1

Change in Recommendation Change in T.P. Change in Estimates Quarterly Review Other

■ We are initiating coverage of Grupo Lala with a BUY recommendation and a 2015 target price of MP 33.0. After the recent selloff in the market, the stock even trades at a discount to its international peers, notwithstanding

a higher growth rate both at the operating and net level.

■ Lala is Mexico’s leading Dairy company with a dominant market share in milk and significant participation in other segments such as cheese and cream. Operations under two mega brands, Lala and Nutrileche, allow for

significant synergy opportunities going forward.

■ Lala has Mexico’s largest chilled distribution network; operating on the base of 17 plants and 160 distribution centers, Lala’s 7,300 delivery trucks

serve over half a million points of sale. Leverage opportunities are ample.

■ We regard Lala as a solid base for further growth in the Dairy industry. Half of revenues come from a stable and mature segment (milk) and the other half (functional) from share-gaining categories. Moreover, the financial structure enhanced post-IPO awaits expansion opportunities

abroad that should gain traction sooner rather than later.

We are initiating coverage of Lala with a BUY recommendation. We regard Lala as a compelling value opportunity that on top of that, has significant growth potential both via acquisitions and organic expansion, particularly in its functional products portfolio (46% of revenues, 14e). Recent market turmoil has left Lala trading at a significant discount to its peers’ market ratios in spite of exhibiting higher growth rates, while our DCF-driven target does not incorporate the application of the company’s excess cash, which we believe will be put to work sooner rather than later. While the trigger for a better valuation —and stock performance—should be a significant acquisition, current prices offer a short-term opportunity not to be missed.

A number of positive elements support our optimism on Lala, not only company-specific, but also underlying in the industry. The company’s undisputed market leadership in key dairy products should be replicated in other categories, including higher added-value functionals, by leveraging its strong brand positioning with cross-selling possibilities. The product diversification has changed the face of the company in the past ten years thanks to investments in innovation capacity and value-added strategy that are still to bear fruits. Mexico has a favorable frameset owing to the still low per-capita consumption and ample recognition of dairy products as healthy options. Demographic expectations and disposable income projections also bode well for demand outlook, while on a fundamental basis, the country is among the main milk importers in the world and Lala’s long-term relationship with Mexico’s top farmers yields it an advantage in the supply chain side that is difficult to replicate.

Recent acquisition in CA is only the start of expansion. The year-long wait for an acquisition (since the IPO) was just recently concluded with the agreement to buy the assets of Eskimo in Nicaragua, but the size (only +1.5% of sales for Lala) makes this just the first step within the company’s long-awaited boost to its international strategy. We expect more to come in the medium term.

The risk profile we perceive in Lala is low, as the most relevant threats that we identify have to do with external issues that would affect the general economic trends. As a result, shifts in economic conditions —specifically those affecting disposable income—sit at the top of possible concerns, while regulatory changes (not only in price, but also regarding sanitary oversight) are also a notable element that nonetheless seems to have a very low probability. On the other hand, internal issues we regard as relevant are typical execution risks, but we should also note that poor disclosure yields lower-than-desired earnings visibility, while recent management changes (new CFO starting in January) are also noteworthy.

Last Price: P$ 28.35

Price Target 2015: P$ 33.0 16% Return

Figures in millions of pesos

2013 L12m 2014e 2015e LALA High Liquidity

Market Data:

Mkt. Cap (mn) USD 4,838

Firm Value (mn) USD 4,329

3mo. Avg. (mn) USD 4.6

1yr. High—low MP 26.34—MP 34.95

Float 20.7%

Lala vs. IPC (December 2013 = 100)

A solid foundation for an attractive growth story in the making Buy

Equity Research

GRUPO LALA, S.A.B. DE C.V. Food & Beverages

December 22, 2014

Carlos Hermosillo Bernal

Food, Retail, Beverages

chermosillo@actinver.com.mx

+52 (55) 1103 6600 x 4134

José Antonio Cebeira González

Food, Retail, Beverages

jcebeira@actinver.com.mx

+52 (55) 1103 6600 x 1394

Actinver

Corporate Headquarters

Guillermo González Camarena 1200

11th Floor, Centro Ciudad Santa Fe

México, D.F. 01210

Sales 43,156 44,273 44,891 47,739

EBITDA 5,147 5,382 5,473 6,003

Margin 11.9% 12.2% 12.2% 12.6%

Growth YoY 9.1% 6.5% 6.3% 9.7%

Net Profit 2,579 3,234 3,247 3,623

Margin 6.0% 7.3% 7.2% 7.6%

Growth YoY 107.8% 207.3% 25.9% 11.6%

Total Assets 26,333 28,786 29,051 32,918

Cash 8,442 9,944 7,270 9,327

Total Liabilities 6,128 7,795 5,423 5,937

Debt 727 720 87 86

Equity 20,204 20,992 23,628 26,981

Majority 19,930 20,711 23,331 26,684

Multiples

EV/Sales 1.5x 1.4x 1.4x 1.3x

EV/EBITDA 12.2x 11.7x 11.6x 10.2x

P/E 27.2x 21.7x 21.6x 19.4x

ROE 42.7% 26.3% 14.9% 14.3%

ROA 25.0% 17.0% 11.2% 11.1%

Net Debt/ EBITDA (1.5x) (1.4x) (1.3x) (1.5x)

Dividend Yield 3.5% 2.7% 0.0% 1.5%

90

100

110

120

Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14LALA IPC

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CONTENT

Investment thesis…..………..…………….…………………. 3

Positives…………………….…..……………………………………. 3

Negatives…………………….…..………………………………….. 5

Valuation…………………………………………....……………...… 7

Discounted cash flow ……..……………………………………....…. 7

Relative valuation………………………………………...……….…. 8

Financial results…………………..……....……………………….. 9

Financial projections……………………………………………… 10

Industry Overview…………………………………………............. 12

Industry in Mexico…………………….………………….………..… 13

Company description……………………………….…………..... 18

Management and Board of Directors…………..……….………….... 23

Shareholders structure………….…….………………...…………….. 25

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Investment thesis

We are initiating coverage of Lala with a Buy rating based on a TP of MP 32.00 and an implied potential return of 18%, plus an expected 2015 dividend yield in the range of 1.6%. Our target is mostly derived from a DCF exercise, but also implies market ratios that would be trading largely in line to those of similar global companies, while ratios that incorporate growth expectations such as PEG do show an advantageous position, as do the profitability indicators that place Lala as one of the outstanding achievers among its comparable companies’ universe.

Nonetheless, we regard one of the key value drivers for the company will be an eventual acquisition that finally deploys the equity raised a year ago, and by which the company now boasts an inefficient balance sheet on which the market has shown increased concerns as of late. We have not included any assumption regarding acquisitions within our estimates, so any announcement in the coming months could add value beyond our initial valuation presented in this document. While its market leadership position within a mature category such as milk (53% of consolidated sales) does have a limiting effect over aggressive growth expectations, we regard the opportunities in functional dairy products, based both in cross selling and innovation, will lead to higher growth rates than we could normally expect in this industry even before considering the low per-capita milk consumption in Mexico.

Market Leadership. We regard Lala as the market leader in dairy products industry within Mexico, as it commands a leading market share position in several categories such as milk (52%), creams (50%), cheese (34%) and dessert (46%) categories, while it holds the second place in yogurt.(26%). The company markets over 600 SKUs and reaches more than half a million points of sale with its chilled distribution network that includes 161 distribution centers (five located in Guatemala) served by a fleet of 7,300 delivery trucks and 6,100 routes. Production is based on 16 plants located in the central-northern region known as La Laguna —hence the name for the company—, plus one in Guatemala.

Brand positioning. The company has a strong brand positioning in the market anchored in two mega-brands —defined as annual sales over USD 1,000 mn— that rank among Mexico’s top consumer brands: Lala and Nutrileche. Furthermore, Lala has roughly 25 additional brands that also enjoy ample consumer recognition either by themselves or by the fact that these are commonly linked to any of the two aforementioned megabrands, enhancing customer loyalty among other categories. Besides its own brands, the company also markets some products with Nestle branding in Mexico, mostly yogurt, but also cheese, as it reached an agreement in mid-2013 to take over Nestle’s refrigerated food unit. Also, attending the higher-end niches, the company has a license to market some products under the Parmalat brand. Lastly, its operations in Guatemala are based on the Foremost brand that is a traditional name in such country.

Portfolio diversification, innovation capacity and value added strategy. With a broad product portfolio that encompasses not only diverse categories, but also a complete range of price points, the company participates in the entire socioeconomic spectrum and therefore has the ability to capitalize on several growth possibilities, either starting with natural population growth, shifts in economic trends, or even new product categories. The relatively recent establishment of its R&D center offers enhanced ability to adapt current offerings as demand changes according to health and other fashion trends, but also has allowed to a faster implementation of a value-added strategy that has seen functional products increasing their share from 42% of consolidated sales in 2011, to 47% in its latest quarterly report (3Q14).

Low per capita consumption of dairy products in Mexico is set to change. As a developing nation with lower-than-average disposable income among its population, Mexico has comparatively lower consumption levels of dairy products, including an average 125 liters in milk that compare to a 129 average in Latam, but also including a dismal 2.2 kg in cheese that compares to 5.4 in Latam, or 6.6 kg yogurt that contrasts to 10.6 in Latam. As is the case of dairy demand in developed nations, it is to be expected that as long as Mexico’s middle class continues to grow, so will the average consumption patterns of dairy products, and more so looking at the higher value-added spectrum. Mexico has both an encouraging outlook regarding the economic improvement among its population, but also in terms of

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demographics that include a concentration of consumers below 30 years of age. In the next ten years the middle class in Mexico could reach just over 40% of total population, rising from the current levels of just over 30%, meaning at least some 12 million additional people will have an enhanced economic profile that should bolster absolute demand, but also mark a trend towards a higher-quality or value-added product such as functional dairy.

