring process. This resulted in the entry of non-recurring items and provi-sions that impacted Alpek’s financial results.

Alpek played an important role in that pro-cess, with actions aimed at supporting the resumption of PTA supply to M&G; maximiz-ing the recovery of accounts receivable from the M&G’s plants in Mexico and Brazil, and reaffirming Alpek’s capacity rights in the plant M&G was building in Corpus Christi.

After two months, the supply of PTA was restored to M&G Mexico, under a PET toll-ing contract, as well as an agreement to provide financing to M&G Mexico during its restructuring process. PTA supply to M&G Brazil was also resumed through an agree-ment of cash payments.

From the operating standpoint, Alpek´s sales volume remained close to estimates, grow-ing by 2%, while revenues increased 8%, supported by higher prices on certain com-modities, mainly paraxylene and propylene.

5,000 metric tons of combined

capacity of the two spheres of propylene storage.

A 75,000-metric-ton-a-year capacity expansion at the EPS plant in Mexico, made it the fifth largest in the world.

Alpek · 2017 ALFA annual report

Propylene storage spheres, Altamira, Mexico.

Nemak

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13Nemak · 2017 ALFA annual report

In 2017, the global automotive industry grew by 2.5% over 2016, fueled by the performance of markets in Europe, Asia and South America. Sales in North America were slightly lower, falling back from record levels in 2016.

REVENUE BREAKDOWN

· North America 55%· Europe 35%· Rest of the world 10%


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electric motors, among others. The advan-tages provided by aluminum from its low weight and good mechanical properties, reaffirm its position as the preferred mate-rial to produce these components.

During the year, Nemak launched seven new SC and EV programs, generating reve-nues of U.S. $100 million. Moreover, it won new contracts for producing engine heads and blocks, transmission cases and SC and for EV totaling U.S. $830 million in annu-al revenues.

Nemak strengthened its growth strategy by investing in human capital, technology and infrastructure, to offer more products that improve vehicle efficiency and help carmakers meet their goals on emissions and fuel economy.

In 2017, the company started up two new plants (Mexico and Slovakia), equipped with high-pressure die casting technology and created a new organization dedicated to CE and EV business.

To date it has established collaboration agreements with more than 30 customers to develop lightweighting solutions target-ing this new segment.

Furthermore, to continue adding value to its products, Nemak expanded its machining capacity, now providing this process to 56% of its production, advancing towards its goal of machining 70% by 2020.

Nemak remains at the cutting edge of in-novation. During the year it won the presti-gious R&D 100 Award for developing a new lightweight high-temperature aluminum al-loy in conjunction with its client FCA and the Oak Ridge National Laboratory in the U.S. It was also selected as a finalist for the 2018 Automotive News Pace Awards for its de-velopment of Rotacast® for engine blocks, a proprietary aluminum casting process.

On financial matters, Nemak successful-ly placed a 500 million Euro bond at sev-en years, with an annual coupon of 3.25%.The proceeds were used to refinance short-er-term obligations, improving its debt ma-turity profile.

In 2018, Nemak will again face challeng-es in some of its markets. In response, the company will continue leaning on efficien-cy initiatives underway, in strengthening its power train business and attracting new opportunities in SC and EV business.

Nemak’s sales volume was 49.9 million equivalent units, 0.4% lower than in 2016, influenced by the performance in North America, where volume dropped 5.6%, in contrast to Europe and the Rest of the World, where volume grew by 5.9% and 13%, respectively.

The rising price of aluminum, Nemak’s main raw material, affected its revenues and EBITDA. While the former grew by 5.3% to U.S. $4.5 billion, the latter shrank by 10.4% to U.S. $715 million, due to the normal lag in the transfer of new metal prices to cus-tomers. Expenses associated with new product launches also affected EBITDA.

Leading automakers continued to place a pri-ority on lightening their vehicles. Nemak be-lieves this trend represents a very strong source of future demand for lightweight alu-minum structural components (SC), which have become key in carmakers’ pursuit of re-ducing overall vehicle weight and improving the efficiency of propulsion systems.

The ongoing advancement in the electrifi-cation of vehicles also opens new oppor-tunities to increase the content of Nemak products. For electric vehicles (EV), Ne-mak supplies components for hybrid trans-missions as well as cases for batteries and

Nemak made further headway in its strategy of growth by investing in human capital, technology and infrastructure.

Nemak launched seven new SC and EV programs, generating revenues of U.S. $100 million.

Nemak · 2017 ALFA annual report

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Axtel

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Axtel has earned a position as the technological partner of choice for Mexican companies, through Information Technology

(IT) and Communication services to support its customers in having more

efficient operations and using technology as a key factor in the development and

transformation of their businesses.

Axtel · 2017 ALFA annual report

REVENUE BREAKDOWN

· Enterprise 64%· Goverment 17%· Mass market 19%


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600 m2

new space at Axtel’s second Querétaro Data Center.

Axtel is a pioneer in IT services in Mexico. It has the most innovative Data Centers in Latin America.

During the year it extended and upgraded its infrastructure, technological and service platform, including the opening a 600 m2 area at its second Queretaro Data Center.

The company signed agreements with two of the world’s largest public cloud opera-tors, seeking to become Mexico’s first Mul-tiCloud Service Provider, by offering inte-grated solutions using the cloud hosted on Axtel Data Centers, through dedicated tele-communications links between these and the two public clouds.

It also continued to expand its portfolio of cloud services, with Cisco as its technolo-gy partner, earning the prestigious “Cloud and Managed Services Partner of the Year” distinction.

As a member of the Altán consortium, which won the public tender for Mexico’s Red Compartida project, Axtel signed con-tracts to supply metropolitan ring connec-tivity, fiber capacity and colocation services, as well as services based on data centers for the consortium. It advanced in its plan for interconnection requirements, which are key for designing and implementation of its mobility strategy.

For Axtel, innovation is at the heart of the design and development of solutions that generate value for its customers, and over the course of the year it released new ser-vices to satisfy companies’ digital transfor-mation needs.

Also during the year, it launched the second generation of NAVE, its business accelera-tor, receiving 150 applications from which it pre-selected 10 enterprising projects in Big Data, Internet of Things, Social Networks, Security, Mobility and Artificial Intelligence technologies, concluding with three select-ed companies to collaborate with Axtel.

In 2017, revenues and EBITDA totaled U.S. $822 million and U.S. $290 million, re-spectively, which were 12% and 29% high-er than in 2016. In peso terms, the growth rates were 13% and 30%, respectively.

Axtel’s 2017 results reflect its commitment to continuously strengthen its capital struc-ture and creating value through innovation and client focus, through an extensive port-folio of Information Technologies and Com-munication services.

To improve its financial structure, Axtel signed a contract to sell 142 telecommu-nications towers to MATC, a subsidiary of American Tower Corporation, for U.S. $56 million. It also successfully placed a U.S. $500 million bond, using the proceeds to refinance existing debt and extend its average ma-turity. The placement was a sign of inves-tor confidence in the company’s performance and the benefits of the Axtel-Alestra merger.

Axtel is a pioneer in IT services in Mexi-co. It has the most innovative Data Cen-ters in Latin America and a portfolio of ser-vices that are in step with global technology trends. In the mass consumer market, Ax-tel remains a leader, offering the best high-speed Internet experience.

In 2017, it increased the penetration of cloud based services with a double dig-it growth in this segment, and it also broad-ened its coverage of financial sector and data security services.

Axtel · 2017 ALFA annual report

Querétaro Data Center

Newpek

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17Newpek · 2017 ALFA annual report

REVENUE BREAKDOWN

· Oil & Condensates 67%· Dry Gas 33%

Although the prices of hycrocarbons recovered in 2017, the decline in oil and gas prices that began in mid-2014 continued affecting operating and financial performance in Newpek during 2017.


18

To contend with this situation, the compa-ny focused on lowering operating costs and concentrating its investment in exploration, drilling and finishing wells.

Accordingly, in the US, production was con-centrated at the Eagle Ford Shale play in Southern Texas, where 11 wells were drilled and 20 were completed and connected to sales, raising the total amount of producing wells to 648.

Sales volume was 4,900 barrels of oil equivalent per day (BOEPD), a reduction of 32% due to the normal decline of operating wells. Production of liquids and oil account-ed for 67% of total volume, compared to 64% reported in 2016.

Newpek will continue monitoring the price environment in its exploration and develop-ment programs.

In Mexico, the company continued operat-ing the mature oil fields at San Andrés and Tierra Blanca in Veracruz, both under ser-vice contracts signed with PEMEX in 2013.

Production at these fields increased slightly in 2017. At the close of the year these fields had 137 wells in operation. Average production was 3,600 (BOEPD), an increase of 3% compared to 2016.

In 2017, Newpek reported total reve-nues of U.S. $107 million and EBITDA of U.S. $2.9 million, declines of 1% and 70%, respectively.

During the year, the company partici-pated in public tenders organized by the Mexican National Hydrocarbons Commis-sion. Newpek submitted the winning bid on two blocks of land located on the Burgos Basin in Northern Mexico, where it expects to extract natural gas and condensates.

Newpek’s technical team has extensive experience in exploration and production of shale hydrocarbons as well as in con-ventional mature fields and shallow waters. It also has world-class capacity for geo-logical and geophysical analysis to continue exploring and capitalizing on growth op-portunities in the future.

648production wells in the U.S.

Newpek will continue analyzing the environment price in its exploration and development programs.

Newpek · 2017 ALFA annual report

19Board of Directors · 2017 ALFA annual report

BOARD OF DIRECTORS

José Calderón Rojas (2A)Chairman of the Board and Chief Executive Officer of Franca Industrias, S.A. de C.V. and Franca Servicios, S.A. de C.V.Board member since April, 2005.Member of the Boards of FEMSA, BBVA Bancomer (Regional Board), ITESM and UDEM. President of Asociación Amigos del Museo del Obispado, member of Fundación UANL and founder of Centro Integral Down.

Enrique Castillo Sánchez Mejorada (1A)Managing Partner of Ventura Capital Privado, S.A. de C.V.Board member since March, 2010.Chairman of the Board of Maxcom Telecomunicaciones and of Banco Nacional de México. Board member of Southern Copper Corporation, Grupo Herdez and Médica Sur. Senior Advisor of General Atlantic. Alternate Board member of Grupo Gigante.

Francisco Javier Fernández Carbajal (1C)President of Servicios Administrativos Contry, S.A. de C.V.Board member since March, 2010.President of ALFA’s Planning and Finance Committee. Member of the Boards of VISA Inc., FEMSA and CEMEX.

Álvaro Fernández Garza (3C)President of ALFA, S.A.B. de C.V.Board member since April, 2005.Chairman of the Board of Universidad de Monterrey. Member of the Boards of Grupo Citibanamex, Cydsa, Grupo Aeroportuario del Pacífico, Vitro and Museo de Arte Contemporáneo de Monterrey.

Armando Garza Sada (3C)Chairman of the Board of ALFA,S.A.B. de C.V.Board member since April, 1991.Chairman of the Boards of Alpek and Nemak. Member of the Boards of Axtel, CEMEX, FEMSA, Grupo Lamosa, Liverpool, Proeza and ITESM.

Claudio X. González Laporte (1B)Chairman of the Board of Kimberly-Clark de México, S.A.B. de C.V.Board member since December, 1987.Member of the Boards of Fondo México, Grupo México and Bolsa Mexicana de Valores. Advisor to Capital Group.

Ricardo Guajardo Touché (1B)Board member since March, 2000.Member of the Boards of Liverpool, Grupo Aeroportuario del Sureste, Grupo Bimbo, FEMSA, Coca-Cola FEMSA, Grupo Coppel, Vitro and ITESM.

David Martínez Guzmán (1C)Chairman of the Board and Special Advisor of Fintech Advisory Inc.Board member since March, 2010.Member of the Boards of CEMEX, Vitro and Banco Sabadell.

Adrián Sada González (1B)Chairman of the Board of Vitro, S.A.B. de C.V.Board member since April, 1994.President of ALFA’s Corporate Practices Committee. Member of the Board of Cydsa. Member of Consejo Mexicano de Negocios.

Federico Toussaint Elosúa (1A)Chairman of the Board and Chief Executive Officer of Grupo Lamosa, S.A.B. de C.V. Board member since April, 2008.President of ALFA’s Audit Committee. Member of the Boards of Xignux, Grupo Iconn, Banco de México (Regional Board), UDEM and Centro Roberto Garza Sada of the UDEM. Member of Consejo Mexicano de Negocios.

Guillermo F. Vogel Hinojosa (1C)Chairman of the Board of Grupo Collado, S.A.B. de C.V., and of Exportaciones IM Promoción, S.A. de C.V. Board member since April, 2008.Member of the Boards of Tenaris, SanLuis Corporación, Corporación Mexicana de Inversiones de Capital, Innovare, Novopharm and Universidad Panamericana-IPADE. Member of the Trilateral Commission and of the International Council of the Manhattan School of Music.

Carlos Jiménez BarreraSecretary of the Board

Keys:1 Independent Board Member2 Independent Proprietary Board Member3 Related Proprietary Board MemberA Audit CommitteeB Corporate Practices CommitteeC Planning and Finance Committee

20Management Team · 2017 ALFA annual report

MANAGEMENT TEAM

José de Jesús Valdez SimancasPresident of AlpekJoined ALFA in 1976. Undergraduate degree from ITESM. Master’s degrees from ITESM and Stanford University.

Armando Garza SadaChairman of the BoardJoined ALFA in 1978. Undergraduate degree from MIT. Master’s degree from Stanford University.

Álvaro Fernández GarzaPresidentJoined ALFA in 1991. Undergraduate degree from Notre Dame University. Master’s degrees from ITESM and Georgetown University.

Mario H. Páez GonzálezPresident of SigmaJoined ALFA in 1974. Undergraduate degree from ITESM. Master’s degrees from ITESM and Tulane University.

Paulino J. Rodríguez MendívilSenior Vice President, Human Capital and ServicesJoined ALFA in 2004. Undergraduate degree and Master’s degree from the University of the Basque Country, Spain.

Ramón A. Leal ChapaChief Financial OfficerJoined ALFA in 2009. Undergraduate degree from UDEM. Master’s degrees from ITESM and Harvard University.

Carlos Jiménez BarreraSenior Vice President,Legal, Audit and Corporate AffairsJoined ALFA in 1976. Undergraduate degree from UDEM. Master’s degree from New York University.

Alejandro M. Elizondo BarragánSenior Vice President, DevelopmentJoined ALFA in 1976. Undergraduate degree from ITESM. Master’s degree from Harvard University.

Rolando Zubirán ShetlerPresident of AxtelJoined ALFA in 1999. Undergraduate degree from UNAM. Master’s degree from USC. Ph.D. from UANL.

Armando Tamez MartínezPresident of NemakJoined ALFA in 1984. Undergraduate degree from ITESM. Master’s degree from George Washington University.

21Corporate Governance · 2017 ALFA annual report

CORPORATEGOVERNANCE

ALFA adheres to Mexico’s current Code of Best Corporate Practices in place in Mexico since 2000.

This Code was developed at the initiative of the securities authorities of Mexico and its purpose is to establish corporate gover-nance principles to increase investor confi-dence in Mexican companies.

Companies whose stocks trade on the Mexican Stock Exchange must disclose the extent to which they adhere to the Code of Best Corporate Practices. This is done annu-ally by responding to a questionnaire, which is available to the public through the Mexi-can Stock Exchange’s web site.

The following is a summary of ALFA’s corpo-rate governance as stated in the June, 2016 questionnaire, with any pertinent informa-tion updated:

A. The Board of Directors comprises eleven proprietary members who have no al-ternates. Of this number, eight are Inde-pendent and one is Independent Propri-etary Board Member. This annual report provides information on all of the Board’s members, identifying those who are in-dependent and the Committees in which they participate.

B. Three Committees assist the Board of Directors in carrying out its duties: Au-dit, Corporate Practices, and Planning and Finance. Board members participate in at least one committee each. All three committees are headed by an indepen-dent board member. The Audit and Cor-porate Practices Committees are formed by independent members only.

C. The Board of Directors meets six times by year. Meetings of the Board can be called by the Chairman of the Board, the President of the Audit Committee, the President of the Corporate Practices Committee, the Secretary of the Board or by at least 25% of its members. At least one of these meetings is dedicated to defining the company’s medium and long term strategy.

D. Members must inform the Chairman of any conflicts of interest that may arise, and abstain from participating in the corresponding deliberations. Average at-tendance at Board meetings was 93% during 2017.

E. The Audit Committee studies and issues recommendations to the Board on mat-ters such as the selection and determi-nation of fees to the independent audi-tor, coordinating with the internal audit area of the company, and studying ac-counting policies, among others.

F. The company has internal control sys-tems with general guidelines. These are submitted to the Audit Committee for its opinion. In addition, the independent auditor validates the effectiveness of the internal control system and issues the corresponding reports.

G. The Planning and Finance Committee evaluates all matters relating to its par-ticular area and issues recommendations to the Board on matters such as feasi-bility of investments, strategic position-ing of the company, alignment of invest-ment and financing policies, and review of investment projects.

H. The Corporate Practices Committee is responsible for issuing recommendations to the Board on such matters as em-ployment conditions and severance pay-ments for senior executives, and com-pensation policies, among others.

I. There is a department dedicated to maintaining an open line of communi-cation between the company and its shareholders and investors. This ensures that investors have the financial and general information they require in order to evaluate the company’s development and progress.

22Consolidated Financial Statements · 2017 ALFA annual report

CONSOLIDATEDFINANCIALSTATEMENTS

Management’s Discussion & Analysis 23

Report of Independent Auditors 37

Consolidated Financial Statements:

Consolidated Statements of Financial Position 42

Consolidated Statements of Income 43

Consolidated Statements of Comprehensive Income 44

Consolidated Statements of Changes in Stockholders’ Equity 45

Consolidated Statements of Cash Flows 46

Notes to Consolidated Financial Statements 47

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MANAGEMENT’S DISCUSSION & ANALYSIS

2017The following report should be considered jointly with the Stockholders’ Letter (pages 5 – 8) and the Audited Consolidated Financial Statements (pages 37 – 105). Unless otherwise indicated, figures are expressed in millions of Mexican pesos for information correspond-ing to the period between 2015 and 2017. Percentage variations are shown in nominal terms. Additionally, some figures are expressed in millions of US dollars (US$) and millions of euros (€).

The financial information included in this Management Discussion and Analysis corresponds to the previous three-year period (2015, 2016 and 2017), and is presented in compliance with International Financial Reporting Standards (IFRS). This information has also been expanded in some chapters to include three years in compliance with the General Provisions applicable to Security Issuing Companies and other Participants of the Securities Market, as issued by the National Banking and Securities Commission (CNBV for its Spanish initials) through December 31, 2017.

San Pedro Garza García, N. L., January 31, 2018.

ECONOMIC ENVIRONMENTIn 2017, the world economy growth continued to expand. The volatility of financial markets persisted due to the uncertainty of the eco-nomic policy in leading countries, geopolitical risks, and the standardization of the monetary policy by central banks such as the US Federal Reserve (Fed). On the other hand, the Mexican peso slightly appreciated with respect to the US dollar, despite the adverse environment of the Mexican economy. Lastly, the international price of oil continued to increase after OPEP upheld the agreement to reduce production.

Changes in the GDP and other variables in Mexico that are critical to better understand ALFA’s results, are described in the following paragraphs:

Mexico’s GDP had similar performance 2.3% in 2016 and 2.3% (estimated) in 2017. Consumer inflation was 6.8%(b) in 2017, higher than the 3.4%(b) recorded in 2016. The Mexican peso experienced annual nominal appreciation of 4.6%(c) in 2016, as compared to depreciation of 19.5%(c) in 2016. In real terms, the annual average overvaluation of the Mexican peso with respect to the US dollar went from 6.3%(d) in 2016 to 3.1(d) in 2017.

With respect to the interest rates in Mexico, the average TIIE for the year was 7.5(b) in 2017 in nominal terms, as compared to 4.5% in 2016. In real terms, there was a cumulative annual increase of 0.5% in 2016 to 7.3% in 2017. This increase is maintained in line with the decisions of the Fed.

The nominal 3-month LIBOR rate in US dollars (annual average) was 1.3%(b) in 2017, above the 0.7%(b) observed in 2016. If the nominal depreciation of the Mexican peso is incorporated vis-a-vis the US dollar, the LIBOR rate in constant pesos went from 16.5%(a) in 2016 to 1.3%(a) in 2017.

Sources: (a) National Statistics, Geography and Information Institute (INEGI).(b) Bank of Mexico (Banxico).(c) Banxico. Exchange rate to settle liabilities in foreign currency payable in Mexico.(d) Own calculations with information from INEGI, bilateral with the United States, considering consumer prices.

MD&A · 2017 ALFA annual report

1716151413

97 101

108

110

111

1716151413

114 12

3

130 14

4

156

95 95 85 74 73

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PRICES Pesos Dollars

VOLUMESPesos

REVENUE INDEXES(2012=100)

ALFA continues expanding worldwide, successfully facing macroeconomic challenges In 2017, ALFA operated with strength in its various businesses around the world. The Company has been exposed to macroeconomic challenges, to the uncertainty generated by the renegotiations of NAFTA in North America, as well as a decrease in the growth of certain markets.

An environment characterized by volatility in the peso-dollar exchange rate continued to be experienced, with an increase in international oil prices. Despite these situations, there were significant achievements in our businesses and ALFA continued demonstrating it is a finan-cially sound, healthy and well positioned Company to capture growth opportunities, while also being able to face potential challenges.

RESULTS REVENUESThe following chart provides information of ALFA’s revenues in 2017, 2016, and 2015, breaking down its volume and price components (indexes are calculated using the 2012=100 basis):

Concept 2017 2016 2015 Var. 2017-2016 (%) Var. 2016-2015 (%)Consolidated revenues 317,627 293,782 258,300 8 14Volume index 155.5 144.3 129.9 8 11Price index in Mexican pesos 110.7 110.2 107.8 0 2Price index in US dollars 73.4 74.2 85.3 (1) (13)

Additionally, consolidated revenues are broken down per ALFA’s principal subsidiaries:

Concept 2017 2016 2015 Var. 2017-2016 Var. 2016-2015Alpek 98,998 90,192 83,590 8,806 6,602Sigma 114,222 106,341 93,568 7,881 12,773Nemak 84,779 79,244 70,891 5,535 8,353Axtel 15,513 13,744 6,163 1,769 7,581Newpek 2,036 1,991 2,180 45 (189)Other 2,079 2,270 1,908 (191) 362Consolidated total 317,627 293,782 258,300 23,845 35,482 Note: In this document, Axtel 2016 figures include results of Alestra for 12 months and of Axtel for 10.5 months. 2015 figures only include Alestra.

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Revenue trends are explained below:

2017-2016:Consolidated revenues in 2017 totaled $317,627 (US$16,804), 8% above the amounts recognized in 2016 (increase of 7% in US dol-lars). Following is an explanation of the performance during the year of each primary ALFA subsidiary:

Alpek reported revenue volume according to its plan. Revenues totaled US$5,231, 8% higher than in 2016 as a result of an increase in prices of raw materials, mainly paraxylene and propylene. In 2017, the petrochemical industry continued to face high volatility in prices of crude oil and its derivatives, causing temporary distortions in demand. In the case of polyester, in the second half of the year, a recovery was observed for a better balance of supply/demand in Asia and more favorable conditions in North America due to the expectation of fa-vorable resolutions in anti-dumping cases. On the other hand, the Plastics and Chemical industries benefited from better profit margins in the polypropylene business.

Sigma’s revenues totaled US$6,054, which is 6% higher than the result for the preceding period, mainly due to a better performance in Mexico and Europe. The sales volume was 1,727 million tons of food, 3% above in relation to the previous period. In 2017, the Compa-ny continued to innovate as a growth factor, establishing a process to speed up the development of new products and drive platforms that allowed the Company to get even closer to the consumer trends. Additionally, it acquired two cold meat companies, in Peru (Supemsa) and Romania (Caroli) (acquisition of remaining 51%), and also initiated the start-up of its plant in Burgos, Spain, improving its efficiency, which has state-of-the-art processes and facilities making it a benchmark in the industry. In 2017, the automotive industry had a contrasting performance, showing a contraction in North America and growth in Europe and other regions. Nemak continued aligned with the auto assembly plants’ plans with structural component trends, whose benefit brings lightening in the weight of vehicles. On the other hand, development in the electrification of vehicles opens up new opportunities in Nemak, seek-ing to grow in the supply of structural components and for electric vehicles, such as hybrid, battery casings and electric motors. Nemak’s revenues totaled 49.9 million of equivalent units in 2017, 0.4% below 2016. Revenue for the period was $84,779, a 7% increase in rela-tion to 2016. Revenue measured in US dollars showed a 5% improvement resulting from an increase in the price of aluminum, its main raw matrial, which directly affected the sales price.

Axtel reached revenues of US$822 in 2017, 12% higher in dollars and 13% in Mexican pesos with respect to 2016. This increase is driv-en mainly by the business and government segments, and includes greater penetration in cloud services in the financial services industry and IT security requirements. To accomplish this growth, it made investments in infrastructure and the opening of the first section of the second Data Center in Queretaro, with 600 meters of white floor. Axtel also strengthened agreements with two of Mexico’s largest pub-lic clouds, seeking to become the first MultiCloud Service Provider in Mexico, where comprehensive solutions are offered using the cloud hosted in its Data Center. It also continued to expand its service portfolio with Cisco as a technology partner.

Lastly, at Newpek, notwithstanding a slight increase in the prices of hydrocarbons, operating and financial performance in 2017 was af-fected by lower prices of oil and gas from mid-2014. In response, the Company continued focusing its activities on reducing operating costs in its assets without jeopardizing the operation thereof, and on its investment in exploration, drilling, and completion of wells. In the US, drilling in Eagle Ford Shaire (EFS) was resumed with 20 new wells, increasing the total of producing wells to 648. In Mexico, it contin-ued operating mature oil wells in San Andrés and Tierra Blanca, located in Veracruz, reaching 137 wells with an average production of 3.6 thousand equivalent oil barrels per day (MBPED). The sales volume was 4.8 thousand of equivalent oil barrels per day (MBPED), which represents a decrease of 34%. In 2017, Newpek revenues reached US$107, a figure very similar to that of the preceding year.

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2016-2015:Consolidated revenues in 2016 amounted to $293,782 (US$15,756), 14% higher than in 2015 (a reduction of 3% in US dollars). Below is an explanation of the performance of each principal subsidiary of the ALFA group:

Alpek revenues were similar in volumen to those of the preceding year. Revenues totaled US$4,838, 8% lower than in 2015 as a result of lower average prices caused by a drop in prices of raw materials. The polyester business experienced a year of contrasts: It generated sav-ings resulting from the operation of the energy cogeneration plant starting in late 2015, although it was affected by the prices of low oil and raw materials, as well as shut-downs of PET plants in the Eastern USA due to damages caused by hurricane Matthew. On the oth-er hand, the Plastics and Chemical industries benefited from better profit margins from polypropylene and the acquisition of plants in South America in 2015.

