SIM

Business Context and Reporting Period

Company: GRUPO SIMEC, S.A.B. De C.V. (Grupo Simec)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2007
Accounting Standards: Mexican Financial Reporting Standards (MFRS) with reconciliation to U.S. GAAP.
Business Overview: Grupo Simec is a diversified manufacturer, processor, and distributor of Special Bar Quality (SBQ) steel and structural steel products. Operations are conducted in Mexico, the United States, and Canada through ten facilities. The company is a subsidiary of Industrias CH, S.A.B. de C.V., which holds approximately 84% of the outstanding shares.

Key Financial Metrics (Year Ended Dec 31, 2007)

Note: USD amounts are translated at the rate of Ps. 10.8662 per $1.00 (Dec 31, 2007 rate).

Material Changes vs. Prior Period (2006)

• Revenue: Net sales increased 3% to Ps. 24.1 billion (from Ps. 23.5 billion in 2006). This was driven by a 0.5% increase in shipments (2.69 million tons vs. 2.68 million tons) and a 2% increase in average selling prices.
• Profitability: Gross profit decreased 18% to Ps. 3.6 billion, and Operating Income decreased 28% to Ps. 2.2 billion. The decline was primarily due to a 7% increase in the average cost of raw materials (scrap, iron ore, alloys) and labor costs per ton, which outpaced the 2% increase in selling prices.
• Cost Structure: Direct cost of sales as a percentage of net sales rose to 85% in 2007 from 81% in 2006. This was exacerbated by unexpected stoppages in rolling lines at Guadalajara and Apizaco facilities due to natural gas shortages.
• Financial Income: The company recorded financial income of Ps. 41 million in 2007, a reversal from a financial expense of Ps. 63 million in 2006. This improvement was driven by higher net interest income (Ps. 273 million) due to larger cash balances following a capital increase in February 2007.
• Capital Expenditures: Capital expenditures totaled Ps. 486 million in 2007, compared to Ps. 417 million in 2006.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Guidance

• Capital Expenditures: Estimated capital expenditures for 2008 are projected at approximately $31.8 million (Ps. 346 million), with the majority allocated to Republic facilities in the U.S.
• Liquidity: Management believes existing cash, cash equivalents, and operating cash flow will be sufficient to meet requirements for the next 12 months.

Material Risks

• Raw Material Costs: Significant exposure to fluctuations in scrap metal, iron ore, and energy prices. The company may not be able to pass these costs to customers immediately.
• Customer Concentration: Sales in the U.S. are concentrated; the ten largest U.S. customers accounted for approximately 30% of total consolidated revenues in 2007. U.S. Steel alone accounted for 7% of consolidated revenues.
• Automotive Industry Dependence: Approximately 30% of total net sales are to the automotive industry. A downturn in vehicle manufacturing would adversely affect results.
• Environmental Liabilities: Ongoing remediation costs at U.S. facilities (specifically Pacific Steel in California) and potential future compliance costs.
• Integration Risks: Risks associated with integrating the 2008 acquisition of Corporación Aceros DM (Grupo San).

Unusual Items and Subsequent Events

• Acquisition of Grupo San: On May 30, 2008, the company consummated the acquisition of 100% of Grupo San for approximately $850 million. This was financed through a $120 million loan, a $112.5 million capital contribution from Industrias CH, and cash reserves.
• Public Offering: In February 2007, the company completed a public offering of ADSs and Series B shares, raising approximately $214 million.
• Derivatives: The company decided not to continue natural gas hedging for Mexican facilities as of December 31, 2007, due to market conditions.

Investor Verification Checklist

• Raw Material Pass-Through: Verify the company's ability to pass increased scrap and energy costs to customers in 2008, given the margin compression seen in 2007.
• Grupo San Integration: Assess the financial impact and integration progress of the $850 million Grupo San acquisition consummated in May 2008.
• Environmental Reserves: Review the adequacy of the $2.5 million (Ps. 27 million) reserve for environmental liabilities at U.S. facilities, particularly regarding the Pacific Steel remediation.
• Customer Concentration: Monitor the stability of relationships with top U.S. customers, specifically U.S. Steel, which represents a significant portion of U.S. revenue.
• Debt Covenants: Confirm compliance with the fixed charge coverage ratio covenants under the Republic GE Capital credit facility ($150 million revolver).
• Accounting Standards: Note the differences between MFRS (which includes inflation restatement) and U.S. GAAP when comparing metrics to U.S. peers.