Favorable perception as a healthy product. Besides the positive outlook that derives from Mexico’s economic perspective and demographic composition, it should be stressed that the general perception of dairy products in Mexico is notably positive in health-related terms, contrary to some other countries in which digestive disorders and fat contents are a generalized concern that limit potential consumption of some categories such as milk.

Cross-selling opportunities. The absolute leadership in its milk categories confers Lala the ability to exploit such market advantage and expand it to other categories within its functional products. In fact, this has been the case since the introduction of new categories in recent years, but we believe there is still room for growth in many of such categories. The lead example might be taken from cream, which has a cross selling rate of 75%, meaning that three quarters of customers that buy milk also buy the company’s cream. Assuming an average product basket, that percentage seems fitting to consumers’ consumption habits, yet in categories such as cheese (30% cross selling), yogurt (47%) and drinkable yogurt (49%) there is a potential to either substitute other competing brands, or entice the consumption of products that are considered as secondary in terms of nutritional contribution—this, of course, should come in line to the population’s disposable income improvement.

Extensive chilled distribution network. We regard this as one of the key value elements to Lala, given that even if the UHT process has massively enhanced the average shelf life and quality assurance in a significant portion of its milk products, the vast majority of functional categories have a shorter shelf life and need to be distributed as fast as possible and with the appropriate handling in order to secure that the products’ characteristics remain unaltered and make them a competitive offering for the end consumer. Offering a variety of 600 SKUs to half a million points of sale are easy numbers to remember, yet not so to achieve. Likewise, the coordination of 7,100 delivery trucks running 6,300 routes on the base of 160 distribution centers is no small feat and offers a robust distribution channel that can easily be leveraged in the eventuality of new products/categories entering Lala’s production scope.

Extraordinary cash generation and solid finances. Following the company’s IPO last year, Lala has sustained what we regard as an excessively liquid balance sheet as it continues to explore possible acquisitions—one of the main reasons behind the IPO in the first place—, but has yet to make a significant investment since. At the end of 3Q, the company reported a net cash position of MP 8,758 mn, just over 12% of its market capitalization and nearly one third of total assets. Assuming an average 1.2x capex to depreciation rate in our earnings model, we project a hefty free cash flow generation that will only add to the already massive cash balance at a rate of at least MP 2,000 mn a year, conservatively.

Further avenues for growth. An outright acquisition is the main growth opportunity that the market has been expecting since the IPO, but it has failed to materialize in the past twelve months. However, we believe it is only a matter of time before the company announces news in this front. Notwithstanding, besides this type of growth driver, we should stress that the company has a number of viable options that complement its organic platform and indeed has been actively exploiting some of them; we also expect these to play a significant role in upcoming results, including themes like distribution, product categories, and productivity.

These three areas have each had an impact already, starting with the improvement of what is already an impressive distribution network, but that the company considers a work in progress. The creation or entrance into new product categories has also been a constant theme in the last years for Lala— a trend started in the 90’s—, and helped transform the product range from a basic staple into a broad range of dairy products that serve different needs or requirements, including economic concerns, nutritional factors, and of course

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lifestyle trends. Taking into consideration the chilled distribution network as one of Lala’s core advantages, a natural evolution towards non-dairy chilled products such as cold cuts is a fitting option that management has been actively considering, and we believe a direct incursion starting from a small scale could even be an option here. Finally, productivity has had its biggest leap with the integration of factories in multiproduct clusters the past two decades, but the availability of space and in-house development of product and process enhancements mean there is also room for improvement in this area.

Barriers of Entry. A successful operation in the dairy industry within Mexico poses significant barriers of entry, most notably a chilled distribution network that allows for a fast and efficient delivery of time-sensitive products, while on the other hand the long-time relationship between farmers and dairy companies makes it hard for the suppliers to shift customers, making supply of raw milk a scarce good for would-be entrants to the market, more so if we consider that the country is a net importer.

Main risks

Sensibility to changes in economic conditions and disposable income. Even when dairy products have an outstanding reputation as health-supporting inputs within the Mexican population, eventual changes in consumer confidence, employment rates, salary level and other economic-linked factors that have direct effects over household disposable income usually have an incidence in dairy demand. Lala has a full range of products that fit most relevant price levels, but even so, at the lower segments of the economic pyramid, customers not only trade down, but also cut off completely in some of the higher added-value products that are categorized as functional.

Customary spot price settling for raw milk, its main input. As an industry standard, Lala´s volume and price negotiation over raw milk is usually done with a short-term scope, and dealings with farmers are non-exclusive. The smooth running on the supply side of its key raw material (industry-wide, raw milk is about two-thirds of the cost structure) is largely done on a customary basis and could be subject to disruptions in the event of unexpected changes on the farmers’ side. Changes in the price of key inputs are not easily translated into final-consumer pricing, so unexpected shifts in the costs of some raw materials (or many other inputs, for that matter) could have adverse effects in short term variations in the company’s gross margins.

40% of supplying farmers are related parties. Besides the above-discussed price and volume supply setting scheme, it is worth noting that a significant percentage of supplying farmers are related parties, which could lead to conflicts of interests either among them, or in relation to the company.

Regulatory changes. The company’s products are subject to sanitary regulation that could eventually change, becoming stricter and requiring further quality controls that translate into higher costs, constitute a temporary disruption of supply, or otherwise limit Lala’s ability to conduct business at current levels. Also, a minimal part of the company’s product portfolio has been subject to a calorie-derived excise tax since the start of 2014, yet there is no assurance that this could change adversely in the future, hitting a wider array of products in Lala’s portfolio. Finally, although it has been a long time since price controls were exerted by the government, there is no guarantee that price limitations could be enforced in the eventuality of eroded economics within the country.

High competition. The most significant competition in Mexico consists of large domestic players that have a considerable tradition in the industry, but the market has also some international players of well known brands. Small scale production is in reality not a concern as the very few that do exist focus on self-consumption or have a very limited production capacity. As such, the main competitors have the size and financial backing in order to enforce price-based competition and organize significant marketing campaigns should market conditions turn negative. Enhanced third-party competition looking for increases in market share could have an adverse impact on operating profitability for most, if not all, of the relevant players.

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Poor disclosure. We believe the company’s earnings visibility is hindered by its poor disclosure practices, as it provides limited information regarding its operating results. For an enterprise that sells over 600 SKUs under an umbrella of more than 25 brands and at least six categories, breaking down sales in just two segments (milk & functional) without information about price or volume behavior seems rather insufficient. Cost structure is also undisclosed, so keeping track of potential incidences without a category breakdown is complicated. Likewise, installed capacity is not disclosed on the basis of a variable-output capacity due to the factories’ flexibility, yet some indication of a range would be widely welcome.

Recent management changes. Even though the majority of management has a long trajectory within the company’s operations, the recently announced change of CFO has not been well received by the markets. Mr. Antonio Zamora will leave the company starting January 1st 2015, due to personal reasons, and will be replaced by Gabriel Fernandez, who comes with an impressive CV based on a long-time experience in international consumer companies.

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Valuation

We are initiating coverage of Grupo Lala, with a BUY recommendation and target

price of MP 33.0 per share for 2015E. Our price is based on a discounted cash flow

valuation which assumes a WACC of 8.3%, entirely representative of the company’s cost

of equity and a very low Beta. A standardizing exercise assuming a higher Beta and a

more efficient equity capital structure yields a similar WACC, so we prefer to stick with the

discounting rates that derive from the company ―as is‖, instead of playing with different

scenarios that would yield pretty much the same end results in terms of valuation. It is

worth noting that throughout our projection timeframe we are not assuming the application

of excess cash in a relevant acquisition that should come eventually, so any

announcement in this front would have a net positive impact and add to our price target,

assuming an attractive value and strategic fit is achieved in such acquisition.

At our target price for 2015, Lala would be trading at an EV/EBITDA multiple of 12.1x

for 2015 and a 22.5x P/E ratio, which are largely in line to the average estimates for a

sample of comparable companies.

LALADiscounted Cash Flow Model (2015-2020E)

Millions of Pesos 2015E 2016E 2017E 2018E 2019E 2020E Perp.

EBIT 4,861 5,094 5,359 5,697 6,074 6,195 6,443

Effective Tax rate 31.5% 32.0% 32.0% 32.0% 32.0% 31.9% 31.9%

Tax Effect On EBIT (1,349) (1,486) (1,630) (1,785) (1,963) (1,976) (2,004)

NOPLAT 3,512 3,608 3,729 3,912 4,111 4,219 4,439

Depreciation 1,143 1,249 1,359 1,472 1,587 1,619 1,683

Working Capital Changes (558) (364) (369) (400) (388) (369) (382)

CAPEX (1,390) (1,498) (1,605) (1,710) (1,812) (1,876) (1,927)

FCFE 2,706 2,995 3,113 3,273 3,498 3,593 3,813

Perpetuity Growth Rate 4.0%

Present Value of Explicit Period (2013-2017E) 12,953

Perpetuity Value 88,794

Present Value of Perpetuity Value 59,616

Theoretical Firm Value 72,569

Net Debt (9,241)

Minority Interest 297

Theoretical Market Value 81,513

Number of Shares (Mn) 2,474

Theoretical Price / Share 32.94$

Current Market Price 27.10$

Potential Return 21.6%

Average Cost of Debt 6.3%

Long Term Tax Rate 30.0%

After-Tax Cost of Debt 4.4%

Cost of Capital 8.5%

Market Risk Premium 5.5%

Risk Free Rate + Country Risk 5.5%

Beta 0.55

% Total Debt 5%

% Capital 95%

WACC 8.3%

Source: Actinver

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Relative Valuation

Lala offers a very attractive valuation when compared to its relative peers, which we have

grouped in pure dairy companies on one hand, and refrigerated foods producers on the

other.