Sigma revenues totaled US$5,698, this figure is 3% lower than that of the preceding year, mainly due to the depreciation of the Mexi-can peso that occurred in the year. The volume of sales reached a total of 1,679 million tons of food, 1% higher than in the preceding year. In 2016, the Company continued implementing a strategy to strengthen its brands. In Mexico, it introduced to the market a selection of Campofrío products and continued enhancing the yogurt category; in the U.S., it advertised its Bar-S and Fud brands and integrated the operations that Campofrío had in that country. In Latin America, it continued incorporating best practices in the marketing and business area. In Europe, it launched the new cold meat plant in Burgos, Spain, with capacity to process 100,000 tons per year.

In 2016, the environment was favorable for the automotive industry in North America and Europe. In U.S., consumer trust, low gasoline prices and low credit rates offered made it possible for car sales to reach a record of 17.6 million units, slightly higher than in 2015. In Eu-rope, the demand in Germany, France and Spain made up for market weakness in Eastern countries. Nevertheless, the performance of Ne-mak main markets, the discontinuation in the the production of a compact model for a major customer affected Nemak’s sales volume, which totaled 50.1 million equivalent units, 1% less than in 2015. Revenues for the year totaled $79,244, an increase of 12% compared to 2015, reflecting the effect of the depreciation of the Mexican peso. Measured in US dollars, revenues showed a reduction of 5% as a result of the contraction of aluminum price, its main raw material, which affected the selling price.

The merger of Alestra and Axtel in February 2016, resulted in the creation of a new company with a more competitive positionin the IT and telecommunications service market in Mexico, resulting in revenues of US$736, which is 89% greater in US dollars and 123% in Mexican pesos with respect to 2015. This increase is mainly due to the merger, but it was also caused by a more solid infrastructure, in-cluding a optical fiber network of 40,400 km and the expansion of the Data Center in Querétaro, which covers a surface of 1,800 m2. However, federal expense cuts in 2016 affected the Company’s income from the government sector.

Lastly, during the 2016 Newpek continued operating in an environment of low oil and gas prices from mid-2014. In the USA, the produc-tion focused on the formation of EFS and Wilcox, connecting 18 wells to sales, which increased the total number of wells in production to 628. Sales volume was 7.2 million barrels of equivalent oil per day (MBPED), a reduction of 29% due to the normal decline of wells in op-eration. In 2016, Newpek revenues totaled US$107, 23% lower than in 2015.

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OPERATING INCOMEALFA’s operating income in 2017, 2016, and 2015 is explained below:

2017-2016:Operating income Variation by Group

2017 2016 Var. Alpek Sigma Nemak Axtel Newpek OtherRevenues 317,627 293,782 23,845 8,806 7,881 5,535 1,769 45 (191)Operating income 11,195 24,214 (13,019) (12,717) 72 (1,669) 921 1,246 (872)Consolidated operating margin (%) 3.5 8.2Alpek (%) (2.9) 10.9Sigma (%) 7.5 8.0Nemak (%) 8.3 11.0Axtel (%) 9.1 3.5Newpek (%) (34.3) (97.7)

The decrease of 54% in consolidated operating income in 2017 compared to 2016 is explained by the individual performance of ALFA’s principal subsidiaries, as detailed below:

In Alpek, although higher margins in polyester supported the good performance of the business, especially in the second half of the year, operating income was affected by the adverse financial situation impacting Mossi & Ghisolfi (M&G), its main customer, which resulted in the recognition of non-recurring impairments of receivables, intangible and financial assets, as well as the temporary suspension of PTA supply to two of the Company’s plants. Regarding plastics and chemicals, the decrease in operating income in the chemical and plastics segment was lower than expected due to improved margins in polypropylene, polystyrene and caprolactam.

In the case of Sigma, the operating income had a slight improvement of 1% in comparison with the preceding year, mainly because in 2017, the Company had better performance in Europe and Mexico. Another factor that contributed to the growth was the acquisition of two companies engaged in the production of cold meats: Caroli in Romania (acquisition of remaining 51%) and Supemsa in Peru, allowing it to venture into to Eastern Europe and assume a position of market leadership in the South American country.

Nemak had a decrease in its operating income of 19% measured in Mexican pesos in the year. This was mainly due to reductions in North America, which was only partially offset by the automotive market in Europe and China, as well as to the time-lag required to pass increas-es in aluminum prices to customers and incremental costs of launching new programs. Expressed in US dollars, the decrease is 21%.

In 2017, Axtel had a favorable development. Operationally, the merger of Axtel and Alestra allowed for cost cutting iniciatives and syner-gies of infrastructure and functions. It was also benefited by better performance in the business and government segment. The sale of its telecommunication towers also benefited the results of the year. All these factors contributed to an operating income increase of 190% in Mexican pesos and 174% in US dollars.

In Newpek, the operating income continued to be influenced by a challenging environment of international oil prices, and by the reduced produc-tion of hydrocarbons as a result of the natural decrease in wells in operation. It was also impacted by a impairments in its unproven reserves.

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2016-2015:Operating income Variation per Group

2016 2015 Var. Alpek Sigma Nemak Axtel Newpek OtherRevenues 293,782 258,300 35,482 6,602 12,773 8,353 7,581 (189) 362Operating income 24,214 24,057 156 2,273 (2,385) 1,286 (1,130) 223 (111)Consolidated operating margin (%) 8.2 9.3Alpek (%) 10.9 9.1Sigma (%) 8.0 11.7Nemak (%) 11.0 10.4Axtel (%) 3.5 26.2Newpek (%) (97.7) (99.4)

The 1% increase in consolidated operating income from 2015 to 2016 is explained by the individual performance of ALFA’s companies, as detailed below:

In the case of Alpek, the increase is due primarily to the following factors. The Plastics and Chemicals business produced solid results due to better polypropylene and EPS margins, which resulted from a positive offer-demand cycle in North America, and from savings arising from the energy cogeneration plant located in Veracruz, Mexico. In the case of polypropylene, the improvement is due basically to an in-crease in Asia reference prices. In the case of EPS, there was a positive profit margin environment in North and South America, as well as the integration of the plants acquired in North and South America in 2015.

In Sigma, the operating income decreased in relation to the previous year, mainly because the 2015 operating income included insurance collection due to the fire at the Spain plant. Additionally, it was affected by the severe drepciation of the Mexican peso during the year, which affected the Mexico operating result. Without the favorable effect of the insurance collection in 2015, the variation would be an in-crease of 20%.

In Nemak, the operating income increased by 17% measured in Mexican pesos in the year. This is due to the increase in sales explained above, as well as to a higher proportion of added value products and efficiencies achieved. Measured in US dollars, performance was simi-lar to that of the preceding year.

In 2016, although new Axtel covered a wider range of services and infrastructure, its operating income decreased by 70% in Mexican pe-sos and 73% in US dollars, mainly due to merger-related expenses, a lower performance of the government business, which was affected by federal government budget cuts, and to depreciation of the Mexican peso during the year.

Newpek’s operating income continued to be negatively affected by a complex environment of low oil prices and reduced production levels.

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REVENUES AND OPERATING INCOME COMPOSITIONThe percentage of revenues remained consistent between 2017 and 2016, while ALFA’s operating incomechanged in 2017 compared to 2016, mainly due to an increase in the operating income of Sigma and Axtel, and a decrease inAlpek and Nemak, all of which are explained above.

The following chart shows these effects:% Data

Sales Operating income2017 2016 2015 2017 2016 2015

Alpek 31 31 32 (25) 41 32Sigma 36 36 36 77 35 45Nemak 27 27 28 63 36 31Axtel 5 5 2 13 2 7Newpek 1 1 1 (6) (8) (9)Other 1 1 1 (20) (5) (6)Total 100 100 100 100 100 100

FINANCE RESULT, NET (FR)In 2017, the FR was influenced by different exchange rates. On the one hand, despite the fact that the Mexican peso against the US dollar had a nominal annual appreciation of 4.6% in 2017, there was a foreign exchange loss because of the volatility in the rest of the currencies with which ALFA operates.

Determining factors 2017 2016Overall inflation (Dec.- Dec.) 6.8 3.4Variation % in the nominal closing exchange rate 4.6 (19.5)Nominal closing exchange rate 19.74 20.66Real appreciation (depreciation) peso / dollar with respect to the previous year:

Closing 8.8 (18.1) Year average 2.5 (14.6)

Average interest rate: Nominal LIBOR 1.3 0.7 ALFA debt, nominal implicit 6.5 5.4 LIBOR in real terms 1.3 16.5

ALFA debt, real implicit (4.6) 22.6Monthly average debt of ALFA in US$ 7,610 7,073

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Expressed in US$, the net financial expenses per year from 2017 to 2015 were $438, $352 and $312, respectively.

Variation in net financial expenses in US$ 17/16 16/15Due to (higher) lower interest rate (54) 6Due to (higher) lower debt (32) (46)Net variation (86) (40)

Net financial expenses in income include bank charges, premiums paid on refinancing transactions and interest expense in 2017, 2016, and 2015.

Measured in Mexican pesos, the FR is composed as follows:Variation

FR 2017 2016 2015 17/16 16/15Financial expenses (8,988) (7,196) (5,942) (1,792) (1,254)Financial income 1,034 597 575 437 22Financial expenses, net (7,964) (6,599) (5,367) (1,365) (1,232)Exchange fluctuation result, net (1,264) (7,189) (4,920) 5,925 (2,269)Impairment in the fair value of financial investment available for sale 0 (1,270) (4,203) 1,270 2,933Impairment of other financial assets (1,694) 0 0 (1,694) 0Total FR (10,912) (15,058) (14,490) 4,146 (568)

The fair value of ALFA’s derivative financial instruments at December 31, 2017 and 2016 is as follows:

Fair value

(Millions of US dollars)Type of derivatives, securities or contracts Dec. 17 Dec. 16Exchange rate 3 (1)Energy (32) (33)Total (29) (34)

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INCOME TAXBelow is a detail of the main factors used to determine income tax expense in each one of the years presented, based on the concept of income tax base, wich is the operating profit less the CFI and other expenses, net.

Income tax Variation amount2017 2016 2015 17/16 16/15

Income before income tax 375 9,271 9,284 (8,896) (13)Equity in income of associates recognized using the equity method (92) (115) 284 23 (399)

283 9,156 9,568 (8,873) (412)Statutory rate 30% 30% 30%Taxes at statutory rate (85) (2,747) (2,870) 2,662 123+ / (-) Income tax effect on:Book to tax FR (782) 283 273 (1,065) 10Other permanent differences, net (936) (2,072) (836) 1.136 (1,236)Income tax total effect on permanent differences (1,718) (1,789) (563) 71 (1,226)Provision for transactions of the year (1,803) (4,536) (3,433) 2,733 (1,103)Total income tax (expense) income (1,803) (4,536) (3,433) 2,733 (1,103)Effective income tax rate 637% 50% 36%Income tax:Current tax expense (5,698) (5,983) (5,420) 189 (563)Deferred tax 3,895 1,447 1,987 2,544 (540)Total income tax (expense) (1,803) (4,536) (3,433) 2,733 (1,103)

2017 NET CONSOLIDATED (LOSS) INCOMEIn the year, ALFA generated net consolidated loss, as detailed in the chart below, which is the result of the matters explained above re-garding operating income, FR and taxes:

VariationStatement of Income 2017 2016 2015 17/16 16/15Operting income 11,195 24,214 24,058 (13,019) 156FR (1) (10,912) (15,058) (14,490) 4,146 (568)Equity in income of associates recognized using the equity method 92 115 (284) (23) 399Income taxes (2) (1,803) (4,536) (3,433) 2,733 (1,103)Net consolidated (loss) income (1,428) 4,735 5,851 (6,163) (1,116)Net (loss) income from controlling interest (2,051) 2,325 3,778 (4,376) (1,453)

(1) Finance result, net. (2) Income tax (current and deferred)

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CONSOLIDATED COMPREHENSIVE (LOSS) INCOMEConsolidated comprehensive (loss) income is shown in the statement of changes in stockholders’ equity and its objective is to show the total effect of the events and transactions affecting capital earned, regardless of whether they are recognized in the statement of income, or directly in the stockholders’ equity. Transactions between the Company and its stockholders are excluded, mainly regarding dividends paid. Comprehensive income for 2017, 2016 and 2015 was as follows:

ConsolidatedConsolidated comprehensive (loss) income 2017 2016 2015Net (loss) income (1,428) 4,735 5,851Other comprehensive income items:Translation of foreign entities 1,223 16,058 3,598Effects of derivative financial instruments 162 419 (650)Actuarial losses from employee benefits (91) (81) (29)Consolidated comprehensive (loss) income (134) 21,131 8,770Controlling interest (906) 15,473 4,794Non-controlling interest 772 5,658 3,976Comprehensive (loss) income for the year (134) 21,131 8,770

A previous section of this report explains the matters related to net income obtained in 2017, 2016 and 2015. The translation effect of foreign entities is the result of using different exchange rates between balance sheet accounts and income statement accounts.

During the year, this item was impacted due to the volatility of exchange rates of the currencies in the different countries in which ALFA operates. The effect of derivative instruments represents the effect of energy derivatives that, in accordance with International Finan-cial Reporting Standards are classified as cash flow hedges. The effect of actuarial losses arising from employee benefits is the difference in actuarial estimates.

DIVIDENDS DECLARED AND CHANGE IN STOCKHOLDERS’ EQUITYIn 2017, a $3,312 dividend was declared, equal to $0.65 Mexican pesos per share.

In 2016, a $3,043 dividend was declared, equal to $0.59 Mexican pesos per share.

In 2015, a $2,380 dividend was declared, equal to $0.46 Mexican pesos per share.

In 2017, stockholders’ equity decreased by 9% due to a net loss, the effect of translation of foreign entities and dividends.

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INVESTMENT IN DAYS OF NWC(1)

In 2017, at the consolidated level, revenues to NWC decreased, as a result, consolidated NWC days decreased from 21 in 2016 to 13 in 2017.

NWC days 2017 2016 2015Alpek 44 52 45 Sigma (2) 1 0 Nemak 10 23 22 Axtel (25) (12) (22) Newpek (124) (58) (59) Consolidated 13 21 19

(1) Net Working Capital

INVESTMENTSProperty, machinery and equipmentTotal investments per group were as follows:

% Variation 17/16

Last 5 years Investment2017 2016 %

Alpek 4,431 5,981 (26%) 21,360 23Sigma 3,542 6,298 (44%) 16,871 18Nemak 8,279 10,164 (19%) 35,347 39Axtel 2,192 3,916 (44%) 10,568 12Newpek 646 467 38% 6,311 7Other 49 538 (91%) 764 1Total 19,139 27,364 (30%) 91,221 100

Business acquisitionsIn 2017, Alfa strategically continued implementing its growth program through acquisitions. Sigma completed the acquisition of two com-panies of processed meat in Peru (Supemsa) and Romania (Caroli) (acquiring remaining 51%), allowing its incursion into Eastern Europe and assuming a leading position in the South American country.

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CASH FLOWSCash flows generated by the the main transactions conducted in 2017 and 2016 are shown in the following table.

2017 2016Cash flows provided by operating activities 34,403 37,298Property, machinery and equipment, and other (19,139) (27,364)Business acquisitions, net of cash received (1,697) 372Increase in bank financing 13,256 (496)Dividends paid by ALFA S. A. B. de C. V. (3,301) (3,043)Dividends paid to non-controlling interest (1,855) (2,834)Repurchase of shares (1,537) 0Interest paid (8,403) (7,784)Other (3,283) 538Increase (decrease) in cash 8,444 (3,313)Adjustments in cash flows due to changes in exchange rates (264) 3,094Cash and cash equivalents at the beginning of the year 24,633 24,852Total cash at year end 32,813 24,633

The main changes in the net debt of ALFA and its companies were as follows:

Changes in debt net of cash US$ Consolidated Alpek Sigma Nemak Axtel Newpek OtherBalance as of December 31, 2016 5,844 1,042 1,724 1,262 972 25 819Long-term financing:Financing 1,916 560 68 501 794 0 (6)Payments (1,543) (236) 0 (472) (834) 0 (2)Short-term financing, net of payments 296 241 1 (49) (4) 0 108Total financing, net of payments 669 565 68 (19) (44) 0 100Currency translation effect 265 (5) 124 106 39 0 0Debt variation in the statement of cash flows 934 560 192 87 (5) 0 100Debt from acquired companies and other 36 0 36 0 0 0 0Total debt variation 970 560 228 87 (5) 0 100Decrease (increase) in cash and restricted cash (533) (343) (28) (82) 5 9 (94)Change in interest payable 19 3 12 4 1 0 (1)Increase (decrease) in debt net of cash 456 220 212 9 1 9 5Balance as of December 31, 2017 6,300 1,262 1,936 1,271 973 34 824

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Debt by group, short and long termAlpek Sigma Nemak Axtel Other

2017 2016 2017 2016 2017 2016 2017 2016 2017 2016Debt balance (US$) 1,734 1,174 2,559 2,330 1,490 1,401 1,037 1,043 1,156 1,058

Porcentage of debt balanceShort-term debt 21 11 4 0 4 12 6 4 9 1Long-term 1 year 2 1 6 10 23 3 19 2 2 4 1 3 14 2 0 11 3 11 8 48 1 4 4 6 0 0 0 2 9 11 26 0 0 5 years or more 58 81 86 66 88 49 72 19 86 94Total 100 100 100 100 100 100 100 100 100 100Average term of long-term debt (years) 4.3 5.4 6.4 6.0 4.8 4.7 5.3 3.4 15.7 16.7Average term of total debt (years) 3.5 4.9 6.2 6.0 4.3 4.2 5.0 3.2 14.3 16.6

US$ % of totalConsolidated debt, short and long term 2017 2016 Var. 2017 2016Short-term debtLong-term 1 year 690 352 338 7 5 2 384 899 (515) 4 13 3 379 981 (602) 4 14 4 247 405 (158) 2 6 5 years or more 6,276 4,369 1,907 63 62Total 7,976 7,006 970 100 100Average term of long-term debt (years) 7.1 7.0Average term of total debt (years) 4.9 6.6

FINANCIAL RATIOS LIQUIDITYDebt net of cash / Cash flows (Times, US dollars in the last 12 months)

Group 2017 2016Alpek 3.29 1.56Sigma 2.86 2.60Nemak 1.78 1.58Axtel 3.36 4.33Newpek 11.98 2.33Consolidated 3.12 2.52

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Interest hedge (Times, US dollar in the last 12 months)* Variation of

2017 2016

17/16 Cash FlowFinancial

ExpensesAlpek 4.8 10.5 (5.7) (4.5) (1.2)Sigma 4.7 5.5 (0.8) 0.1 (0.9)Nemak 11.2 11.9 (0.7) (1.2) 0.5Axtel 3.4 6.3 (2.9) 1.8 (4.7)Newpek 0.7 1.5 (0.8) (1.0) 0.2Consolidated 4.6 6.6 (2.0) (0.9) (1.1)

* Defined as operating income plus asset depreciation, amortization, and impairment, divided by net financial expenses.

FINANCIAL POSITIONALFA’s financial position indicators improved during 2017, as observed in the following table:

Financial indicators 2017 2016Total liabilities / Equity 2.88 2.46Long-term debt / Total debt (%) 91 95Total debt in foreign currency / Total debt (%) 95 94

to the Board of Directors and Stockholders ofAlfa, S. A. B. de C. V.

OpinionWe have audited the consolidated financial statements of Alfa, S. A. B. de C. V. and Subsidiaries (the “Company”), which comprise the consolidated statement of financial position as of December 31, 2017, and the consolidated statement of income, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and its consolidated financial performance and cash flows for the year then ended, in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board.

Basis for OpinionWe conducted our audit in accordance with International Standards on Auditing (“ISA”). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (“IESBA Code”) together with the Code of Ethics issued by the Mexican Institute of Public Accountants (“IMCP Code”), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code and with the IMCP Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Other matterThe Company’s consolidated financial statements for the year ended December 31, 2016, have been audited by other auditors, who expressed an unqualified opinion on February 20, 2017.

Key audit mattersKey audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined that the matters described below are the key audit matters which should be communicated in our report.

Impairment of assets derived from agreements with various subsidiaries of Mossi & Ghisolfi Group (“M&G”)As disclosed in Note 2b. to the consolidated financial statements, in 2015 Alpek, S. A. B. de C. V. (“Alpek”), subsidiary of the Company, entered into agreements with M&G Resins USA, LLC (“M&G Resins”), one of capacity reserve for a term of 5 years and another of maquila for 20 years, for which the latter agreed to supply with 500 thousand tons of PET (manufactured with 420 thousand tons of PTA) from the start-up of the plant located in Corpus Christi. As a result of these agreements, the Company paid $7,745 million (US$435 million) to M&G Resins, of which $6,410 million (US$360 million) were recognized as an intangible asset, amortizable based on production volumes, and $1,335 million (US$75 million) were recognized as prepayments for the purchase of inventories. In 2017, due to M&G’s declared insolvency, its difficulty to obtain additional financing, and its lack of liquidity, which resulted in the inability to complete the construction of the plant, Alpek decided to recognize an impairment for these assets of $7,745 million (net of taxes, $6,087). In addition, due to the aforementioned conditions, Alpek also decided to impair notes and accounts receivable of $3,711 million (net of taxes, $2,634 million).

Subsequently, on October 9, 2017, Alpek (transferee) entered into a transfer-of-rights agreement with Banco Inbursa, S. A. (transferor), on an unsecured loan agreement bearing interest and mortgage guarantee with M&G Polímeros México, S. A. de C. V. (“M&G Polímeros México”). The consideration for the transfer of rights that Alpek paid amounts to $1,870 million, which is recognized in the consolidated financial statements as other non-current assets. This contract grants Alpek the right in the first instance over the other creditors of M&G Polímeros México and is guaranteed by a plant in Altamira, Mexico, of which fair value exceeds the amount of the right of collection maintained by Alpek.

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INDEPENDENT AUDITORS’ REPORT

Due to the significant judgments used by management to determine the impairment loss of the assets of Alpek associated with M&G, and the recognition of other non-current assets for the transfer of rights, our audit procedures focused on reviewing elements and significant judgments considered by the Company to recognize the impairment loss of the long-lived assets and the other non-current assets in the consolidated financial statements.

Regarding the impairment loss recognized, we obtained and read the contractual agreements of the transaction and performed the following procedures:

• We obtained the analysis prepared by management, including level of indebtedness of M&G, lack of liquidity and level of insolvency of M&G; we also assessed the current situation of the construction of the plant and the possibility of reactivation. With respect to the accounts receivable of PTA sales and notes receivable, we obtained the aging analysis, management’s estimates of recovery and, if applicable, the guarantees granted.

• We assessed and discussed with management the information and evidence provided to corroborate the considerations for recognizing impairment losses.

As part of our audit, regarding the recognition of the long-term notes receivable arising from the transfer of rights, among others, we performed the following procedures:

• We obtained confirmation from lawyers in relation to the level of the mortgage guarantee.

• With respect to the mortgaged property, with the support of our expert appraisers, we verified that the models used by management to determine the fair values were used and recognized to value assets with similar characteristics in the industry.

• We assessed and discussed with management the probability of recovery of the long-term notes receivable, considering the fair value of the mortgage guarantee.

The results of our procedures were satisfactory and we agree with the amount of impairment of the assets recorded in the year. In addition, the results of our procedures were satisfactory with respect to the recoverability of the other non-current assets arising from the transfer of rights, considering the guarantee established.

Assessment of impairment intangible assetsAs described in Notes 3j., 3k. and 12 to the consolidated financial statements, the Company performs impairment tests on its intangible assets with indefinite useful lives on an annual basis and for intangible assets with finite useful lives when an impairment indicator exists.

We have been focused in the review of the intangible assets, mainly due to the importance of the intangible assets balance in the consolidated financial statements of the Company, which consists of goodwill of $24,848 million, trademarks of $15,051 million, development costs of $4,199 million, exploration costs of $2,100 million, customers relationships of $6,271 million, intellectual property rights of $2,771 million, and others of $2,818 million and because impairment tests on intangible assets involve the application of significant judgments by the Company’s management in determining the assumptions related to the estimation of the recoverable value of intangible assets allocated to its cash generating units (“CGUs”).

As part of our audit, we focused on the following significant assumptions that the Company considered when estimating future projections to assess the recoverability of intangible assets: growth rate of the industry, new projects and significant customers, estimated revenues, discount rates, expected gross profit margin and projected cash flows. With support from our expert appraisers, our procedures, among others, included:

• We reviewed the models applied to determine the recoverable value of the assets and methods used and accepted for valuing assets with similar characteristics.

• We challenged the financial projections by comparing them to the business performance and historical trends, verifying the explanations of the variations with management. In addition, we assessed the internal processes used by management to make projections, including timely monitoring and analysis by the Board of Directors, and if the projections are consistent with the budgets approved by the Board.

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• We analyzed the assumptions used in the impairment model, specifically including the cash flow projections, EBITDA multiple and long-term growth plans. The key assumptions used to estimate cash flows in impairment tests of the Company are those related to revenue growth and operating margin.

• Independent assessment of discount rates used and the methodology used in the preparation of the model of the impairment test. In addition, we tested the integrity and accuracy of the impairment model.

• We evaluated the factors and variables used to determine the CGUs, among which were considered the analysis of operating cash flows and borrowing policies, analysis of the legal structure, allocation of production and understanding of the operation of the commercial area and sales.

• We discussed with management the sensitivity calculations for all CGUs, calculating the degree to which the assumptions used will need to be changed, and the likeliness these changes may arise.

The results of our procedures were satisfactory, and we believe the assumptions used, including the discount rate, are reasonable.

Assessment of the recoverability of deferred income tax assetsThe Company records deferred income tax assets derived from tax losses. Management performed an assessment of the probability of recovering the tax losses carryforward to support the deferred tax assets recognized on its consolidated financial statements.

Due to the significance of the deferred income tax asset balance as of December 31, 2017 amounting to $9,621 million, and the significant judgments and estimates to determine future projections of the Company’s taxable income, we focused on this line item, among others, and performed the following procedures:

• We verified the reasonableness of the projections used to determine future taxable income.

• We challenged the projections used by comparing them to the business performance and historical trends, verifying the explanations of the variations with management.

• With the support of internal experts, we assessed the processes used to determine the projected taxable income, and the assumptions used by management in preparing tax projections.

• We discussed with management the sensitivity analysis and assessed the degree to which the key assumptions used would need to be modified in order for an adjustment to be considered for evaluation.

The results of our audit procedures were satisfactory. The Company’s accounting policy for the recording of deferred taxes, as well as the detail of their disclosure are included in Notes 3m. and 17, respectively, to the accompanying consolidated financial statements.

