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LALAB.MX - Q2 2016 Grupo LALA SAB de CV Earnings Call


EVENT DATE/TIME: JULY 26, 2016 / 3:00PM GMT

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JULY 26, 2016 / 3:00PM, LALAB.MX - Q2 2016 Grupo LALA SAB de CV Earnings Call
CORPORATE PARTICIPANTS
Enrique Gonzalez Grupo LALAS AB de CV - Head of IR
Scot Rank Grupo LALA SAB de CV - CEO

CONFERENCE CALL PARTICIPANTS


Lauren Torres UBS - Analyst
Antonio Gonzalez Credit Suisse - Analyst
Pedro Leduc J.P. Morgan - Analyst
Luis Miranda Santander - Analyst
Jeronimo De Guzman Morgan Stanley - Analyst
Luca Cipiccia Goldman Sachs - Analyst
Benjamin Theurer Barclays - Analyst

PRESENTATION
Operator
Good afternoon. My name is Matt and I will be your conference call operator today. At this time, I'd like to welcome everyone to Grupo LALA's
second-quarter 2016 results conference call. (Operator Instructions) Later we will conduct a question-and-answer session.
I'll now turn the call over to your host for today, Mr. Enrique Gonzalez, Grupo LALA's Head Investor Relations. Please go ahead, sir.

Enrique Gonzalez - Grupo LALAS AB de CV - Head of IR


Thank you for joining our call today. This is Enrique Gonzalez, Grupo LALA's Head of Investor Relations. Yesterday we issued our earnings press
release after market close. It can be downloaded at the Investor section of Grupo LALA's website. This review is been available via webcast accessible
from LALA's website. For those of you listening via telephone also wish to view the slide presentation, please click on the listen by phone (inaudible)
tab on the Media Player window.
I would like to remind you that for everyone who was not able to connect in the slide presentation, there will be a replay service once the slide
session is finished. Next it will be available at LALA's web page where information can be found on our earnings release documents.
Before we get started, I would like to remind you that this call contains forward-looking statements. Forward-looking statements are subject to
future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements should
be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the Mexican
Bolsa.
On our call today is Scot Rank, Grupo LALA's CEO. Following Scot's remarks, I will give further detail about the quarter results and financial position,
and then we will open the line for taking your questions. With that, I would like to turn the call over to Mr. Scot Rank. Scot, please go ahead.

Scot Rank - Grupo LALA SAB de CV - CEO


Thanks Enrique. Good morning everyone and thank you for joining us today. We will start on slide 3. During the first half of the year, the Mexican
economy continued to grow moderately. On the positive side, wages are growing at roughly 4%. Overall inflation is between 2% and 3% and is