The P/E multiple estimated for 2015 at 18.5x trades in line to its peers’ average when we

consider both refrigerated food and pure dairy plays, but it offers a significant discount to

the latter and moreover, when incorporating growth expectations for 2015 the PEG ratio

offers a compelling discount and, save the case of Diamond Foods (seems to be a special

situation), it is the absolute lowest in our sample. In terms of EV/EBITDA Lala also offers a

significant discount to both peer groups.

Name Mkt Cap (M)P/E

current

P/E

2014

P/E

2015

EV/

EBITDA

current

EV/

EBITDA

2014

EV/

EBITDA

2015

P/B ROE ROICPEG

2014

PEG

2015

GRUPO LALA $4,843 21.7 21.6 19.4 11.7 11.6 10.2 3.3 26.3 18.3 0.8 1.7

Average Peers $31,161 21.5 20.9 19.0 12.0 12.5 12.0 4.4 16.2 7.3 2.5 2.3

Dairy $46,215 23.8 21.3 19.6 12.0 12.4 11.8 4.6 19.2 8.1 2.8 2.5

HERSHEY CO $23,185 27.6 26.2 23.6 14.0 15.1 13.2 15.0 57.6 24.3 2.7 2.5

JM SMUCKER CO $10,447 17.9 18.5 17.2 10.3 10.1 10.3 2.0 10.8 0.0 3.6 3.5

J & J SNACK FOODS $2,010 28.1 26.4 24.8 12.3 13.5 12.1 3.6 13.3 11.9 2.6 2.6

NESTLE SA-REG $236,901 24.2 21.3 19.6 N/A 14.6 13.6 4.0 15.8 0.0 3.8 N/A

DANONE $42,622 30.2 20.4 18.4 N/A 12.8 12.2 2.9 9.5 7.8 2.5 N/A

SAPUTO INC $11,481 22.6 21.6 20.0 13.1 15.3 13.4 4.5 20.9 13.0 2.0 1.9

PARMALAT SPA $5,313 21.1 19.8 18.2 N/A 8.0 7.6 1.4 6.5 0.0 N/A N/A

Refrigerated food $13,597 18.4 20.3 18.3 12.1 12.6 12.3 4.2 12.6 6.2 2.3 2.2

GENERAL MILLS INC $31,075 19.6 18.2 16.9 11.4 11.2 11.9 4.4 22.8 0.0 2.6 2.5

KELLOGG CO $22,754 11.4 16.4 15.8 10.8 11.2 11.2 6.7 56.1 8.3 2.7 2.6

MCCORMICK & CO-NON $9,294 21.7 21.4 19.9 14.0 14.5 13.9 4.8 22.5 14.3 2.8 2.7

DIAMOND FOODS INC $840 N/A 25.9 21.0 12.4 13.7 13.1 3.0 -54.6 0.0 0.7 0.7

PINNACLE FOODS INC $4,025 20.9 19.8 17.9 11.7 12.2 11.5 2.3 16.4 8.6 2.5 2.3

Source: Company, Actinver Estimates, Bloomberg.

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Recent Financial Results

Enhanced profitability has been a constant theme in the past few years for Lala, as a

deeper institutionalization and further integration of functional product lines results in an

improved sales mix; for 3Q14, functional products were already 47.0% of total revenues,

up from 44.8% a year before.

However, in the past twelve months revenues have shown a moderate growth rate as

consumption in Mexico has suffered from diminished purchasing power as a consequence

of fiscal changes enacted for 2014. Higher income taxes, the homologation of VAT in

border cities, and excise taxes in sugary drinks and high-calorie food have all produced a

negative impact in the population’s disposable income—it is worth noting that Lala’s

products affected by the excise taxes were minimal. Likewise, the spectacular growth of no

-interest credit card campaigns in recent years seems to have an increased weight in

spending patterns as of late. As a consequence, sales performance has been limited to

advances made mostly on the back of price hikes with what seems to be flat to lower

volumes (no details are provided by the company), while on the other hand higher added

value products do seem to be gaining market share.

It is worth noting that capacity additions will only come in line early in 2015, so most of the

growth expected next year will come from a deeper penetration in functional categories

and only a modest increase in same-base sales. Talking about capacity, the current capex

program that concentrates its efforts in the expansion at the Torreón Complex is expected

to yield results throughout 2015, and has been the most significant portion of the total

investment made since Lala’s IPO. So far in 2014 (3Q), the company has invested over

MP 1,928 mn, a hefty increase when compared to MP 1,232 mn and MP 1,505 mn that

were invested during 2013 and 2012, respectively. As a consequence, Lala has sustained

an outstanding cash balance that, even in the face of an intensive investment program,

has been on average above the MP 9,000 mn mark.

Financial projections

Our estimates for the 2014-2019 period show conservative growth rates and exclude

any possible acquisition, since the eventual contribution of new operations will depend on

the specific product category and geographic market it operates. As such, our estimates

show an increasing cash balance even after incorporating a 33% payout ratio as one of our

key assumptions.

Regarding operations, we expect growth rates between milk and functional categories to

3T13 YoY 4T13 YoY 1T14 YoY 2T14 YoY 3T14 YoY 2012 2013 13/12

Income Statement

Revenues 11,101 10.4% 11,092 6.7% 11,108 6.7% 10,973 4.0% 11,329 2.0% 40,345 43,156 7.0%

Cost of Sales 7,143 9.8% 6,995 4.9% 7,106 5.5% 6,973 3.5% 7,315 2.4% 26,135 27,608 5.6%

Operating Expenses 2,845 11.8% 2,985 10.9% 2,970 10.3% 2,921 2.3% 2,984 4.9% 10,411 11,379 9.3%

Other Income (Expense) 12 37.4% 18 35.6% 32 850.0% 12 11.3% 85 613.6% (50) (44) -11.0%

Operating Profit 1,125 10.9% 1,129 7.3% 1,063 7.7% 1,091 12.3% 1,114 -0.9% 3,849 4,213 9.5%

Margin 10.1% 10.2% 9.6% 9.9% 9.8% 9.5% 9.8%

EBITDA 1,358 10.5% 1,381 7.6% 1,304 7.5% 1,339 0.9% 1,366 0.6% 4,717 5,147 9.1%

Margin 12.2% 12.4% 11.7% 12.2% 12.1% 11.7% 11.9%

Taxes 253 -34.7% 481 -23.2% 352 36.8% 353 -19.7% 381 50.5% 1,961 1,432 -27.0%

Profit from Continuing Operations 907 113.8% 724 28.2% 796 69.8% 843 16.7% 755 -16.7% 1,670 2,821 68.9%

Minority Participation 6 0.8% 12 -37.0% 6 -45.1% 10 33.8% 7 4.7% 34 37 7.6%

Net Profit 900 293.3% 712 50.1% 790 126.1% 832 34.8% 748 -16.9% 1,241 2,579 107.8%

Margin 8.1% 6.4% 7.1% 7.6% 6.6% 3.1% 6.0%

Source: Company, Actinver Estimates.

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have markedly different paths. The first one should only achieve rates that reflect either

population growth or inflation-derived price hikes, making for a CAGR of only 2.2%. On the

other hand, functional products should have significantly better performance as the

company introduces new products and enhances the cross-selling rate, but mostly, as it

rolls out new capacity in 2015. Our expected CAGR for functional products is 8.5%, so

total revenues should have a 5.2% rate. By the end of 2019, our projection assumes

functional products will contribute 53.3% of sales, up from 44.3% reported in 2013.

Margins should advance gradually over the next few years, but we also have taken a

conservative approach in our estimates. The company should be able to improve operating

profitability as functional products make up a higher proportion of total sales, but also as

production facilities improve their efficiency year after year as maintenance capex not only

covers wear and tear, but also as it incorporates up-to-date production technology. On the

other hand we assume the raw milk supply, which makes up most of the cost structure at

roughly two thirds, will hardly be a source of improvement due to the scarcity in the

domestic market.

On the financial front, our estimates point to a growing cash flow generation even after

considering a 33% payout ratio and a 1.3x capex/depreciation rate, which we believe are

both conservative estimates. Under these assumptions, we project a negative net debt to

EBITDA ratio that could grow from -1.3x at the end of 2014, to –2.7x by the end of 2019.

Clearly, the financial front is no concern under the current operating platform, as half of the

company (milk) effectively operates as a cash cow, and the other half (functional products)

is self-funding by a wide margin.

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2012 2013 2014 E 2015 E 2016 E 2017 E 2018 E 2019 E 13/12 14/13 15/14

Income StatementRevenues 40,345 43,156 44,891 47,739 50,143 52,950 55,944 59,290 7.0% 4.0% 6.3%

Cost of Sales 26,135 27,608 28,647 30,417 31,948 33,737 35,588 37,659 5.6% 3.8% 6.2%

Operating Expenses 10,411 11,379 11,936 12,641 13,284 14,038 14,841 15,740 9.3% 4.9% 5.9%

Other Income (Expense) (50) (44) 165 180 183 183 183 183 -11.0% -472.8% 8.9%

Operating Profit 3,849 4,213 4,473 4,861 5,094 5,359 5,697 6,074 9.5% 6.2% 8.7%

Margin 9.5% 9.8% 10.0% 10.2% 10.2% 10.1% 10.2% 10.2%

EBITDA 4,717 5,147 5,473 6,003 6,343 6,718 7,169 7,661 9.1% 6.3% 9.7%

Margin 11.7% 11.9% 12.2% 12.6% 12.6% 12.7% 12.8% 12.9%

Net Financial Expenses (221) 61 277 428 621 911 1,169 1,474 -127.4% 357.4% 54.7%

Financial Income 11 236 340 445 661 931 1,193 1,502 2146.8% 44.2% 30.8%

Interest Gain 49 97 300 445 661 888 1,142 1,442 96.8% 210.4% 48.7%

Financial Expenses 231 175 64 17 40 20 24 28 -24.1% -63.8% -73.2%

Interest Paid 231 175 15 4 4 4 4 5 -24.1% -91.2% -73.7%

Results form JVs 3 (21) 0 0 0 0 0 0 -854.3% -100.7% 3.5%

Profit Before Taxes 3,631 4,253 4,750 5,289 5,716 6,270 6,866 7,548 17.1% 11.7% 11.4%