Information other than the Consolidated Financial Statements and Auditor’s Report thereonManagement is responsible for the other information presented. The other information includes two documents, the Annual Stock Exchange Filing and the information that will be incorporated in the Annual Report that the Company must prepare pursuant to the General Provisions Applicable to Issuers and other Participants in the Mexican Stock Exchange and file it with the National Banking and Securities Commission (“CNBV” for its acronym in Spanish). The Annual Stock Exchange Filing and the Annual Report are expected to be made available to us after the date of this auditors’ report.

Our opinion of the consolidated financial statements does not cover the other information and we do not express any form of assurance over it.

In connection with our audit of the consolidated financial statements, our responsibility will be to read the other information, when available, and in doing so, consider whether the other information contained therein is materially inconsistent with the consolidated financial statements or with our knowledge obtained in the audit, or otherwise appears to contain a material error. If based on the work we have performed, we conclude that there is a material misstatement therein, we are required to communicate the matter in a statement in the Annual Report required by the CNBV and those charged with governance in the Company.

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Responsibilities of management and Those Charged with Governance for the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s consolidated financial reporting process.

Auditor’s responsibilities for the audit of the consolidated financial statementsOur objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

- Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

- Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

- Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

- Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company and subsidiaries to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision, and performance of the Company and subsidiaries audit. We remain solely responsible for our audit opinion.

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We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Galaz, Yamazaki, Ruiz Urquiza, S.C.Member of Deloitte Touche Tohmatsu Limited

C. P. C. Emeterio Barrón PeralesMonterrey, Nuevo León, Mexico January 31, of 2018

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Nota 2017 2016

AssetsCurrent assets: Cash and cash equivalents 6 $ 32,813 $ 24,633 Restricted cash 7 961 538 Trade and other accounts receivable, net 8 38,994 40,300 Inventories 9 44,341 40,923 Derivative financial instruments 4 209 56 Other current assets 10 4,817 5,318 Total current assets 122,135 111,768Non-current assets: Property, plant and equipment, net 11 153,642 149,503 Goodwill and intangible assets, net 12 58,058 63,171 Deferred income taxes 17 19,517 17,976 Investments accounted for using the equity method and other non-current assets 13 5,616 6,145 Total non-current assets 236,833 236,795Total assets $ 358,968 $ 348,563

Liabilities and Stockholders’ EquityCurrent liabilities: Debt 16 $ 15,146 $ 8,807 Trade and other accounts payable 15 77,366 69,713 Income taxes payable 17 2,737 1,515 Derivative financial instruments 4 304 99 Provisions 18 471 769 Other current liabilities 19 2,170 2,103 Total current liabilities 98,194 83,006Non-current liabilities: Debt 16 142,799 136,323 Derivative financial instruments 4 472 651 Provisions 18 796 1,163 Deferred income taxes 17 13,874 16,228 Income taxes payable 17 4,826 5,379 Employee benefits 20 4,982 4,502 Other non-current liabilities 19 599 698 Total non-current liabilities 168,348 164,944 Total liabilities 266,542 247,950Stockholders’ equity:Controlling interest: Capital stock 21 211 213 Retained earnings 51,202 58,774 Other reserves 18,023 16,789Total controlling interest 69,436 75,776Non-controlling interest 22,990 24,837 Total stockholders’ equity 92,426 100,613Total liabilities and stockholders’ equity $ 358,968 $ 348,563

The accompanying notes are an integral part of these consolidated financial statements.

ALFA, S. A. B. DE C. V. AND SUBSIDIARIESAs of December 31, 2017 and 2016In millions of Mexican pesos

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CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


CONSOLIDATED STATEMENTS OF INCOME

Note 2017 2016

Revenues 28 $ 317,627 $ 293,782Cost of sales (254,283) (226,422) Gross profit 63,344 67,360

Selling expenses (21,582) (19,975)Administrative expenses (21,228) (20,971)Other expenses, net 24 (9,339) (2,200) Operating income 11,195 24,214

Financial income 25 1,034 597Financial expenses 25 (8,988) (7,196)Loss due to exchange fluctuation, net 25 (1,264) (7,189)Impairment of financial assets 25 (1,694) (1,270) Financial result, net (10,912) (15,058)

Equity in income of associates recognized using the equity method 92 115

Income before taxes 375 9,271

Income taxes 17 (1,803) (4,536) Net consolidated (loss) income $ (1,428) $ 4,735

(Loss) income attributable to: Controlling interest $ (2,051) $ 2,325 Non-controlling interest 623 2,410 $ (1,428) $ 4,735

(Losses) earnings per basic and diluted shares, in Mexican pesos $ (0.40) $ 0.45

Weighted average outstanding shares (thousands of shares) 5,087,743 5,120,500

ALFA, S. A. B. DE C. V. AND SUBSIDIARIESFor the years ended December 31, 2017 and 2016In millions of Mexican pesos, except for earnings per share amounts

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Nota 2017 2016

Net consolidated (loss) income $ (1,428) $ 4,735Other comprehensive income for the year: Items that will not be reclassified to the consolidated statement of income Remeasurement of employee benefit obligations, net of taxes 20 (91) (81)

Items that will be reclassified to the consolidated statement of incomeEffect of derivative financial instruments designated as cash flow hedges, net of taxes 162 419Translation effect of foreign entities 1,223 16,058 Total comprehensive income of the year 1,294 16,396

Consolidated comprehensive (loss) income $ (134) $ 21,131

Attributable to: Controlling interest $ (906) $ 15,473 Non-controlling interest 772 5,658Comprehensive (loss) income for the year $ (134) $ 21,131

ALFA, S. A. B. DE C. V. AND SUBSIDIARIESFor the years ended December 31, 2017 and 2016In millions of Mexican pesos

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Total Non- Total Capital Retained Other controlling controlling stockholders’ Stock earnings reserves interest interest equity

Balances as of January 1, 2016 $ 205 $ 58,345 $ 3,641 $ 62,191 $ 17,624 $ 79,815 Transactions with stockholders: Repurchase of own shares 8 - - 8 - 8 Dividends declared - (3,043) - (3,043) (2,834) (5,877) Movements in non-controlling interest - 1,147 - 1,147 4,389 5,536 8 (1,896) - (1,888) 1,555 (333)

Net income 2,325 - 2,325 2,410 4,735 Total other comprehensive income for the year - - 13,148 13,148 3,248 16,396 Comprehensive income - 2,325 13,148 15,473 5,658 21,131Balances as of December 31, 2016 213 58,774 16,789 75,776 24,837 100,613

Transactions with stockholders: Repurchase of own shares (2) (1,535) - (1,537) - (1,537) Dividends declared - (3,312) - (3,312) (1,924) (5,236) Movements in non-controlling interest - 184 - 184 (184) - Other - (769) - (769) (511) (1,280) (2) (5,432) - (5,434) (2,619) (8,053)

Net loss - (2,051) - (2,051) 623 (1,428) Total other comprehensive income for the year - (89) 1,234 1,145 149 1,294 Comprehensive (loss) income - (2,140) 1,234 (906) 772 (134)

Balances as of December 31, 2017 $ 211 $ 51,202 $ 18,023 $ 69,436 $ 22,990 $ 92,426


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CONSOLIDATED STATEMENTS OF CASH FLOWS

2017 2016

Cash flows from operating activities Income before income taxes $ 375 $ 9,271 Depreciation and amortization 18,638 16,947 Impairment of long-lived assets 8,479 2,094 Allowance for doubtful accounts 2,261 223 Gain on sale of property, plant and equipment (856) (4) Effect of changes in the fair value of derivative financial instruments (10) 727 Gain on purchase and sale of shares (732) - Financial expenses, net 7,435 6,007 Exchange fluctuation, net 1,264 6,647 Equity in results of associates, provisions and others (336) 902 Impairment of financial assets 1,694 1,270 Movements in working capital: Increase in trade and other accounts receivable (1,529) (1,999) Increase in inventories (3,183) (2,444) Increase in trade and other accounts payable 5,711 2,970 Income taxes paid (4,808) (5,313) Net cash flows generated by operating activities 34,403 37,298

Cash flows from investing activities Interest collected 781 464 Cash flows in acquisition of property, plant and equipment (18,811) (20,936) Cash flows in sale of property, plant and equipment 2,035 - Cash flows in acquisition of intangible assets (2,363) (5,134) Cash flows in business acquisitions, net of cash acquired (1,697) 372 Restricted cash (1,190) 122 Dividends collected 11 42 Other (2,529) (1,141) Net cash flows used in investing activities (23,763) (26,211)

Cash flows from financing activities Proceed from borrowings or debt 66,155 36,804 Payments of borrowings or debt (52,899) (37,300) Interest paid (8,403) (7,784) Dividends paid (3,301) (3,043) Dividends paid to non-controlling interest (1,855) (2,834) Repurchase of shares (1,537) - Other (356) (243) Net cash flows used in financing activities (2,196) (14,400)Net increase (decrease) in cash and cash equivalents 8,444 (3,313)Effect of changes in exchange rates (264) 3,094Cash and cash equivalents at beginning of year 24,633 24,852Cash and cash equivalents at end of year $ 32,813 $ 24,633


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Note 1 - Alfa companies’ activitiesAlfa, S. A. B. de C. V. and subsidiaries (therein after “Alfa” or “the Company”), is a Mexican company controlling five business groups with the following activities: Alpek, engaged in the production of petrochemicals and synthetic fibers; Sigma, a refrigerated food producer; Nemak, engaged in the manufacture of high-tech aluminum auto parts; Axtel (previously Alestra), in the telecommunications sector; and Newpek, a natural gas and hydrocarbons company.

Alfa has a competitive position globally in the auto parts segment as a producer of aluminum engine heads and blocks, as well as in the manufacture of PTA (raw material for the manufacture of polyester), and is a leader in the Mexican market for refrigerated foods. Alfa operates industrial production and distribution centers mainly in Mexico, the United States of America (U.S.), Canada, Germany, Slovakia, Belgium, Czech Republic, Italy, Holland, Portugal, France, Costa Rica, Dominican Republic, El Salvador, Argentina, Peru, Ecuador, Austria, Brazil, China, Hungary, Spain, India, Poland, Turkey, Romania and Russia. The company markets its products in over 45 countries worldwide and employs over 82,000 people.

Alfa’s shares are traded on the Mexican Stock Exchange, S. A. B. de C. V. and Latibex, the Latin American market of the Madrid Stock Exchange.

Alfa is located in Avenida Gómez Morín Avenue Sur No. 1111, Col. Carrizalejo, San Pedro Garza García, Nuevo León, México.

In the following notes to the consolidated financial statements references to pesos or “$”, mean millions of Mexican pesos. References to “US$” or dollars, mean millions of dollars from the United States. In addition, references to “€”, means millions of euros.

Note 2 - Acquisitions and other significant events2017a. Issuance and prepayment of debtSigmaOn February 2, 2017, Sigma Alimentos, S. A. de C. V. issued Senior Notes on the Irish Stock Exchange through a private offering under Rule 144A and Regulation S, in the amount of €600 , gross from issuance costs of €5.4 and discounts of €2.2. The Senior Notes mature in seven years at a coupon of 2.625%. The transaction resources were mainly used to pay debt

On March 9, 2017, the Company prepaid the Senior Notes maturing on December 14, 2018, in the amount of US$450, incurring a cost for the prepayment of US$20 recognized as a financial expense in the consolidated statement of income. The Notes were issued in 2011 under Rule 144A and Regulation S at an annual coupon of 5.625%. All transaction costs to be amortized previously presented net of debt were recognized in the consolidated statement of income for the year ended December 31, 2017 for US$1.9.

NemakOn March 9, 2017, Nemak issued Senior Notes on the international market that were listed on the Irish Stock Exchange in the amount of €500, through a private offering under Rule 144A and Regulation S. The Senior Notes accrue an annual coupon of 3.25%, maturing in 7 years. The proceeds were mainly used to prepay other financial liabilities with shorter maturity terms.

AxtelOn November 9, 2017, Axtel placed Senior Notes in the international market and listed on the Irish Stock Exchange under a private offering under Rule 144A and Regulation S in the amount of US$500, gross of issuance costs of US$7. The Senior Notes accrue an annual coupon of 6.375% maturing in 7 years. The proceeds were mainly used to prepay the existing debt, including certain issuance costs. All transaction costs to be amortized previously presented net of debt were recognized in the consolidated statement of income for the year ended December 31, 2017, for $53.

Additionally, on December 19, 2017, Axtel signed a bilateral credit agreement with HSBC México, for an amount of $5,709 (equivalent to US$300) with a maturity of 5 years and at a variable interest rate with a margin on the TIIE rate applicable according to the leverage ratio between 1.875% and 3.25%. The proceeds obtained were used to prepay the remaining debt of the syndicated loan, denominated mainly in dollars.

ALFA, S. A. B. DE C. V. AND SUBSIDIARIESAs of and for the years ended December 31, 2017 and 2016In millions of Mexican pesos, except where otherwise indicated

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

b. Impairment of assets from supply agreements with several subsidiaries of Mossi & Ghisolfi Group (“M&G”) and agreement to provide secured financing to M&G MexicoDuring 2015, Alpek held a licensing agreement for IntegRex® PTA technology and another PTA-PET supply agreement with M&G Resins USA, LLC (“M&G Resins”). These agreements will allow M&G to use the IntegRex® PTA technology in the PTA-PET integrated plant to be constructed in Corpus Christi, Texas in the United States of America.

Resulting from this agreement, Alpek paid US$435 to M&G Resins, of which US$360 were recognized as an intangible asset, to be amortized based on their production volumes, and US$75 were recognized as an inventory advance within the prepayment line item. However, during 2017 M&G suspended payments and began formal restructuring of its operations, including bankruptcy filings in the United States and Italy, due to its liquidity problems. As a result of the foregoing, Alpek recognized an impairment due to the following concepts: Recognized Deferred in net Impairment amount tax effect income

Intangible assets and advanced payments US$ 435 $ 7,745 $ 1,658 $ 6,087Trade and other accounts receivable (1) 113 2,017 560 1,457Long-term notes receivable (1) 94 1,694 517 1,177

(1) Held with various subsidiaries of M&G.

Subsequently, on October 9, 2017, Alpek entered into a transfer-of-rights agreement with Banco Inbursa, S. A., on an unsecured loan agreement bearing interest and mortgage guarantee with M&G Polímeros México, S. A. of C. V. (“M&G Polímeros México”). The consideration for the assignment of rights paid by Alpek amounts to $1,870 (US$100), which were recognized in the consolidated financial statements as other non-current assets. This contract gives Alpek a right in the first instance over the other creditors of M&G Polímeros México and is guaranteed by a PET plant in Altamira, Mexico, whose fair value exceeds the amount of the right to payment maintained by Alpek.

On December 29, 2017 Alpek signed an agreement to provide secured financing to M&G Polímeros México, S. A. de C. V. (“M&G Mexico”). The new credit facility is secured by a second lien on M&G Polímeros México’s PET production facility in Altamira, Mexico, and has a two-year term for a maximum principal amount of US$60 that will be disbursed in several intervals subject to certain conditions, including a restructuring plan that should be presented by M&G Polímeros México and approved by its creditors. The new credit facility is intended to support M&G Polímeros México’s PET operations during its restructuring process.

c. Acquisition of Sociedad Suizo Peruana de Embutidos, S. A.On July 1, 2017, Sigma acquired 100% of the common shares of Sociedad Suizo Peruana de Embutidos, S.A. (“SUPEMSA”) for US$38. The acquired entity is engaged in the production of processed meat and marketing of dairy products in Peru, and is included in the Latam segment. In 2016, SUPEMSA generated sales of $1,020.

At the issuance date of the consolidated financial statements, Sigma is in the process of assigning the purchase price to the identifiable assets acquired and liabilities assumed within the twelve-month period following the acquisition date, as established by IFRS 3, Business Combinations.

d. Acquisition of Caroli Foods Group B. V.On September 1, 2017, Sigma acquired the remaining 51% of the shares of Caroli Foods Group B.V. (“Caroli”) for $1,054, whereby Sigma became the only owner. Caroli is an entity engaged in the production and marketing of processed meat and prepared meals in Pitesti, Romania, where it has operated for over 23 years, and it is included in the Europe segment (see Note 28). In 2016, Caroli generated sales of $1,812.

Sigma already owned 49% of the shares and, with this transaction, it acquired the entire shares of Caroli; therefore, under IFRS 3, the transaction is deemed an acquisition in stages. According to this standard, the Company remeasured the previously held interest in 49% of the shares of Caroli at fair value at the acquisition date of the remaining 51% of the shares of this entity; therefore, it recognized a gain in the consolidated statement of income of $410 (equivalent to €18.5).

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At the issuance date of the consolidated financial statements, Sigma is in the process of assigning the purchase price to the identifiable assets acquired and liabilities assumed within the twelve-month period following the acquisition date, as established by IFRS 3, Business Combinations.

e. Stock purchase contract of Petroquímica SUAPE y CITEPEOn December 28, 2016, Alpek S.A.B. de C.V. (“Alpek”), signed a stock purchase contract with Petróleo Brasileiro, S. A. (“Petrobras”) to acquire its equity in Companhia Petroquimica de Pernambuco (“Petroquimica Suape”) and Companhia Integrada Textil de Pernambuco (“Citepe”).

Petroquimica Suape and Citepe operate an integrated PTA-PET site in Ipojuca, Pernambuco, Brazil, with a capacity of 700,000 and 450,000 tons of PTA and PET per year, respectively. Citepe also operates a textured polyester filament plant with a capacity of 90,000 tons per year.

The agreed-upon price for the 100% of equity of Petrobras in Petroquimica Suape and Citepe amounts to US$385. This amount will be paid in Brazilian Reals at the date on which the transaction is closed, and it is subject to working capital and debt adjustments, among others.

On April 3, 2017, Alpek announced that it obtained all corporate approvals necessary to conduct the transaction. However, for the closing thereof, the approval from the competent government authorities is required. The contract sets forth a maximum fifteen-month period to complete the transaction as of the date of the contract. In the second quarter of 2017, the Company made an initial deposit of US$39 ($738) as a guarantee for the acquisition. This amount is classified in the consolidated statement of income as restricted cash. At the issuance date of these consolidated financial statements, the approvals and conditions are in the process of being obtained.

f. Adjustment to Alfa shareholdingOn July 18, 2017 and in accordance with the resolutions adopted at the General Stockholders’ Extraordinary Meeting held on January 15, 2016 relating to the merger of Onexa, S. A. of C. V., Axtel, proceeds to deliver to Alfa 1,019,287,950 Class “I” shares of Series “B”, representing an additional ownership to Alfa of 2.50% in Axtel. The shares were previously held in the Axtel’s Treasury and its payment to Alfa cancelled the liability previously recognized by Axtel as a consideration for the merger.

g. Acquisition of Selenis Canada Inc.On July 29, 2016, Alpek S. A. B. de C. V. (“Alpek”) acquired a controlling interest in Selenis Canada, Inc. (“Selenis”), company that is the only producer of PET in Canada which operates a manufacturing plant located in Montreal, Canada with capacity to produce 144 thousand tons per year. The acquisition of the business is included in the Alpek segment, see Note 28.

The amount paid for this business was US$17 ($320). Alpek recognized a bargain purchase gain of US$12, which was recorded in 2017 when Alpek finalized the fair value allocation of net acquired assets and 2016 figures were not restated given the immaterial nature of the 2017 purchase adjustments.

The consolidated financial statements include the financial information of Selenis beginning on August 1, 2016.

The purchase agreement included a payment clause for future benefits (earn-out) for having started PETG production. Under this clause, the selling party kept in stock the shares not acquired by Alpek (49%), which could be released to the extent that Alpek completed the first production run of PETG. During 2017, these conditions were met, releasing the shares held in deposit to Alpek. As of December 31, 2017, Alpek holds 100% of the shareholding.

2016h. Acquisition of AxtelOn December 3, 2015, Alfa, Axtel, S. A. B. de C. V. (“Axtel”) and Onexa, S. A. de C. V. (“Onexa”), Alfa’s subsidiaries, and a group of its main stockholders of Axtel signed a cooperation agreement, as well as an agreement between shareholders (“the Agreements”) to merge Onexa with Axtel, subsisting the latter. Onexa is the holding company of Alestra, S. de R. L. (“Alestra”).

On January 15, 2016, Axtel and Onexa held Extraordinary Meetings where the Stockholders approved the merge and the members of the Board of Directors, the Chief Executive Officer and the Audit and Corporate Practices Committees were appointed. After finishing the legal, operating and financial review process and obtaining the approvals from authorities, the transaction was effective on February 15, 2016. The merge allows combining the competitive advantages of both companies, including qualified human resources, new technologies and a wide service infrastructure to meet the increasing market demand. Furthermore, scale economy synergies will arise, as well as efficiency in network integration and skill transfer.

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The merged entity, Axtel, is a Mexican company engaged in providing fixed and integrated telecommunications services (data transmission services, Internet and long-distance telephone services) and is expected to continue to be traded in the Mexican Stock Exchange (“BMV”). Under the merger agreement, Alfa acquired 50.19% of the combined entity’s voting shares, in exchange for 100% of Onexa voting shares. The Agreements established a series of rights and obligations for the parties involved in terms of corporate governance and decision making, that granted Alfa the ability to direct activities related to the merged entity, mainly due to the fact that Alfa appoints most of the members of the Board of Directors and the main Directors who hold the power to direct the merged entity’s relevant operations. The Agreements were intended to reasonably anticipate likely future events of the subsidiary and their stockholders during the term of the contract and to set forth the manner accorded to them. Examples include: approval of the generality rules for the business plan; approval of the budget and of ordinary and extraordinary corporate events; changes in Axtel ownership; and resolution of disputes between the stockholders. In accordance with IFRS requirements, Alfa acquired control of Axtel, as the former has the ability to direct its most relevant activities (See Note 5).

In accordance with International Financial Reporting Standard 3 - Business Combinations (“IFRS 3”), the merger represents a business acquisition and has therefore been recorded by the purchase method established in IFRS 3. Axtel and Alestra operations are considered a single business for accounting purposes, in accordance with IFRS 3. This acquisition is included in Axtel’s segment (See Note 28). The acquisition was recorded, distributing the total assets acquired, including intangible assets and assumed liabilities, based on the fair values determined at the date of acquisition. The acquisition cost in excess of the net fair values of the assets acquired and assumed liabilities has been recorded as goodwill.

Consideration paid by Alfa totaled $6,851, corresponding to the fair value of its investment in Onexa (Alestra), which merged with Axtel and as an exchange it received 9,594,008,144 of new ordinary shares pertaining to the combined entity (equivalent to 50.19% of its’ equity) with a fair value of $0.7140 per share. This exchange resulted in a gain of $1,785 that was recognized in accumulated results, since it represents the sale of 49.81% of Onexa to the non-controlling interest. The fair value of the shares of the new combined entity issued to Alfa was determined on the basis of the market value of the Axtel share at the Mexican Stock Exchange in effect on the day prior to the transaction date. The total compensation of $6,851 includes the cash and cash equivalents acquired in the amount of $1,030.

As of December 31, 2016, fair values of assets and liabilities have been determined, and the distribution of the estimated consideration is as follows:Current assets (1) $ 4,368Non-current assets 440Property, plant and equipment 14,281Intangible assets (2) 2,283Deferred income tax assets 2,567Customer portfolio 3,047Current liabilities (3) (4,326)Non-current liabilities (4) (644)Employee benefits (162)Deferred income tax asset (1,530)Debt (13,749)Total identifiable assets acquired, net 6,575Non-controlling interest (3,274)Goodwill 3,550Transferred consideration $ 6,851

(1) Current assets consist of cash $1,030, accounts receivable $2,547, fair value financial assets $346, advance payments $261 and other $184.(2) Intangible assets consist of brands $2,162 and other intangibles $121(3) Current liabilities consist of suppliers and accounts payable $2,417, taxes payable $16, other accruals $1,313 and provisions $580(4) Non-current assets consist of derivative financial instruments $70 and other accounts payable $574

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Net assets given in exchange through the investment in Onexa (Alestra), amounted to $3,320; however, in the terms of IFRS 3, these net assets do not form part of the distribution of the aforementioned compensation.

Goodwill is mainly comprised of the market share obtained through expanded capacity of the Company’s asset base. It arises from the acquisition and represents the compensation transferred in excess of the fair value of the identifiable assets acquired and liabilities assumed at the date of the acquisition. The goodwill recorded is not deductible for tax purposes.

The non-controlling interest was recognized based on the proportional interest of Axtel’s net assets acquired.

No contingent liability has arisen from this acquisition that would require posting, and there are no contingent compensation agreements in place.

Costs related to the association totaled $835 and were recognized in the statement of income for the year ended December 31, 2016, in the other expenses line item.

As part of the merger, on the date of the transaction took effect, in a separate transaction but related to the acquisition, and based on the Agreements, Alfa and Alestra paid a group of Axtel shareholders the amount of $1,233 (US$67.5) as a remuneration for these to assume certain obligations to do and not to do (confidentiality and abstained from certain activity, among others), which has been registered as intangible assets in Alfa’s consolidated statement of financial position as of December 31, 2016.

The aforementioned Agreements included certain indemnity payments in the event of default by any of the parties, such as: a consequence of the lack of integrity, inaccuracy or falsehood, solely with respect to their own statements and/or failure to comply with their respective obligations. On the basis of the foregoing and in accordance with the obligations assumed by Axtel and the aforementioned group of relevant stockholders, it was agreed to have Alfa receive the compensation corresponding to the negative economic effects arising from uncollectibility of certain accounts receivable of $984, which qualifies as an adjustment to the consideration transferred, since it is Axtel who has the obligation to pay. In addition, during the year 2017 it was agreed that Alfa would receive compensation for additional negative economic effects for $219.

Revenues contributed by Axtel assets included in the consolidated statement of income from the acquisition date through December 31, 2016 amounted to $13,744, and a net loss of $1,752. If the acquisition had taken place on January 1, 2016, the revenues would have increased by $974 and net loss by $1,938, approximately.

i. Debt refinancing processIn May 2016, Sigma refinanced its debt through the issuance of Senior Notes for US$1,000. The notes were sold in the U.S., to qualified institutional investors in accordance with Rule 144A under the U.S. Securities Act of 1933 and to certain investors outside the U.S. under Regulation S. The proceeds from this issuance were used to prepay outstanding debt.

The following is a summary of the conditions of the debt in a comparative manner, before and after the aforementioned refinancing: Conditions Conditions subsequent prior to to refinancing refinancing

Debt level US$ 997 US$ 1,041Maturity dates 2026 2018Interest rate 4.125% 1.77%

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j. Acquisition of Cevher DökümOn November 1, 2016, Nemak acquired all the shares representing of the capital stock of Cevher Döküm Sanayii A.Ş (“Cevher”), a producer company of aluminum castings for the manufacture of automotive components. The acquired entity operates a production plant in Turkey and a trading company. The acquisition of the business is included in the Nemak segment, see Note 28.