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JULY 26, 2016 / 3:00PM, LALAB.MX - Q2 2016 Grupo LALA SAB de CV Earnings Call
yet to reflect the impact of the Mexican peso's devaluation versus the US dollar. And remittances continue to grow double-digit helping support
consumption in lower income households.
Headwinds for the second half of the year include softness in consumer confidence, and the ongoing devaluation of the Mexican peso which will
force producers to eventually raise prices faster than we have seen to-date. The current macro environment will not significantly modify our strategy
for 2016 and we will continue execute our investment and commercial plans as scheduled for operations in Mexico, Central America, and the US.
On slide 4, I want to highlight the strong top-line growth achieved in the quarter which was led by organic sales growth in Mexico. Revenues for
the quarter reached MXN12.9 billion increasing 8.9% year on year. The sales drivers during the quarter were attributed to a 7.4% increase in ongoing
operations including pricing action, and 1.5 percentage points from the acquisition of La Perfecta in late January of this year.
New production capacity in Mexico and Central America is coming on line and this helps support growth across all of our product segments. Higher
value other diary products continue to drive sales and gross margin, and this segment that includes products like yogurt, cream, and butter posted
a 12.4% growth year on year.
The milk category also continues to deliver strong performance and grew slightly above our goal of 4% to 6%. The beverage and other segment
includes very solid performance from our plant-based beverages, packaging and [raw] milk sales for third parties, and the juice business from the
acquisition of La Perfecta in Nicaragua.
Next quarter we will be disclosing sales by region which will include operations in Mexico as one region and international operations at the other
region. This will help investors track the progress of our business outside of Mexico.
Continuing on to slide 5, in addition to another strong quarter in sales, LALA achieved important margin expansion led by favorable product mix,
SG&A savings and operating efficiencies. These positive effects were partially offset by foreign exchange pressure on LALA's gross margin.
Second-quarter EBITDA reached MXN1.9 billion, 12.9% increase year on year. This growth is in line with our expectations of growing EBITDA above
sales.
Quarterly net income increased by 10.1% to close at MXN1.1 billion. This was again primarily due to LALA's quarterly operating income expansion
and to the profit achieved in the all-in cost of finance.
Moving on to slide 6, I want to recap on the four strategic priorities announced for 2016 -- accelerating organic growth in Mexico, developing
internal capabilities, expanding and consolidating Central America operations, and M&A and alliance.
On slide 7 regarding our first-track strategic priority, I want to take a moment to present an example of our capability to use disruptive innovation
to drive organic sales growth. This is an untrimmed product with packaging innovation named LALA 100, a premium milk produced with a new
patent-pending nano and ultra filtration technology developed by LALA, and an aseptic manufacturing process that uses clear PET packaging. The
result is a milk with enhanced nutritional performance and a great taste, a longer shelf-life, and a clear bottle that gives the sense of a vintage glass
milk bottle.
LALA's nano and ultra-filtration technology is used to concentrate the protein and calcium naturally found in LALA milk, and remove the lactose
sugar molecules that affect lactose-intolerant consumers. With this new production process, we create a milk with 70% more protein, 30% more
calcium, and 30% less carbohydrates, and 100% lactose-free. The difference versus other filtered milks with higher protein and calcium found in
other countries is that LALA 100 also tastes great.
The difference versus traditional lactose-free milk is that LALA 100 tastes like regular pasteurized milk, whereas the traditional lactose-free milks
are typically sweeter. LALA 100 is being rolled out to major food-store chains and comes in two high-protein presentations, and two presentations
that are only lactose-free. Each version comes in a family and single-serve sizes and the product has a 45-day refrigerator shelf life until opened.
LALA 100 is priced roughly 20% higher than a lactose-free milk.