Taxes 1,961 1,432 1,480 1,666 1,829 2,006 2,197 2,415 -27.0% 3.4% 12.6%

Profit from Continuing Operations 1,670 2,821 3,270 3,623 3,887 4,263 4,669 5,133 68.9% 15.9% 10.8%

Minority Participation 34 37 23 0 0 0 0 0 7.6% -37.6% -100.0%

Net Profit 1,241 2,579 3,247 3,623 3,887 4,263 4,669 5,133 107.8% 25.9% 11.6%

Margin 3.1% 6.0% 7.2% 7.6% 7.8% 8.1% 8.3% 8.7%

Balance SheetTotal Assets 27,251 26,333 29,051 32,918 37,018 41,612 46,637 52,039 -3.4% 10.3% 13.3%

Current Assets 10,466 15,076 15,834 18,640 21,598 24,962 28,665 32,685 44.0% 5.0% 17.7%

Cash & Equivalents 1,028 8,442 7,270 9,327 11,734 14,462 17,485 20,908 721.0% -13.9% 28.3%

Receivables 4,097 2,427 2,894 3,274 3,576 3,921 4,296 4,553 -40.8% 19.2% 13.1%

Other Receivables 2,070 1,326 1,379 1,466 1,540 1,626 1,718 1,821 -35.9% 4.0% 6.3%

Inventories 2,940 2,629 2,885 3,146 3,305 3,490 3,681 3,896 -10.6% 9.7% 9.1%

Long Term Assets 16,784 11,257 13,218 14,279 15,420 16,650 17,971 19,354 -32.9% 17.4% 8.0%

Investment in Associated Companies 149 100 96 96 96 96 96 96 -33.0% -3.4% 0.0%

Property, Plant & Equipment 12,786 9,934 11,555 12,945 14,443 16,047 17,758 19,570 -22.3% 16.3% 12.0%

Total Liabilities 13,621 6,128 5,423 5,937 6,470 7,121 7,821 8,493 -55.0% -11.5% 9.5%

Current Liabilities 8,414 4,197 3,206 3,319 3,440 3,631 3,830 3,950 -50.1% -23.6% 3.5%

Bank Loans (ST) 1,750 646 0 0 0 0 0 0 -63.1% -100.0% n.a.

Debt Securities (ST) 0 0 0 0 0 0 0 0 n.a. n.a. n.a.

Suppliers 3,037 2,261 2,346 2,491 2,617 2,763 2,915 3,085 -25.5% 3.8% 6.2%

Taxes Payable (ST)

Other ST Liabilities

Long Term Liabilities 5,207 1,931 2,217 2,618 3,030 3,490 3,991 4,543 -62.9% 14.8% 18.1%

Bank Loans (LT) 3,063 81 0 0 0 0 0 0 -97.4% -100.0% n.a.

Debt Securities (LT) 0 0 0 0 0 0 0 0 n.a. n.a. n.a.

Consolidated Equity 13,630 20,204 23,628 26,981 30,548 34,491 38,816 43,546 48.2% 16.9% 14.2%

Controlling Interest 13,362 19,930 23,331 26,684 30,251 34,194 38,519 43,249 49.2% 17.1% 14.4%

Minority Equity 268 274 297 297 297 297 297 297 2.4% 8.3% 0.0%

Cash Flow StatementProfit Before Taxes 3,631 4,253 4,750 5,289 5,716 6,270 6,866 7,548 17.1% 11.7% 11.4%

Pre-Tax Cash Flow 4,625 5,539 5,600 6,445 7,001 7,602 8,306 9,099 19.8% 1.1% 15.1%

Working Capital Changes 107 (3,146) (2,960) (1,880) (1,828) (1,973) (2,157) (2,319) -3030.4% -5.9% -36.5%

Cash Flow from Operations 4,733 2,393 2,640 4,565 5,173 5,630 6,150 6,780 -49.4% 10.3% 72.9%

Cash Flow from Investment (1,927) (1,757) (3,234) (1,418) (1,528) (1,642) (1,748) (1,850) -8.8% 84.1% -56.1%

Cash Flow from Financing (3,097) 6,778 (567) (1,076) (1,200) (1,287) (1,411) (1,545) -318.8% -108.4% 89.7%

Net Incr. (Decr.) in Cash and T.I. (291) 7,415 (1,161) 2,072 2,445 2,701 2,991 3,385 -2646.5% -115.7% -278.5%

FX Gain (Loss) in Cash and T.I. (17) (1) (12) (14) (39) 28 33 38 -94.9% 1291.3% 21.7%

Source: Company, Actinver Estimates.

12

Industry analysis

Food & Beverages trade in general, and specifically the case of the Dairy Industry, is

heavily influenced by the most basic macroeconomic factors, mostly economic growth and

income trends, and the evolution of population, in which we should note that not only its

increase per se matters, but also geographic shifts, age groups, education and urban/rural

distribution constitute key determinants for the demand of dairy products. Nonetheless,

another key issue for the industry is the trend of the economic policy decisions among

different countries, the stage of economic evolution of the specific country

(developed/developing), as well as international trade agreements; all these elements play

a major role in the definition of demand, supply, and world trade.

Economic studies point out to population growth as the main demand driver in the dairy

industry, explaining roughly 70% of shifts in demand, while the remainder 30% is attributed

to changes in consumption patterns. A higher purchasing power and per capita

consumption determines that most of the dairy consumption is concentrated in developed

countries, however, the higher growth rate among the population in developing countries

has resulted in an increasing contribution from these in the last decades.

Per-capita consumption in developed countries has exhibited high levels for some time,

limiting demand growth to the rate of population increases, while in the case of emerging

economies demand has shown a better pace as consumers still have room for growth in

their per-capita consumption; as long as economic growth and government programs

continue to foster demand in emerging countries, it is fair to expect that such regions might

continue diminishing the gap to the per-capita level already reached by developed

countries.

A sizable part of worldwide demand is subject to protectionist measures and/or subsidy

programs that limit international trade. Even so, the unbalanced nature of supply/demand

as well as the generalized globalization process have contributed to the expanding

dynamism of international dairy trade. Local protectionist measures have extended

implications for the international trade, as such measures are mostly concentrated in

developed countries that also have the highest demand, but at the same time participate

as relevant players through exports that inherently carry the influence of subsidies (this is a

common occurrence in the Euro Zone).

Forex implications in international trade are also worth noting, as the dairy industry has the

particular fact that transactions are not denominated in US dollars, but instead in New

Zealand dollar and euros. As such, a strengthening US dollar enhances the

competitiveness of European exports, pressuring US-based and US-linked producers.

Shifts in the mix of urban and rural concentration within the population also explain

increases and changes in consumption trends. As the product variety tends to be notably

smaller in rural locations, the evolution towards rural populations seems to increase the

demand for dairy products as a wider variety and better availability are further enhanced by

the entrance of retail chains into the picture. On top of that, within the urban locations the

trend towards healthier products comes into play as products with specific nutritional

characteristics fit to the changes in living style; dairy products with low sugar or fat content,

with added vitamins, fiber, and probiotics are showing consistently higher demand across

the globe, fueling the evolution of the Functional dairy products category.

Production cycles are also an important determinant to international dairy trade, since

there are really only a few countries with exportable production surpluses. While in the

northern hemisphere (key producers: US, Canada, Europe) the high season takes place

13

during spring-summer, the southern hemisphere (key producers: New Zealand, Australia

and Argentina) experiences its low production cycle at the same time. Powdered milk has

taken a buffer role in some countries and within certain specific products—such is the case

of Mexico and the Liconsa milk program run by the government.

Worldwide production hubs. As previously mentioned, the nutritional contribution of dairy

products is a key element that makes milk production a national priority, and as a result

many developed countries exert protectionist measures in favor of their local industry.

Even so, the largest producers that also have protectionist measures, such as the US and

Europe, end up producing significant surpluses that more often than not distort

international prices.

During the past years Europe has consolidated its place as the world’s premier milk

producer, followed by the US in the second place. The leading international trade position

of these two players has been achieved by the conjunction of an industrialized base and a

heavily subsidized framework that results in surplus production. While China and India also

stand out among the major producers, their role in international trade is limited as their

production is not sufficient to cover internal demand. On the other hand, countries that

enjoy favorable weather and infrastructure conditions as determinants for a low-cost

production, such as Australia, New Zealand and Argentina, are also among the major

players in the supply side of international milk trade. Most of milk’s international trade takes

the form of powdered milk due to the convenience of such form factor.

On the other hand, the demand side of international trade is dominated by China due to

the conjunction of its population size and recent economic improvement among the middle

class, and is followed by Indonesia on similar grounds, but also due to a sharply

underdeveloped local industry. Mexico is the third largest importer of powdered milk in the

world, as local production is only sufficient to cover 60% of total consumption. The

Canada2%

Mexico2%

United States19%

Argentina3%

Brazil7%

European Union - 28

30%

Russia6%

Ukraine2%

India13%

China8%

Japan2%

Australia2%

New Zealand4%

Total Production:479 bn Ton

(2014e)

Fluid Milk Production — Major Worldwide Players

Source: USDA.