The amount paid for this business was $56 (€2.5) in cash. Nemak recognized a bargain purchase gain of €2.2 associated with this acquisition, which was recorded in 2017 when Nemak finalized the fair value allocation of net acquired assets and 2016 figures were not restated given the immaterial nature of the 2017 purchase adjustments.

No contingent liability has arisen from this acquisition that should be recorded. Neither exist contingent consideration agreements. Nemak is not responsible for environmental liabilities except for those that may originate on or after the date of acquisition.

Costs related to the association totaled $15 and were recognized in the statement of income for the year ended December 31, 2016, in the other expenses line item. In addition, the entity changed its name to Nemak Izmir Dökum Sanayii, A. S.

Revenues contributed by the acquired business included in the consolidated statement of income from the acquisition date through December 31, 2016 amounted to $182, and a net loss of $36.

k. Investment in Pacific Exploration & Production, Corporation (formerly Pacific Rubiales Energy)During 2014, Alfa acquired 59,897,800 ordinary shares from Pacific Exploration & Production, Corporation (“PRE”), which represents approximately 19% of the total outstanding shares, in the amount of $14,135. The shares were acquired in the Toronto, Canada stock market. PRE is a public company engaged in the exploration and production of oil and gas in Colombia, listed in Toronto and Canada’s stock markets.

This investment was recorded as “Financial assets available for sale,” and was shown as current assets, and recorded at fair value. The changes in such value are recorded directly in stockholders’ equity. The accumulated effects of changes in the fair value are reclassified to income when sold or when there is an impairment in the value. An analysis of the available objective evidence, based on the significant drop in the market price of the PRE share in the market, concluded that there is an impairment in the investment; therefore, the value of this investment was fully written down at December 31, 2016. For the year ended December 31, 2016, the Company recorded an impairment loss of $1,270 corresponding to the investment in PRE, which was presented in the statement of income as part of the financial result, net.

Note 3 - Summary of significant accounting policiesThe following are the most significant accounting policies followed by Alfa and its subsidiaries, which have been consistently applied in the preparation of their financial information in the years presented, unless otherwise specified:

a. Basis of preparationThe consolidated financial statements of Alfa, S. A. B. de C. V. and subsidiaries have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”). IFRS include all International Accounting Standards (“IAS”) in force and all related interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”), including those previously issued by the Standard Interpretations Committee (“SIC”).

The consolidated financial statements have been prepared on a historical cost basis, except for the cash flow hedges which are measured at fair value, and for the financial assets and liabilities at fair value through profit or loss with changes reflected in the consolidated statement of income and for financial assets available for sale.

The preparation of the consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. Additionally, it requires management to exercise judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where judgments and estimates are significant to the consolidated financial statements, are disclosed in Note 5.

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b. Consolidationi. SubsidiariesThe subsidiaries are all the entities over which the Company has control. The Company controls an entity when it is exposed, or has the right to variable returns from its interest in the entity and it is capable of affecting the returns through its power over the entity. When the Company’s interest in subsidiaries is less than 100%, the interest attributed to external stockholders is recorded as non-controlling interest. Subsidiaries are consolidated in full from the date on which control is transferred to the Company and up to the date it loses such control.

The accounting method used by the Company for business combinations is the acquisition method. The Company defines a business combination as a transaction in which it gains control of a business, and through which it is able to direct and manage the relevant activities of the set of assets and liabilities of such business with the purpose of providing a return in the form of dividends, smaller costs or other economic benefits directly to stockholders.

The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable acquired assets and liabilities and contingent liabilities assumed in a business combination are initially measured at their fair values at the acquisition date. The Company recognizes any non-controlling interest in the acquiree based on the share of the non-controlling interest in the net identifiable assets of the acquired entity.

The Company accounts for business combinations using the predecessor method in a jointly controlled entity. The predecessor method involves the incorporation of the carrying amounts of the acquired entity, which includes the goodwill recognized at the consolidated level with respect to the acquiree. Any difference between the transferred consideration and the carrying amount of the net assets acquired at the level of the subsidiary are recognized in equity.

The acquisition-related costs are recognized as expenses when incurred.

Goodwill is initially measured as excess of the sum of the consideration transferred and the fair value of the non-controlling interest over the net identifiable assets and liabilities assured. If the consideration transferred is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the consolidated statement of income.

If the business combination is achieved in stages, the book value at the acquisition date of the interest previously held by the Company in the acquired entity is remeasured at its fair value at the acquisition date. Any loss or gain resulting from such remeasurement is recorded in results of the year.

Transactions and intercompany balances, as well as unrealized gains on transactions between Alfa’s companies are eliminated in preparing the consolidated financial statements. In order to ensure consistency with the policies adopted by the Company, the amounts recorded by subsidiaries have been changed where it was deemed necessary.

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As of December 31, 2017 and 2016, the primary subsidiary companies of Alfa were as follows: Shareholding (%) (2)

Country (1) 2017 2016 Functional currency

Alpek (Petrochemicals and synthetic fibers)Alpek, S. A. B. de C. V. (Holding company) 82 82 Mexican peso Grupo Petrotemex, S. A. de C. V. 100 100 U.S. dollar DAK Americas, L.L.C. USA 100 100 U.S. dollar DAK Resinas Americas Mexico, S. A. de C. V. 100 100 U.S. dollar DAK Americas Exterior, S. L. (Holding company) Spain 100 100 Euro DAK Americas Argentina, S. A. Argentina 100 100 Argentine peso Tereftalatos Mexicanos, S. A. de C. V. 92 92 U.S. dollar Akra Polyester, S. A. de C. V. 93 93 Mexican peso Indelpro, S. A. de C. V. 51 51 U.S. dollar Polioles, S. A. de C. V. (3) 50 50 U.S. dollar Unimor, S. A. de C. V. (Holding company) 100 100 Mexican peso Univex, S. A. 100 100 Mexican peso Grupo Styropek, S. A. de C. V. 100 100 Mexican peso Styropek Mexico, S. A. de C. V. 100 100 Mexican peso Styropek SA Argentina 100 100 Argentine peso Aislapol SA Chile 100 100 Chilean peso Styropek Do Brazil Brazil 100 100 Real Selenis Canada Inc. (4) (9) Canada 100 51 U.S. dollarSigma (Refrigerated food)Sigma Alimentos, S. A. de C. V. (Holding company) 100 100 U.S. dollar Alimentos Finos de Occidente, S. A. de C. V. 100 100 Mexican peso Grupo Chen, S. de R. L. de C. V. 100 100 Mexican peso Sigma Alimentos Lácteos, S. A. de C. V. 100 100 Mexican peso Sigma Alimentos Centro, S. A. de C. V. 100 100 Mexican peso Sigma Alimentos Noreste, S. A. de C. V. 100 100 Mexican peso Sociedad Suizo Peruana Embutidos, S. A. (5) Peru 100 - Peruvian sol Caroli Foods Group C. V. (5) (6) Romania 100 49 Euro Sigma Alimentos Exterior, S. L. (Holding company) Spain 100 100 Euro Bar-S Foods Co. USA 100 100 U.S. dollar Mexican Cheese Producers, Inc. USA 100 100 U.S. dollar Braedt, S. A. Peru 100 100 Nuevo sol Elaborados Cárnicos SA Ecuador 100 100 U.S. dollar Campofrío Food Group, S. A. Spain 95 95 Euro Fábrica Juris Compañía Limitada Ecuador 100 100 U.S. dollar Comercial Norteamericana, S de R. L. de C. V. 100 100 Mexican pesoNemak (Aluminum auto parts)Nemak, S. A. B. de C. V. (Holding company) 75 75 U.S. dollar Nemak, S. A. 100 100 U.S. dollar Modellbau Schönheide GmbH Germany 100 100 Euro Corporativo Nemak, S. A. de C. V. 100 100 Mexican peso Nemak Canada, S. A. de C. V. (Holding company) 100 100 Mexican peso Nemak of Canada Corporation Canada 100 100 Canadian dollar Camen International Trading, Inc. USA 100 100 U.S. dollar Nemak Europe GmbH (Holding company) Germany 100 100 Euro Nemak Exterior, S. L. (Holding company) Spain 100 100 Euro Nemak Dillingen GmbH Germany 100 100 Euro Nemak Wernigerode (GmbH) Germany 100 100 Euro Nemak Linz GmbH Austria 100 100 Euro Nemak Gyor Kft Hungary 100 100 Euro

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Shareholding (%) (2)

Country (1) 2017 2016 Functional currency

Nemak Poland Sp. z.o.o. Poland 100 100 Euro Nemak Nanjing Aluminum Foundry Co., Ltd. China 100 100 Yuan Nemak USA, Inc. USA 100 100 U.S. dollar Nemak Alumínio do Brasil Ltda. Brazil 100 100 Real Nemak Argentina, S. R. L. Argentina 100 100 Argentine peso Nemak Slovakia, S.r.o. Slovakia 100 100 Euro Nemak Czech Republic, S.r.o. Czech Republic 100 100 Euro Nemak Rus, LLC. Russia 100 100 Russian Ruble Nemak Aluminum Castings India Private, Ltd. India 100 100 Rupee Nemak Automotive Castings, Inc. USA 100 100 U.S. dollar Nemak Izmir Döküm Sanayii A. Ş. (4) Turkey 100 100 Euro Nemak Izmir Dis Ticaret A. Ş. (4) Turkey 100 100 EuroAxtel (Telecommunications)Axtel, S. A. B. de C. V. (4) (8) 53 50 Mexican peso Alestra, S. de R. L. de C. V. (7) - 100 Mexican peso Avantel, S. de R. L. de C. V. (4) 100 100 Mexican peso Servicios Axtel, S. A. de C. V. (4) 100 100 Mexican pesoNewpek (Natural gas and hydrocarbons)Newpek, S. A de C. V. 100 100 Mexican peso Oil and Gas Holding España, S.L.U. (Holding) (formerly Alfa Energía Exterior, S.L.U.) Spain 100 100 Euro Newpek, L. L. C. USA 100 100 U.S. dollar Newpek Capital, S. A de C. V. 100 - Mexican pesoAlfasid del Norte, S. A. de C. V. 100 100 Mexican pesoOther companiesColombin Bel, S. A. de C. V. 100 100 U.S. dollarTerza, S. A. de C. V. 50 50 Mexican pesoAlfa Corporativo, S. A. de C. V. 100 100 Mexican peso

(1) Companies incorporated in Mexico, except those indicated.(2) Ownership percentage that Alfa has in the holding companies of each business group and ownership percentage that such holding companies have in the companies

integrating the groups. Ownership percentages and the right to vote are one and the same.(3) The Company owns 50% plus one share, see Note 5.2 a.(4) Companies acquired in 2016, see comments in Note 2.(5) Companies acquired in 2017, see comments in Note 2.(6) In 2017, 100% of the shares were acquired. Prior to the acquisition, Sigma owned 49% of the shares.(7) In 2017, a merger agreement was signed by incorporation between Alestra, S de R. L. of C. V. with Axtel, S. A. B. of C. V., the merger was effective as of May 1,

2017 and has no impact on the operation at the consolidated level of the Company.(8) In 2017, the Extraordinary General Stockholders’ Meeting decided that, concerning the merger of Onexa, S. A. de C. V. with Axtel, 1,019,287,950 Class “I” Series

“B” shares, equivalent to 2.50% of Axtel’s capital stock will be delivered to Alfa.(9) During 2017, the conditions included in the initial purchase agreement were fulfilled, releasing the shares held in deposit at the time of acquisition (49%) to Alpek.

At the end of 2017, Alpek maintains 100% of the shareholding.

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As of December 2017 and 2016, there are no significant restrictions for investment in shares of subsidiary companies mentioned above.

ii. Absorption (dilution) of control in subsidiariesThe effect of absorption (dilution) of control in subsidiaries, that is, an increase or decrease in the percentage of control, is recorded in stockholders’ equity, directly in retained earnings, in the period in which the transactions that cause such effects occur. The effect of absorption (dilution) of control is determined by comparing the book value of the investment in shares before the event of dilution or absorption against the book value after the relevant event. In the case of loss of control the dilution effect is recognized in income.

The Company has issued a call option on certain non-controlling interests in a consolidated subsidiary. The exercise price of the option is determined according to a predefined formula based on the financial performance of the subsidiary and can be exercised on a certain date. Put options granted to non-controlling stockholders that hold the risks and benefits on the net assets of the consolidated subsidiary are recognized as financial liabilities at the present value of the amount to be reimbursed of the options, initially recorded with a corresponding reduction in the Equity and subsequently accrue through financial charges in results during the contractual period.

iii. Sale or disposal of subsidiariesWhen the Company ceases to have control any retained interest in the entity is remeasured at fair value, and the change in the carrying amount is recognized in the consolidated statement of income. The fair value is the initial carrying amount for the purposes of accounting for any subsequent retained interest in the associate, joint venture or financial asset. Any amount previously recognized in comprehensive income in respect of that entity is accounted for as if the Company had directly disposed of the related assets and liabilities. This results in the amounts previously recognized in comprehensive income being reclassified to income for the year.

iv. AssociatesAssociates are all entities over which the Company has significant influence but not control. Generally, an investor must hold between 20% and 50% of the voting rights in an investee for it to be an associate. Investments in associates are accounted for using the equity method and are initially recognized at cost. The Company’s investment in associates includes goodwill identified at acquisition, net of any accumulated impairment loss.

If the equity in an associate is reduced but significant influence is maintained, only a portion of the amounts recognized in the comprehensive income are reclassified to income for the year, where appropriate.

The Company’s share of profits or losses of associates, post-acquisition, is recognized in the consolidated statement of income and its share in the other comprehensive income of associates is recognized as other comprehensive income. When the Company’s share of losses in an associate equals or exceeds its equity in the associate, including unsecured receivables, the Company does not recognize further losses unless it has incurred obligations or made payments on behalf of the associate.

The Company assesses at each reporting date whether there is objective evidence that the investment in the associate is impaired. If so, the Company calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes it in “share of profit of associates recognized by the equity method” in the consolidated statement of income.

Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company´s equity in such gains. Unrealized losses are also eliminated unless the transaction provides evidence that the asset transferred is impaired. In order to ensure consistency with the policies adopted by the Company, the accounting policies of associates have been modified. When the Company ceases to have significant influence over an associate, any difference between the fair value of the remaining investment, including any consideration received from the partial disposal of the investment and the book value of the investment is recognized in the consolidated statement of income.

v. Joint venturesJoint arrangements are those where there is joint control since the decisions over relevant activities require the unanimous consent of each one of the parties sharing control.

Investments in joint arrangements are classified in accordance with the contractual rights and obligations of each investor such as: joint operations or joint ventures. When the Company holds the right over assets and obligations for related assets under a joint arrangement, this is classified as a joint operation. When the company holds rights over net assets of the joint arrangement, this is classified as a joint venture. The Company has assessed the nature of its joint arrangements and classified them as joint ventures. Joint ventures are accounted for by using the equity method applied to an investment in associates.

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c. Foreign currency translationi. Functional and presentation currencyThe amounts included in the financial statements of each of the Company’s subsidiaries and associates should be measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). In the case of Alfa, S. A. B. de C. V., the functional currency is determined to be the Mexican peso. The consolidated financial statements are presented in Mexican pesos, which is the Company’s presentation currency.

When there is a change in the functional currency of one of the subsidiaries, according to International Accounting Standard 21 - Effects of changes in foreign exchange rates (“IAS 21”), this change is accounted for prospectively, translating at the date of the functional currency change, all assets, liabilities, equity, and income items at the exchange rate of that date.

ii. Transactions and balancesTransactions in foreign currencies are translated into the functional currency using the foreign exchange rates prevailing at the transaction date or valuation date when the amounts are remeasured. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at the closing exchange rates are recognized as foreign exchange gain or loss in the consolidated statement of income, except for those which are deferred in comprehensive income and qualify as cash flow hedges.

Changes in the fair value of securities or monetary financial assets denominated in foreign currency classified as available for sale are divided between fluctuations resulting from changes in the amortized cost of such securities and other changes in value. Subsequently, currency fluctuations are recognized in income and changes in the carrying amount arising from any other circumstances are recognized as part of comprehensive income.

Translation of subsidiaries with recording currency other than the functional currency.

The financial statements of foreign subsidiaries, having a recording currency different from their functional currency were translated into the functional currency in accordance with the following procedure:

a. The balances of monetary assets and liabilities denominated in the recording currency were translated at the closing exchange rate.

b. To the historical balances of monetary assets and liabilities and stockholders’ equity translated into the functional currency the movements that occurred during the period were added, which were translated at historical exchange rates. In the case of the movements of non-monetary items recognized at fair value, which occurred during the period stated in the recording currency, these were translated using the historical exchange rates in effect on the date when the fair value was determined.

c. Revenues, costs and expenses of the periods, expressed in the recording currency, were translated at the historical exchange rate of the date they were accrued and recognized in the consolidated statement of income, except when they arose from non-monetary items, in which case the historical exchange rate of the non-monetary items was used.

d. The exchange differences arising in the translation were recognized as income or expense in the consolidated statement of income in the period they arose.

Translation of subsidiaries with functional currency other than the presentation currency.

The results and financial position of all Alfa entities (none of which is in a hyperinflationary environment) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

a. Assets and liabilities for each statement of financial position are translated at the closing exchange rate at the closing date.

b. Stockholders’ equity of each statement of financial position presented is translated at historical rates.

c. Revenues and expenses for each statement of income are translated at average exchange rates (when the average exchange rate is not a reasonable approximation of the cumulative effect of the rates of the transaction, to the exchange rate at the date of the transaction is used); and

d. The resulting exchange differences are recognized in the consolidated statement of comprehensive income.

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The main exchange rates in the different translation procedures are listed below: Local currency to Mexican pesos Closing exchange Average annual rate at December 31, exchange rate,

Country Local currency 2017 2016 2017 2016

Canada Canadian dollar 15.74 15.40 15.09 15.35USA US dollar 19.75 20.66 19.10 20.54Brazil Brazilian real 5.96 6.35 5.81 6.21Argentina Argentine peso 1.06 1.30 1.07 1.30Peru Peruvian sol 6.09 6.16 5.92 6.09Costa Rica Costa Rican Colon 0.04 0.04 0.04 0.04Ecuador US dollar 19.75 20.66 19.10 20.54Czech Republic Euro 23.69 21.80 22.92 21.80Germany Euro 23.69 21.80 22.92 21.80Austria Euro 23.69 21.80 22.92 21.80Italy Euro 23.69 21.80 22.92 21.80France Euro 23.69 21.80 22.92 21.80Hungary Euro 23.69 21.80 22.92 21.80Poland Euro 23.69 21.80 22.92 21.80Slovakia Euro 23.69 21.80 22.92 21.80Spain Euro 23.69 21.80 22.92 21.80Romania Euro 23.69 21.80 22.92 21.80Russia Russian ruble 0.34 0.34 0.33 0.33China RenMinBi Chinese yuan 3.03 2.98 2.92 2.98India Indian rupee 0.31 0.30 0.30 0.30

d. Cash and cash equivalentsCash and cash equivalents include cash on hand, bank deposits available for operations and other short-term investments of high credit-quality and liquidity, with original maturities of three months or less, all of which are subject to insignificant risk of changes in value. Bank overdrafts are presented as loans as a part of the current liabilities.

e. Restricted cashCash and cash equivalents whose restrictions cause them not to comply with the definition of cash and cash equivalents given above, are presented in a separate line in the consolidated statement of financial position and are excluded from cash and cash equivalents in the consolidated statement cash flows.

f. Financial instrumentsFinancial assetsThe Company classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, investments held to maturity and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets upon initial recognition. Purchases and sales of financial assets are recognized on the settlement date.

Financial assets are written off in full when the right to receive the related cash flows expires or is transferred and the Company has also transferred substantially all risks and rewards of ownership, as well as control of the financial asset.

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i. Financial assets at fair value through profit or lossFinancial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorized as held for trading unless they are designated as hedges.

Financial assets at fair value through profit or loss are initially recognized at fair value and transaction costs are expensed in the consolidated statement of income. Gains or losses from changes in fair value of these assets are presented in the consolidated statement of income as incurred.

ii. Loans and receivablesThe receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the consolidated statement of financial position date. These are classified as non-current assets.

Loans and receivables are measured initially at fair value plus directly attributable transaction costs and subsequently at amortized cost, using the effective interest method. When circumstances occur that indicate that the amounts receivable will not be collected at the amounts originally agreed or will be collected in a different period, the receivables are impaired.

iii. Held to maturity investmentsIf the Company intends and has the demonstrable ability to hold debt securities to maturity, they are classified as held to maturity. Assets in this category are classified as current assets if expected to be settled within the next 12 months, otherwise they are classified as non-current. Initially they are recognized at fair value plus any directly attributable transaction costs, and subsequently they are valued at amortized cost using the effective interest method. Investments held to maturity are recognized or derecognized on the day they are transferred to or by the Company. As of December 31, 2017 and 2016, the Company had no such investments.

iv. Available for sale investmentsAvailable for sale investments are non-derivative financial assets that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless their maturity is less than 12 months or management intends to dispose of the investment within the next 12 months after the consolidated statement of financial position date.

Available for sale investments are initially recognized at fair value plus directly attributable transaction costs. Subsequently, these assets are carried at fair value (unless they cannot be measured by their value in an active market and the value is not reliable, in which case they will be recognized at cost less impairment).

Gains or losses arising from changes in fair value of monetary and non-monetary instruments are recognized directly in the consolidated statement of comprehensive income in the period in which they occur.

When investments classified as available for sale are sold or impaired, the accumulated fair value adjustments recognized in equity are reclassified to the statement of income.

Financial liabilitiesFinancial liabilities that are not derivatives are initially recognized at fair value and are subsequently valued at amortized cost using the effective interest method. Liabilities in this category are classified as current liabilities if expected to be settled within the next 12 months, otherwise they are classified as non-current.

Trade payables are obligations to pay for goods or services that have been acquired or received from suppliers in the ordinary course of business. Loans are initially recognized at fair value, net of transaction costs incurred. Loans are initially recognized at fair value, net of transaction costs incurred. Loans are subsequently carried at amortized cost; any difference between the funds received (net of transaction costs) and the settlement value is recognized in the consolidated statement of income over the term of the loan using the effective interest method.

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Offsetting financial assets and liabilitiesFinancial assets and liabilities are offset and the net amount is presented in the consolidated statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or to realize the asset and settle the liability simultaneously.

Impairment of financial instrumentsa. Financial assets carried at amortized costThe Company assesses at the end of each year whether there is objective evidence of impairment of each financial asset or group of financial assets. An impairment loss is recognized if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and provided that the loss event (or events) has an impact on the estimated future cash flows arising from the financial asset or group of financial assets that can be reliably estimated.

Aspects evaluated by the Company to determine whether there is objective evidence of impairment are:

- Significant financial difficulty of the issuer or debtor.

- Breach of contract, such as late payments of interest or principal.

- Granting a concession to the issuer or debtor, by the Company, as a result of financial difficulties of the issuer or debtor and that would not otherwise be considered.

- There is a likelihood that the issuer or debtor will enter bankruptcy or other financial reorganization.

- Disappearance of an active market for that financial asset due to financial difficulties.

- Verifiable information indicates that there is a measurable decrease in the estimated future cash flows related to a group of financial assets after initial recognition, although the decrease cannot yet be identified with the individual financial assets of the Company, including:

i. Adverse changes in the payment of borrowers in the group of assets.

ii. National or local conditions that correlate with breaches of noncompliance by the issuers of the asset group.

Based on the items listed above, the Company assesses whether there is objective evidence of impairment. Subsequently, for the category of loans and receivables, when impairment exists, loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the original effective interest rate. The carrying amount of the asset is reduced by that amount, which is recognized in the consolidated statement of income.

If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. Alternatively, the Company could determine the impairment of the asset given its fair value determined on the basis of a current observable market price.

If in subsequent years, the impairment loss decreases and the decrease can be related objectively to an event occurring after the date on which such impairment was recognized (such as an improvement in the debtor’s credit rating), the reversal of the loss impairment is recognized in the consolidated statement of income.

b. Financial assets available for saleIn the case of debt financial instruments, the Company also uses the above-listed criteria to identify whether there is objective evidence of impairment. In the case of equity financial instruments, a significant reduction of approximately to 30% of the cost of the investment against its fair value or a reduction of the fair value against the cost for a period longer than 12 months is considered objective evidence of impairment.

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Subsequently, in the case of financial assets available for sale, an impairment loss determined by computing the difference between the acquisition cost and the current fair value of the asset, less any impairment loss previously recognized, is reclassified from the other comprehensive income to the consolidated statement of income in the financial net result. Equally, gain or losses in the sale of these assets are recognized in the consolidated statement of income under net financial results. Impairment losses recognized in the consolidated statement of income related to equity financial instruments are not reversed through the consolidated statement of income. Impairment losses recognized in the consolidated statement of income related to financial debt instruments could be reversed in subsequent years, if the fair value of the asset is increased as a result of a subsequent event.

c. Derivative financial instruments and hedging activitiesAll derivative financial instruments are identified and classified as fair value hedges or cash flow hedges, for trading market risks hedging and are recognized in the consolidated statement of financial position as assets and/or liabilities at fair value and similarly measured subsequently at fair value. Fair value is determined based on recognized market prices and when non-quoted in an observable market, it is determined using valuation techniques accepted in the financial sector.

Fair value of hedging derivatives is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months and as a current asset or liability if the remaining maturity of the hedged item is less than 12 months.

Derivative financial instruments classified as hedges are contracted for risk hedging purposes and meet all hedging requirements; their designation at the beginning of the hedging operation is documented, describing the objective, primary position, risks to be hedged, types of derivatives and the effectiveness of the hedging relationship, characteristics, accounting recognition and how the effectiveness, applicable to the operation, is to be measured.

Fair value hedgesChanges in the fair value of derivative financial instruments are recorded in the consolidated statement of income. The change in fair value hedges and the change in the primary position attributable to the hedged risk are recorded in the consolidated statement of income in the same line item as the hedged position. As of December 31, 2017 and 2016, the Company has no derivative financial instruments classified as fair value hedges.

Cash flow hedgesThe changes in the fair value of derivative instruments associated to cash flow hedges are recorded in stockholders’ equity. The effective portion is temporarily recorded in comprehensive income, within stockholders’ equity and is reclassified to profit or loss when the hedged position affects these. The ineffective portion is immediately recorded in profit or loss.

Suspension of hedge accountingThe Company suspends hedge accounting when the derivative financial instrument or the non-derivative financial instrument has expired, is cancelled or exercised, when the derivative or non-derivative financial instrument is not highly effective to offset the changes in the fair value or cash flows of the hedged item, or when the Company decides to cancel the hedge designation.

