Letter to the Shareholders

Year 2016 was a year full of important challenges due to the exchange rate, however, Lala Group has been able to provide solid results, to expand its geographic presence and to invest to prepare for future growth.

During 2016, we developed internal abilities in regards to planning, purchases and logistics, which allowed us to become more efficient and create a decrement in our margins. We also invested heavily in the expansion of our international presence by acquiring “La Perfecta” in Nicaragua, and the distribution agreement reached with Florida Bebidas in Costa Rica and with these activities, we have increased our presence in Central America.

Similarly, with the acquisition of the brands and added value portfolio in the US, we have now entered the largest dairy products market in the world.

During this past 2016, acquisitions outside Mexico had an effect in the consolidated level of Grupo Lala. We are expecting an improvement in the results of these acquisitions during 2017.

INVESTMENTS

From January to December 2016, a total of 2,863 million pesos of capital was invested, of these, 73.0% was mainly destined to the increment of property, factory and equipment.

RESULTS

» Net sells increased in 11.0% in comparison to 2015, from 48,183 million pesos to 52,468 million pesos to 53,468 million pesos, of which 6.7% were destined to organic growth, whereas the remaining 4.3% was allotted to acquisitions.

» During 2016, gross profit increased 7.6%, lower than the 11.0% of increment of gross sales. This due to the growing inflation in the cost of raw material which could not be compensated with price increments.

» Operation profit showed a decrement of 7.0% which can be explained by the consolidation of five months of operation in the US business, unexpected integration expenses in the Central America acquisitions, as well as the inflation of expenses in Mexico, above the increment of gross profit.

» As a consequence of this, the 2016 EBITDA increased 0.7% to reach 6,861 million pesos. At the same time, the EBITDA margin decreased 130 base points, from 14.1% to 12.8%.

During 2016, consolidated gross profit increased 243 million pesos to reach a closing figure of 4,193 million pesos, or 6.2% above last year’s.

INNOVATION

Strengthening our portfolio of products through innovation is a strategic priority. In year 2016 we innovated via the launching of new products, functionalities and new presentations, and with these, we were able to boost the consumption of dairy products in Mexico and to meet the demands of more consumers.

The launching of the line LALA 100® in its different presentations is amongst the most important launchings of 2016. This not only met our expectations but surpassed them and boosted the growth of the fresh milk category in Mexico. We also launched the Yoghurt Batido Deslactosado (Lactose-free crème yogurt),Yoghurt Batido LALA Semillas® (seeds creme yogurt) and Queso Panela under NutriLeche® brand.

USE OF CAPITAL

We made some investments dedicated to optimize our productions capabilities, also we developed processes that allowed using our distribution and administration structures more efficiently. This will allow us to face future challenges and to ensure a business model with a steady growth.

SUSTAINABILITY

During 2016, we continued sharing our culture among the groups of interest we have relations with in order to achieve a sustainable balance within and outside Grupo Lala. Aligned to our Lala Sustainability Model, and in agreement with the scientific information backing our global efforts, we carry our operations locally and in a coordinated manner with our clients and suppliers in order to reduce the emission of greenhouse gases and hydric footprint.

As a result of our efforts in the Environmental, Social and Corporate Government axes, last February Lala entered the Sustainable IPC, becoming one of the 30 companies in the Mexican market with the best practices in regards to Sustainability and Social Responsibility.

We would like to thank our collaborators, clients, partners, advisors and shareholders for the trust invested in 2016. Year 2017 comes full of new opportunities and we are certain that our team of collaborators in the United States, Mexico and Central America will continue to focus on the needs of our consumers, as well as on the creation and distribution of value for each one of our groups of interest.