Fluid Milk Production (MT 000's)

2009 2010 2011 2012 (p) 2013 (f)2014 CAGR

Canada 8,280 8,350 8,400 8,614 8,535 8,450 0.4%

Mexico 10,866 11,033 11,046 11,274 11,255 11,442 1.0%

United States 85,880 87,474 88,978 90,962 91,271 93,375 1.7%

North America 105,026 106,857 108,424 110,850 111,061 113,267 1.5%

Argentina 10,350 10,600 11,470 11,679 11,933 12,112 3.2%

Brazil 28,795 29,948 30,715 31,490 32,380 33,375 3.0%

South America 39,145 40,548 42,185 43,169 44,313 45,487 3.0%

European Union - 28 133,700 135,472 138,220 139,000 140,100 144,000 1.5%

Russia 32,600 31,847 31,646 31,831 30,661 30,500 -1.3%

Ukraine 11,370 10,977 10,804 11,080 11,160 11,220 -0.3%

Former Soviet Union 43,970 42,824 42,450 42,911 41,821 41,720 -1.0%

India 48,160 50,300 53,500 55,500 57,500 60,125 4.5%

China 28,445 29,300 30,700 32,600 34,300 36,000 4.8%

Japan 7,910 7,721 7,474 7,631 7,560 7,580 -0.8%

Asia 36,355 37,021 38,174 40,231 41,860 43,580 3.7%

Australia 9,326 9,327 9,568 9,811 9,400 9,900 1.2%

New Zealand 16,983 17,173 18,965 20,567 20,200 21,450 4.8%

Oceania 26,309 26,500 28,533 30,378 29,600 31,350 3.6%

Total Selected Countries 432,665 439,522 451,486 462,039 466,255 479,529 2.1%

Source: USDA.

14

government’s social program run by Liconsa is the main driver for imports, as its

production runs on powdered milk as a base for vitamin-added liquid products that are

distributed to low income population.

Outlook for international demand. International industry players forecast a steady

increase in demand for the next few years, including an expected expansion of one third

within the next ten years. Demand should be driven by developing countries (mostly Asia,

Latin America and Africa) where population growth, rising wages and urbanization will join

to widen the already common deficit balance of their local dairy industry. Couple that with

the decreasing intensity in per capita consumption for the developed countries, and the

relevance of international trade looks ready to increase consistently in coming years.

Viable markets in developed economies —where consumption already has shown a

declining trend— will rely on added-value products which provide enhanced nutrition,

convenience, flavor, or additional lifestyle benefits in order to sustain consumer appeal.

Many of these new products will incorporate additives (fruit, juice, crereals, coffee, yoghurt

and so on) that might reduce the net milk content per presentation, adding to the possible

surplus in the developed block.

On the other hand, the rising demand in developing economies shall be focused on the

basic end of the spectrum, driving local companies to increase their focus on raw milk

supply that complies with ever-tightening nutritional, sanitary and commercial screening by

government authorities. Many players, as has been the case of Mexico, could focus their

trade efforts in the powdered milk industry as one of the most convenient far-reaching

supply methods, but with the advances in UHT technology, trade of liquid products might

also join the heightened international trade. Whatever the case, a certain fact is that

securing a quality milk supply will be one of the key elements in any dairy company

operating in developing countries; investment/support to farming activities and international

trade collaborations will be common place in coming years.

The Mexican Dairy Industry

Mexico’s Dairy industry has a mixed milk production base owing to the vast differences in

technological, agricultural and socioeconomic conditions among the national territory. Even

so, the dairy industry is the third most important activity within the food industry, in terms of

economic value.

There are five key determinants that shape Mexico’s milk production: the level of

industrialization available, the feeding characteristics, the variety/race of cattle, weather

conditions, and water availability.

—Industrialization. Contrary to intuitive presumptions, the level of industrialization

determines production costs that are directly proportional as feeding costs, general

expenses, depreciation, taxes and financial costs add up and compare to the traditional

production schemes where the main costs relate to labor. The downside to these

traditional methods is that quality assurance is virtually nonexistent, and consistency in

production amounts is irregular, therefore limiting the effective market for this producers to

local consumption in rustic environments. In short, traditional production methods are

cheaper and might even be more profitable, but their reach in terms of product, market and

scalability, is extremely short.

—Feed. While cattle feed takes a primary role in industrialized production schemes and

exposes the industry to variations in international prices of grains, a high quality and

Major Milk Importers *

* Skimmed and Whole Powdered Milk, MT 000’s.

Source: USDA.

2013 2014 Var %

China 854 1,330 55.7%

Indonesia 275 285 3.6%

Mexico 198 210 6.1%

Russia 175 182 4.0%

Philippines 142 151 6.3%

Total 2,108 2,637 25.1%

Source: INEGI's 2010 population survey

0 to 4

10 to 14

20 to 24

30 to 34

40 to 44

50 to 54

60 to 64

70 to 74

80 to 84

Not specified

Mexico's population in 2010

Women

Men

Age

Millions

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

%

Population growth rate (Mexico)

15

controlled feeding structure is a basic element of the quality of the final product. As such,

grains and other cattle feed components take up to two thirds of production costs, while

traditional production usually has less than half its costs linked to feeding.

—Weather and water. Mexico’s diverse geography results in a wide variety of weather

patterns throughout the national territory, which also influences on the availability and

quality of water supply. The country has three well-defined regions: Arid, mostly in the

northern part of the country, Warm in the central area, and Tropical in the southern of the

country.

Even though the physical characteristics of the country benefit the southern part of the

country, in reality if is the central/northern region known as La Laguna that concentrates

most of the domestic production. The northern states of Coahuila, Durango, and

Chihuahua are among the top producing states, along with Jalisco, which is the national

leader.

Production Trends. In the past ten years, domestic milk production has grown at a 1.1%

CAGR, while imports make up for a third of total consumption and have grown at a higher

rate of +2.1% in the past five years, albeit with an extremely irregular trend. The most

important dairy import is powdered milk, given that it is used to complement the

requirements of fluid milk demand, as well as the government-run social supply program

known as Liconsa. Import composition has been altered significantly since 2008, year in

which NAFTA eliminated all tariffs within the region. Roughly three quarters of imports

come from the US as a consequence, and the remaining 25% comes from WTO members

that still are subject to import tariffs.

Domestic production has exhibited an upward trend since the start of the 90’s, following

the liberalization of government-enforced price controls. Before that decade, producers

had limited incentives to increase supply and in fact during the 80’s production even

posted a negative –2.1% CAGR. The longer-term CAGR since the liberalization of price

controls has been higher than the previously-commented 1.1%, and for the 1989-2013

period exhibited a 2.7% rate, which nonetheless is still barely in line to the growth seen in

population numbers.

Mexico — Fluid Milk Production

Source: SAGARPA. Figures in millions of liters.

9,000

9,500

10,000

10,500

11,000

2005 2006 2007 2008 2009 2010 2011 2012 2013

Mexico — Dairy Imports

Source: SAGARPA. Figures in millions of equivalent liters.

3,000

3,500

4,000

4,500

5,000

2005 2006 2007 2008 2009 2010 2011 2012 2013

Mexico — Regional Fluid Milk Production

16

As production is heavily dependent on seasonal cycles and surpluses are commonly

generated during the high season (in Mexico it extends from April to September), the

smaller producers in Mexico have consistently manifested their inability to completely sell

their production surpluses, relying on SAGARPA and LICONSA to dispose of such

amounts. The reason behind this complication is that they lack vertical integration or long-

term supply agreements, while their limited industrialization processes result in products

that lack adequate sanitary controls and barely cover solid-milk requirement contents.

Much of this eventual surplus production ends up in local consumption, or even going to

waste.

Demand Structure in Mexico. Like other developing countries in Asia and South America,

the Mexican population has a generalized positive concept regarding dairy products and

their nutritional properties, but consumption is far behind the average per capita of

developed countries due to income differences and the geographic distribution of the

population (urban/rural). Mexico has an annual consumption of 125 liters per capital, while

the World Health Organization (WHO) recommends at least 182.

In terms of volume, liquid milk is the most demanded variety of dairy products in Mexico

with just over 78% of the total market —worth a total MP 154,600 mn—, while yogurt

(10%) and cheese (7%) constitute the other two largest products and the remainder 5% is

made up of a large number of functional and other high-added-value derivatives. Even if

liquid milk has the lowest average price per weight, this category makes up for 45% of the

dairy market in terms of monetary value, followed by cheese (33%) due to its relatively

higher price.

The liquid milk market in Mexico is dominated by a number of large-scale companies—

including Lala as the absolute leader—, which focus on pasteurized and UHT milk as the

main varieties serving demand. In recent years, producers have shifted their efforts

towards a more ample variety, including the so-called functional categories, in order to

exploit the requirements that in the higher-end of the market tend to copy those seen in

developed economies.

Mexico — Dairy Market, by Value

Source: Euromonitor.

Mexico — Average Values by Category

Source: Euromonitor.

Mexico — Dairy Market, by Volume

Source: Euromonitor.

Milk78%

Cheese7%

Yogurt10%

Other5% 6.9 million

Tonnes

Milk45%

Cheese33%

Yogurt15%

Other7% P$ 154.6 bn

12.8

103.4

32.736.0

0

20

40

60

80

100

Milk Cheese Yogurt Other

Pesos / Kilogram

Mexico — Fluid Milk Production, Price Deregulation

Source: SAGARPA. Figures in millions of liters.

5,000

6,000

7,000

8,000

9,000

10,000

11,000

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

+2.7% CAGR-2.1% CAGR

17

Annual per capita milk consumption in Mexico is around 125 liters, while the recommended

level by the World Health Organization (WHO) is 182 liters. Hence the interest from

Mexico’s government to participate in milk supply programs aimed to the lower

socioeconomic levels of the population.

Lala estimates it has a 50% market share for liquid milk in the modern channel, and that

the number might even be higher in the traditional channel. Roughly 90% of milk trade is

represented by branded offerings that, as Lala, market their products on cardboard and

plastic containers and are mostly pasteurized and UHT milk.

It is important to realize the differences between Pasteurized and UHT milk, as both

coexist in the market but cater different needs and/or tastes. Pasteurization consists in

raising the temperature to 72-75 degrees Celsius for 15-20 seconds before being cooled.