On suspending hedge accounting, in the case of fair value hedges, the adjustment to the carrying amount of a hedged amount for which the effective interest rate method is used, is amortized to profit or loss over the maturity period. In the case of cash flow hedges, the amounts accumulated in equity as a part of comprehensive income remain in equity until the time when the effects of the forecasted transaction affect profit or loss. In the event the forecasted transaction is not likely to occur, the gain or loss accumulated in comprehensive income are immediately recognized in the consolidated statement of income. When the hedge of a forecasted transaction appears satisfactory and subsequently does not meet the effectiveness test, the cumulative effects in comprehensive income in stockholders’ equity are transferred proportionally to the consolidated statement of income, to the extent the forecasted transaction impacts it.

Fair value of derivative financial instruments reflected in the consolidated financial statements of the Company, is a mathematical approximation of their fair value. It is computed using proprietary models of independent third parties using assumptions based on past and present market conditions and future expectations at closing date.

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g. InventoriesInventories are stated at the lower of cost or net realizable value. Cost is determined using the average cost method. The cost of finished goods and work-in-progress includes cost of product design, raw materials, direct labor, other direct costs and production overheads (based on normal operating capacity). It excludes borrowing costs. The net realizable value is the estimated selling price in the normal course of business, less the applicable variable selling expenses. Costs of inventories include any gain or loss transferred from other comprehensive income corresponding to raw material purchases that qualify as cash flow hedges.

h. Property, plant and equipmentItems of property, plant and equipment are recorded at cost less the accumulated depreciation and any accrued impairment losses. Costs includes expenses directly attributable to the asset acquisition.

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flows to the Company and the cost of the item can be reliably measured. The carrying amount of the replaced part is derecognized. Repairs and maintenance are recognized in the consolidated statement of income during the year they are incurred. Major improvements are depreciated over the remaining useful life of the related asset.

When the Company carries out major repairs or maintenance of its property, plant and equipment assets, and the cost is recognized in the carrying amount of the corresponding asset as a replacement, provided that the recognition criteria are met. The remaining portion of any major repair or maintenance is derecognized. The Company subsequently depreciates the recognized cost in the useful life assigned to it, based on its best estimate of useful life.

Depreciation is calculated using the straight-line method, considering separately each of the asset’s components, except for land, which is not subject to depreciation. The estimated useful life of the asset classes is indicated below:Buildings and constructions 33 to 60 yearsMachinery and equipment 10 to 14 yearsVehicles 4 to 8 yearsTelecommunications network 6 to 28 yearsLab and IT furniture and equipment 6 to 10 yearsTooling and spare parts 3 to 20 yearsLeasehold improvements 3 to 20 yearsOther assets 3 to 20 years

The spare parts to be used after one year and attributable to specific machinery are classified as property, plant and equipment in other fixed assets.

General and specific borrowing costs related to financing of property, plant and equipment whose acquisition or construction requires a substantial period (nine months or more), are capitalized as part of the cost of acquiring such qualifying assets, up to the moment when they are suitable for their intended use or sale.

Assets classified as property, plant and equipment are subject to impairment tests when events or circumstances occur indicating that the carrying amount of the assets may not be recoverable. An impairment loss is recognized in the consolidated statement of income in other expenses, net, for the amount by which the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value in use.

The residual value, useful lives and depreciation method of assets are reviewed at least at the end of each reporting period and, if expectations differ from previous estimates, the changes are accounted for as a change in accounting estimate.

Gains and losses on disposal of assets are determined by comparing the sale value with the carrying amount and are recognized in other expenses, net, in the consolidated statement of income.

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i. LeasesThe classification of leases as finance or operating depends on the substance of the transaction rather than the form of the contract.

Leases in which a significant portion of the risks and rewards relating to the leased property are retained by the lessor are classified as operating leases. Payments made under operating leases (net of incentives received by the lessor) are recognized in the consolidated statement of income based on the straight-line method over the lease period.

Leases where the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the beginning of the lease, at the lower of the fair value of the leased property and the present value of the minimum lease payments. If its determination is practical, in order to discount the minimum lease payments to present value, the interest rate implicit in the lease is used; otherwise, the incremental borrowing rate of the lessee should be used. Any initial direct costs of the leases are added to the original amount recognized as an asset.

Each lease payment is allocated between the liability and finance charges to achieve a constant rate on the outstanding balance. The corresponding rental obligations are included in non-current debt, net of finance charges. The interest element of the finance cost is charged to the income for the year during the period of the lease, so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term.

j. Intangible assetsIntangible assets are recognized in the consolidated statement of financial position when they meet the following conditions: they are identifiable, they provide future economic benefits and the Company has control over such benefits.

Intangible assets are classified as follows:

(i) Indefinite useful lifeThese intangible assets are not amortized and are subject to annual impairment assessment. As of December 31, 2017 and 2016, no factors have been identified limiting the life of these intangible assets.

(ii) Finite useful lifeThese assets are recognized at cost less accumulated amortization and accrued impairment losses. They are amortized on a straight-line basis over their estimated useful life, determined based on the expectation of generating future economic benefits, and are subject to impairment tests when triggering events of impairment are identified.

The estimated useful lives of intangible assets with finite useful lives are summarized as follows:Development costs 5 to 20 yearsExploration costs (1)

Trademarks 5 to 22 yearsRelationships with customers 15 to 17 yearsSoftware and licenses 3 to 11 yearsIntellectual property rights 20 to 25 yearsOther (patents, concessions, non-competition agreements, among others) 3 to 20 years

(1) Exploration costs are depreciated based on the unit-of-production method based on proven reserves of hydrocarbons.

a. Development costsResearch costs are recognized in income as incurred. Expenditures on development activities are recognized as intangible assets when such costs can be reliably measured, the product or process is technically and commercially feasible, potential future economic benefits are obtained and the Company intends also has sufficient resources to complete the development and to use or sell the asset. Their amortization is recognized in income by the straight-line method over the estimated useful life of the asset. Costs in development that do not qualify for capitalization are recognized in income as incurred.

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b. Exploration costsThe Company uses the successful efforts method of accounting for its oil and gas properties. Under this method, all costs associated with productive and non-productive wells are capitalized while non-productive and geological exploration costs are recognized in the consolidated statement of income as incurred. Net capitalized costs of unproved reserves are reclassified to proven reserves when they are found. The costs of operating the wells and field equipment are recognized in the consolidated statement of income as incurred

c. TrademarksTrademarks acquired in a separate transaction are recorded at acquisition cost. Trademarks acquired in a business combination are recognized at fair value at the acquisition date. Trademarks are amortized based on their useful life according to the Company’s evaluation; if in said evaluation it is determined that the useful life of these assets proves to be indefinite, then trademarks are not amortized but are subject to annual impairment tests.

d. LicensesLicenses acquired in a separate transaction are recorded at acquisition cost. Licenses acquired in a business combination are recognized at fair value at acquisition date.

Licenses that have a defined useful life are presented at cost less accumulated amortization. Amortization is recorded by the straight-line method over its estimated useful life.

The acquisition of software licenses is capitalized based on the costs incurred to acquire and use the specific software.

e. Software developmentCosts associated with the maintenance of software are recorded as expenses are incurred.

Development costs directly related with the design and tests of unique and identifiable software products controlled by the Company are recorded as intangible assets when they fulfill the following criteria:

- Technically, it is possible to complete the intangible asset so that it may be available for its use or sale;

- The intangible asset is to be completed for use or sale;

- The ability to use or sell the intangible asset;

- The way in which the intangible asset is to generate probable future economic benefits;

- The availability of adequate technical, financial or other type of resources, to complete the development and use or sell the intangible asset; and

- The ability to reliably calculate the disbursement attributable to the intangible asset during its development.

The amount initially recognized for an intangible asset generated internally will be the sum of disbursements incurred from the moment the element fulfills the conditions for recording, as established above. When no intangible asset internally generated may be recognized, the disbursements for development are charged to income in the period they are incurred.

k. GoodwillGoodwill represents the excess of the acquisition cost of a subsidiary over the Company’s interest in the fair value of the identifiable net assets acquired, determined at the date of acquisition, and is not subject to amortization. Goodwill is shown under goodwill and intangible assets and is recognized at cost less accumulated impairment losses, which are not reversed. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

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l. Impairment of non-financial assetsAssets that have an indefinite useful life, for example goodwill, are not depreciable or amortizable and are subject to annual impairment tests. Assets that are subject to amortization are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and its value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels at which separately identifiable cash flows exist (cash generating units). Non-financial long-term assets other than goodwill that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

m. Income taxThe amount of income taxes in the consolidated statement of income represents the sum of the current and deferred income taxes.

The amount of income taxes included in the consolidated statement of income represents the current tax of the year and the effects of deferred income tax assets determined in each subsidiary by the assets and liabilities method, applying the rate established by the legislation enacted or substantially enacted at the consolidated statement of financial position date, wherever the Company operates and generates taxable income. The applicable rates are applied to the total temporary differences resulting from comparing the accounting and tax bases of assets and liabilities, and that are expected to be applied when the deferred tax asset is realized or the deferred tax liability is expected to be settled, considering, when applicable, any tax-loss carryforwards, prior to the recovery analysis. The effect of the change in current tax rates is recognized in current income of the period in which the rate change is determined.

Management periodically evaluates positions taken in tax returns with respect to situations in which the applicable law is subject to interpretation. Provisions are recognized when appropriate based on the amounts expected to be paid to the tax authorities.

Deferred tax assets are recognized only when it is probable that future taxable profits will exist against which the deductions for temporary differences can be taken.

Deferred income tax on temporary differences arising from investments in subsidiaries, associates, and joint agreements is recognized, unless the period of reversal of temporary differences is controlled by Alfa and it is probable that the temporary differences will not reverse in the near future.

Deferred tax assets and liabilities are offset when a legal right exists and when the taxes are levied by the same tax authority.

n. Employee benefitsi. Pension plansDefined contribution plans:

A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate entity. The Company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to their service in the current and past periods. The contributions are recognized as employee benefit expense on the date that the contribution is required.

Defined benefit plans:

A defined benefit plan is a plan which specifies the amount of the pension an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

The liability recognized in the consolidated statement of financial position in respect of defined benefit plans is the present value of the defined benefit obligation at the consolidated statement of financial position date less the fair value of plan assets. The defined benefit obligation is calculated annually by independent third parties using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using discount rates in conformity with IAS 19 – Employee Benefits that are denominated in the currency in which the benefits will be paid, and have maturities that approximate the terms of the pension liability.

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Actuarial remeasurements arising from adjustments and changes in actuarial assumptions are recognized directly in stockholders’ equity in other items of the comprehensive income in the year they occur, and will not be reclassified to profit or loss of the period.

The Company determines the net finance expense (income) by applying the discount rate to the liabilities (assets) from net defined benefits.

Past-service costs are recognized immediately in the consolidated statement of income.

ii. Post-employment medical benefitsThe Company provides medical benefits to retired employees after termination of employment. The right to access these benefits usually depends on the employee´s having worked until retirement age and completing a minimum of years of service. The expected costs of these benefits are accrued over the period of employment using the same criteria as those described for defined benefit pension plans.

iii. Termination benefitsTermination benefits are payable when employment is terminated by the Company before the normal retirement date or when an employee accepts voluntary termination of employment in exchange for these benefits. The Company recognizes termination benefits on the following dates, whichever occurs first: (a) when the Company can no longer withdraw the offer of these benefits, and (b) when the Company recognizes the costs from restructuring within the scope of the IAS 37 and it involves the payment of termination benefits. If there is an offer that promotes the termination of the employment relationship voluntarily by employees, termination benefits are valued based on the number of employees expected to accept the offer. The benefits that will be paid in the long term are discounted at their present value.

iv. Short-term benefitsThe Company grants benefits to employees in the short term, which may include wages, salaries, annual compensation and bonuses payable within 12 months. Alfa recognizes an undiscounted provision when it is contractually obligated or when past practice has created an obligation.

v. Statutory employee profit sharing (PTU in Spanish) and bonusesThe Company recognizes a liability and an expense for bonuses and statutory employee profit sharing when it has a legal or assumed obligation to pay these benefits and determines the amount to be recognized based on the profit for the year after certain adjustments.

o. ProvisionsLiability provisions represent a present legal obligation or a constructive obligation as a result of past events where an outflow of resources to meet the obligation is likely and where the amount has been reliably estimated. Provisions are not recognized for future operating losses.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the value of money over time and the risks specific to the obligation. The increase in the provision due to the passage of time is recognized as interest expense.

When there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

A restructuring provision is recorded when the Company has developed a formal detailed plan for the restructure, and a valid expectation for the restructure has been created between the people affected, possibly for having started the plan implementation or for having announced its main characteristics to them.

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p. Share based paymentThe Company has compensation plans that are based on the market value of shares of Alfa, Alpek, Axtel and Nemak granted to certain senior executives of the Company and its subsidiaries. The conditions for granting such compensation to the eligible executives includes compliance with certain financial metrics such as the level of profit achieved and remaining in the Company for up to 5 years, among other requirements. The Board of Directors has appointed a Technical Committee to manage the plan, and it reviews the estimated cash settlement of this compensation at the end of the year. The payment plan is always subject to the discretion of the senior management of Alfa. Adjustments to this estimate are charged or credited to the consolidated statement of income.

Fair value of the amount payable to employees in respect of share-based payments which are settled in cash is recognized as an administrative expense in the consolidated statement of income, with a corresponding increase in liabilities, over the period of service required. The liability is included within other liabilities and is adjusted at each reporting date and settlement date. Any change in the fair value of the liability is recognized as an expense in the consolidated statement of income.

q. Treasury sharesThe Company’s stockholders’ periodically authorize a maximum amount for the acquisition of the Company’s own shares. Upon the occurrence of a repurchase of its own shares, they become treasury shares and the amount is presented as a reduction to stockholders’ equity at the purchase price. These amounts are stated at their historical value.

r. Capital stockAlfa’s common shares are classified as capital stock within stockholders’ equity. Incremental costs directly attributable to the issuance of new shares are included in equity as a reduction from the consideration received, net of tax.

s. Comprehensive (loss) incomeComprehensive income or loss is comprised of net income or loss plus the annual effects of their capital reserves, net of taxes, which include the translation of foreign subsidiaries, the effects of derivative cash flow hedges, actuarial remeasurements or losses, net investment hedges, the effects of the change in the fair value of financial instruments available for sale, the equity in other items of comprehensive income or losses of associates, and other items specifically required to be reflected in stockholders’ equity, and which do not constitute capital contributions, reductions and distributions.

t. Segment reporting Segment information is presented consistently with the internal reporting provided to the Chief Executive Officer who is the highest authority in operational decision-making, resource allocation and assessment of operating segment performance.

u. Revenue recognitionRevenue comprises the fair value of the consideration received or receivable for the sale of goods and rendering of services in the normal course of operations. Revenue is shown net of estimated customer returns, sales and similar discounts.

The Company grants discounts and incentives to customers, which are recognized as a deduction from income or as selling expenses depending on their nature. These programs include customer discounts for sales of products based on: i) sales volume (usually recognized as a reduction of revenue) and ii) promotions in retail products (usually recognized as selling expenses), mainly.

Revenue from the sale of goods and products are recognized when all and each of the following conditions are met:

- The risks and rewards of ownership have been transferred

- The amount of revenue can be reliably measured

- It is likely that future economic benefits will flow to the Company

- The company retains no involvement associated with ownership nor effective control of the sold goods

- The costs incurred or to be incurred in respect of the transaction can be measured reasonably

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In the Axtel segment, revenues from rendering of services are recognized as follows:

- Revenue from the provision of data transmission services, internet and local services are recognized when services are rendered

- Revenues from national and international long distance outgoing and incoming services are recognized based on minutes of traffic processed by the Company and processed by a third party, respectively.

- Installation revenues and related costs are recognized as revenue during the period of the contract with the customers.

- The estimates are based on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Dividend income from investments is recognized once the rights of stockholders to receive this payment have been established (when it is probable that the economic benefits will flow to the Company and the revenue can be reliably valued).

Interest income is recognized when it is likely that the economic benefits will flow to the entity and the amount of revenue can be reliably valued by applying the effective interest rate.

v. (Losses) earnings per shareEarnings or losses per share are calculated by dividing the profit or loss attributable to the stockholders of the controlling interest by the weighted average number of common shares outstanding during the year. As of December 31, 2017 and 2016, there are no dilutive effects from financial instruments potentially convertible into shares.

w. Changes in accounting policies and disclosuresi. New standards and changes adopted by the Company.The Company adopted all new standards and interpretations in effect as of January 1, 2017, including the annual improvements to IFRS; however, they had no significant effects on the Company’s consolidated financial statements.

ii. New standards and interpretations yet to be adopted by the Company.A number of new standards, amendments and interpretations have been issued, are not yet effective for reporting periods ended December 31, 2017, and have not been early adopted by the Company.

Below is a summary of these new standards and interpretations as well as the Company’s assessment as to the potential impacts on the consolidated financial statements:

IFRS 9, Financial InstrumentsIFRS 9, “Financial Instruments”, replaces IAS 39 “Financial Instruments: Recognition and Measurement”. This standard is mandatorily effective for periods beginning on or after January 1, 2018 and introduces a new expected loss impairment model and limited changes to the classification and measurement requirements for financial assets. More specifically, the new impairment model is based on expected credit losses rather than incurred losses, and will apply to debt instruments measured at amortized cost or fair value through other comprehensive income (FVTOCI), lease receivables, contract assets and certain written loan commitments and financial guarantee contracts.

In regards of the expected loss impairment model, the initial adoption requirement of IFRS 9 is retrospective and establishes as an option to adopt it without modifying the financial statements of previous years by recognizing the initial effect on retained earnings at the date of adoption. In case of hedge accounting, IFRS 9 allows application with a prospective approach.

The Company did not have a material impact associated with the new measurement category of FVTOCI as it does not currently hold any instruments that qualify for this treatment; however, potential impacts could arise should it change its investment strategy in the future. Additionally, in terms of hedge accounting, the requirements of IFRS 9 are consistent with the Company’s current accounting policy under IAS 39 and no impact is anticipated on its initial adoption nor future hedging operations.

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Lastly, regarding the new expected loss impairment model, the Company’s management decided to adopt the standard retrospectively recognizing the effects on retained earnings as of January 1, 2018 and has determined the impacts on its consolidated financial position are not material as of that date. The Company has estimated that the effects it will have on its results from operations are not significant.

IFRS 15, Revenues from contracts with customersIFRS 15, Revenues from contracts with customers, was issued in May 2014 and is effective for periods beginning January 1, 2018, although early adoption is permitted. Under this standard, revenue recognition is based on the transfer of control, i.e. notion of control is used to determine when a good or service is transferred to the customer.

The standard also presents a single comprehensive model for the accounting for revenues from contracts with customers and replaces the most recent revenue recognition guidance, including the specific orientation of the industry. This comprehensive model introduces a five-step approach for revenue recognition: (1) identifying the contract; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when the Company satisfies a performance obligation. Furthermore, the amount of disclosures required in the financial statements, both annual and interim, is increased.

The Company has determined that for Axtel segment IFRS 15 will impact the following items: (i) contracts with multiple performance obligations, and (ii) the deferred recognition of costs to obtain contracts. The Company’s management will utilize the modified prospective method to contracts entered into prior to January 1, 2018. Based on its analysis, the Company didn’t identify significant impacts associated with the initial adoption of IFRS and will consider the requirements of this standard on new revenue generating contracts as of the adoption date. The new standard provides for additional disclosure requirements for contracts with clients. For new contracts entered into subsequent to January 1, 2018, which include embedded leases of the equipment used to provide services to customers, the Company will recognize revenues for the sale of such equipment as of the inception date of the lease, as well as the corresponding cost of equipment, and a lease receivable for the contractual payments recognized at present value. Additionally, the Company will recognize interest income over the contractual period in accordance with the effective interest method.

Additionally, the Company determined and quantified that the initial adoption effect for the Nemak segment in retained earnings is of $1,103, net of deferred income taxes, which consists of variable consideration for performance obligations related to long-term contractual relationships that at the date of adoption have already been met.

IFRS 16, LeasesIFRS 16, Leases, supersedes IAS 17, Leases, and the related interpretations. This new standard brings most leases on balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. IFRS 16 is effective for periods beginning on or after January 1, 2019.

Under IFRS 16, lessees will recognize the right of use of an asset and the corresponding lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly and the liability accrues interest. On the other hand, the financial liability will be measured at the initial recognition, in a similar way as required by IAS 17 Leases and subsequently, it should be evaluated if a remeasurement is required, based on contractual modifications of the minimum lease payments.

Additionally, IFRS 16 establishes as exception to these requirements to leases with a term of 12 months or less and containing no purchase options, as well as for leases where the leased asset is low-valued, such as personal computers or small office furniture items.

Management has determined that IFRS 16 could have an impact on the accounting of its existing operating leases. As of December 31, 2017, the Company has non-cancellable operating lease commitments as follows:Less than 1 year $ 2,685Between 1 and 4 years 6,238More than 4 years 5,224Total $ 14,147

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However, it has not determined yet to what extent these commitments will result in the recognition of an asset or liability for future payments, and how this will affect the Company’s capital structure, its results and cash flows. The Company will be applying a modified retrospective transition as of January 1, 2019, which implies that any transition impact will be recognized directly in stockholders’ equity as of such date.

IFRIC 22, Interpretation on foreign currency transactions and advance considerationThis new interpretation clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. The interpretation is being issued to reduce diversity in practice related to the exchange rate used when an entity reports transactions that are denominated in a foreign currency in accordance with IAS 21 in circumstances in which consideration is received or paid before the related asset, expense, or income is recognized. Effective for annual reporting periods beginning after January 1, 2018 with earlier application permitted.

The Company translates advance consideration at the exchange rate on the date of the transaction, either received or paid; as a result, management concluded there were no significant impacts on the Company’s consolidated financial statements resulting from the adoption of this interpretation.

IFRIC 23, Interpretation on uncertainty over income tax treatmentsThis new interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 Income tax, when there is uncertainty over income tax treatments. Uncertain tax treatments is a tax treatment for which there is uncertainty over whether the relevant taxation authority will accept the tax treatment under tax law. In such circumstances, the Company shall recognize and measure its current or deferred tax assets or liabilities by applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits, and the tax rates determined by applying this interpretation.

The Company shall apply IFRIC 23 for annual reporting periods beginning on or after January 1, 2019. Earlier application is permitted. On initial application, IFRIC 23 must be applied retrospectively under the requirements of IAS 8 or retrospectively with the cumulative effect of initially applying the interpretation as an adjustment to the opening balance of retained earnings.

The Company is assessing and determining the potential impacts for the adoption of this interpretation on its consolidated financial statements.

Note 4 - Financial instruments and financial risk managementThe Company’s activities expose it to various financial risks; market risk (including exchange rate risk, price risk, and interest rate variation risk), credit risk and liquidity risk.

The Company has a general risk management program focused on the unpredictability of financial markets, and seeks to minimize the potential adverse effects on its financial performance.

The objective of the risk management program is to protect the financial health of its business, taking into account the volatility associated with foreign exchange and interest rates. Sometimes, the Company uses derivative financial instruments to hedge certain exposures to risks. In addition, due to the nature of the industries in which it participates, the Company has performed hedges of input prices with derivative financial instruments.

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Alfa has a Risk Management Committee (RMC), comprised of the Board’s Chairman, the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and a Risk Management Officer (“RMO”) acting as technical secretary. The RMC reviews derivative transactions proposed by the subsidiaries of Alfa, in which a potential loss analysis surpasses US$1. This Committee supports both the CEO and the Company’s Board President. All new derivative transactions which the Company proposes to enter into, as well as the renewal or cancellation of derivative arrangements, must be approved by both Alfa’s CEO and the corresponding subsidiary, according to the following schedule of authorizations: Maximum possible loss US$1 million Annual Individual cumulative transaction transactions

Chief Executive Officer of Alfa 1 5Risk Management Committee of Alfa 30 100Finance Committee 100 300Board of Directors of Alfa >100 >300

The proposed transactions must meet certain criteria, including that the hedges are lower than established risk parameters, and that they are the result of a detailed analysis and properly documented. Sensitivity analysis and other risk analyses should be performed before the operation is entered into.

The Company’s risk management policy indicates that hedge positions must always be less than the projected exposure to allow for an acceptable margin of uncertainty. Exposed transactions are expressly prohibited. The Company’s policy indicates that the farther the exposure is, the lower the coverage, based on the following table: Maximum coverage (as a percentage of the projected exposure) Current year

Commodities 100Energy costs 75Exchange rate for operating transactions 80Exchange rate for financial transactions 100Interest rates 100

Capital managementThe Company’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can continue to provide returns to stockholders and benefits to other stakeholders, as well as maintaining an optimal capital structure to reduce the cost of capital.

To maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to stockholders, return equity to stockholders, issue new shares or sell assets to reduce debt.

Alfa monitors capital based on a leverage ratio. This percentage is calculated by dividing total liabilities by total equity.

The financial ratio of total liabilities/total equity was 2.88 and 2.46 as of December 31, 2017 and 2016, respectively, resulting in a leverage ratio that meets the Company’s management and risk policies.

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Financial instruments by categoryBelow are the Company’s financial instruments by category:

As of December 31, 2017 and 2016, financial assets and liabilities consist of the following: As of December 31, 2017 2016

Cash and cash equivalents $ 32,813 $ 24,633 Restricted cash 1,965 775Financial assets measured at amortized cost: Trade and other accounts receivable 38,690 39,538 Other non-current assets 2,227 1,473Financial assets measured at fair value: Derivative financial instruments 209 56 $ 75,904 $ 66,475

Financial liabilities measured at amortized cost: Debt $ 157,945 $ 145,130 Trade and other accounts payable 77,366 69,713 Other non-current liabilities 82 380Financial liabilities measured at fair value: Other non-current liabilities - 318 Derivative financial instruments 776 750 $ 236,169 $ 216,291

Fair value of financial assets and liabilities valued at amortized costThe amount of cash and cash equivalents, restricted cash, customers and other accounts receivable, other current assets, trade and other accounts payable, current debt, other current liabilities approximate their fair value, because their maturity date is less than twelve months. The net carrying amount of these accounts represents the expected cash flows to be received as of December 31, 2017 and 2016.

The carrying amount and estimated fair value of assets and liabilities valued at amortized cost is presented below: As of December 31, As of December 31, 2017 (1) 2016 Carrying Carrying amount Fair value amount Fair value

Financial assets: Non-current accounts receivable $ 2,227 $ 2,227 $ 1,473 $ 1,459

Financial liabilities: Non-current debt (1) 146,425 151,475 136,323 137,281

(1) The book value of the debt, for purposes of calculating its fair value, is presented gross of interest payable and issuance costs.