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JULY 26, 2016 / 3:00PM, LALAB.MX - Q2 2016 Grupo LALA SAB de CV Earnings Call
Another important driver to improve organic sales in Mexico is through a better go-to-market execution. As shown on slide 8, in early June we
launched the second year of the SUMA TAPAS promotion, a national consumer promotion that brings excitement to the fresh milk category and
extends the reach of other less-penetrated product categories. To support these national initiatives, the implementation of hand-held devices and
smartphones across 4,800 distribution routes has been a key point for the success of the promotion, helping enhancement of selling procedures
in both traditional and modern trade channels. These initiatives towards product development and R&D capabilities along with world-class
go-to-market execution and marketing efforts will be important drivers to keep accelerating organic growth in Mexico.
Turning to slide 9, and LALA Group made important efforts to support operating efficiency gains by developing our internal capabilities. For the
past 12 months, there have been investments focused on significant upstream and downstream process improvement, infrastructure and
organizational capability projects. These efforts and investments can be summarized in the projects listed on the slide. First strategic procurement,
the ARIBA software implementation phase is over and now we are fine-tuning this technology for LALA's operational needs.
Second, sales and operation planning, improving customer services has been the focus of this project and we continue with implementation
process and expected to have -- get ready by the end of this year. Third LALA shared services model; we want to improve administrative controls
and reduce expenses with this shared service model. The site location has already been defined to operate in Northern Mexico, and we expect to
start the construction phase soon.
Finally, SAP software update; the ERP software is what makes our national and international operation possible, so we decided to update the SAP
software to meet recent management needs.
In this line of developing internal capabilities, CapEx investments are essential. As shown on slide 10, for the first six months for the year the
investment activity including PP&E acquisitions and major maintenance reached MXN1.8 billion. The main CapEx allocation has been invested to
increase production capacity by roughly 22% in Mexico and Central America to meet LALA's sales objectives. These capacity investments are
targeted towards innovative products and improved manufacturing efficiencies. If you want further detail about these investments, on LALA's
webpage you will find a three-minute video regarding 2016 total CapEx investments.
Moving to slide 11, our third strategic priority is to expand and consolidate Central America operations. On July 6, we announced the strategic
agreement signed with the Costa Rican company Florida Bebidas. This agreement will provide LALA with access to a platform to strengthen its
regional presence. Once the transaction is completed, we will begin operations in Costa Rica with a capacity to manufacture, distribute, and sell
LALA products in one of the biggest Central American dairy markets. In addition to these capacities, the agreement contemplates an exclusive
relationship with regional forming cooperative Coopeleche to have raw milk supplier assurance, something essential for any diary operation. As
this project unfolds, we will keep you updated.
The Central American agreement is also a part of the fourth and last strategic priority, M&A and alliances. Continuing on slide 12, as part of LALA's
M&A efforts, at the end of May we announced the acquisition of LALA branded products, the US operation of value-added diary products which
was spun-off from LALA back in June 2013. This acquisition is an important piece of our international expansion, and it gives us the unique
opportunity to enter the biggest diary market in the world with a right platform to compete in high-value diary categories and expand the operations
in (inaudible) in each businesses.
The three production facilities plus the five brands as well as the talented and experienced management team that we obtained from this acquisition
in addition to the expertise of LALA for building brands to grow businesses will create the right formula to enter the US market. I want to emphasize
the mid-term opportunity that we see in the US market that was not part of the initial evaluation for acquiring this business, the Hispanic consumer,
the fastest-growing group within the US population. The Hispanic consumer has an important spending capacity and we see it with significant
potential for the production and sale of typical Mexican LALA products.
We expect to complete the integration process by August 1st, and begin to consolidate the operation within Grupo LALA results in Q3.
With that I will pass the call over to Enrique, who will be providing further details about the results and financial position of Grupo LALA during the
second quarter. Thank you again. Enrique, please go ahead.
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JULY 26, 2016 / 3:00PM, LALAB.MX - Q2 2016 Grupo LALA SAB de CV Earnings Call

Enrique Gonzalez - Grupo LALAS AB de CV - Head of IR


Thank you Scot, and good morning everyone. LALA had another quarter of solid performance which is an endorsement of our efforts to grow sales
and improve efficiencies across the business. As Scot mentioned, we continue to make progress on our strategic priorities and are encouraged by
the results achieved during the first half of the year.
I would like to begin by reviewing the drivers behind the solid second quarter P&L results released yesterday. Turning to slide 13, revenues for the
quarter reached MXN12.9 billion, increasing by 8.9% year on year. Inorganic growth from the acquisition of La Perfecta added 1.5 percentage points
to serve this quarter, and the remaining 7.4 percentage points came from organic growth as a result of the different commercial and sales strategy
as well as innovation efforts achieved during the quarter.
Gross margin in the second quarter reached 39.1%, a 60 basis points year-on-year contraction in comparison with the same period of last year.
Gross margin contraction was the result of (inaudible) exposure that our (inaudible) during the quarter. Expenses in the second quarter is below
sales, reaching 27.4% of sales. This is a result of the different savings and efficiencies achieved in the sales and administrative expenses line as part
of our efforts to develop the internal capabilities that Scot mentioned today.
The operating margin expansion was offset by the contraction in the gross margin resulting in a 50 basis point increase in LALA's second quarter
EBITDA margin reaching MXN1.9 billion, a 12.9% growth year on year. Quarterly net income increased by 10.1% to close at MXN1.1 billion. This
was primarily due to LALA's operating income expansion for the quarter, and to the profit achieved in the cost of financing line as a result of the
increased cash position we have maintained over the past 12 months and the exchange rate profit obtained from the hedging operation implemented
during the quarter.
On slide 14, we continue to see a healthy balance sheet. As of end of June 2016, Grupo LALA presented a negative net debt. This (inaudible) position
the Company to continue taking advantage of potential M&A opportunities that may arise (inaudible) to products. Our cash position at the end of
June stands at MXN8.8 billion. Our fixed assets increased from MXN12.9 billion to MXN14.6 billion reflecting our investment in technology,
distribution, and manufacturing.
For the past 12 months, LALA's net cash from operation reached MXN6.1 billion as shown on slide 15. The operating net cash flow is a result of
improved operating income plus depreciation and subtracting paid taxes, as well as changes in our financing expenses and reduction in working
capital. LALA's net cash from operations has consistently increased year on year demonstrating our focus on improving LALA's working capital
structure.
As announced on February 10th, the 12th installment of the cash dividend will be paid on August 25th on line with the released press schedule.
With that, I would like to turn the call over to the operator and open the line for Q&A session. Operator, please go ahead.