Along with proper cooling, pasteurization produces milk with a longer shelf life; using

proper cold distribution, the life of pasteurized milk may be 5 to 15 days.

On its part, under the UHT process, liquid products are exposed to brief, intense heating to

135-140 degrees Celsius. in a closed system that prevents the product from being

contaminated by airborne microorganisms. The product passes from a heating to a cooling

in rapid succession. Aseptic filling is an integral part of the process because it avoids

contamination. The end result is a product that can be kept for long periods without the

need for preservatives or refrigeration, which is needed only after the product has been

opened.

In the next few years, a steady rise in milk consumption is expected in Mexico as both

demographics and purchasing power should constitute a solid base for further

development of the market. Moreover, the increasing popularity of the added-value

presentations such as flavored milk, vitamin-enriched milk, and even lactose free

variations, are expected to increase their popularity.

In Cheese, on the contrary, Mexico has a very fragmented market that mimics under-

developed economies’ conditions, as the largest part of the market is served by unbranded

bulk offerings produced by small enterprises, while pre-packaged products lag behind but

have a notable presence in the modern retail channel. Lala is also the absolute leader in

the pre-packaged cheese market, with over 31% of market share.

In the case of yogurt, the Mexican market is highly competitive but still is dominated by a

relatively small number of large-scale producers that operate under highly recognized

brands. According to AC Nielsen, Lala is the second player in this category within the

modern channel, with a market share that is close to 20%. At 6.6 kg a year, Mexico’s per

capita yogurt consumption is notably lower than similar economies such as Argentina (19

kg) or Chile (12 kg), and is largely in line to the US at 7.3 kg. In the past few years, yogurt

producers have extended the variety of their offerings towards what is perceived as

healthier, more natural products, so the range of products in this category has grown not

only because of different size and presentations, but also as new subcategories (ie.

Probiotics) have emerged from within.

As in most other dairy products, availability plays a key role in the determination of market

positioning for yogurt, thus shelf space and distribution network are two major elements

that producers tend to stress.

18

Company description

A brief history. The company had its formal origins in the late 40’s through the union of

several dairy farmers that started the Milk Producers Union of Torreon. The region in which

operations were based, La Comarca Lagunera, gave birth to the company’s denomination:

Lala. Just a year after its inception, in 1950 Pasteurizadora Laguna was established and

was followed by Pasteurizadora Nazas in 1956; these two units were to be merged in the

late 70’s. The sixties marked the industrialization of production processes, including

automated milking procedures and cardboard packaging that substituted the traditional

glass containers. This period was followed by an expansion effort that took Lala to an

accelerated geographic coverage during the 70 and 80’s. It was until 1987 that Lala began

production of UHT milk, widening the scope and reach of the company’s basic product as it

liberated the need for a cold distribution network. The 90’s saw the first efforts to diversify

Lala’s product portfolio with the inauguration of its first yogurt plant, also in Torreón.

Later on, further expansion efforts would come via acquisitions that included

Pasteurizadora de Durango in 1992, Leche Queen in 2000, and Latinlac (owner of

Nutrileche) in 2003 followed by Parmalat in 2004. By this time, Lala achieved national

distribution of its products. The first incursion overseas, and the only one to date, was

made in 2008 with the acquisition of Foremost in Guatemala. A major breakthrough was

made in 2009 as the Complejo Industrial Laguna started operations and became the entry

to the cheese market for Lala, at the time it also reinforced its yogurt portfolio. In 2010 Lala

inaugurated its R&D center in order to provide a solid base for new product development,

with the goal to constantly innovate with new presentations, flavors, and even creating new

subcategories within the dairy products’ universe.

Business Focus. Lala processes, sells and distributes milk and added-value dairy

products under an umbrella of well-known commercial brands. Value-added products,

mostly milk derivatives, are segmented with the purpose of serving a wide range of age

and economic levels that virtually encompass the whole population universe in Mexico.

LALA — Market-Leading Brands

19

Lala defines itself as a Food and beverage business with a focus geared towards the

healthy spectrum of its industry. The company operates in the mass market with leading

brands in order to command a top market share position in every major category it

operates; over 50% in milk, over 30% in prepackaged cheese, and more than 20% in

yogurt. Lala prides itself as a innovator in the dairy industry, constantly shifting the variety

of its products, be it in size, presentation, or even in new sub categories, as a differentiator

that allows Lala to capture growth opportunities before its competition.

The company produces and distributes a large number of dairy products under the Lala

and Nutrileche brands, which are regarded as the second and fourth most recognized

consumer-product brands in Mexico, according to market researcher Kantar World Panel.

Nonetheless, Lala has over 25 brands for milk, yogurt, cream, desserts, and juices. Adding

up, Lala produces and sells over 600 SKUs.

Lala’s business model aims to produce and commercialize highest-quality products that

constitute a healthy and nutritional option for a wide spectrum of the socioeconomic

universe, while developing high-recognition brands that are valued by the customer and

are constantly demanded along their lifetime. Lala seeks to operate with a notable level of

efficiency and intends to constantly innovate in order to sustain the industry-leading

position it has reached after more than 64 years since its inception.

Production Facilities. The company operates 17 plants and 160 distribution centers,

which help Lala reach roughly half a million points of sale through 6,100 delivery routes.

Besides the company’s brand strength and focus on innovation, Lala believes that its key

competitive advantages also lie within its distribution network —the largest chilled

distribution network in Mexico— and production capacity per se.

Sixteen of its plants are located in Mexico, and the remaining one in Guatemala. Most

facilities produce Pasteurized Milk, UHT Milk, and flavored beverages, while some others

are dedicated to dairy products and packaging material. Each plant has several production

lines and each of these is capable of producing a large variety of products; as such, the

company does not provide a base figure for its installed capacity.

In the company’s opinion, organic expansion needs could be currently fulfilled within the

existing locations of its plants as space availability is not a constrain; this was just the case

of its Irapuato Plant, which had a capacity increase recently. All of the assets are covered

by comprehensive insurance policies and comply to regulatory requirements, including

business, environment and other supervision.

LALA — Main Production Facilities

Plant Location Product Size (m2) Age

Torreón Pasteurizing Torreón, Coahuila UHT Milk & Beverages 7,132 1949

México Plant México, Distrito Federal Milk & Flavored Beverages 20,500 1967

Cooling and Transport Gomez Palacio, Durango Milk and Cream Collection 23,207 1976

Yogurt Complex Torreón, Coahuila Yogurt, Cream, Desserts 26,320 1992

Guadalajara Plant Guadalajara, Jalisco Milk & Flavored Beverages 29,252 1998

Aguascalientes Plant Aguascalientes, Aguascalientes UHT Milk, Powdered Milk and Cream 110,000 2003

Irapuato Plant Irapuato, Guanajuato Yogurt, Cream and Desserts 99,764 2003

Veracruz Plant Veracruz, Veracruz Milk and Fortified Milk 14,599 2003

Tizayuca Plant Tizayuca, Hidalgo Fortified Milk 31,323 2003

Tecate Plant Tecate, Baja California Milk, Fortified Milk and Flavored beverages 32,271 2006

Cheese Complex Torreón, Coahuila Fresh Cheese, Butter 69,464 2009

UHT Complex Torreón, Coahuila UHT Milk 21,500 2009

Source: Lala.

20

Product range. The aforementioned 600 SKUs that the company produces and distributes

are marketed under a range of leading brands that include a couple of so-called mega-

brands (Lala and Nutrileche, annual sales over a billion dollars). Even if the product variety

is considerable, three key categories make the majority of Lala’s business: Milk, Yogurt

and Cheese.

Milk. The company produces an ample rage of milk types including lower grades that

serve the lower end of the economic spectrum, while in all cases keeping check of their

nutrition and health characteristics. The main brands used in milk are LALA, Nutrileche,

Borden, Mileche, Boreal, Vive, Siluette, Parmalat, Monarca, Shot and Queen.

Yogurt. Lala also produces a vast array of yogurt types and ´presentations that

include classic yogurt, drinkable, light, calcium-fortified, mixed with fruits, fiber-enhanced,

and probiotic. Lala, Break and Biobalance are the mains brands, while Lalacult and Bio4

are specific brands used within the probiotic offering.

Cheese. The company produces and markets pre-packaged cheese of several

popular kinds, including panela, Oaxaca, cottage, manchego, Chihuahua and cream

cheese, while some of these are also produced in a low-fat variety. Branding of cheese

products is mostly carried out under the Lala brand, which is a nationwide brand, while in

the center of the country the company also markets the Los Volcanes brand.

Other Products. Lala offers a complete array of dairy products besides the three

categories mentioned above, even if these make the bulk of the company's income.

Additional products include Cream, Butter, Desserts, Flavored Milk, Child Food, and juices

Production Scheme. Milk is the main raw material to the company’s operations. Lala

obtains its raw milk supply from hundreds of farms located in the region known as La

Laguna, which encompasses the states of Durango, Coahuila, Jalisco and Hidalgo, as the

company believes that farmers in that region have a technological edge over those of other

states in the country. The average daily production per cow in La Laguna is around 30

liters, while the national average is only 12 liters.

LALA — Production and Distribution Facilities

21

Some of the farmers that supply Lala are also shareholders in the company, and, as is

customary in the industry, long term supply contracts are not established with any of the

farmers that usually provide Lala. The company does not own any farm. Raw milk Pricing

is subject to market conditions, largely determined by supply and demand variations. Since

some of its products can be produced using powdered milk, from time to time Lala

produces and imports powdered milk in order to complement its needs; this does not

represent more than 5% of milk input, usually.

Other raw materials such as syrup, artificial flavors, fruits and sugar are usually bought

from a main supplier in order to ensure consistent quality, availability and delivery, but in

any case, Lala has determined alternate suppliers in order to cover any eventuality.

