29826

Equity Research
BTG Pactual Global Research

Latin America
Food & Beverages
Company Note
01 September 2015
Lala
Milk and (an option on) honey
Rating
Initiating with a BUY and a TP of Ps$46/share. Our TOP pick for Mx Consumer
12m Price Target
MXN46.00/US$2.71
Lala is not your typical dairy company. We see Lala as a core holding in the Mexican
Price
MXN36.93/US$2.18
consumer space not only due to its dominant market share across most dairy
RIC: LALAB MM, BBG: LALAB MM
categories in Mexico, but also due to its access to a unique milk market (and semivertical integration) that offers high and stable returns relative to comparable global
peers (mainly coming from a high stability in milk prices).
Lala could look like a very different company in the next five years
Lala is going through a transformation period on many fronts that if successful, could
become a multiyear earnings growth and rerating story.
1)
Lala is transitioning into becoming a higher value-added dairy company, a

process that should bring revenue growth acceleration and higher
margins/returns.
2)
3)
New management could transform the culture. We are optimistic about
Buy
Trading Data and Return Forecasts

52-wk range
MXN38.29-27.04/US$2.59-1.82
Market cap.
MXN91,381m/US$5,386m
Shares o/s (m)
2,474.4
Free float
21%
Avg. daily volume('000 Shares)
1,785
Avg. daily value (MXN m)
62.8
Forecast price appreciation
+24.6%
Forecast dividend yield
0.3%
Forecast stock return
+24.9%
Stock Performance (MXN)
potential changes as Scott Rank could Walmartize Lala in positive ways: a
50.0
150
very process-oriented execution in all areas such as new business/product
40.0
120
development, supply chain efficiencies, and tight cost controls.
30.0
90
20.0
60
10.0
30
0.0
After more than two years exploring inorganic growth opportunities we

believe a transaction is imminent. The long wait might pay off as valuation
In line valuations, but premium warranted... Expect a re-rating
Price Target (MXN)
Stock Price (MXN)
1-Jun-15
1-Sep-15
1-Mar-15
1-Dec-14
1-Jun-14
1-Sep-14
1-Mar-14
1-Dec-13
1-Jun-13
1-Sep-13
1-Mar-13
1-Dec-12
however, we believe an expansion to the US is the most likely scenario.
1-Sep-12
expectations from sellers normalize in struggling markets. At this point,
Rel. IPC
Trading at 21.4x P/E 2016E, Lala is not a cheap stock, like the majority of consumer
stocks in Mexico. But we believe the risk/reward of buying at current prices is still
attractive when we consider that 1) Valuations are in line with Mexican staples peers
and global dairy companies, despite the fact that, current multiples do not capture any
of the potential upside from the potential transformations discussed, 2) Lala is still a
pure Mexico play without exposure to struggling markets like South America and 3)
The risk/reward is attractive at current prices when we look at the DCF-based TPs in
our different scenarios.
Valuation
RoIC (EBIT) %
EV/EBITDA
P/E
Net dividend yield %
12/2013
14.8
16.4
35.4
2.7
12/2014
17.8
15.5
29.7
0.0
12/2015E
19.8
12.9
23.2
1.4
12/2016E
19.9
11.6
21.4
2.2
12/2017E
21.0
10.5
19.9
2.8
Financials (MXNmn)
Revenues
EBITDA
Net Income
EPS (MXN)
Net DPS (MXN)
Net (debt) / cash
12/2013
43,156
5,147
2,785
1.13
0.99
7,715
12/2014
44,993
5,471
3,082
1.25
0.01
7,116
12/2015E
48,043
6,591
3,946
1.59
0.52
6,882
12/2016E
51,243
7,232
4,276
1.73
0.80
8,323
12/2017E
54,680
7,936
4,708
1.90
1.04
9,671
Rafael Shin
New York BTG Pactual US Capital LLC
rafael.shin@btgpactual.com
+1 646 924 2472
Daniel Sanchez
Mexico - BTG Pactual - Estrategias de Inversin
daniel.sanchez@btgpactual.com
+52 55 3692 2245
Source: Company reports, Bovespa, BTG Pactual S.A. estimates. / Valuations: based on the last share price
of the year; (E) based on a share price of MXN36.93, on 01 September 2015.
ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 51

Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Any U.S. person receiving this report and wishing to effect any transaction in a security
discussed in this report should do so with BTG Pactual US Capital, LLC at 212-293-4600, 601 Lexington Avenue. 57th Floor, New York NY 10022.
Lala
01 September 2015
Index
Lala in charts 3
Investment thesis...6
Investment positives 8
Investment negatives... 12
Key drivers 15
Valuation 35
Company description 43
page 2
Lala
01 September 2015
page 3
Lala in charts
Chart 1: Lala - Consolidated Sales (Ps$ Mn)
Chart 2: Lala - Consolidated EBITDA and EBITDA Margin (Ps$ Mn)

44,993
45,000
EBITDA
EBITDA Margin
6,000
40,000
5,471
13.0%
35,000
5,000
12.5%
30,000
4,000
12.0%
3,000
11.5%
25,000
20,000
2,000
15,000
11.0%
1,083
1,000
10,000
5,000
10.5%
2000
2006
2009
2010
2011
2012
2013
Source: Company Data
Chart 3: Dairy - Global Comparables Sales and EBITDA margins
Source: Bloomberg, Company Data
2014
10.0%
2009
2010
2011
2012
2013
2014
Lala
01 September 2015
Chart 4: Lala - Revenue Breakdown (LTM 2Q15)
page 4
Chart 5: Lala Estimated Cost of Sales Breakdown (LTM 2Q15)
Milk
65%
Liquid Milk >95%

Milk
55%
Lala Revenues
Ps$46 Bn
Other Dairy Products

30%
Powder Milk <5%

Packaging
(USD-denominated)
20%
Lala COGS
Ps$29 Bn
Others
25%
Non-Dairy Beverages and Others

6%
Chart 6: Lala - Sales by Channel (LTM 2Q15)
Chart 7: Lala Distribution Network
18
16 in Mx, 2 in CAm
Production Plants
165
160 in Mx, 5 in Cam
Traditional
49%
Modern
51%
Distribution Centers
>6,500
Delivery Routes
>500,000
Points of Sale
Lala
01 September 2015
page 5
Table 1: Mexico - Dairy Categories

Category
Drinking Milk
Cheese
Lala's Market Share (2014, %)
Lala's Market Share Position (2014, #)
Category's 2014-19E CAGR (by value)
34%
1.0%
14%
4.2%
23%
2.2%
2
3
Yoghurt and Sour Cream
Includes Nutri Leche, Parmalat, Borden and Mi Leche

2 Includes Los Volcanes and Nestl
3 Includes Nestl
Source: Euromonitor
1
Table 2: Lala Financials Summary (Ps$ Mn,

2014)
Table 3: Lala EV Components (Ps$ Mn)
Revenues
44,993
Market Capitalization
Gross Profit
16,312
(+/-) Net Debt (Cash)
Gross Margin
EBITDA
EBITDA Margin
Net Income
12.2%
(+) Minority Interest
5,471
EV
91,554
-
7,849
530
Table 4: 2015-18 expected CAGR
Revenues
6.5%
EBITDA
9.5%
Earnings
9.3%
84,235
12.2%
3,082
Net Margin
6.8%
ROIC
17.8%
ROE
14.3%
Source: Company Data, BTG Pactual research
Chart 8: Lala Ownership Structure
Minority
1%
Free
float
21%
Control
group
78%
Source: BTG Pactual research
Lala
01 September 2015
Investment Thesis
We are initiating coverage on Grupo Lala with a BUY rating and YE 2016 TP of
Ps$46/share, making it our Top Pick in the Mexican consumer space and implying a
total return of 24.6% from current prices.
We believe Lala is an attractive core holding not only due to its dominant market
share across most dairy categories in Mexico (offering exposure to secular growth
trends such as favorable demographics, burgeoning middle class, and increasing per
capita milk consumption) but also due to its access to a unique milk market that offers
high and stable returns relative to comparable global peers (mainly derived from
strong stability in milk prices). At the same time, Lala is going through a
transformation period on many fronts that, if successful, could make it a multi-year
earnings growth and re-rating story.
Following a choppy stock performance since the IPO (mainly due to a disappointing
performance in volumes in 2014), Lalas stock has become one of the market
favorites (shares have soared 38%, outperforming the IPC by 30 percentage points)
on the back of a solid rebound in revenues and stronger-than-expected margin
expansions. Despite the rally, however, we believe it is not too late and remain
optimistic on the potential transformation of the company over the next three to five
years, considering that:
1)
Lala is transitioning into becoming a higher value-added dairy company, a