QUESTIONS AND ANSWERS


Operator
Thank you. At this time we will be starting a question-and-answer session. (Operator Instructions) Lauren Torres, UBS.

Lauren Torres - UBS - Analyst


Scot, from your prepared comments, it does appear that you're a bit more cautious with respect to Mexico going in the second half and we have
seen some good coupling for the first half. So just curious how you're thinking about the components of growing the top line going into the second

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JULY 26, 2016 / 3:00PM, LALAB.MX - Q2 2016 Grupo LALA SAB de CV Earnings Call
half? I guess you've been a bit less aggressive on pricing, but volume and mix have been positive. As a result of the environment, will you be more
aggressive on pricing or how should we think about the component of top-line growth second half?
And I guess on a related note seeing gross margin pressure in the second quarter on the FX impacts, how should we think about managing that?
I mean, I know you don't really hedge your commodities, but you hedge currency, so are there ways to better manage your gross margin line in
the second half in light of the pressure that you're seeing?

Scot Rank - Grupo LALA SAB de CV - CEO


Sure, Lauren, thank you for the question. Looking forward on one hand I guess we're not assuming that the consumption will accelerate. I think
we're being cautiously optimistic with our outlook on consumption, and our expectation is to continue to grow sales, grow via the innovation and
better go-to-market execution. We're satisfied with the result in the second quarter. We've been gradually growing organic growth in Mexico over
the past few quarters and we see some good things coming online for Mexico related like I said to innovation and better go-to-market execution.
So we're fairly optimistic regarding top-line growth in -- for the rest of the year. Regarding gross margin, we are going to have to take a hard look
at our pricing, we're going to have to take a hard look at some of our cost of goods. We do have some good initiatives coming on line in the strategic
souring program that I mentioned when I had some references to our internal capabilities that are going to help us to continue to offset as we've
been able to do for the past year-and-a-half or so some of the effects of devaluation, but maybe not all of them. So we will be taking a hard look
at pricing in some lines, but I think we expect to see a good, solid, healthy increase in top-line results from a nice combination of volume, pricing,
and favorable product mix.

Lauren Torres - UBS - Analyst


Okay. And just like a follow-up on that, I assume you don't want to give too much on the price side, but I'm just curious with the environment that
you're seeing in Mexico and being somewhat cautious on the pricing front first half of the year, I guess by being selective you're saying that there
could be opportunities for certain categories. Am I hearing that correct?

Scot Rank - Grupo LALA SAB de CV - CEO


That's correct.

Lauren Torres - UBS - Analyst


Okay. All right. Thank you.

Scot Rank - Grupo LALA SAB de CV - CEO


Thanks.

Operator
Antonio Gonzalez, Credit Suisse.

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JULY 26, 2016 / 3:00PM, LALAB.MX - Q2 2016 Grupo LALA SAB de CV Earnings Call
Antonio Gonzalez - Credit Suisse - Analyst
Congratulations on the result and thanks for taking my question. Just two quick follow-ups. The first one, you mentioned on the press release the
buildup of inventories to increase storage and protect yourselves from some raw material pressure in the future. Would you be able to share with
us how far out in time would these storage strategy help you and what kind of benefit in cost would you expect from this strategy? That's the first
one.
And then secondly, related to the previous question on top-line growth, do you feel comfortable quantifying at this stage how much do you think
top-line growth in milk in particular can accelerate after the improvement in sales and operational planning that you've referred to also in the
prepared remarks or is this a sustainable growth rate we should be expecting going forward for the milk segment in particular?

