MANAGEMENT´S DISCUSSION AND ANALYSIS

TO THE BOARD OF DIRECTORS REGARDING THE RESULTS OF THE FISCAL YEAR OF 2019

The consolidated sales of Grupo Carso increased by 6.0% in 2019 to $102.478 billion pesos, that is, $5.838 billion pesos more than in 2018. The three principal subsidiaries of the Group contributed to this performance. Their growth rates were: Infraestructura y Construcción, 26.0%; Comercial and Industrial 3.0% and 2.6%, respectively.

The operating income rose from $11.032 billion in 2018 to $11.453 billion in 2019, an increase of 3.8%. This is explained mainly by the reevaluation of investment properties by $222 million pesos. In 2018, on the other hand, we recognized $373 million from the depreciation of exploration investments in the Colombian oil fields.

Accumulated EBITDA totaled $14.481 billion pesos, increasing by 0.3%. For the calculation of this indicator, the extraordinary items mentioned above were not considered, nor other items that do not imply a cash flow. The corresponding EBITDA margin was 14.1%, compared to 14.9% in the previous year.

The exchange rate variation during 2019, as well as the effects of hedging positions, explain why the comprehensive financing result (IFR) represents an expense of $1.097 billion, which is unfavorable in comparison to the 2018 IFR of $27 million.

The controlling net income was $7.547 billion pesos, decreasing by 17.7% against the income obtained in 2018.

Total debt on 31 December was $12.600 billion pesos, composed basically of the financing for the Samalayuca-Sásabe gas pipeline and the stock market certificate issued in 2018, and it decreases by 4.4% compared to indebtedness at the close of the previous year.

Net indebtedness was $2.741 billion pesos, compared to a net debt of $4.269 billion pesos on 31 December of 2018. The amount of cash and cash equivalents totaled $9.859 billion compared to $8.918 billion on December 31, 2018.

The financial situation of Grupo Carso continues to be healthy, with a twelve-month net debt to EBITDA ratio of 0.19 times, compared to 0.30 in 2018. The Coverage of Interest Index, measured as Interest Paid/EBITDA, was 0.08 times.

Currently, the Company has – since February 17 – an authorized dual bond notes program for $10.0 billion pesos, with an issue for $3.0 billion pesos on March 16, 2018 and one for $3.5 billion pesos on March 13, 2020, both of them with an expiration date of 3 years.

Total Debt

Investments in Fixed Assets

Net Debt/EBITDA 12 months

COMMERCIAL

AND CONSUMER GOODS

GRUPO SANBORNS

In 2019 the sales of the commercial and consumer goods division totaled $53.288 billion pesos, which is $1.533 billion pesos above 2018, an increase of 3.0%.

The income from sales on credit increased by 4.8%, for a total of $3.975 billion, against $3.794 billion recorded in 2018.

Operating income dropped from $5.223 billion in 2018 to $4.699 billion in 2019, a reduction of 10.0%. This was due to the greater weight of technology items, white line products, furniture and decorative items in the mix. Additionally, greater operating and administrative expenses were recorded, associated to wage and salary increases, the opening of iShop stores, improvements to technological platforms, an increase to unrecoverable accounts reserves, and higher electricity bills.

EBITDA decreased by 5.7% from $7.201 billion in 2018 to $6.789 billion pesos en 2019. The EBITDA margin was 12.7%.

Sales

Operating Income

EBITDA

The controlling net income of Grupo Sanborns decreased by 20.9% to $2.949 billion pesos, compared to $3.730 billion pesos in 2018. This was due to the preceding results, as well as to the comprehensive Financing Results, which represented an expense of $377 million, greater than the $32 million expense of the previous year, which showed a profit when lease contracts were converted to national currency.

Grupo Sanborns investments of capital totaled $895 billion pesos, destined mainly to the opening of iShop stores and the remodeling of the Group’s principal formats. On December 31 there were 451 stores in the various formats in operation, with a sales floor area of 1,234,254 square meters.

INDUSTRIAL

AND MANUFACTURING DIVISION

GRUPO CONDUMEX

During 2019 Grupo Condumex sales increased by 2.6% to a total of $31.747 billion pesos, compared to $30.930 billion pesos recorded in the previous year. In Cables we saw a greater demand for telecommunications cables, both domestically as well as abroad, while the Construction Sector experienced a contraction. The Automotive Sector saw growth until the fourth quarter, when it began to feel the effects of the General Motors strike in the United States.

Operating income and EBITDA totaled $3.837 and $4.241 billion pesos, for a reduction of 5.5% and 3.7%, respectively, compared to the 2018 figures. Profitability was affected by variations in the price of copper, higher energy costs, and expenses related to the implementation of additional security measures in logistics and distribution.

In 2019 the net controlling income of Grupo Condumex decreased to the amount of $1.832 billion pesos, compared to $2.747 billion pesos in 2018.

Grupo Condumex’s capital expenditures during the year totaled $450 million pesos, and they were realized mainly for the purpose of maintaining the Group’s industrial plant in good condition and for technological updating.