The estimated fair values as of December 31, 2017 and 2016 were determined based on discounted cash flows and with reference to the yields at the closing of the debt securities, using rates reflecting a similar credit risk, depending on the currency, maturity period and country where the debt was acquired. The primary rates used are the Interbank Equilibrium Interest Rate (“TIIE” for its acronym in Spanish) for instruments in Mexican pesos, London Interbank Offer Rate (“LIBOR”) for instruments in U.S. dollars and Euro Interbank Offer Rate (“EURIBOR”) for instruments in Euro. Measurement at fair value for non-current accounts receivable is deemed within Level 3 of the fair value hierarchy, while for the financial debt, the measurement at fair value is deemed within Levels 1 and 2 of the hierarchy, as described herein below.

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Market risks(i) Exchange rate riskThe Company operates internationally, and is exposed to foreign exchange risk, primarily derived from the transactions and balances that the subsidiaries conduct and have in foreign currency, respectively. A foreign currency is that which is different from the functional currency of an entity. In addition, the Company is exposed to changes in the value of financial instruments arising from foreign exchange variations; therefore, the Company applies hedge accounting to the differences in foreign currency originated between the functional currency of the foreign operation and the functional currency of the holding company (pesos), regardless of whether the net investment is maintained directly or indirectly through a subholding.

The behavior of the exchange rates fluctuations between the Mexican peso, U.S. dollar and the euro represents a very important factor for the Company due to the effect that such currencies have on its consolidated results and because, in addition, Alfa has no interference in its determination.

Historically, in times when the Mexican peso has appreciated in against other currencies such as the U.S. dollar, Alfa’s profit margins have been reduced. On the other hand, when the Mexican peso has lost value, Alfa’s profit margins have increased. However, although this factor correlation has arisen several times in the recent past, there is no assurance that it will be repeated in the event the exchange rate between the Mexican peso and any other currency fluctuates again, because it also depends on the foreign currency monetary position of its subsidiaries. Accordingly, the Company sometimes enters into transactions with derivative financial instruments on exchange rates in order to hedge the risk associated with exchange rates. However, as most of the Company’ revenues are in U.S. dollars, there is a natural hedge against its obligations in U.S. dollars.

Based on the above, the Company has the following assets and liabilities in foreign currency in relation to the functional currency of the subsidiary entities, translated to millions of Mexican pesos at the closing exchange rate as of December 31, de 2017: MXN USD EUR

Financial assets $ 19,167 $ 26,267 $ 4,356Financial liabilities (20,558) (49,009) (26,224)Foreign exchange monetary position $ (1,391) $ (22,742) $ (21,868)

The exchange rates used to translate the foreign currency monetary positions to Mexican pesos are those described in Note 3.

Based on the financial positions in foreign currency maintained by the Company, a hypothetical variation of 10% in the MXN/USD and MXN/EUR exchange rate and keeping all other variables constant, would result in an effect of $4,513 in the consolidated statement of income and stockholders’ equity as of December 31, 2017.

Derivative financial instruments to hedge exchange rate risksThe effectiveness of derivative financial instruments designated as hedges is measured periodically.

Cross currency exchange rate derivative contracts

As of December 31, 2016, the Company had forwards (USD / MXN) to cover short-term needs, which correspond to the sale of US dollars for the purchase of raw materials in Mexican pesos.

As of December 31, 2017 the Company has forwards (USD / MXN) to cover short-term needs. The coverages correspond to the purchase of US dollars for interest and principal payments of a Syndicated Loan and a loan from Bancomext for the periods of January, April, July and October 2018.

Additionally, the Company has hedging corresponding to the purchase of US dollars for the payment of interest on the bond issued in November 2017 for the periods of May and November 2018.

The Company’s cross currency exchange rate derivative contracts are recognized at fair value through profit or loss in the consolidated statement of income.

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The positions in derivative financial instruments of foreign currency are summarized below: As of December 31, 2017 Value of underlying asset Maturity by yearType of derivative, Notional Collateral / value or contract amount Units Reference Fair value 2018 2019 2020 + guarantee

Cross currency swapsUSD/MXN $ 63 Pesos/Dollar 19.74 $ 62 $ 62 $ - $ - $ -

As of December 31, 2016 Value of underlying asset Maturity by yearType of derivative, Notional Collateral / value or contract amount Units Reference Fair value 2018 2019 2020 + guarantee

Cross currency swapsUSD/MXN $ (186) Pesos/Dollar 20.66 $ (12) $ (12) $ - $ - $ -

Price riskIn carrying out its activities, the Company depends on the supply of raw materials provided by its suppliers, both in Mexico and abroad, among which are intermediate petrochemicals, beef products, pork and poultry, dairy products and aluminum scrap, principally.

In recent years, the price of some inputs have shown volatility, especially those related to oil, natural gas, food, such as meat, cereals and milk, and metals.

In order to fix the selling prices of certain of its products, the Company has entered into agreements with certain customers. At the same time, it has entered into transactions involving derivatives on natural gas that seek to reduce price volatility of the prices of this input.

Additionally, it has entered into derivative financial instruments transactions to hedge purchases of certain raw materials, since these inputs have a direct or indirect relationship with the prices of its products.

The derivative financial operations have been privately contracted with various financial institutions, whose financial strength was highly rated at the time by rating agencies. The documentation used to formalize the contract operations is that based generally on the “Master Agreement”, generated by the “International Swaps & Derivatives Association” (“ISDA”), which is accompanied by various accessory documents known in generic terms as “Schedule”, “Credit Support Annex” and “Confirmation”.

Regarding natural gas, Pemex is the only supplier in Mexico. The selling price of natural gas is determined by the price of that product on the “spot” market in South Texas, USA, which has experienced volatility. For its part, the Mexican Electric Commission is a decentralized public company in charge of producing and distributing electricity in Mexico. Electricity rates have also been influenced by the volatility of natural gas, since most power plants are gas-based.

The Company entered into various derivative agreements with various counterparties to protect it against increases in prices of natural gas and other raw materials. In the case of natural gas derivatives, hedging strategies for products were designed to mitigate the impact of potential increases in prices. The purpose is to hedge the price from volatility by taking positions that provide stable cash flow expectations, and thus avoid price uncertainty. The reference market price for natural gas is the Henry Hub New York Mercantile Exchange (NYMEX). The average price per MMBTU for 2017 and 2016 was US$3.00 and US$2.60, respectively.

As of December 31, 2017 and 2016, the Company had hedges of natural gas prices for a portion expected of consumption needs in Mexico and the United States. .

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Derivative forward contracts to hedge adverse changes in commodity pricesAlfa’s subsidiaries use natural gas to carry out their operating processes and within the polyester chain some of their main raw materials are paraxylene and ethylene, this causes that an increase in the prices of natural gas, paraxylene or ethylene has a negative effect on the operating cash flow. The objective of the hedge is to hedge against the exposure in the price increase of the aforementioned commodities, for future purchases by contracting swaps where variable prices are received and a fixed price is paid. A strategy called roll-over has been implemented, through which it is analyzed each month if more derivatives are contracted to expand the time or the amount of coverage. Currently, the Company is hedged until December 2020. At the end of 2016, it also had an ethane hedge, however, due to market movements, these hedges are not currently available.

Additionally, one of Alfa’s subsidiaries is a producer of hydrocarbons, so a drop in oil and gas prices negatively affects cash flow. The objective of the hedge is to hedge against the exposure to the decrease in prices of the aforementioned commodities, for future sales by contracting swaps where a fixed price is received and a variable price is paid. A strategy called roll-over has been implemented, through which it is analyzed each month if more derivatives are contracted to expand the time or the amount of coverage. Currently, the Company is hedged until December 2018.

These derivative instruments have been classified as cash flow hedges for accounting purposes.

Positions in financial instruments derived from natural gas, ethylene, crude WTI, ethane and paraxylene, are summarized below: As of December 31, 2017 Value of underlying asset Maturity by yearType of derivative, Notional Collateral / value or contract amount Units Reference Fair value 2018 2019 2020 + guarantee

Cash flow hedges Ethylene 359 Cent Dollar/lb. (1) 27.65 $ 22 $ 22 $ - $ - $ - Natural gas 2,165 Dollar/MBTU (2) 2.74 (712) (240) (230) (242) - Paraxylene 1,828 Dollar/MT (4) 910 125 125 - - - Crude WTI 684 Dollar/BBL (5) 57.95 (64) (64) - - - $ (629) $ (157) $ (230) $ (242) $ -

As of December 31, 2016 Value of underlying asset Maturity by yearType of derivative, Notional Collateral / value or contract amount Units Reference Fair value 2018 2019 2020 + guarantee

Cash flow hedges Ethylene 350 Cent Dollar/lb. (1) 25.33 $ 20 $ 20 $ - $ - $ - Natural gas 2,345 Dollar/MBTU (2) 3.72 (659) (13) (187) (459) - Ethane 3 Cent Dollar/Gallon (3) 26.37 1 1 - - - Paraxylene 2,650 Dollar/MT (4) 795 (24) (24) - - - Crude WTI 628 Dollar/BBL (5) 53.72 (15) (15) - - - $ (677) $ (31) $ (187) $ (459) $ -

(1) Cent of dollar per pound(2) Dollar per Mega British Thermal Unit(3) Cent of dollar per Gallon(4) Dollar per Metric Ton(5) Dollar per Barrel

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Interest rate riskThe Company is exposed to interest rate variation risk mainly for long-term loans bearing interest at variable rates. Fixed-interest loans expose the Company to interest rate risk at fair value, which implies that Alfa might be paying interest at rates significantly different from those of an observable market.

In order to hedge the total cost of its financing and volatility associated to interest rates, the Company has contracted derivative financial instruments to convert the payment of interest on certain loans at variable rates to a fixed rate. As of December 31, 2017, 79% of the financings are denominated at a fixed rate and 21% at a variable rate.

As of December 31, 2017, if interest rates on variable rate are increased or decreased by 100 basis points in relation to the rate in effect, the income and stockholders’ equity of the Company would change by $333.

Interest rate swaps derivative contracts to hedge interest rate risksAs of December 31, 2016 the Company had fixed-rate Euribor exchange rate agreements. The derivatives were entered into with the intention of hedging a loan owned by a foreign operation that was acquired by one of Alfa’s subsidiaries, which was paid in advance at the time of acquisition. However, the derivatives were maintained until September 2017, when they were terminated. During this period, the derivatives were recorded at fair value through profit or loss:

Positions in derivative financial instruments to hedge the risk of variability in interest rates are summarized below: As of December 31, 2016 Value of underlying asset Maturity by year Type of derivative, Notional Collateral / value or contract amount Units Reference Fair value 2017 2018 2019 + guarantee

Interest Rate Swap Euribor Euribor $ 190 % per year 0.16 $ (5) $ (2) $ 2 $ 1 $ -

As of December 31, 2017 and 2016, the net fair value of the aforementioned derivative financial instruments amounts to $567 y $694, respectively, which is shown in the consolidated statements of financial position as follows: As of December 31, 2017 Fair value

Current assets $ 209Short-term liability 304Long-term liability 472Net position $ (567)

As of December 31, 2016 Fair value

Current assets $ 56Short-term liability 99Long-term liability 651Net position $ (694)

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Credit riskCredit risk is managed on a group basis, except for the credit risk related to accounts receivable balances. Each subsidiary is responsible for managing and analyzing credit risk for each of its new customers before setting the terms and conditions of payment. Credit risk is generated from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions as well as credit exposure to customers, including receivables and committed transactions. If wholesale customers are rated independent, these are the ratings used. If there is no independent rating, the Company´s risk control group evaluates the creditworthiness of the customer, taking into account their financial position, past experience and other factors.

Individual risk limits are determined based on internal and external ratings in accordance with limits set by the RMC. The use of credit risk is monitored regularly. Sales to retail customers are in cash or by credit card. During 2017 and 2016, credit limits were not exceeded.

The impairment provision for doubtful accounts represents estimated losses resulting from the inability of customers to make required payments. In determining the allowance for doubtful accounts, significant estimates have to be made. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by a review of their current credit information. In addition, the Company considers a number of factors to determine the size and appropriate timing for the recognition of allowances, including historical collection experience, customer base, current economic trends and the ageing of the accounts receivable portfolio.

Liquidity riskProjected cash flows are determined at each operating entity of the Company and subsequently the finance department consolidates this information. The finance department of the Company continuously monitors the cash flow projections and liquidity requirements of the Company ensuring that sufficient cash and highly liquid investments are maintained to meet operating needs, and it’s that some flexibility is maintained through open and committed credit lines. The Company regularly monitors and makes decisions ensuring that the limits or covenants set forth in debt contracts are not violated. The projections consider the financing plans of the Company, compliance with covenants, compliance with minimum liquidity ratios and internal legal or regulatory requirements.

The Company’s treasury department invests those funds in time deposits and marketable securities whose maturities or liquidity allow flexibility to meet the cash needs of the Company.

The following table analyzes the derivative and non-derivative, grouped according to their maturity, from the date of the consolidated statement of financial position to the contractual maturity date. Derivative financial liabilities are included in the analysis if their contractual maturities are required to understand the timing of the Company’s cash flows. The amounts disclosed in the table are contractual undiscounted cash flows. Less than a From 1 to 5 More than year years 5 years

As of December 31, 2017 Trade and other accounts payable $ 77,366 $ - $ - Current and non-current debt (excluding debt issuance costs) 15,146 38,216 105,756 Derivative financial instruments 304 472 - Other liabilities 2,170 599 -

Less than a From 1 to 5 More than year years 5 years

As of December 31, 2016 Trade and other accounts payable $ 69,713 $ - $ - Current and non-current debt (excluding debt issuance costs) 8,807 68,963 111,494 Derivative financial instruments 99 651 - Other liabilities 2,103 698 -

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Fair value hierarchyThe following is an analysis of financial instruments measured in accordance with the fair value hierarchy. The 3 different levels used are presented below:

- Level 1: Quoted prices for identical instruments in active markets

- Level 2: Other valuations including quoted prices for similar instruments in active markets, which are directly or indirectly observable

- Level 3: Valuations made through techniques where one or more of their significant data inputs are unobservable.

The derivative financial instruments of the Company that are measured at fair value as of December 31, 2017 and 2016, are located within level 2 of the fair value hierarchy.

There were no transfers between level 1 and 2 or between level 2 and 3.

The specific valuation techniques used to value financial instruments include:

- Market quotations or quotations for similar instruments.

- The fair value of interest rate swaps is calculated as the present value of estimated future cash flows based on observable yield curves.

- The fair value of forward exchange agreements is determined using exchange rates at the closing balance date, with the resulting value discounted at present value.

- Other techniques such as the analysis of discounted cash flows, which are used to determine fair value of the remaining financial instruments.

Note 5 - Critical accounting estimates and judgmentsEstimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

5.1 Critical accounting estimates and judgmentsThe Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

a. Estimated impairment of goodwill and intangible assets with indefinite livesThe Company annually performs tests to determine whether goodwill and intangible assets with indefinite live have suffered any impairment (see Note 12). For impairment testing purposes, goodwill and intangible assets with indefinites lives is allocated to the groups of cash generating units (“CGUs”) of which the Company has considered that economic and operating synergies of the business combinations are generated. The recoverable amounts of the groups of CGUs were determined based on the calculations of their value in use, which require the use of estimates, within which, the most significant are the following:

- Estimate of gross margins and future operations according to the historical performance and expectations of the industry for each CGU group.

- Discount rate based on the weighted cost of capital (WACC) of each CGU or group of CGUs.

- Long-term growth rates

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b. Contingent lossesManagement also makes judgments and estimates in recording provisions for matters relating to claims and litigation, primarily in relation to rates of interconnection services. Actual costs may vary from estimates for several reasons, such as changes in cost estimates for resolution of complaints and disputes based on different interpretations of the law, opinions and evaluations concerning the amount of loss.

Contingencies are recorded as provisions when it is likely that a liability has been incurred and the amount of the loss is reasonably estimable. It is not practical to estimate sensitivity to potential losses if other assumptions were used to record these provisions, due to the number of underlying assumptions and the range of possible reasonable outcomes regarding potential actions by third parties, such as regulators, both in terms of loss probability and estimates of such loss.

c. Recoverability of deferred tax assetsAlfa has applicable tax-loss carryforwards, which can be used in the following years until maturity expires. Based on the projections of income and taxable income that Alfa will generate in the following years through a structured and robust business plan, which includes the sale of non-strategic assets, new services to be provided to its subsidiaries, among others, Management has considered that current tax losses will be used before they expire and, therefore, it was considered appropriate to recognize a deferred tax asset for such losses.

d. Long-lived assetsThe Company estimates the useful lives of long-lived assets in order to determine the depreciation and amortization expenses to be recorded during the reporting period. The useful life of an asset is calculated when the asset is acquired and is based on past experience with similar assets, considering anticipated technological changes or any other type of changes. Were technological changes to occur faster than estimated, or differently than anticipated, the useful lives assigned to these assets could have to be reduced. This would lead to the recognition of a greater depreciation and amortization expense in future periods. Alternatively, these types of technological changes could result in the recognition of a charge for impairment to reflect the reduction in the expected future economic benefits associated with the assets.

The Company reviews depreciable and amortizable assets on an annual basis for signs of impairment, or when certain events or circumstances indicate that the book value may not be recovered during the remaining useful life of the assets. For intangible assets with an indefinite useful life, the Company performs impairment tests annually and at any time that there is an indication that the asset may be impaired.

To test for impairment, the Company uses projected cash flows, which consider the estimates of future transactions, including estimates of revenues, costs, operating expenses, capital expenditures and debt service. In accordance with IFRS, discounted future cash flows associated with an asset or CGU are compared to the book value of the asset or CGU being tested to determine if impairment exists whenever the aforementioned discounted future cash flows are less than its book value. In such case, the carrying amount of the asset or group of assets is reduced to its value in use, unless its fair value is higher.

5.2. Critical judgments in applying the Company’s accounting policiesa. Basis of consolidationThe financial statements include the assets, liabilities and results of all entities in which the Company has a controlling interest. The outstanding balances and significant intercompany transactions have been eliminated in consolidation. To determine control, the Company considers whether it has the power to govern the financial and operational strategy of the respective entity and not just the power of the capital held by the Company.

As a result of this analysis, the Company has exercised critical judgment to decide whether to consolidate the financial statements of Axtel, where the determination of control is not clear. Based on the principal substantive right of Alfa in accordance with the by-laws of Axtel by appointing the General Director, who has control over the relevant decision making and based on the by-laws of Axtel and supported in the General Law of Mercantile Organizations, which allow Alfa to control the decisions over relevant activities by a simple majority through an Ordinary Stockholders’ Meeting, where it holds 52.78% of Axtel. Management has concluded that there are circumstances and factors described in the by-laws of Axtel and applicable standards that allow the Company to conduct the daily operations of Axtel, which therefore demonstrate control.

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Additionally, the Company has evaluated critical control factors and has concluded it should consolidate the financial statements of its subsidiaries Polioles and Indelpro. The analysis performed by the Company included the assessment of the substantive decision making rights of the respective stockholders set forth in their by-laws, resulting in management’s conclusion that it has the power to govern their relevant activities.

The Company will continue to evaluate these circumstances at the date of each statements of financial position to determine whether these critical judgments will continue to be appropriate.

Note 6 - Cash and cash equivalentsCash and cash equivalents presented in the consolidated statements of financial position consist of the following: December 31, 2017 2016

Cash on hand and in banks $ 15,192 $ 12,922Short-term bank deposits 17,621 11,711Total cash and cash equivalents $ 32,813 $ 24,633

Note 7 - Restricted cash and cash equivalentsThe value of restricted cash is composed as follows: December 31, 2017 2016

Current (1) and (3) $ 961 $ 538Non-current, (see Note 13) (1) (2) (3) 1,004 237Restricted cash $ 1,965 $ 775

(1) Applies to deposits that Alpek made in the amount of $738 (US $39) related to the acquisition of the shares of Petroquímica Suape y Citepe (see Note 2 e.).(2) This restricted cash is for proceedings before The Mexican Federal Telecommunications Commission in connection with a dispute arising from a resale of

interconnection rates that Axtel (previously Alestra) has with Teléfonos de Mexico, S. A. de C. V. (“Telmex”) and Teléfonos del Norte (“Telnor”, a subsidiary of Telmex). Axtel and Telmex created a trust with BBVA Bancomer (as trustee) to ensure the payment of fixed interconnection services on the dispute applicable to 2008, 2009 and 2010. As of December 31, 2017, the restricted cash status remains unchanged. The restricted cash representing the balance of the trust is presented in the consolidated statement of financial position within non-current assets. As of December 31, 2017 and 2016, the balance of the trust was $162 and $153, respectively composed of contributions by Alestra and corresponding yields.

(3) Corresponds to judicial deposits that Nemak has made, whose balance as of December 31, 2017 and 2016, is $774 and $474, respectively, which will be reimbursed to the Company in case of winning the trial.

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Note 8 - Trade and other accounts receivable, net December 31 2017 2016

Trade accounts receivable $ 32,748 $ 31,537Recoverable taxes 2,531 2,235Interest receivable 2 4Other debtors:Sundry debtors 8,756 9,094Notes receivable 2,311 1,590Allowance for impairment of trade and other accounts receivable (5,127) (2,687) 41,221 41,773Less: non-current portion (1) 2,227 1,473Current portion $ 38,994 $ 40,300

(1) The non-current accounts receivable represent long-term receivables and other non-current assets, and are presented in the consolidated statement of financial position in other non-current assets (see Note 13).

Balance for trade accounts receivable include past-due balances of $6,768 and $6,942 as of December 31, 2017 and 2016, respectively.

The analysis by age of the balances due from customers and other receivables not covered by impairment provisions is as follows: December 31 2017 2016

1 to 30 days $ 3,554 $ 3,45530 to 90 days 1,219 1,32890 to 180 days 741 822Over 180 days 1,254 1,337 $ 6,768 $ 6,942

As of December 31, 2017 and 2016, trade and other accounts receivable of $38,994 and $40,300, respectively have an impairment provision (represented by customers and sundry debtors). The amount of the impairment provision as of December 31, 2017 and 2016 amounts to $5,127 and $2,687, respectively. Trade and other accounts receivable impaired correspond mainly to companies going through difficult economic situations.

Movements in the provision for impairment of customers and other receivables are analyzed as follows: As of December 31, 2017 2016

Opening balance as of January 1 $ 2,687 $ 762Allowance for impairment of trade and other accounts receivable 2,600 2,032Receivables written off during the year (160) (107)Ending balance as of December 31, $ 5,127 $ 2,687

Increases in the provision for impairment of customers and other receivables are recorded in the consolidated statement of income under sale expenses.

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Note 9 - Inventories December 31, 2017 2016

Finished goods $ 15,320 $ 14,554Raw material and other consumables 18,419 17,044Work in process 10,602 9,325 $ 44,341 $ 40,923

For the years ended on December 31, 2017 and 2016 damaged, slow-moving and obsolete inventory was charged to cost of sales in the amount of $24 and $108, respectively.

As of December 31, 2017 and 2016 there were no inventories pledged as collateral.

Note 10 - Other current assetsOther current assets consist of the following: December 31, 2017 2016

Prepayments (1) $ 1,751 $ 1,786Accounts receivable - affiliates 2,881 3,379Other 185 153Total other current assets $ 4,817 $ 5,318

(1) This item comprises mainly advertising and insurance paid in advance.

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Note 11 - Properties, plant and equipment Lab and IT Buildings and Machinery and Telecommunication furniture and Tooling and Constructions Leasehold Other fixed Land constructions equipment Vehicles network equipment spare parts in progress improvements assets Total

For the year ended December 31, 2016Opening balance, net $ 9,790 $ 20,045 $ 58,434 $ 1,517 $ 4,554 $ 1,520 $ 332 $ 9,751 $ 301 $ 132 $ 106,376Translation effect 992 3,166 10,044 61 6 215 59 1,922 4 21 16,488Additions 47 703 3,212 496 1,108 106 2 18,851 30 94 24,649Additions from business acquisitions 508 92 2,228 160 10,048 2,335 132 1,609 103 32 17,247Disposals (10) (42) (529) (45) (575) 61 (3) (100) (1) (60) (1,304)Impairment charges recognized in the year - - (459) (1) - - (1) (59) - (30) (550)Depreciation charge recognized in the year - (1,245) (7,807) (435) (2,946) (615) (284) - (43) (28) (13,403)Transfers 134 1,227 6,602 80 2,184 500 301 (11,062) 38 (4) -Final balance as of December 31, 2016 $ 11,461 $ 23,946 $ 71,725 $ 1,833 $ 14,378 $ 4,124 $ 535 $ 20,912 $ 432 $ 157 $ 149,503

As of December 31, 2016Cost $ 11,461 $ 46,679 $ 171,929 $ 5,175 $ 55,695 $ 10,899 $ 1,682 $ 20,912 $ 1,053 $ 434 $ 325,919Accumulated depreciation - (22,733) (100,204) (3,342) (41,317) (6,775) (1,147) - (621) (277) (176,416)Net carrying amount as of December 31, 2016 $ 11,461 $ 23,946 $ 71,725 $ 1,833 $ 14,378 $ 4,124 $ 535 $ 20,912 $ 432 $ 157 $ 149,503

For the year ended December 31, de 2017Net opening balance $ 11,461 $ 23,946 $ 71,725 $ 1,833 $ 14,378 $ 4,124 $ 535 $ 20,912 $ 432 $ 157 $ 149,503Translation effect 1 271 (92) 38 (2) 65 45 (337) (2) 216 203Additions 117 239 2,943 368 81 274 70 15,952 36 55 20,135Additions from business acquisitions 129 330 877 60 - (1) - 26 - 17 1,438Disposals (159) (105) (1,423) (31) (15) (31) 3 (520) (6) (32) (2,319)Impairment charges and reversals recognized in the year (123) (10) 155 - - (2) - (3) - (227) (210)Depreciation charge recognized in the year - (1,331) (8,685) (509) (3,600) (570) (299) - (59) (55) (15,108)Transfers 63 2,533 8,632 119 4,417 (1,308) 398 (14,968) 69 45 -Final balance as of December 31, 2017 $ 11,489 $ 25,873 $ 74,132 $ 1,878 $ 15,259 $ 2,551 $ 752 $ 21,062 $ 470 $ 176 $ 153,642

As of December 31, de 2017Cost $ 11,489 $ 49,754 $ 181,642 $ 5,399 $ 57,791 $ 11,885 $ 2,131 $ 21,062 $ 1,152 $ 649 $ 342,954Accumulated depreciation - (23,880) (107,514) (3,520) (42,531) (9,333) (1,379) - (683) (472) (189,312)Net carrying amount as of December 31, 2017 $ 11,489 $ 25,874 $ 74,128 $ 1,879 $ 15,260 $ 2,552 $ 752 $ 21,062 $ 469 $ 177 $ 153,642

Of the total depreciation expense, $13,688 and $12,020 were charged to cost of sales, $704 and $622 to selling expenses and $716 and $761 to administrative expenses, in 2017 and 2016, respectively.