Scot Rank - Grupo LALA SAB de CV - CEO


Antonio, thank you for your questions. Concerning raw material inventories, we have been, as we've mentioned, acquiring some raw material
inventories looking forward. We expect to be able to cover the rest of this year -- of this fiscal year with raw material inventories that we've acquired
today or committed to to-date. So that will give us some -- I think some advantages from now through the rest of the year.
Regarding the benefits we expect to receive from some of our sales and operation planning procedures, I think those benefits will help all businesses
across the line, not just milk. So we expect to see some benefits to the business, I think top line generally speaking across the business, not just the
milk business. So I don't know if that answered your question, but -- go ahead.

Antonio Gonzalez - Credit Suisse - Analyst


No, that's helpful. Is it fair to say that you are at the early stages I guess of capturing those benefits or do you think we are already seeing them
when we look at the top-line evolution currently?

Scot Rank - Grupo LALA SAB de CV - CEO


I think just beginning to see the benefits of that. Yes, that's correct.

Antonio Gonzalez - Credit Suisse - Analyst


Excellent, great. Thanks, Scot.

Scot Rank - Grupo LALA SAB de CV - CEO


Thank you, Antonio.

Operator
Pedro Leduc, J.P. Morgan.

Pedro Leduc - J.P. Morgan - Analyst


And it would be regarding the COGS performance in the second quarter. Scot, if you could help us reconcile how it grew 10% year over year. In
the release, you mentioned the facts related pressures. But we understand, and please correct me if I'm wrong, US-dealing COGS only 20%-25% of

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JULY 26, 2016 / 3:00PM, LALAB.MX - Q2 2016 Grupo LALA SAB de CV Earnings Call
total, so it would be big chunk of the COGS increase that is explained by other non-FX related raw materials. So if you could elaborate a bit on that
where the pressures might be coming from so we can try to model it better for the second half of the year. So that will be the first question.

Scot Rank - Grupo LALA SAB de CV - CEO


Yes, cost of goods was -- the primary effect was exchange rates as I mentioned. There were some other minor effects on some channel -- some
selected channel promotion activity in Mexico, some impacts of the integration of the business in the different businesses in Nicaragua. So it was
all three of those, although the most important factors we mentioned in our release was for the impact of almost 20% devaluation of the peso year
on year.

Pedro Leduc - J.P. Morgan - Analyst


Okay. And anything in the other raw materials that you face organically in Mexico, especially milk, because again the bridge between FX explanation
and the 10% is pretty large?

Scot Rank - Grupo LALA SAB de CV - CEO


No, really no change in milk prices. Our milk prices are stable in Mexico. And I think the good news that you saw on our report is we were able to
offset the gross margin impact with some savings in SG&A. We think some of those savings are sustainable looking forward. So I think that's -- that
was the good news in the report and we're happy with the EBITDA margin expansion.

Pedro Leduc - J.P. Morgan - Analyst


Okay. Congrats on that. And any news regarding the new CFO selection that you want to share with us, is that still under works or is it part of the
--?

Scot Rank - Grupo LALA SAB de CV - CEO


The process is completed and we expect to be announcing something in the coming weeks.

Pedro Leduc - J.P. Morgan - Analyst


Great. Thank you very much.

Scot Rank - Grupo LALA SAB de CV - CEO


Thank you.

Operator
Luis Miranda, Santander.