process that should bring revenue growth acceleration and higher
margins/returns. Lala has the scale and distribution platform to be
successful.
2)
New management could transform the culture. We are optimistic about

potential changes as Scott Rank could Walmartize Lala in positive ways: a
very process-oriented execution in all areas such as new business/product
development, supply chain efficiencies, and tight cost controls. At this point
it is difficult to price how much value such a transformation could create, but
it stands as a free option in our view.
3)
Lala has been exploring inorganic growth opportunities for two years now
and a transaction is imminent as new management prioritizes M&A. The
company has attractive inorganic growth expansion opportunities (in Mexico
and internationally) and the long wait might pay off as valuation expectations
from sellers normalize in struggling markets. At this point, however, we
believe an expansion to the US is the most likely scenario.
There are risks of course on each area: 1) the largest processed dairy categories are
dominated by long established players so market share gains wont be easy, 2)
management turnover could continue as was the case in the past three years, and 3)
Lala, as many other companies in this stage of growth, could end up making a bad
investment that could dent returns. Throughout the report, we discuss each point in
more detail, but conclude that the risk/reward is positive.
page 6
Lala
01 September 2015
With regards to valuation, Lala is not cheap based on any valuation metric, like the
majority of consumer stocks in Mexico, especially after the recent rally (stock up
29.9% YTD vs. -0.5% for the IPC). But we believe the risk/reward of buying at current
prices is still attractive when we consider factors such as:
1) Valuation multiples are in line with Mexican staples peers and global dairy
companies, despite the fact that, in our view, forward looking multiples in 2016/2017
do not capture any of the potential upside from a) a culture transformation by new
management and b) an imminent M&A move. In other words, we believe the market
has not priced in any of the potential benefits since these are extremely difficult to
price at this point.
Our view is that considering 1) Lalas strong earnings momentum in the medium
term, 2) earnings CAGR of 15% in the next 5 years (relative to 8% of Mexican peers),
3) its highly defensive business model and 4) potential upside from a positive impact
from change in management and potential M&A, Lala should be trading at the high
end of 20-25x earnings, where high quality staple names in Mexico have been trading
at.
In addition, Lala is one of the few Mexican staple names that is a pure Mexico play
(i.e. most peers are exposed to markets that are struggling today in SA). We expect
pure Mexico players such as Lala to start trading at a premium to those with
exposure to struggling markets (or with higher risk) in countries in South America (i.e.
Argentina, Brazil, Ecuador) considering 1) its relative lower currency risk, 2) stronger
macro outlook in the mid to long term, and 3) scarcity value. At our TP of Ps$46,
Lala would be trading at 25x P/E 16.
2) The risk/reward is attractive at current prices when we look at the DCF-based TPs
in our bearish (10.6% downside), base (24.6% upside), and bull case (35.4% upside)
scenarios. Our base case scenario assumes revenue and EBITDA CAGR of 6.6%
and 9.6%, respectively (EBITDA margin expansion of 200bps). Our base case
scenario numbers are roughly in line with Bloomberg consensus (as seen in table
12). Our bear case scenario shows sales and EBITDA CAGR of only 4.4% (assuming
flat EBITDA margins) while our bullish case scenario implies revenue and EBITDA
(margin expansion of 300bps) CAGR of 7% and 11.5%, respectively.
page 7
Lala
01 September 2015
Investment Positives
1. Not your typical dairy company. Unique market and company