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As of December 31, 2017 and 2016, there were no property, plant and equipment pledged as collateral, except for what is mentioned in Note 16.

Assets under finance lease include the following amounts in which the Company is the lessee: December 31, 2017 2016

Cost – capitalized finance leases $ 2,109 $ 1,679Accumulated depreciation (1,127) (868)Carrying value, net $ 982 $ 811

The Company has entered into non-cancellable finance lease agreements as lessee. The lease terms of the agreements entered into vary between 2 and 3 years.

Note 12 - Goodwill and intangible assets Finite life Indefinite life Intellectual Development Exploration Customers Software property costs costs Trademarks relationships and licenses rights Others Goodwill Trademarks Other Total

CostAs of January 1, 2016 $ 5,181 $ 6,924 $ 152 $ 3,860 $ 4,373 $ 2,832 $ 6,873 $ 15,600 $ 10,908 $ 8 $ 56,711Translation effect 1,096 1,408 42 711 472 628 1,326 2,357 1,887 2 9,929Additions 1,573 180 36 867 233 484 2,652 - 6,025Additions from business acquisitions - - 2,345 3,564 17 - 847 3,534 8 - 10,315Impairment charges recognized in the year - (1,334) - - - - - - (210) - (1,544)Transfers 71 - 36 1 13 (7) (241) - (36) - (163)Disposals (2) - - - (27) - - - - - (29)As of December 31, 2016 $ 7,919 $ 7,178 $ 2,611 $ 9,003 $ 5,081 $ 3,937 $ 11,457 $ 21,491 $ 12,557 $ 10 $ 81,244Exchange differences $ (289) $ - $ (10) $ (56) $ 321 $ (172) $ (805) $ 172 $ 913 $ (9) $ 65Additions 1,265 574 - 230 273 - 56 - - - 2,398Additions from business acquisitions 9 - - - 19 - - 3,185 - 13 3,226Impairment charges recognized in the year - (131) - - (3) - (6,692) - (77) - (6,903)Transfers (414) - - 493 134 - (129) - - - 84Disposals (148) - - - (14) - (1) - (292) - (455)As of December 31, 2017 $ 8,342 $ 7,621 $ 2,601 $ 9,670 $ 5,811 $ 3,765 $ 3,886 $ 24,848 $ 13,101 $ 14 $ 79,659

Net carrying amountCost $ 7,919 $ 7,178 $ 2,611 $ 9,003 $ 5,081 $ 3,937 $ 11,457 $ 21,491 $ 12,557 $ 10 $ 81,244Accumulated amortization (3,463) (5,334) (491) (2,284) (3,554) (815) (2,132) - - - (18,073)As of December 31, 2016 $ 4,456 $ 1,844 $ 2,120 $ 6,719 $ 1,527 $ 3,122 $ 9,325 $ 21,491 $ 12,557 $ 10 $ 63,171

Cost $ 8,342 $ 7,621 $ 2,601 $ 9,670 $ 5,811 $ 3,765 $ 3,886 $ 24,848 $ 13,101 $ 14 $ 79,659Accumulated amortization (4,143) (5,521) (651) (3,399) (4,277) (994) (2,616) - - - (21,601)As of December 31, 2017 $ 4,199 $ 2,100 $ 1,950 $ 6,271 $ 1,534 $ 2,771 $ 1,270 $ 24,848 $ 13,101 $ 14 $ 58,058

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Other intangible assets consist mainly of patents, licenses, concessions and non-compete agreements.

The Company has concessions of public telecommunications networks granted by the federal government in 1995 and 1996, to offer local and long distance telephony services for periods of 30 years that, given certain conditions, are renewable for equal periods. In addition, the Company has concessions of various radio spectrum frequencies with a duration of 20 years, which are renewable for additional periods of 20 years under the terms of applicable laws and regulations.

Of the total amortization expense, $1,371 and $1,465, were charged to cost of sales, $385 and $402 to selling expenses and $1,774 y $1,677 to administrative expenses in 2017 and 2016, respectively.

Research expenses incurred and recorded in the results of 2017 and 2016 were $6 and $72, respectively.

As mentioned in Note 2.h., goodwill was increased during 2016 as a result the acquisition of Axtel in the amount of $ 3,550.

Impairment testing of goodwillAs mentioned in Note 5, goodwill is allocated to groups of cash generating units (“CGUs”) that are associated with the operating segments, from which are expected to benefit from the synergies of the business combination, irrespective of whether other assets or liabilities of the acquirer are assigned to those units or groups of units, as follows: December 31, 2017 2016

Alpek $ 339 $ 362Sigma 14,742 10,912Nemak 6,257 5,836Axtel 3,357 4,024Other segments 153 357 $ 24,848 $ 21,491

The recoverable value from each group of CGUs has been determined based on calculations of values in use, which consist of cash flow projections after on pre-tax financial budgets approved by management covering a period of 5 years.

The gross and operating margins included in the estimates of value in use have been estimated based on the historical performance and the growth expectations of the market in which each group of CGUs operates. The long-term growth rate used in estimating value in use is consistent with the projections included in industry reports. The present value of the cash flows was discounted using a specific discount rate after taxes for each group of CGUs and reflects the specific risks associated with each of them.

The key assumptions used in calculating the value in use in 2017 and 2016 were as follows: 2017 Other Alpek Sigma Nemak Axtel segments

Long-term perpetual growth rate 0.0% 2.1% 1.8% 4.9% 4.0%Discount rate 9.0% 8.1% 8.7% 10.1% 12.7%

2016 Other Alpek Sigma Nemak Axtel segments

Long-term perpetual growth rate 0.0% 6.9% 1.8% 6.7% 4.0%Discount rate 9.0% 7.9% 9.1% 10.9% 12.7%

In relation to the calculation of the value in use of groups of cash-generating units, the Alfa Management considers that a possible increase in the discount rate in 100 basis points would cause an impairment of $1,765, while a possible decrease in the long-term growth rate in a similar level, a loss of $1,321.

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For the periods ended December 31, 2017 and 2016, no impairment loss was recognized for goodwill.

As a result of the fall in oil prices, for the years ended December 31, 2016, the Company recognized impairment of $ 1,413, respectively, in the energy operating segment. Likewise, in the food segment, the Italian market declined by 4.1% in 2016 as a result of the country’s economic situation and the significant impact of the World Health Organization (“WHO”) statement on the market, which resulted in an impairment of $184 for the year ended December 31, 2016.

Note 13 - Investments accounted for using the equity method and other non-current assets December 31, 2017 2016

Portion of trade and other non-current accounts receivable (1) (Note 8) $ 2,227 $ 1,473Other capital instruments 485 371Other assets 446 1,953Restricted cash (Note 7) 1,004 237Other non-current financial assets 4,162 4,034Investments in associates 1,101 1,348Joint ventures 353 763Total other non-current assets $ 5,616 $ 6,145

(1) Mainly comprised by a loan receivable that generates a semiannual interest at a rate of 6.99% (Libor + 5.3%) and with maturity on December 2019.

Financial assets available for saleThese assets are investments in shares of companies not listed on the market, representing less than 1% of their capital stock and equity investments in social clubs. No impairment loss was recognized as of December 31, 2017 and 2016.

The other equity investments are denominated in Mexican pesos.

Investments in associatesThe following includes the investments in associates that the Company has as of December 31, 2017: Percentage of Name Segment ownership

Starcam Nemak 49.0%Loncin Nemak 35.0%Clear Path Recycling LLC Alpek 34.2%Terminal Petroquímica de Altamira, S. A. de C. V. Alpek 21.1%Agua Industrial del Poniente, S. A. de C. V. Alpek 47.6%Financière de la Charcuterie JV Sigma 49.0%DePorCyL SL Sigma 42.1%CogBurg S. A. Sigma 50.0%Nuova Mond SpA Sigma 50.0%Servicios Integrales de Salud Nova, S. A. de C. V. Alfa 22.5%BPZ Energy Newpek 50.0%

There are no contingent liabilities related to the investment of Alfa in investments in associates. The Company has no commitments in relation with investments in associates as of December 31, 2017 and 2016.

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Joint venturesThe following includes the joint ventures that the Company has as of December 31, 2017: Percentage of Name Segment possession

Conectividad Inalámbrica 7GHz, S. de R. L. Axtel 50.0%Petroalfa Servicios Newpek 50.0%Oilserv, Sapi De C. V. Newpek 50.0%Petroliferos Tierra Newpek 50.0%Galpek, LDA Alpek 50.0%

There are no contingent liabilities related to the investment of Alfa in joint agreements. The Company has no material commitments with respect to joint venture agreement as of December 31, 2017 and 2016.

Note 14 - Subsidiaries with significant non-controlling interestThe non-controlling interest is comprised as follows: Income (loss) Non-controlling of the non-controlling interest as of Percentage of non- interest of the year December 31, controlling interest 2017 2016 2017 2016

Axtel, S. A. B. de C. V. (1) 47% $ (273) $ (931) $ 2,788 $ 3,378Alpek, S. A. B. de C.V. 18% (99) 2,016 9,578 11,280Nemak, S. A. B. de C. V. 25% 926 1,339 9,815 9,179Other 69 (14) 809 1,000 $ 623 $ 2,410 $ 22,990 $ 24,837

(1) See Note 2h.

The summarized financial information as of December 31, 2017 and 2016 and for the year then ended, corresponding to each subsidiary with a significant non-controlling interest is shown below: Axtel, Nemak, Alpek, S. A. B. de C. V. (1) S. A. B. de C. V. S. A. B. de C. V. 2017 2016 2017 2016 2017 2016

Statements of financial positionCurrent assets $ 5,703 $ 6,293 $ 28,436 $ 26,907 $ 42,192 $ 34,222Non-current assets 25,051 25,873 68,253 64,986 51,586 57,279Current liabilities 7,905 7,579 25,509 23,684 28,019 19,408Non-current liabilities 20,357 21,940 32,757 31,138 34,095 30,371Stockholders’ equity 2,492 2,647 38,423 37,071 31,664 41,722Statements of incomeRevenues 15,513 13,937 84,779 79,244 98,998 90,192Net (loss) income 62 (3,599) 3,691 5,410 (4,555) 4,093Comprehensive income (loss) of the year 53 (3,607) 4,602 10,887 (6,843) 11,671Comprehensive income attributable to non-controlling interest 1 2 - 1 727 2,145Dividends paid to non-controlling interest - - - (434) (618) (2,049)Cash flowsCash flows from operating activities 4,395 3,898 14,359 12,825 7,225 6,019Net cash used in investing activities (2,307) (3,527) (8,239) (8,864) (7,618) (6,212)Net cash used in financing activities (2,347) (1,675) (5,035) (3,842) 5,816 (4,209)

(1) These figures are disclosed without the adjustments of the purchase price allocation.

The information above does not include the elimination of intercompany balances and transactions.

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Note 15 - Trade and other accounts payable December 31, 2017 2016

Trade accounts payable $ 61,214 $ 53,729Short-term employee benefits 1,267 1,417Customer advance payments 665 616Other payable taxes 4,403 4,760Other accounts and accrued expenses payable 9,817 9,191 $ 77,366 $ 69,713

Note 16 - Debt As of December 31, 2017 2016

Current:Bank loans (1) (2) $ 10,836 $ 4,563Current portion of non-current debt 4,156 4,009Notes payable (1) (2) 154 235Current debt $ 15,146 $ 8,807

Non-current:In U.S. dollars:Senior Notes $ 82,969 $ 85,923Secured bank loans 884 932Unsecured bank loans 16,814 30,252Finance lease 683 706Other 166 193

In Mexican pesos:Unsecured debt securities 1,805 1,757Unsecured bank loans 5,757 6,247

In euros:Senior Notes 35,671 10,879Unsecured bank loans 1,041 2,630Finance leases 640 122Other 149 254

Other currencies:Unsecured bank loans 167 235Finance leases 209 202 146,955 140,332Less: current portion of non-current debt (4,156) (4,009)Non-current debt (2) $ 142,799 $ 136,323

(1) As of December 31, 2017 and 2016, short-term bank loans and notes payable incurred interest at an average rate of 3.23%, and 4.34%, respectively.(2) The fair value of bank loans and notes payable approximates their current book value, due to their short maturity.

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The carrying amounts, terms and conditions of long-term debt were as follows: Debt Balance as of Balance as of Interest Contractual Value in MX issuance Interest December 31, December 31, Maturity date rate Description currency pesos costs paid 2017 2016 (1) MM/DD/YYYY %

Fixed rate USD $ 884 $ - $ - $ 884 $ 932 12/31/2019 4.25%Total secured bank loans 884 932

Banking BRL 85 - - 85 106 01/25/2025 9.50%Bilateral ARS 63 - 1 64 102 04/01/2022 22.50%Bilateral ARS 16 - - 16 27 12/08/2022 19.00%Bilateral USD - - - - 358 08/14/2018 1.40%Bilateral USD - - - - 415 04/02/2018 1.95%Bilateral USD - - - - 1,038 12/19/2019 2.59%Banking USD 2,960 - 38 2,998 - 11/30/2020 2.55%Banking USD 1,974 - 23 1,997 - 10/25/2022 5.13%Banking USD 987 - 1 988 - 12/15/2022 3.04%Banking USD 987 - 1 988 - 07/06/2021 2.67%Banking USD 987 - 2 989 - 07/17/2020 3.86%Banking USD 395 1 2 396 - 04/03/2020 2.34%Bilateral USD 2,367 7 2 2,362 2,474 12/23/2025 4.13%Bilateral USD 1,578 6 1 1,573 1,647 12/29/2025 4.13%Bilateral EUR - - - - 27 09/30/2017 4.55%Bilateral USD 3,563 8 40 3,595 3,886 01/17/2024 4.30%Bilateral MXN 79 - 1 80 - 11/30/2020 10.13%Bilateral USD 83 - 1 84 176 11/30/2020 6.14%Bilateral USD - - - - 157 10/22/2018 2.33%Club Deal EUR 96 - - 96 977 12/13/2020 1.25%Club Deal USD 448 - 2 450 5,212 12/13/2020 2.56%Club Deal EUR - - - - 865 12/05/2018 1.50%Club Deal USD - - - - 4,445 12/05/2018 1.83%Bilateral USD - - - - 168 02/01/2018 2.22%Bilateral MXN 5,709 51 19 5,677 - 12/19/2022 10.38%Syndicate MXN - - - - 4,752 01/15/2021 7.60%Syndicate MXN - - - - 1,495 01/15/2021 7.85%Syndicate USD - - - - 10,276 01/15/2021 3.38%Bilateral EUR 806 - - 806 761 12/29/2019 1.60%Banking EUR 35 - - 35 - 02/09/2019 -Banking EUR 15 - - 15 - 07/31/2026 -Banking EUR 1 - - 1 - 12/25/2031 1.00%Banking EUR 88 - - 88 - 03/01/2020 1.50%Banking RUR 2 - - 2 - 11/10/2018 4.05%Banking USD 394 - - 394 - 06/24/2024 1.42%Total unsecured bank loans 23,779 39,364

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Debt Balance as of Balance as of Interest Contractual Value in MX issuance Interest December 31, December 31, Maturity date rate Description currency pesos costs paid 2017 2016 (1) MM/DD/YYYY %

Debt securities/ fixed rate MXN 1,000 - 50 1,050 1,048 07/12/2018 10.25%Debt securities / UDIS MXN 736 - 19 755 709 07/12/2018 5.32%Total unsecured debt securities 1,805 1,757

Senior Notes - Fixed rate USD 12,806 70 64 12,800 13,389 11/20/2022 4.50%Senior Notes - Fixed rate USD 5,921 37 126 6,010 6,287 08/08/2023 5.38%Senior Notes - Fixed rate USD 9,854 67 137 9,924 10,355 03/25/2024 5.25%Senior Notes - Fixed rate USD 9,824 109 183 9,898 10,408 03/25/2044 6.88%Senior Notes - Fixed rate USD 9,867 120 190 9,937 10,398 02/28/2023 5.50%Senior Notes - Fixed rate EUR 11,847 197 139 11,789 - 03/15/2024 3.25%Senior Notes - Fixed rate USD 9,868 139 82 9,811 - 11/14/2024 6.38%Senior Notes - Fixed rate EUR 14,169 104 339 14,404 - 02/07/2024 2.63%Senior Notes - Fixed rate USD 4,910 11 14 4,913 5,129 12/16/2019 6.88%Senior Notes - Fixed rate EUR 9,477 92 93 9,478 10,878 03/15/2022 3.38%Senior Notes - Fixed rate USD 19,701 154 129 19,676 20,576 05/02/2026 4.13%Total Senior Notes - Fixed rate 118,640 96,801

Other loans USD 166 - - 166 193 Various VariousOther loans EUR 149 - - 149 256 Various VariousTotal other loans 315 449

China finance leases RMB 188 - - 188 200 02/01/2026 6.45%Finance leases USD 679 - 4 683 1 Various VariousFinance leases EUR 640 - - 640 - Various VariousFinance leases CAD 6 - - 6 - 03/01/2020 0.83%Finance leases SOL 15 - - 15 - Various VariousFinance leases RUR - - - - 2 04/30/2018 4.05%Total finance leases 1,532 1,029Total $ 146,425 $ 1,173 $ 1,703 $ 146,955 $ 140,332

(1) For the year ended as of December 31, 2017 and 2016 the debt issuance costs were $1,173 and $1,394, respectively.

Maturities:As of December 31, 2017, the annual maturities of long-term debt are as follows: 2022 and 2019 2020 2021 thereafter Total

Bank and other loans $ 2,385 $ 7,291 $ 4,798 $ 10,064 $ 24,538Senior Notes 4,910 - - 113,334 118,244Finance leases 357 184 113 395 1,049Non accrued future interests 6,641 6,189 5,811 27,665 46,306 $ 14,293 $ 13,664 $ 10,722 $ 151,458 $ 190,137

As of December 31, 2017 and 2016, the Company has contractual unused credit lines for a total of US$1,316 and US$1,122, respectively.

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Covenants:Loan contracts and debt agreements contain restrictions, primarily relating to compliance with financial ratios, incurring additional debt or making loans that require granting real guarantees, dividend payments and submission of financial information, which if not met or remedied within a specified period to the satisfaction of creditors may cause the debt to become payable immediately.

Financial ratios to be fulfilled include the following:

a. Interest coverage ratio: which is defined as EBITDA (See Note 28) for the period of the last four complete quarters divided by financial expenses, net or gross as appropriate, for the last four quarters, which shall not be less than 3.0 times.

b. Leverage ratio: which is defined as consolidated debt at that date, being the gross debt or net debt, depending on the case, divided by EBITDA for the period of the last four complete quarters, which shall not be more than 3.5 times.

During 2017 and 2016, the financial ratios were calculated according to the formulas set out in the loan agreements.

Covenants contained in the credit agreements of the subsidiaries establish certain obligations, conditions and certain exceptions that require or limit the capacity of the subsidiaries to:

- Provide certain financial information;- Maintain books and records;- Maintain assets in appropriate conditions;- Comply with applicable laws, rules and regulations;- Incur additional indebtedness;- Pay dividends;- Grant liens on assets;- Enter into transactions with affiliates;- Perform a consolidation, merger or sale of assets, and- Carry out sale and lease-back operations

As of December 31, 2017 and 2016, and the date of issuance of these consolidated financial statements, the Company and its subsidiaries complied satisfactorily with such covenants and restrictions.

Pledged assets:As of December 31, 2017 and 2016, the Newpek segment has pledged assets under a line of credit for an amount up to $888 (US$45) and $930 (US$45), respectively, maturing on December 31, 2019, which has been fully disposed as of December 31, 2017.

In addition, the Nemak segment has assets under guarantee under long-term financing granted by a Brazilian government entity to promote investment. The unpaid balance of the loan as of December 31, 2017, as well as the value of the pledged assets is approximately $84 and $92, respectively.

2017a. On February 2, 2017, Sigma issued Senior Notes on the Irish Stock Exchange through a private offering under Rule 144A and Regulation S, in the

amount of €600, gross from issuance costs of €5.4 and discounts of €2.2. The Senior Notes mature in seven years at a coupon of 2.625%. The transaction resources were mainly used to pay debt.

b. On March 9, 2017, Sigma prepaid the Senior Notes maturing on December 14, 2018, in the amount of US$450, incurring a cost for the prepayment of US$20 recognized as a financial expense in the consolidated statement of income. The Senior Notes were issued in 2011 under Rule 144A and Regulation S at an annual coupon of 5.625%. All transaction costs to be amortized previously presented net of debt were recognized in the consolidated statement of income for the year ended December 31, 2017, for US$1.9.

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c. On March 9, 2017, Nemak issued Senior Notes on the international market that were listed on Irish Stock Exchange in the amount of €500, through a private offering under Rule 144A and Regulation S. The Senior Notes accrue an annual coupon of 3.25%, maturing in 7 years. The proceeds were mainly used to prepay other financial liabilities with shorter maturity terms.

d. On November 9, 2017, Axtel placed Senior Notes in the international market and on the Irish Stock Exchange under a private offering under Rule 144A and Regulation S in the amount of US$500, gross of issuance costs of US$7. The Senior Notes accrue an annual coupon of 6.375% maturing in 7 years. The proceeds were mainly used to prepay the existing debt, including certain issuance costs and expenses. All transaction costs to be amortized previously presented net of debt were recognized in the consolidated statement of income for the year ended December 31, 2017 for $53.

e. On December 19, 2017, Axtel signed a bilateral credit agreement with HSBC México, for an amount of $5,709 (equivalent to US$300) for five years and a variable interest rate with a margin on the TIIE rate applicable according to the leverage ratio between 1.875% and 3.25%. The resources obtained were used to refinance the remaining debt of the syndicated loan, denominated mainly in dollars.

2016a. On January 15, 2016, Axtel signed a syndicated loan agreement in the amount of US$835 in three parts: Part “A” in pesos (equivalent to US$250) at 3 years and

a variable interest rate with a margin over TIIE rate between 2.00% and 2.50%; part “B” in dollars (US$500) at 5 years and a variable interest rate with a margin on the Libor rate between 2.50% and 3.00%; and part “B” in pesos (equivalent to US$85) at 5 years and a variable interest rate with a margin on the TIIE rate between 2.25% and 2.75%. The use of the funds of this loan was to redeem on February 19, 2016 all senior secured and unsecured notes and to pay other short-term credits.

b. On May 2, 2016, Sigma completed an issuance of Senior Notes denominated in U.S. dollars through a private offering under Rule 144A and Regulation S to qualified institutional investors in the nominal amount of US$1,000, and a maturity date of May 2, 2026. Interest on the Senior Notes is paid semi-annually at an annual interest rate of 4.125% beginning November 2, 2016. The proceeds were entirely used to prepay outstanding debt. The Senior Notes are unconditionally secured.

The Senior Notes can be paid in advance at the Company’s option, total or partially at any time, at an amortization price equal to the greatest of any of the following: (i) 100% of the principal amount; or (ii) the sum of the net present value of each payment of principal and interest payable (excluding interest accrued at the amortization date) discounted at the amortization date half-yearly at a rate equal to the sum of the rate of the US treasury plus 0.45% plus the accrued unpaid interest at the amortization date. In case of a change in the control structure of the Company together with a reduction in the international credit rating under the investment level, the holders of the Senior Notes will have the right to demand from the Company the repurchase of obligations at a price equal to 101% of the principal amount plus unpaid interest accrued.

Finance leases:The finance lease liabilities are effectively guaranteed, as the rights of the leased asset, to be reversed to the lessor in case of default.

The total of future minimum payments of finance leases that include non-accrued interest is analyzed as follows: December 31, 2017 2016

- Less than 1 year $ 515 $ 388- Over 1 year and less than 5 years 788 553- Over 5 years 298 85Total $ 1,601 $ 1,026

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The present value of finance lease liabilities is analyzed as follows: December 31, 2017 2016

- Less than 1 year $ 479 $ 388- Over 1 year and less than 5 years 759 553- Over 5 years 290 85Total $ 1,528 $ 1,026

Note 17 - Income taxesThe Company is subject to income tax, whose rate is 30% in Mexico. The statutory income tax rates applicable to the main foreign subsidiaries were as follows: 2017 2016

Germany 30.0% 30.0%United States (1) 35.0% 35.0%Spain 25.0% 25.0%

(1) On December 22, 2017, the U.S. government enacted substantial changes to its existing tax law (“H.R. 1”, originally known as the “Tax Cuts and Jobs Act”, or the “Act”). Although most provisions of the Act, including the reduction of the corporate tax rate to 21%, are effective beginning on January 1, 2018, IFRS requires entities to recognize the effect of tax law changes in the period of enactment, therefore, the Company recognized the impacts as part of the deferred income tax item in the consolidated statement of income for 2017.

Income tax under tax consolidation regime in MexicoThe Company incurred income tax in a consolidated manner through 2013 with its Mexican subsidiaries. Since the Mexican income tax law in effect through 2013 was repealed, the tax consolidation regime was eliminated. Therefore, Alfa has the obligation to pay long-term deferred tax determined as of that date during the following ten periods beginning in 2014, as shown below.

In accordance with paragraph a) of section XVIII of the ninth transition article of the 2014 Mexican Tax Law, and provided that the Company at December 31, 2013 was acting as the controlling company and was subject, at that date, to the payment system contained in section VI of the fourth article of the transition provisions of the Mexican Income Tax Law published in the federal official gazette on December 7, 2009, or article 70-A of the 2013 Mexican Income Tax Law that was revoked, shall continue paying the tax consolidation deferred tax in fiscal years 2007 and prior years in conformity with the abovementioned provisions, until payment is concluded.

Income tax from deferred tax consolidation at as of December 31, 2017 and 2016 amounts to $2,289 y $2,835, respectively and will be paid off in installments in accordance with the table shown below: Payment year 2021 and 2018 2019 2020 subsequent Total

Tax losses $ 614 $ 700 $ 417 $ 508 $ 2,239Dividends distributed by controlled entities, which do not arise from CUFIN and reinvested CUFIN 49 1 - - 50Total deferred tax consolidation $ 663 $ 701 $ 417 $ 508 $ 2,289

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Optional regime for consolidated groups in Mexico (Incorporation Regime)As a result of the elimination of the tax consolidation regime in Mexico, the Company chose to adopt the new optional regime for consolidated groups beginning in 2014, which consists in grouping companies with specific characteristics and allows for the deferral of part of the income tax payable in three years in March 2018, 2019 and 2020; the deferral percentage is calculated using a factor determined in accordance to the amount of tax profit and losses of the year 2017 and 2016, respectively.

a) Income taxes recognized in the statement of income: 2017 2016

Current tax expense $ (5,698) $ (5,983)Deferred income tax benefit 3,895 1,447Income taxes expense $ (1,803) $ (4,536)

b) The reconciliation between the statutory and effective income tax rates was as follows:

2017 2016

Income before taxes $ 375 $ 9,271Equity in losses of associates recognized through the equity method (92) (115)Income before interest in associates 283 9,156Statutory rate 30% 30%Taxes at statutory rate (85) (2,747)(Add) less tax effect on:Differences based on comprehensive financial cost (782) 283Effect of difference of tax rates and other differences, net (936) (2,072)Total provision for income taxes charged to income $ (1,803) $ (4,536)

Effective rate 637% 50%

c) The detail of deferred income tax asset and liability is as follows: (Asset) liability December 31, 2017 2016

Inventories $ 74 $ 5Prepayments - 110Intangible assets 6,197 6,661Property, plant and equipment 11,997 13,644Provisions (1,087) -Other temporary differences, net (3,307) 1,588Deferred tax liability $ 13,874 $ 22,008

Trade accounts receivable $ - $ 539Inventories 99 -Property, plant and equipment (942) -Intangible assets 994 -Labor liabilities - 330Valuation of derivative instruments 25 167Provisions 978 2,178Tax cost of shares 7,544 6,395Tax loss carryforwards 9,621 14,274Other temporary differences, net 1,198 127Deferred tax assets $ 19,517 $ 23,756

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Deferred income tax assets are recognized on tax loss carryforwards to the extent the realization of the related tax benefit through future tax income is likely.