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JULY 26, 2016 / 3:00PM, LALAB.MX - Q2 2016 Grupo LALA SAB de CV Earnings Call
Luis Miranda - Santander - Analyst
A couple of questions. First one is, Scot, if you could give us some color when we talk about the 7.4% organic growth, how much is volume and
how much roughly is it prices? The second question is with regards to the non-diary division, I was wondering if this growth similar to last quarter
was mainly explained by M&A or integration of the operations, and the operations in Mexico were -- continued to be flat or are we starting to see
some improvement in that category? And the third question is with regards to the point you mentioned about the integration of -- further integration
of the sub-system within the Company, should -- what's the effect of this project? How is the timing, I mean in terms of implementation?

Scot Rank - Grupo LALA SAB de CV - CEO


Sure, Luis. Let me take your questions in a couple of different parts. Let me take the last part first. We expect to conclude the SAP upgrade by the
end of third quarter this year. So we start -- expect to start to see some benefits there potentially beginning the fourth quarter. Primarily those are
benefits related to control, financial controls although it also gives us some better flexibility on financial information as well. So that will be concluded
by the end of the third quarter.
Regarding our sales growth of 7.4% organic growth in Mexico, it was a good mix, it's low single-digit volume growth complemented by pricing
and also some good mix, which gets us to that 7.4%. So we're very -- again, very happy with the top-line growth. It's very healthy. It's across the
business. Like you saw there is actually the milk performance itself exceeding our expectations before the 6% range. The other value-added dairy
products continue to grow double-digits, we're happy with that.
The beverages and others is I think like we mentioned a combination of the juice business we acquired in Nicaragua with La Perfecta, a better
performance in our juice and fruit beverage business in Mexico. Some very solid growth in a small business, but growing very, very rapidly, the
plant-based beverage business in Mexico, as well as sales of some packaging in raw milk to third parties. So it's kind of a combination everything.
I'm sorry, I also didn't mention the -- our deli business. The deli pilot program continues to grow. Very slow controlled growth, we're still in the pilot
phase, but it is helping that sales volume as well because that's where our deli business numbers are as well. I may not have mentioned that. But
thank you for bringing it up.

Luis Miranda - Santander - Analyst


Yes. That's very interesting, Scot.

Scot Rank - Grupo LALA SAB de CV - CEO


Thank you, Luis.

Operator
Jeronimo De Guzman, Morgan Stanley.

Jeronimo De Guzman - Morgan Stanley - Analyst


I wanted to follow up on what you just mentioned earlier on SG&A, wanted to see if you do expect to continue leveraging the expenses going
forward or we do expect some pressure to come onboard as you have some of the non-recurring expenses with integrating businesses. I also -my second question, just wanted to ask about your CapEx levels, just an update on what is the expectation for the year kind of given the run-up
in the first half and if you do expect higher CapEx intensity going forward beyond 2016.

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JULY 26, 2016 / 3:00PM, LALAB.MX - Q2 2016 Grupo LALA SAB de CV Earnings Call
And then finally just wanted to get an update on your M&A priorities and where you see the biggest opportunities or whether it's currently
developing the business in Central America, seeing opportunities to leverage distribution in Mexico, or whether you do also see opportunities to
build up from you already acquired in the US?

Scot Rank - Grupo LALA SAB de CV - CEO


Sure, Jeronimo. Let me -- couple of questions, let me start and then you come back to me if I didn't answer everything please. Regarding CapEx, I
think we're on track to meet the MXN3 billion CapEx figure that we announced at the beginning of the year. I think what's important is CapEx a lot
of it is oriented towards growing our production capacity in both Mexico and Central America, and most of that production capacity is going into
a lot of innovative new products in particular. So as I think we mentioned on one of the slides there, I think it's maybe number 10 that we'll be
adding about 22% production capacity to our manufacturing footprint in Mexico specifically.
There's also some added capacity going in the Central America as well. So we're happy with that like almost 60% of our CapEx this year is going
into innovation and its expended capacity. So -- and I think we're on track to meet that MXN3 billion investment that we announced beginning of
the year. There's -- and I think there's more detail on what some of that investment is going towards in -- on our website.
So we're excited about that, making good progress on that. That's going to help us improve service levels to our customers and it's also going to
give us the capacity we need to grow through some of the disruptive innovation examples that we gave you in the webcast. So that's one thing
we're excited about. The other thing I mentioned -- you mentioned, as I recall, SG&A and operating leverage. Again, we've got some advantages
to product mix that are not -- they help in gross margin. They also help us leverage SG&A. And so that's kind of ongoing as we continue to grow
double-digit, the higher value very alternative that you've -- that we've talked about, our cheeses, our yogurts, our creams, et cetera.
The other thing is we are seeing efficiencies in some of our operating expenses that we'll be able to continue, in particular selling expenses, we're
doing a great job in selling expenses as we start to leverage some of the programs we've been working on. That's something we'll be able to
continue looking forward. We've also achieved some efficiencies on upstream distribution, we've talked about that. And then looking forward next
year, we'll start to see other advantages in SG&A like the shared service center and things like that.
So I think we'll see benefits from SG&A. We'll be able to leverage SG&A looking forward. There will be some occasional one-offs related to alliance
and M&A activity. But other than that, we don't expect to see any major changes, and I think it's a trend we can start to continue.