Lala collects the milk with its own refrigerated trucks and transports it to its collection and

production facilities, where milk is stored, pasteurized and processed. The truck fleet

consists of around 300 units with capacities ranging from 15,000 to 50,000 liters per truck

that add up to a total 10 million liter transport capacity. Once processed and packaged,

finished products are transported to the company’s distribution centers and finally

distributed to end retailers.

Pasteurization is a sterilizing process that consists of a 15-second cycle in which

milk is heated to at least 72oC and then homogenized and stored at low

temperatures (4oC). Pasteurized milk has a shelf life of roughly fifteen days, so the

speed of distribution is particularly important in this category.

UHT. On the other hand, UHT milk is pasteurized using a 3-second cycle at 132oC

that is quickly followed by a cooling phase to less than 32oC. UHT eliminates most

microorganisms so that, using an aseptic packaging, shelf life is extended to up to

six months. Having no need to be refrigerated before the product is opened, UHT

continues to gain popularity due to its convenience that fits modern consumer

habits.

Distribution Scheme. Lala has established a nine-zone geographical division in order to

optimize its product distribution. Said zones are North, Northeast, Northwest, Center,

Southeast, Päcific, South Pacific, Occident and Central America. In each of these zones,

the company has one or two pasteurizing plants as anchors, while several distribution

centers are strategically positioned within each zone. Out of its total 161 distribution

centers, only five are located in Guatemala, with most of them throughout Mexico. These

are served by a fleet of 7,300 delivery trucks, which reach over half a million retail delivery

locations. Although the variety of products is the same on a nationwide level, Lala does

offer a varied mix within each zone in order to accommodate different tastes, traditions,

weather and competition.

Dairy products and pasteurized beverages are distributed on a daily basis given their need

for refrigeration, while non-refrigerates products, mostly UHT milk, is delivered twice or

three times a week depending on the specific demand. Third party distributors are used in

a modest amount of Lala’s zones where the company has limited infrastructure, as 94.8%

of its products are directly distributed by the company.

Lala’s products are distributed on a wide array of commercial venues, including mom&pop

stores, convenience stores, self-service supermarkets, price clubs, bakeries, government

agencies and restaurants. The company’s top five clients make up for 40% of total

revenues, and include Sam’s club, Soriana, Bodega Aurrera, WalMart and Oxxo; none of

these accounts individually for more than 10%. The split between the modern and

traditional retail channels is nearly even with 49% of sales generated in the modern trade,

47% in the traditional, and 4% in other channels.

1-Farm

2-Transport to Collection Center

3-Collection Center

4-Transport to production facilities

5-Production Facilities

6-Distribution Centers

7-Retail Channels

Lala — Production Scheme

22

R&D. In 2010 the company set up a new Research and Development center located in

Torreón, in order to speed up the development processes of new products and

complement its existing product lines through their enhancement and redesign. The R&D

center aims to operate with the latest technology and industry knowledge, supported by a

team of biochemical and food technology professionals that are under constant

educational updates and postgraduate programs. Besides the integral design and testing

of products, this area is also responsible for the physical/chemical and ecological analysis,

as well as shelf life studies in order to comply with quality assurance standards.

Brands. While the company markets most of its products under an umbrella of 25 main

brands, it has more than 1,000 registered brands and commercial trademarks among

which Lala and Nutrileche are by far its most important names. These two fall under the

category of mega-brands, meaning annual sales of over USD 1,000 mn under each of

them.

Lala also has a number of intellectual property records in several countries that start with

Mexico, but include Switzerland, several Euro-Area participants, the NAFTA region,

several countries in Latin America, and China. Typically, brand registry has a ten-year

renewable life span.

The company is a licensee of Parmalat, by which Lala extends its reach to cover all

socioeconomic segments of the population. The license comes due in 2019, but is

renewable upon compliance of its initial requirements.

Since August 2013 Lala was awarded a license to produce and distribute a number of

refrigerated products under the Nestle brand, with the aim to expand its products portfolio

and enhance its share of the yogurt and cheese markets. The license initially covers

twenty years (until 2033) and is renewable subject to certain conditions.

.

23

Management and Board of Directors

Board of Directors

Lala currently operates with a seven-member Board of Directors, each being elected on a

yearly basis by the Shareholders Meeting. The company’s by-laws state that al least 25%

of its Boards Members should be independent.

Edurado Tricio Haro, Chairman of the Board. Mr. Tricio is an agronomy zootechnician

engineer. Mr. Tricio graduated from the Instituto Tecnólogico y de Estudios Superiores de

Monterrey. He has served as Chairman of Lala’s board of directors since 2000 and as

board member for more than 25 years. He is also the chairman of the board of directors of

Aeroméxico, and a board member of the following Mexican companies: Grupo Televisa,

Grupo Financiero Banamex, Mexichem, Grupo Industrial Saltillo, and Grupo Porres, and

vice president of the Mexican Council of Businessmen. In addition, he is president of the

Foundation Lala, which provides support to underprivileged youth through social and

feeding programs that meet their basic nutritional needs.

Marcelo Fulgencio Gómez Ganem, Member of the Board. Mr. Gómez is a shareholder

of Lala and member of the Control Trust, he has been a member of the board of directors

since 1975. He studied Physical Sciences at the University of Texas at Austin. He has

been a board member of the Torreón Livestock Farming Association, as well as the

Livestock Farming Union, the Torreón Agriculture and Livestock Farming Chamber, and

the Agricultural Cooperative.

José Manuel Tricio Cerro, Member of the Board. Mr. Tricio is a public accountant,

graduate of Universidad Iberoamericana, Laguna campus. He is a Lala shareholder and

member of the Control Trust, and has been a member of the board of directors since 1997.

Arquímedes Adriano Célis Ordaz, Member of the Board. Mr. Celis is Lala’s lead

director and has more than 37 years of experience in general management, marketing,

sales and operations. He is an industrial engineer. Mr. Celis joined the company in 2001 as

Chief Executive Officer. From 1994 to 2001, he served as CEO of Bachoco, and was in

charge of that company’s initial public offering in 1997. Previously, he was the CEO of

Barcel, a subsidiary of Grupo Bimbo, where he worked for more than 20 years.

Rafael Robles Miaja, Independent Member of the Board. Mr. Robles Miaja is an

attorney and graduate of Escuela Libre de Derecho. He is a founding partner of the law

firm Bufete Robles Miaja. Among other positions, he currently serves as a member of the

board of directors of Barclays Bank México, as secretary of the boards of directors of Bolsa

Mexicana de Valores, Grupo Aeroméxico, and Grupo Aeroportuario del Sureste, and as

assistant secretary of the boards of directors of América Móvil and Teléfonos de México, In

addition, he is involved in several educational and philanthropic organizations.

Juan Pablo del Valle Perochena, Independent Member of the Board. Mr. Del Valle is

an industrial engineer. He launched his professional career at Teléfonos de México, where

he worked for four years. In 2001, he joined Grupo Empresarial Kaluz, where he was in

charge of real estate projects. Since 2003, he has been a member of the board of

Mexichem, and has chaired its executive committee since 2009. He graduated as an

industrial engineer from Universidad Anáhuac and earned a graduate degree from the

Harvard Business School.

Roberto González Guajardo, Independent Member of the Board. Mr. Pablo González

graduated from Escuela Libre de Derecho and holds a Masters in Business Administration

from Stanford University. He is general manager and member of the board of directors of

24

Kimberly-Clark de México, a market company leader of consumer products. He is also a

member of the board of directors of America Movil, Acciones y Valores Banamex, Casa de

Bolsa, Grupo Sanborns, and C Estrategia. Furthermore, he is a member of GE

International México, the international advisory council of The Brookings Institution and the

board of directors of The Conference Board and is a founding partner of Mexicanos

Primeros and Chairman of the board of directors of UNETE in México, D.F., an

organization dedicated to educational improvement.

Juan Carlos Larrinaga Sosa, Secretary of the Board. Mr. Larrinaga is agricultural

zootechnician engineer. Mr. Larrinaga is shareholder and member of the Control Trust.

Since April 2000, Mr. Larrinaga has been the Secretary of the board of directors.

Management Team

Arquímedes Adriano Célis Ordaz, CEO. CV as above.

Gabriel Fernández Ares de Parga, CFO. Mr. Fernández will take over the role of CFO

starting in January 2015, taking over Antonio Zamora Galland, who leaves the company for

personal reasons. Mr. Fernández was until recently VP of Finance at Mars Chocolate

North America, while previously served a similar position in Europe, as well as corporate

finance jobs in Mexico and Latin America. Before that, he worked in several finance-related

positions at P&G México for seven years. Mr. Fernández has a Mechanical Engineering

degree from UNAM, as well as post graduate studies for the same field in MIT.

Ricardo Arista Puigferrat, Chief Tecnology Officer. Mr. Arista has more than 30 years

of international experience at food industry companies, including vast experience in dairy

product manufacturing. He has been CTO since February 2005 and previously held

several executive positions at Grupo Bimbo and Nestlé México. He worked in Nestlé for

over 20 years and was involved, among other matters, in the elaboration of evaporated

milk, condensed milk, UHT milk and powdered milk. He is a chemical engineer, having

earned his degree at UNAM.

Antonio Hernández Astorga, Chief Operating Officer. Mr. Hernández has more than 27

years of experience at Lala. Since 1984 has acted as COO after serving in various other

positions, including Packaging Director, Chief Technology Officer and Production Director.

Mr. Hernández previously worked as Superintendent of Production and Corporate

Technical Advisor at the Continental Group and Technical Expert in the Federal Electricity

Commission. He is a licensed electrical engineer, with a degree in Executive Management

and a master’s degree in Management from ITESM, Laguna campus.