Tax losses as of December 31, 2017 expire in the following years: Tax losses to Loss year be amortized Expiration year

2008 $ 276 20182009 79 20192010 189 20202011 838 20212012 635 20222013 1,130 20232014 31,465 2024 and laterNo maturity 6,256 $ 40,868

d) The tax charge/(credit) related to comprehensive income is as follows: 2017 2016 Before Tax charged Before Tax charged taxes (credited) After taxes taxes (credited) After taxes

Effect of derivative financial instruments contracted as cash flow hedge $ 231 $ (69) $ 162 $ 598 $ (179) $ 419Remeasurement of employee benefit obligations (130) 39 (91) (115) 34 (81)Translation effect of foreign entities 1,223 - 1,223 16,058 - 16,058Other comprehensive income $ 1,324 $ (30) $ 1,294 $ 16,541 $ (145) $ 16,396

e) Income tax payable consists of the following: December 31, 2017 2016

Current income tax $ 2,074 $ 828Income tax from tax consolidation (regime in effect through 2013) 2,289 2,835Income tax from optional regime for group of entities in Mexico 3,200 3,231Total income tax payable $ 7,563 $ 6,894

Current portion 2,737 $ 1,515Non-current portion 4,826 5,379Total income tax payable $ 7,563 $ 6,894

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Note 18 - Provisions Restructuring Termination and Environmental benefits Disputes demolition (1) (2) remediation(2) and other(2) Total

At January 1, 2016 $ 93 $ 557 $ 317 $ 948 $ 1,915Business acquisitions (1) - - - 326 326Additions 29 132 - 36 197Exchange effects 7 79 8 115 209Cancelation of provisions (2) (6) (190) (29) (124) (349)Payments (8) (115) - (243) (366)At December 31, 2016 115 463 296 1,058 1,932Business acquisitions 31 100 - (43) 88Additions 37 - - 133 170Exchange effects 8 4 - 7 19Cancelation of provisions 7 (118) (43) (414) (568)Payments (21) (178) - (175) (374)At December 31, 2017 $ 177 $ 271 $ 253 $ 566 $ 1,267

(1) This provision comes from Campofrío and its strategic redefinition process to obtain, among others, efficiencies and a higher level of specialization in the production and logistics centers, as well as strengthening existing synergies.

(2) Corresponds to the cancellation of provisions of the telecommunications segment due to a favorable resolution of a litigation related to interconnection rates. 2017 2016

Short-term provisions $ 471 $ 769Long-term provisions 796 1,163As of December 31, $ 1,267 $ 1,932

Note 19 - Other liabilities December 31, 2017 2016

Share-based employee benefits (Note 22) $ 267 $ 318Dividends payable 83 72Deferred credits 419 500Accounts payable - Affiliates (Note 27) 2,000 1,911Total other liabilities $ 2,769 $ 2,801

Current portion $ 2,170 $ 2,103Non-current portion 599 698Total other liabilities $ 2,769 $ 2,801

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Note 20 - Employee benefitsThe valuation of employee benefits for retirement plans is based primarily on their years of service, current age and estimated salary at retirement date.

The Company has establish funds for the payment of retirement benefits through irrevocable trusts.

The employee benefits recognized in the consolidated statement of financial position are shown below: December 31, 2017 2016

CountryMexico $ 2,505 $ 1,948United States 986 1,235Other 1,491 1,319Total $ 4,982 $ 4,502

Below is a summary of the primary financial data of these employee benefits: December 31, 2017 2016

Obligations in the consolidated statement of financial position:Pension benefits $ 4,186 $ 3,754Post-employment medical benefits 796 748Liability recognized in the consolidated statement of financial position $ 4,982 $ 4,502

Charge in the statement of income for:Pension benefits $ (375) $ (432)Post-employment medical benefits (62) (52) $ (437) $ (484)Remeasurements for employee benefit obligations recognized in other comprehensive income for the year $ (91) $ (81)Remeasurements for accrued employee benefit obligations recognized in other comprehensive income $ (399) $ (308)

Post-employment pension and medical benefitsThe Company operates defined benefit pension plans based on employees’ pensionable remuneration and length of service. Most plans are externally funded. Plan assets are held in trusts, foundations or similar entities, governed by local regulations and practice in each country, as is the nature of the relationship between the Company and the respective trustees (or equivalent). The Company operates post-employment medical benefit schemes in Mexico and the United States. The accounting method, assumptions and frequency of the valuations are similar to those used for defined benefits in pension schemes. Most of these plans are not funded.

The amounts recognized in the consolidated statement of financial position are determined as follows: December 31, 2017 2016

Present value of obligations $ 10,563 $ 10,127Fair value of plan assets (6,692) (6,454)Present value of defined benefit obligations 3,871 3,673Liability for defined contributions 1,111 829Liabilities in the consolidated statement of financial position $ 4,982 $ 4,502

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The movement in the defined benefit obligation during the year was as follows: 2017 2016

As of January l $ 10,127 $ 8,766Current service cost 293 362Interest cost 416 375Contributions from plan participants 17 203

Remeasurements:Loss/(gains) for changes in personnel experience 180 153Exchange differences 207 887Benefits paid (645) (617)Acquired in business combinations - 57Curtailments (29) (53)Settlements (3) (6)As of December 31, $ 10,563 $ 10,127

The movement in the fair value of plan assets for the year was as follows: 2017 2016

As of January 1 $ (6,454) $ (5,750)Remeasurements – expected return on plan assets, excluding interest in income (272) (238)Exchange differences (216) (709)Contributions from plan participants (85) (76)Employee contributions (2) (2)Benefits paid 337 321As of December 31, $ (6,692) $ (6,454)

The primary actuarial assumptions were as follows: December 31, 2017 2016

Discount rate MX 7.25% MX7.75%Discount rate US 3.40% US3.89%Inflation rate 3.50% 3.50%Wage increase rate 4.50% 4.50%Future wage increase 3.50% 4.50%Medical inflation rate 6.50% 6.50%

The sensitivity analysis of the discount rate was as follows: Effect on defined benefit obligations Change in Increase Decrease assumptions in assumptions in assumptions

Discount rate +1% Decrease by $629 Increase by $1,115

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Pension benefit assetsPlan assets are comprised of the following: As of December 31, 2017 2016

Equity instruments $ 4,645 $ 3,211Short and long-term fixed-income securities 1,964 3,147 $ 6,609 $ 6,358

Note 21 - Stockholders’ equityAt December 31, 2017 and 2016, the capital stock is variable, with a fixed minimum without withdrawal rights of $211 and $213, respectively, represented by 5,200,000,000 “Class I” Series “A” shares, without par value, fully subscribed and paid. The variable capital entitled to withdrawal will be represented, if issued, by registered “Class II” Series “A” shares without par value.

For the year ended December 31, 2016, the Company did not repurchase shares. During 2017, the Company started a stock repurchase program which was authorized by the Ordinary General Meeting held on February 28, 2017. As of December 31, 2017, the Company repurchased 65,388,980 shares, which were kept in treasury. As of December 31, 2017 and 2016, the Company held 144,888,980 and 79,500,000 treasury shares, respectively, and the market value of the shares was $21.62 and $25.70, respectively.

The profit for the period is subject to the legal provision requiring at least 5% of the profit for each period to be set aside to increase the legal reserve until it reaches an amount equivalent to one fifth of the amount of paid capital. As of December 31, 2017 and 2016, the legal reserve amounted to $60, which is included in retained earnings.

On February 28, 2017, the Ordinary General Stockholders´ Meeting approved the payment of an ordinary cash dividend of US$0.0332 for each of the outstanding shares, equivalent to approximately $3,312. Additionally, on March 4, 2016, the Ordinary General Stockholders´ Meeting approved the payment of an ordinary cash dividend of US$0.03 for each of the outstanding shares, equivalent to approximately $3,043.

In accordance with the Mexican Income Tax Law becoming effective on January 1, 2014, a 10% tax on income generated starting 2014 on dividends paid to foreign residents and Mexican individuals when these correspond to taxable income. It also establishes that for fiscal years 2001 to 2013, the net tax on profits will be determined as established in the Income Tax Law effective in the corresponding fiscal year.

Dividends paid are not subject to income tax if paid from the Net Tax Profit Account (CUFIN). Dividends exceeding CUFIN will cause a tax on the income at the applicable rate for the period in which they are paid. This tax is payable by the Company and may be credited against its income tax in the same year or the following two years or, if applicable, against the flat tax of the period. Dividends paid from profits which have previously paid income tax are not subject to tax withholding or to any additional tax payment. At December 31, 2017, the tax value of the CUFIN and tax value of the Capital Contribution Account (CUCA) amounted to $36,455 ($31,864 in 2016) and $40,767 ($38,182 in 2016), respectively.

In case of capital reduction, the procedures established by the Income Tax Law provide that any surplus of stockholders’ equity be made over the balances of the tax accounts of the capital contributed, the same tax treatment as applicable to the dividends.

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Note 22 - Share-based paymentsAlfa has a compensation scheme referenced to the value of its own shares and the value of the shares of its subsidiaries for senior executives of the Company. According to the terms of the plan, eligible executives will receive a cash payment conditional on the achievement of certain quantitative and qualitative metrics based on the following financial measures:

• Improved share price of the Group

• Improvement in net income

• Permanence of the executives in the Company

The bonus will be paid in cash over five years after the grant date, i.e. 20% each year at the average price of the share at the end of each year. The average price of the shares in 2017 and 2016 was $21.12 and $26.73, respectively. These payments are measured at the fair value of the consideration, so, because they are based on the price of Alfa shares, the measurement is considered to be within level 1 of the fair value hierarchy.

As of December 31, 2017 and 2016, the liability for share-based payments amounted to $267 and $318, respectively.

The short-term and long-term liability is as follows: December 31, 2017 2016

Short term $ 87 $ 120Long term 180 198Total carrying amount $ 267 $ 318

Note 23 - Expenses classified by their natureThe total cost of sales, selling and administrative expenses, classified by nature of the expense, were as follows: 2017 2016

Raw material and service costs $ (172,033) $ (155,104)Maquila (production outsourcing) (8,074) (7,853)Employee benefit expenses (43,416) (39,831)Maintenance (9,860) (9,721)Depreciation and amortization (18,638) (16,947)Freight charges (8,577) (7,268)Advertising expenses (2,438) (2,788)Lease expenses (3,695) (3,337)Consumption of energy and fuel (9,994) (8,367)Travel expenses (1,118) (1,166)Technical assistance, professional fees and administrative services (7,912) (6,095)Other items (11,338) (8,892)Total $ (297,093) $ (267,369)

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Note 24 - Other expenses, net 2017 2016

Gain on sale of assets $ 856 $ 4Gain on sale of shares 732 337Other income 1,588 341

Valuation of derivative financial instruments (192) (251)Impairment of long-lived assets (1) (see Note 11and 12) (8,479) (2,094)Other items (2) (2,256) (216)Other expenses (10,927) (2,561)Total other expenses, net $ (9,339) $ (2,220)

(1) Includes $7,745 of expense for impairment of intangible assets and prepayments recognized by Alpek, arising from the agreement with M&G, see Note 2b.

(2) Includes $2,017 of impairment expense for accounts receivable recognized by Alpek, arising from the agreement with M&G, see Note 2.b.

Note 25 - Financial income and expenses 2017 2016

Financial income: Interest income on short-term bank deposits $ 357 $ 328 Other financial income 655 269 Loss on changes in fair value of derivative financial instruments 22 -Total financial income $ 1,034 $ 597

Financial expenses: Interest expense on bank loans $ (2,966) $ (2,567) Interest expense on debt securities (4,712) (3,475) Interest expense on portfolio sale (375) (267) Financial cost of employee benefits (254) (227) Supplier interest expense (90) (49) Other financial expenses (591) (611)Total financial expenses and other financial expenses $ (8,988) $ (7,196)

Exchange fluctuation (loss) gain, net: Exchange fluctuation gain $ 6,519 $ 11,050 Exchange fluctuation loss (7,783) (18,239)Exchange fluctuation (loss), net: $ (1,264) $ (7,189)

Impairment of financial assets (Note 2b.) $ (1,694) $ (1,270)

Financial result, net $ (10,912) $ (15,058)

Note 26 -Employee benefit expenses 2017 2016

Salaries, wages and benefits $ 37,753 $ 34,658Social security fees 4,497 4,035Employee benefits 772 758Other fees 394 380Total $ 43,416 $ 39,831

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Note 27 - Transactions with related partiesTransactions with related parties during the years ended December 31, 2017 and 2016, which were carried out in terms similar to those of arm’s-length transactions with independent third parties, were as follows: 2017 2016

Sale of goods and services: Affiliates $ 23,914 $ 24,380 Stockholders with significant influence over subsidiaries (1) 1,647 1,344

Purchase of goods and services: Affiliates $ 19,742 $ 10,791 Stockholders with significant influence over subsidiaries (1) 872 418

(1) Includes the effects of the agreements between Alpek and BASF on the polyurethane (PU) businesses.

For the year ended December 31, 2017 and 2016, wages and benefits received by top officials of the Company were $826 and $889, respectively, an amount comprising base salary and legal benefits, supplemented by a variable compensation program primarily based on the results of the Company and the market value of its shares.

At December 31, 2017 and 2016, the balances with related parties were as follows: Nature of the transaction 2017 2016

Receivables: Affiliates Sale of goods $ 2,082 $ 3,379 Affiliates Loans 799 -

Payable: Affiliates Purchase of raw materials $ 1,846 $ 1,911 Affiliates Loans 154 -

Balances payable to related parties at December 31, 2017 are payable in 2018 and do not bear interest.

The Company and its subsidiaries did not have significant transactions with related parties or conflicts of interest to be disclosed.

Note 28 - Financial information by segmentsSegment information is presented consistently with the internal reporting provided to the chief executive officer who is the highest authority in operational decision-making, resource allocation and assessment of operating segment performance.

An operating segment is defined as a component of an entity over which there is separate financial information that is evaluated regularly.

The Company manages and evaluates its operation through five primary operating segments, which are:

- Alpek: This segment operates in the petrochemical and synthetic fibers industry, and its revenues are derived from sales of its main products: polyester, plastics and chemicals.

- Sigma: This segment operates in the refrigerated food sector and its revenues are derived from sales of its main products: deli meats, dairy and other processed foods.

- Nemak: This segment operates in the automotive industry and its revenues are derived from sales of its main product: aluminum engine heads and blocks.

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- Axtel: This segment operates in the telecommunications sector and its revenues are derived from the provision of data transmission services, Internet and long distance phone service.

- Newpek: This segment is dedicated to the exploration and exploitation of natural gas and oil fields.

- Other segments: includes all other companies operating in business services and others which are non-reportable segments and do not meet the quantitative limits in the years presented and, therefore, are presented in aggregate, besides the eliminations of consolidation.

These operating segments are managed and controlled independently because the products and the markets they serve are different. Their activities are performed through various subsidiaries. The transactions between operating segments are performed at market value and the accounting policies with which the financial information by segments is prepared, are consistent with those described in Note 3.

The Company evaluates the performance of each of the operating segments based on income before financial result, income taxes, depreciation and amortization (“EBITDA”), considering that this indicator is a good metric to evaluate operating performance and the ability to meet principal and interest obligations with respect to indebtedness, and the ability to fund capital expenditures and working capital requirements. Nevertheless, EBITDA is not a measure of financial performance under IFRS and should not be considered as an alternative to net income as a measure of operating performance or cash flows as a measure of liquidity.

The Company has defined the Adjusted EBITDA by also adjusting EBITDA by the impacts of asset impairment. Below is the condensed financial information of the operating segments to be reported for the year ended December 31, 2017: Other segments and Alpek Sigma Nemak Axtel Newpek eliminations Total

Statement of incomeIncome by segment $ 98,998 $ 114,222 $ 84,779 $ 15,513 $ 2,036 $ 4,768 $ 320,316Inter-segment income (315) - - (160) - (2,214) (2,689)Income from external customers $ 98,683 $ 114,222 $ 84,779 $ 15,353 $ 2,036 $ 2,554 $ 317,627

Adjusted EBITDA $ 7,483 $ 12,725 $ 13,546 $ 5,451 $ 50 $ (943) $ 38,312Depreciation and amortization (2,635) (3,776) (6,320) (4,034) (560) (1,313) (18,638)Impairment of assets (7,702) (359) (211) (12) (189) (6) (8,479)Operating income (2,854) 8,590 7,015 1,405 (699) (2,262) 11,195Financial result, net (3,410) (4,389) (1,900) (915) 109 (407) (10,912)Equity in results of associates (4) 16 60 - 36 (16) 92Income or loss before taxes $ (6,268) $ 4,217 $ 5,175 $ 490 $ (554) $ (2,685) $ 375

Statement of financial positionInvestment in associates $ 483 $ 1 $ 505 $ - $ 498 $ (33) $ 1,454Other assets 93,295 105,585 96,184 30,754 12,271 19,425 357,514Total assets 93,778 105,586 96,689 30,754 12,769 19,392 358,968Total liabilities 62,114 87,297 58,266 28,261 6,485 24,119 266,542Net assets $ 31,664 $ 18,289 $ 38,423 $ 2,493 $ 6,284 $ (4,727) $ 92,426

Capital investment (Capex) $ (4,431) $ (3,542) $ (8,279) $ (2,192) $ (646) $ (49) $ (19,139)

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For the year ended December 31, 2016 Other segments and Alpek Sigma Nemak Axtel (1) Newpek eliminations Total

Statement of incomeIncome by segment $ 90,192 $ 106,341 $ 79,244 $ 13,744 $ 1,991 $ 5,052 $ 296,564Inter-segment income (295) - - (137) - (2,350) (2,782)Income from external customers $ 89,897 $ 106,341 $ 79,244 $ 13,607 $ 1,991 $ 2,702 $ 293,782

Adjusted EBITDA $ 12,425 $ 12,374 $ 14,850 $ 4,177 $ 199 $ 770 $ 43,255Depreciation and amortization (2,560) (3,494) (5,872) (3,638) (730) (653) (16,947)Impairment of assets (2) (361) (294) (54) (1,413) 30 (2,094)Operating income 9,863 8,519 8,684 485 (1,944) (1,393) 24,414Financial result, net (2,509) (2,757) (1,439) (2,995) (792) (4,566) (15,058)Equity in losses of associates (3) 50 55 5 41 (23) 115Income or loss before taxes $ 7,351 $ 5,812 $ 7,300 $ (2,515) $ (2,695) $ (5,982) $ 9,271

Statement of financial positionInvestment in associates $ 403 $ 899 $ 417 $ - $ 412 $ (20) $ 2,111Other assets 91,097 99,711 91,746 32,167 6,679 25,262 346,452Total assets 91,500 100,670 91,893 32,167 7,091 25,242 348,563Total liabilities $ 49,778 $ 83,713 $ 54,822 $ 29,521 $ 6,044 $ 24,072 $ 247,950Net assets $ 41,722 $ 16,957 $ 37,071 $ 2,646 $ 1,047 $ 1,170 $ 100,613

Capital investment (Capex) $ (5,981) $ (6,298) $ (10,164) $ (3,916) $ (467) $ (539) $ (27,365)

(1) The amounts of Axtel’s segment in 2016 contain the results and the financial situation as of the date of acquisition, see Note 2.h.

Below are the sales to external customers, as well as property, plant and equipment, goodwill and intangible assets by geographic area. Sales to external customers were classified based on their origin: For the year ended December 31, 2017 Sales to Property, external plant and Intangible customers equipment Goodwill assets

Mexico $ 137,376 $ 85,044 $ 8,221 $ 14,246United States 83,851 15,437 46 4,962Canada 4,610 2,453 - 22Central and South America 16,154 4,316 - 222Europe and other countries 75,636 46,392 16,581 13,758Total $ 317,627 $ 153,642 $ 24,848 $ 33,210

For the year ended December 31, 2016 Sales to Property, external plant and Intangible customers equipment Goodwill assets

Mexico $ 129,182 $ 85,258 $ 9,027 $ 15,695United States 71,250 16,637 360 12,723Canada 2,801 2,132 - 28Central and South America 16,761 4,374 - 690Europe and other countries 73,788 41,102 12,104 12,544Total $ 293,782 $ 149,503 $ 21,491 $ 41,680

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Note 29 - Contingencies and commitments:In the normal course of its business, the Company is involved in disputes and litigations. While the results of the disputes cannot be predicted, as of December 31, 2017, the Company does not believe that there are current or threatened actions, claims or legal proceedings against or affecting the Company which, if determined adversely to it, would damage significantly its individual or overall results of operations or financial position.

As of December 31, 2017, the Company and its subsidiaries had the following commitments:

a. As of December 31, 2017 and 2016, the subsidiaries had entered into several agreements with suppliers and customers for the purchase of raw materials used in the production and sale of finished products, respectively. These agreements have a maturity of between one and five years, and generally comprise price adjustment clauses.

b. In September 2007, Indelpro (a subsidiary of Alpek) renewed its agreement with PEMEX Refinación to cover the supply of propylene for the chemical and refining area due in 2018; this contract establishes the obligation to buy the maximum level of production available at a price referenced to market values.

c. Newpek, S. A. de C. V., (“Newpek”) a subsidiary of the Company, won in areas 2 and 3 auctioned on July 12, 2017, corresponding to the third bidding of the Round 2 held by the National Hydrocarbons Commission (“CNH for its acronym in Spanish”). In order to comply with the requirements of the contract for exploration and extraction of hydrocarbons in conventional onshore deposits under the license modality, the Company has granted CNH an indirect investment in Newpek Capital, S. A. of C.V. The latter must maintain a stock capital equal to or greater than US$300 or the shareholding held must equal that amount, which covers the part that corresponds to the Company. The contract establishes that such guarantee will be exercised in the last resort, in a subsidiary way and exclusively to demand compliance with the obligations established in the bidding of the contract, referring to those obligations that have not been paid and/or fulfilled in their entirety.

d. A subsidiary of the Company, Nemak México, S. A. (“Nemak México”) received a tax credit from the Tax Agency of Canada (CRA) for refunds of Tax on Goods and Services (GST) and the Harmonized Tax on Sale (HST) by an approximate total amount including interest of US$82 million. The CRA alleges that Nemak Mexico delivered certain assets in Canada that were subject to GST and HST. Nemak Mexico presented an objection to the CRA arguing that its clients acted as importers in Canada and that the goods were delivered outside that country. As of the date of the financial statements, the result of this claim cannot be predicted, however management considers that it has the arguments to obtain a favorable result.

Note 30 - Subsequent eventsIn preparing the consolidated financial statements the Company has evaluated the events and transactions for recognition or disclosure subsequent to December 31, 2017, and through January 31, 2018 (date of issuance of the consolidated financial statements), and except for the matters mentioned in the following paragraph, no additional significant subsequent events have been identified:

On January 11, 2018, Nemak issued Senior Notes on the Irish Stock Exchange and on the Global Exchange Market in the amount of US$500, through a private offering under Rule 144A and Regulation S. The Senior Notes accrue an annual coupon of 4.750%, maturing in 7 years. The proceeds were mainly used to prepay other financial liabilities with shorter maturity terms.

During January 2018, M&G disposed of US$29 of the guaranteed credit line provided by Alpek, which is described in Note 2b.

Note 31 - Authorization to issue the consolidated financial statementsOn January 31, 2018, the issuance of the accompanying consolidated financial statements was authorized by Álvaro Fernández Garza, Chief Executive Officer, and Ramón A. Leal Chapa, Chief Financial Officer. These consolidated financial statements will be subject to the approval of the Company’s Ordinary Stockholders’ Meeting.

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GLOSSARY

Caprolactam Raw material derived from oil (cyclohexane), used for the production of nylon.

Cloud applicationsBusiness model where applications are accessed through the Internet, and are not physically present in the customer’s facilities.

Data securityA practice that includes techniques, applications, and devices responsible for ensuring availability, integrity and confidentiality of the data of information systems, data and telecommunications networks.

EPSThermoplastic used for insulation and packaging.

Independent Board MemberA Board member who does not own company shares and is not involved in the daytoday management of the company.

Independent Proprietary Board Member A Board member who owns company shares but is not involved in the day-to-day management of the company.

Last-mile accessThe physical link between the location of the customer and the nearest node of Axtel’s telecommunications network.

Network ManagementServices provided by an external supplier to operate, monitor, configure and provide support in case of failure oftelecommunications equipment and their value-added services.

PET (Polyethylene Terephtalate)Plastic resin mostly used to manufacture containers.

PolyesterPlastic resin used to manufacture textile fibers, films and containers.

PolypropylenePropylene derivative used in the production of plastics and fibers, among other products.

PTA (Purified Terephtalic Acid)Raw material used to manufacture polyester

Related Proprietary Board MemberA Board member who owns company shares and is involved in the day-to-day management of the company.

Scale UpsBusiness established with potential of growth.

Starts UpsNew or emerging businesses.

Systems integrationPractice of service which consists in designing and building customized computer solutions, combining and connecting hardware and/or software of one or severalmanufactures products.

Triple playA marketing term for the provisioning, over a single broadband connection for voice, Internet and TV.

Glossary · 2017 ALFA annual report

Investor Relations

Luis Ochoa ReyesVice-President Corporate CommunicationsPhone: +52 (81) 8748 [email protected]

Juan Andrés MartínInvestor Relations ManagerPhone: +52 (81) 8748 [email protected]

Independient Auditor

Mexican Stock ExchangeALFADate listed:August 1978

Latibex (Madrid Stock Exchange)ALFA C/I-s/ADate listed:December 2003

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ALFA, S.A.B. de C.V.Av. Gómez Morín 1111 sur, Col. CarrizalejoSan Pedro Garza García, N.L.C.P. 66254, Mexico

www.alfa.com.mx

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