Jeronimo De Guzman - Morgan Stanley - Analyst


Okay. And then just one follow-up on the CapEx, I mean, given that a lot of the investments have been on production capacity and innovation,
should we expect it to -- the intensity of the CapEx to come down next year and then just that final question on M&A priorities going forward
please?

Scot Rank - Grupo LALA SAB de CV - CEO


Yes, sure. We'll -- mentioned I think our outlook to CapEx towards the beginning of next year, we like to announce that sort of the start of every
year. But we'll say it's a significant step forward I think we took this year with the significant increase in production capacity in Mexico that I just
mentioned. M&A and alliances, we're looking at opportunities across the Americas at this point in time.
As we've mentioned one of our priorities is to consolidate Central America. The other is to leverage the most recent investment we've made in the
US, but we're also looking at opportunities for the south as well. So we're not committing specific information till we actually have projects to
announce, but we are -- we do have a number of active, both alliance and M&A projects in the works right now.

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JULY 26, 2016 / 3:00PM, LALAB.MX - Q2 2016 Grupo LALA SAB de CV Earnings Call
Jeronimo De Guzman - Morgan Stanley - Analyst
Okay, great. Thank you.

Scot Rank - Grupo LALA SAB de CV - CEO


Thank you.

Operator
Luca Cipiccia, Goldman Sachs.

Luca Cipiccia - Goldman Sachs - Analyst


Just a follow-up. I was hoping if you could maybe discuss a bit the competitive environment in Mexico. Just curious to hear your feedback on how
the industry you think is evolving, is moving, is being a relatively favorable consumer backdrop. You were commenting on a positive mix. We hear
about more interest for the dairy category in general including by the current (inaudible) system and I was hoping to get some feedback on where
you see the industry growing from a competitive standpoint, whether this trend is supportive of mix overall, whether there's any notable channel
that you would like to highlight whereas competitive environment is somewhat changing or evolving, just maybe if you can share some thoughts
on the competitive landscape more broadly on the -- for the dairy industry in Mexico, that would be great.

Scot Rank - Grupo LALA SAB de CV - CEO


Sure, Luca. The dairy industry is very competitive in Mexico. There are very good strong regional players that have been on the market for many,
many years and very strong brands. Those regional players continue to invest in their business to evolve their business. And there are great
competitors. There are obviously some very large multinational diary companies, existing companies that have been around for many, many
decades that you know. There's also new entrants, relatively new entrants that you've mentioned in the question you just asked.
So I think it's a very competitive market and I think the key to LALA is we're going to have to be able to develop our strategies at a pace that allows
us to stay ahead of the market and execute them very well as I think we've been able to do recently to try to keep us a step ahead. So focus is -- we
have great competitors, but I think we're going to focus more and more consumers, and what we're excited about as we see consumer trends
towards healthier, more natural foods that are totally in line with what our LALA mission is all about, we have the new product launches this year
like Lala Semillas and yogurts, the supersedes on a more natural yogurt is doing very, very well.
We have disruptive innovation on products like LALA 100 using the nano and ultra-filtration. Our whole lactose-free line is doing very well and
evolving. We now have it in cheeses and yogurts, not just milk.
So I think what we're excited about is we're on trend. We have the R&D and innovation capabilities I think to stay a step ahead of the market and
that's what we're trying to do right now.