José Luis Chavarría Alarcón, Director of Independent Retailer Sales. Mr. Chavarría

has more than 12 years of experience at Lala, having worked in the purchasing,

transportation, logistics and sales departments. Previously, he was Sales Director in the

México region and additionally led Lala’s SAP system implementation. Mr. Chavarría has

held several executive positions at Bachoco, Equipos Técnicos Profesionales and Grupo

Industrial Bimbo. He is a licensed industrial engineer with a specialty in Electricity and has

a degree in Executive Management.

Alejandro Campomanes Morante, Director of Retail Chain Sales. Mr. Campomanes is

Director of Retail Chain Sales. Previously, he worked for 24 years at PepsiCo Food &

Beverage, primarily at Sabritas, where he served for more than 20 years as National

Director of Retail Chain Sales, achieving very significant growth in his division’s share of

sales. Prior to joining the Company, he worked at Citibank, which he joined after eight

years at American Express, where he held various positions, notably that of Customer

25

Service Director. Mr. Campomanes earned a law degree at Universidad Anáhuac and

holds an MBA from ITAM.

Alejandro Zenteno Sánchez, Director of Human Resources. Prior to Joining Lala, Mr.

Zenteno worked for over 25 years at PepsiCo Food & Beverage, primarily at Sabritas,

KidZania and Alsea. Over the years, he has served as Director of Human Resources for

Sales and Production, Director of Strategic Planning for Human Resources, Corporate

Director of Human Resources, Director of Organizational Development and Training,

Director of Cultural Transformation and Director of Human Resources for México and Latin

America. He has also worked as independent consultant and speaker on human resources

topics. He earned a degree in Psychology from the Universidad Popular Autónoma del

Estado de Puebla and a Master’s in Public Image from the Colegio de la Imagen Pública.

Efraín Tapia Córdova, General Counsel. Mr. Tapia has served as General Counsel since

2008. He has vast experience in mergers and acquisitions, corporate law, contract law and

debt restructuring. Previously, he worked as an attorney at the law firm Loperena Lerch &

Martín del Campo, and as a corporate attorney and M&A specialist at major Mexican

companies. Mr. Tapia also worked as an attorney at Teléfonos de México. He holds a law

degree from Universidad Anáhuac.

Shareholding structure

There is a single share class (B class I), and each of them confers full voting rights to its

owner. Given the large number of shareholders that Lala had even before going public, the

shareholding structure is conformed of three main blocks: A Control Trust, which groups

the majority of pre-IPO shareholders and stands for a 55.0% equity participation. The

Offering Trust is the second most important block, and serves to oversee the participation

of involved shareholders within a possible equity offer, in any case. The Offering Trust

holds a 23.7% equity participation. Finally, public float stands for a 20.6% participation in

the company, with the remaining 0.8%

The company held its IPO on October 2013, and placed a total 511.1 mn shares among

public investors at a price of MP 27.50 per share, which was the top end of the proposed

rage; the green shoe option was fully exercised. The IPO was carried out in Mexico and

the US under the 144A rule, and in other international markets through regulation S.

Total proceeds of MP 14,055 mn raised were earmarked to accelerate the company’s

growth, both organically and through acquisitions. However, up to date the company has

yet to make a major investment and holds a substantial amount of cash in its books

awaiting for investment opportunities.

Lala — Shareholding Structure

Control Trust55.0%

Offering Trust23.6%

Other Minority

0.8%

Float20.7%

Shareholder Shares (mn)

Control Trust 1,361.192

Offering Trust 583.399

Other Minority 18.730

Float 511.111

Source: Lala,.

26

Company’s structure

GRUPO LALA

Comercializadora de Lácteos y Derivados,

S.A. de C.V.

100%

México: Comercializadora de

leche y productos lácteos en México.

Abastecedora de Alimentos de México,

S.A. de C.V.

100%

México: Compañía dedicada a la compra

de leche fluida

Productos Lácteos de Centroamérica, S.A. y

Subsidiarias

100%

INVERSIONES EN NEGOCIOS

CONJUNTOS

Lala Elopak, S.A. de C.V. y Subsidiarias

50.1%

Leche Bell, S.A. de C.V.

50.1%

Bell Servicios, S.A. de C.V.

50.1%

INVERSIONES EN ASOCIADAS

Innovación en Alimentos, S.A. de C.V.

50%

Fundación Grupo Lala, A.C.

60%

27

Equity, Economic, Quantitative and Fixed Income Research Departments

Equity Research

Gustavo Terán Durazo, CFA

Head of EquityResearch (52) 55 1103-6600 x1193 gteran@actinver.com.mx

Senior Analysts

Martín Lara Telecommunications, Media and

Financials (52) 55 1103-6600x1840 mlara@actinver.com.mx

Carlos Hermosillo Bernal Consumption

(52) 55 1103-6600 x4134 chermosillo@actinver.com.mx

Pablo Duarte de León FIBRAs (REITs) (52) 55 1103-6600 x4334 pduarte@actinver.com.mx

Ramón Ortiz Reyes Cement, Construction and Concessions (52) 55 1103-6600 x1835 rortiz@actinver.com.mx

Federico Robinson Bours Carrillo

Energy, Conglomerates, Industrial and Mining

(52) 55 1103-6600 x4127 frobinson@actinver.com.mx

Junior Analysts

Juan Ponce Telecommunications, Media and

Financials (52) 55 1103-6600x1693 jponce@actinver,com.mx

Ana Cecilia González Rodríguez

FIBRAs (REITs) (52) 55 1103-6600x4130 acgonzalezr@actinver.com.mx

Enrique Octavio Camargo Delgado

Energy, Conglomerates, Industrial and Mining

(52) 55 1103-6600x1836 ecamargod@actinver.com.mx

José Antonio Cebeira González

Consumption (52) 55 1103-6600x1394 jcebeira@actinver.com.mx

Economic and Quantitative Research

Ismael Capistrán Bolio Head of Economic and Quantitative

Research

(52) 55 1103-6600 x1487 icapistran@actinver.com.mx

Jaime Ascencio Aguirre Economy and Markets

(52) 55 1103-6600 x793325 jascencio@actinver.com.mx

Santiago Hernández Morales Quantitative Research

(52) 55 1103-6600 x4133 shernandezm@actinver.com.mx

Roberto Ramírez Ramírez Análisis Cuantitativo (52) 55 1103-6600x1672 rramirezr@actinver.com.mx

Roberto Galván González Technical Research

(52) 55 1103 -66000 x5039 rgalvan@actinver.com.mx

Fixed Income Research

Araceli Espinosa Elguea Head of Fixed Income Research (52) 55 1103 -66000 x6641 aespinosae@actinver.com.mx

Jesús Viveros Hernández Fixed Income Research (52) 55 1103 -66000 x6649 jviveros@actinver.com.mx

Mauricio Arellano Sampson Fixed Income Research (52) 55 1103-6600 x4132 marellanos@actinver.com.mx

28

Disclaimer

Guide for recommendations on investment in the companies under coverage included or not, in the Mexican Stock Exchange main Price Index (IPC)

StrongBuywith an extraordinary perspective. According to the analyst, in the next twelve months, the valuations of stock

and/or prospects for the sector are EXTREMELY FAVORABLE

Buy. According to the analyst, in the next twelve months, the stock’s valuation and / or prospects for the sector are VERY

FAVORABLE

Neutral. According to the analyst, in the next twelve months, the valuation of stock and / or sector ARE NEUTRAL OR

FAVORABLE but with a similar perspective to the IPC

Belowmarket. According to the analyst, in the next twelve months, the valuation of stock and / or sector outlook ARE NOT

POSITIVE

Sell. According to the analyst, in the next twelve months, the valuation of stock and / or sector outlook ARE NEGATIVE, or

likely to worsen

In reviewwith positive outlook

In review with negative or unfavorable perspective

ImportantStatements.

a) Of theAnalysts:

―The analysts in charge of producing the Analysis Reports: Jaime Ascencio Aguirre; Mauricio Arellano Sampson; Enrique Octavio Camargo Delgado; Ismael Capistrán Bolio; Pablo Enrique Duarte de León; Araceli Espinosa Elguea; Roberto Galván González; Ana Cecilia González Rodríguez; Carlos Hermosillo Bernal; Santiago Hernández Morales; Martín Roberto Lara Poo; Ramón Ortiz Reyes; Juan Enrique Ponce Luiña; Federico Robinson Bours Carrillo; Gustavo Adolfo Terán Durazo; Jesús Viveros Hernández, declare‖:

1. "All points of view about the issuers under coverage correspond exclusively to the responsible analyst and authentically reflect his vision. All recommendations made by analysts are prepared independently of any institution, including the institution where the services are provided or companies belonging to the same financial or business group. The compensation scheme is not based or related, directly or indirectly, with any specific recommendation and the remunerationis only received from the entity which the analysts provide their services.

2. "None of the analysts with coverage of the issuers mentioned in this report holds any office, position or commission at issuers underhis coverage, or any of the people who are part of the Business Group or consortium to which they belong. They have neither held any position during the twelve months prior to the preparation of this report. "

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4. "Analysts maintain investments subject to their analysis reports on the following issuers: AC, ALFA, ALPEK, ALSEA, AMX,AZTECA, CEMEX, CHDRAUI, FEMSA, FIBRAMQ, FINDEP, FUNO, GENTERA, GFREGIO, GRUMA, ICA, IENOVA, KOF, LAB, LIVEPOL, MEXCHEM, OHLMEX,POCHTEC, TLEVISA,SORIANA, SPORTS, VESTA, WALMEX.

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1. Actinver Casa de Bolsa, S.A. de C.V. GrupoFinanciero Actinver, under any circumstance shall ensure the sense of the recommendations contained in the reports of analysis to ensure future business relationship.

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4. Certain directors and officers of Actinver Casa de Bolsa, SA de C.V. GrupoFinanciero Actinver occupy a similar position at the following issuers: AEROMEX, MASECA, AZTECA, ALSEA, FINN, MAXCOM, SPORTS, FSHOP and FUNO.

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