structure provide high and stable returns
Lalas dominant market share and diversified client base in the Mexican dairy market
and unique milk industry structure have allowed the company to 1) enjoy one of the
highest margins/returns relative to global milk producers and 2) maintain significant
stability over time, helped by low volatility in milk prices (its main raw material).
On the revenue front, Lalas diversified product portfolio and leading market share in
most categories provides it with significant economies of scale and a platform to
accelerate organic growth through product innovation while its extensive cold
distribution network (the largest of its kind in Mexico) has allowed Lala to build
significant barriers to entry and strong leverage to negotiate/cross sell with the
traditional channel (49% of Lalas sales).
On the cost/investment side, Lalas unique relationship with suppliers (Lala currently
sources roughly two thirds of its milk needs from related parties) has resulted in a
mutually beneficial relationship for the parties involved. Lala on one hand, has
enjoyed the benefits that come with vertical integration such as high stability in milk
costs, favorable negotiating terms with unrelated suppliers, and high barriers to entry
while avoiding the burden of owning a highly capital-intensive asset. At the same
time, the long term visibility on demand has allowed suppliers to make investments in
technology and improve its productivity (productivity of suppliers in La Laguna are on
par with US peers with yields per cow close to 32 liters/day vs an average of 12
liters/day nationwide).
2. Earnings are strong and should remain so in the medium term

A
recovering
Mexican
consumer,
stable-to-declining
milk
prices,
operating
efficiencies, and a limited impact from a weak Peso have supported solid results for
Lala YTD. YTD sales and EBITDA have grown 4.8% and 17.0% respectively (mostly
organic), with EBITDA margin expanding 190 bps y/y (mostly driven by a gross
margin expansion of 324 bps). We expect this momentum to continue into 2H15 as
most of the same drivers will remain in place in our view.
Top line growth should remain strong, mainly driven by the price increase
implemented in 4Q14 (along with a more favorable product mix) and recovery of
volumes from a low base in 2014. In addition, processed dairy growth (which
currently accounts for 35% of sales) is accelerating as a result of increased marketing
spending and new commercial processes implemented by new management.
Margin expansion should also be sustainable supported by 1) a favorable outlook of
milk prices (ie flat to declining y/y as international milk powder prices have
page 8
Lala
01 September 2015
plummeted - discussed later in the report), and 2) operating efficiencies coming from
investments made last year in upstream logistics (ie increasing ownership in primary
fleet and renovating secondary fleet) and manufacturing efficiencies (ie consolidating
plants). We estimate two thirds of the 324 bps gross margin expansion in 1H15 came
from pricing/product mix. We expect margin expansion to slow down vs 1H15 mainly
due to the pressures of a weak Peso.
3. We are optimistic about potential changes in culture that new

management could bring
After Lalas high turnover in management since the IPO (naming three different CEOs
and two different CFOs since early 2013), we expect the market to keep a close eye
on the development of newly appointed CEO Scott Rank and CFO Gabriel
Fernandez.
Although it is too early to assess at this point how much of an impact a change at the
C-level management will have on Lalas strategic direction and execution, we are
optimistic and believe the market has not priced the potential upside from a possible
culture transformation, which we acknowledge is difficult to measure.
New management team got off on the right foot and has built goodwill with investors
already, after delivering a solid set of results since they took over, and we believe
Scott Rank can bring part of the Walmart culture to Lala, a very process-oriented
execution in all areas such as new business/product development, supply chain
efficiencies, and tight cost controls. Following several years of focusing on top line
growth (both in terms of M&A in the US and product innovation/SKU proliferation in
processed dairy), we believe there will be significant room for improvements in some
areas, especially in costs.
New management has not formally unveiled its 3- or 5-year strategic plan yet to the
market (although already discussed internally), but we expect a more open
communication going forward in terms of specific revenue/returns/margin targets. In
our view, the market should react positively as current management will be given the
benefit of the doubt, considering Scotts vast experience in the Mexican retail market
and solid reputation, and the positive quarterly results delivered since they took over.
4. High Mexico exposure relative to Mexican staple names