Luca Cipiccia - Goldman Sachs - Analyst


And do you see that space getting, let's say, a bit more crowded or you feel as you just mentioned LALA is a step ahead or has as a driver of that
innovation, how do you see that in particular when it comes to this faster growing high value-add health and segment of the market that seem to
be encountering more demand?

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JULY 26, 2016 / 3:00PM, LALAB.MX - Q2 2016 Grupo LALA SAB de CV Earnings Call
Scot Rank - Grupo LALA SAB de CV - CEO
Yes, I think we have the capability to be -- stay a step ahead as I think we have been recently. We have a great R&D team, we have great marketing
team. We are developing better and better go-to-market capabilities. We have the most important chilled distribution network in Mexico and a
growing network in Central America. So I think we have the capabilities in place to kind of leverage what we can do in R&D faster than some of the
others. I'm not sure whether there will be more crowded or less crowded. That will kind of depend on what happens. There may be some consolidation
down the road. I'm not really sure. We're not really participating in that. So our focus is really customer and trying to stay ahead of customer needs.

Luca Cipiccia - Goldman Sachs - Analyst


Okay. Thank you. Thank you very much.

Scot Rank - Grupo LALA SAB de CV - CEO


No, Thank you, Luca.

Operator
Benjamin Theurer, Barclays.

Benjamin Theurer - Barclays - Analyst


Just a quick follow-up, so you've mentioned that you're going to report basically in a separate way going forward how your business in Mexico is
doing and then the business outside. So I assumed this will then include what you're going to try -- well, what you're likely to consolidate August
onwards as you've mentioned the business in the US. Now just one question on that business in the US. So clearly we all know that EBITDA right
now is not as promising obviously. We know the sales figure, et cetera.
But related to your CapEx, is there anything specific on CapEx that you will have to dedicate to the integration of that business or is that already
part of the MXN3 billion you just mentioned or shall we expect here some increase in CapEx just to get all systems connected and so on? And if
you could maybe quickly share a little bit what's your time-horizon, what you expect to face in order to have everything set up and properly within
the systems on the recently announced US business?

Scot Rank - Grupo LALA SAB de CV - CEO


Sure. I think from a CapEx perspective, there will be no material CapEx investments in the coming months for the US business. A lot of what we
acquired is -- they are relatively new modern assets. So there will be some cost involved with integration. But I don't see any major as CapEx
investments in the coming months. There will be some, but I think it's relatively controllable amount given the size of LALA.
The integration process I think will take us between three to five months. We're currently coordinating some planning right now and getting ready
for the integration. It's a fairly self-sustainable business and so with some service agreements from the Board dairy company that will give us a
good transition period. But -- so we're in the process working on integration right now and like I said a fairly limited amount of CapEx to be invested
in that business looking forward. We'll start operating that business on August 1st and we expect to be able to I think have more influence on the
results like I think it may have mentioned in previous calls beginning first quarter next year.

Benjamin Theurer - Barclays - Analyst


First quarter. Okay, perfect. Thank you very much, Scot.
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JULY 26, 2016 / 3:00PM, LALAB.MX - Q2 2016 Grupo LALA SAB de CV Earnings Call

Scot Rank - Grupo LALA SAB de CV - CEO


No, thank you. Enrique, would you like to add anything else?

Enrique Gonzalez - Grupo LALAS AB de CV - Head of IR


No, Scot. Thank you. I think you were quite clear. I don't know if anyone else has a question. If not, we're going to proceed to close the call. Matt?

Operator
(Operator Instructions) And if there are no further questions, I'll turn the floor back over to management for any closing remarks.

Enrique Gonzalez - Grupo LALAS AB de CV - Head of IR


We thank you for your time and interest in Grupo LALA. We hope you will join us again next quarter. Until then, we will be sure to provide you with
important updates and developments unfold. Thank you again and goodbye.

Operator
This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.

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