INFRASTRUCTURE

AND CONSTRUCTION DIVISION

CARSO INFRASTRUCTURE AND CONSTRUCTION

In 2019 the sales of Carso Infraestructura y Construcción increased by 26.0% to the amount of $19.538 billion pesos, compared to $15.504 billion pesos the previous year. This was due mainly to the increase in telecommunications projects, the progress in the construction of the Samalayuca-Sásabe gas pipeline and the construction of various highway projects, both in Mexico and abroad, as well as a greater activity in the drilling of geothermal wells and various works involving oil well services.

A greater profitability in the Fabrication and Services sector for the Chemical and Petroleum Industry, and Infrastructure and Construction in the Pipeline Installation industry was reflected in the operating income and EBITDA during the year, with increases of 28.4% and 21.1%, respectively.

On the controlling net income level, there was an increase of 28.1%, from $1.215 billion pesos in 2018 to $1.557 billion pesos in 2019.

The projects in progress at the end of 2019 include the construction of the Las Varas-Vallarta, Mitla-Tehuantepec highways; the Las Playas corridor in Panama; various real estate projects; the installation services for Telecommunications; the construction of the Samalayuca-Sásabe gas pipeline; the Maloob E-I offshore platforms, and various services and equipment for the petroleum industry.

Sales

Operating Income

EBITDA

ENERGY

DIVISION

CARSO ENERGY

Carso Energy’s sales were $52 million pesos, a reduction of 28.7% due to lower income from the production and sale of oil by our company Tabasco Oil Company (TOC) in Colombia.

Certain expenses were recorded during the year for the various projects in progress in this division, such as hydrocarbons and geothermal works in Mexico, which explain the operating losses and accumulated EBITDA, which were $17 and $9 million pesos, much less than the losses of $507 and $37 million pesos the previous year, and which included the effect of the depreciation of the exploration investments in our fields in Colombia.

The net controlling income of Carso Energy was $633 million, decreasing by 61.3% compared to $1.638 billion pesos in 2018, when the deferred taxes for our operation of gas pipelines in Texas were recognized.

The Waha-Presidio and Waha-San Elizario gas pipelines, both of which are in Texas, U.S.A., and in which we hold a 51% share, reported income and profits during 2019, but they are not consolidated with us and therefore they are not reflected in the operating results of this division but rather in the results of associated companies.

The construction of the Samalayuca-Sásabe gas pipeline, located between the states of Chihuahua and Sonora, continues apace with our permitting of the rights of way, which as of this date is 90% complete. Carso has a 100% share of the project.

The exploration of the two geothermal energy fields in the states of Baja California and Guanajuato, in which Carso holds 70% of the capital was also continued during the year.

The capital expenditures by Carso Energy during 2019 were in the amount of $1.977 billion pesos.

Sales

^{Note: Beginning in 2017, Carso Energy has not reported the income generated by the Jack-Up rig “Independencia I” but rather the income earned by the production and sale of oil through the Tabasco Oil Company. In 2018 Other Expenses in the amount of $373 million pesos in exploration investments in Colombia’s oil fields were recorded.}

Operating income

EBITDA

ASSOCIATED COMPANIES

The principal associated companies in which Grupo Carso has a share are: Elementia (36.5%), a company that manufactures various construction materials, such as cement, copper piping, metal sheets, etc.; GMéxico Transportes (15.14%), a railroad intermodal freight transportation company in Mexico; Trans-Pecos Pipeline, LLC (51%), owner and operator of the Waha-Presidio gas pipeline in Texas. U.S.A..; Comanche Pipeline, LLC (51%), owner and operator of the Waha-San Elizario gas pipeline in Texas, U.S.A., and Inmuebles SROM (14%), a real estate company, owner of commercial strips in Mexico. The Sales and EBITDA of these companies that would proportionately correspond to Grupo Carso are $19.796 and $6.278 billion pesos.

Sincerely,

Mr. Antonio Gómez García
Chief Executive Officer

LOCATION AND FEATURES OF THE GAS PIPELINES

The Waha-Presidio and Waha-San Elizario gas pipelines, located in Texas, U.S.A., have been generating income from the transmission of gas to the Federal Electricity Commission (CFE) since 2017.

Waha-Presidio

- Share owned by Carso Energy: 51.0%
- Length: 238 kilometers and a diameter of 42 inches
- Income in USD from a 25 years contract for the transmission of gas

Waha-San Elizario

- Share owned by Carso Energy: 51.0%
- Length: 313 kms. and a diameter of 42 inches
- Income in USD from a 25 year contract for the transmission of gas

In September of 2015, the CFE selected Carso Electric, a subsidiary of Carso Energy S.A. for the construction and operation of a gas pipeline in the State of Chihuahua, Mexico:

Samalayuca-Sásabe

- Share owned by Carso Energy: 100.0% (Consolidated with Grupo Carso)
- 471 USD was offered as VPN
- Length 624 kms. and a diameter of 36 inches
- Gas transmission contract
- Income in USD for 25 years
- Estimated initiation of operations: 2021