Lala is the only pure Mexico play in the Mexican consumer space considering that
Mexican staple peers such as Kof, Gruma, Bimbo (and to a lesser degree Arca and
Grupo Herdez) have significant exposure to markets other than Mexico.
page 9
Lala
01 September 2015
We expect pure Mexico players such as Lala to start trading at a premium to those
with exposures to struggling markets (or with higher risk) in countries in South
America (ie Argentina, Brazil, Ecuador) considering 1) its relative lower currency risk,
2) stronger macro outlook in the mid to long term, and 3) scarcity value.
5. A plethora of options for inorganic growth The wait might pay off.
Expansion to US most likely in our view
Lala has taken a more proactive stance on the M&A front as Scott Rank has made it
one of its top priorities. A new team dedicated solely to M&A/new business
development has been put in place (no much information provided about the new
team yet).
The long wait might pay off, since many of these markets are sailing through rough
macro conditions. Valuations should be more reasonable and several international
players might be willing to sell some of their operations if tough macro conditions
persist and the timing could be favorable in terms pricing and deal structure as some
of the potential markets are now struggling.
M&A conditions for Lala could improve in the medium term in South America but
remain risky under current market conditions. While growing organically in adjacent
categories in Mexico might make more sense, especially now that Lala has begun to
implement pilot programs in categories such as cold cuts, an acquisition or
reintegration of assets starts looking more likely, in our view, but could be received
with skepticism by investors.
However, we would be more optimistic in this case, since 1) industry conditions in the
US have improved significantly as milk prices have rebounded and feed costs
declined consistently (although we have little visibility on how much margins have
improved so far for Lala if at all) and 2) considering that Lala is very familiar by now
with the US dairy market and more specifically with the Laguna Dairy assets,
reintegrating some of these assets or acquiring related dairy assets (mostly
processed/higher value added) would result in a smoother integration.
6. Not a cheap stock but looks fairly valued with free optionality
Like the majority of consumer stocks in Mexico, Lala is not cheap based on any
valuation metric, especially after the recent rally (stock up 29.9% YTD vs. -0.5% for
the IPC). But we believe the risk/reward of buying at current prices is still attractive
when we consider factors such as:
1) Valuations multiples are in line with
Mexican staples peers and global dairy
companies, despite the fact that, in our view, forward looking multiples in 2016/2017
page 10
Lala
01 September 2015
do not capture any of the potential upside from a) a potential culture transformation
by new management and b) an imminent M&A move. In other words, we believe the
market has not priced in any of the potential benefits since these are extremely
difficult to price at this point.
Our view is that considering 1) Lalas strong earnings momentum in the medium
term, 2) earnings CAGR of 15% in the next 5 years (relative to 8% of Mexican peers),
3) its highly defensive business model and 4) potential upside from a positive impact
of change in management and potential M&A, Lala should be trading in the high end
of 20-25x earnings where high quality staple names in Mexico have been trading at.
At our TP of Ps$46, Lala would be trading at 25x P/E 16
2) The risk/reward is attractive at current prices when we look at the DCF-based TPs
in our bearish (10.6% downside), base (24.6% upside), and bull case (35.4% upside)
scenarios. Our base case scenario assumes revenue and EBITDA CAGR of 6.6%
and 9.6%, respectively (EBITDA margin expansion of 200bps). Our base case
scenario numbers are roughly in line with Bloomberg consensus (as seen in table
12). Our bear case scenario shows sales and EBITDA CAGR of only 4.4% (assuming
flat EBITDA margins) while our bullish case scenario implies revenue and EBITDA
CAGR of 7% and 11.5%, respectively (margin expansion of 300bps).
page 11
Lala
01 September 2015
Investment Negatives
1. Accelerating organic top line growth in Mexico will not be easy

As we will discuss throughout the report, we believe that in a market where per capita
consumption of milk has been stagnant for almost a decade, a transition into higher
growth and higher value-added categories will be a key driver to not only accelerate
revenue growth and diversify Lalas revenue base but also to sustain consistent
margin growth in the coming years.
Lalas dominant market share in drinking milk along with the most extensive cold
distribution network in Mexico (and relationships in the traditional channel) should
facilitate a transition to operate at the high end of the range of global dairy giants, but
redefining its product positioning in search of higher margins will not be an easy task.
The higher value-added segments are much more competitive, featuring longestablished global players in many categories who not only have strong brands but
also deep pockets to retaliate. Cheese and yogurt are the most relevant categories in
processed dairy products accounting for 70% of total processed dairy sales according
to our estimates. Lala has a relevant presence in both categories but does not have a
leading position in either of them with long established market leaders (cheese is led
by Sigma while yoghurts is dominated by Danone - Lala is number 2 in both cheese
and yogurt).
2. Limited visibility on milk costs

Even though we believe Lalas relationship with milk producers owned by related
parties is positive in the long run, we also understand the concerns from potential
conflicts of interest.
Lala currently sources roughly two thirds of its milk needs from related parties (out of
~1,000 suppliers, 40% are shareholders of Lala) at prices that are negotiated at arms
length on a one-on-one basis according to management.
The question is: Will the controllers prioritize returns of Lala or returns of the milk
production facilities if things go sour? Prices have been stable in the past 15 years
despite high volatility in corn either because 1) milk producers took a hit on margins
or 2) became highly productive and offset such an impact.
A potential decline in milk prices derived from growing milk powder imports will be a
good test to see if Lala is willing to squeeze its related parties returns at some point.
It might be Lalas turn to return the favor in such case.
page 12
Lala
01 September 2015
3. A weak Peso could squeeze margins

With ~20% of direct costs in USD (mostly packaging, which has not yet affected Lala
as it has fallen in USD-terms, offsetting the impact of the depreciation of the MXN),
while most revenues in MXN, we expect a weakening MXN to dent margins going
forward (unless they can pass through most of the impact to the consumer on top of
the yearly price increases in line with inflation).
In addition, Lala is indirectly exposed to a weak MXN since feed costs, which account
for roughly two thirds of the total costs for milk producers, are mostly dollarized. We
have no visibility on whether this impact would be fully passed through or partially
absorbed by related milk producers.
4. Risks of capital allocationLala might be forced to take on higher

risk/lower return projects to keep growing
Like most staple companies in Mexico with a dominant position in its market, Lala is
now facing the challenge of looking for new sources of growth and is currently sitting
on about 8 billion pesos in cash, mostly raised during the IPO in 2013, in addition to
potential leverage (an additional Ps$20 billion if it levers up to 2x EBITDA, which
would represent 27% of Lalas EV). We believe some investors would prefer to see
Lala returning cash to investors, but that does not seem like a possibility since the
funds raised in the IPO were exactly for this purpose (with no dividend policy in place
yet).
Companies in this stage of growth are always faced with challenges of expanding into
new
markets
where
returns
are
lower
and
execution
risks
are
higher.
Lala has not pulled the trigger yet due to a lack of options and/or managements
financial discipline in Latam/related categories and some investors have grown
impatient as the cash raised at the IPO has been sitting in the balance sheet and
management seems to be reacting in our view, making a concerted effort to close a
transaction.
Although we are optimistic about its prospects, we believe some of the transactions
might not be completely welcomed by the market. A US entry for example, which
seems the most likely option in our view, could be received with skepticism by some
investors considering Lalas still unproven track record.
5. High management turnover could continue

Lala has seen high turnover in its management since the IPO, naming three different
CEOs and two different CFOs since early 2013 and, as a result, we expect the
page 13
Lala
01 September 2015
market to keep a close eye on whether Lala will be able to retain newly appointed
Scott Rank and Gabriel Fernandez for the long run.
In our view, Lala is still a closely held company in which the chairman and largest
shareholder Eduardo Tricio has the last word on strategic decisions (especially when
it comes to expansion to new markets/M&A) and new management could also find
resistance across the organization if new management is not provided with enough
leeway to operate.
6. Additional taxes on junk food and soft drinks could slow down
volumes again
Even though budgetary discussions are still ongoing, there is increased speculation
that the government is planning to implement a second round of increases in junk
food (from 8% currently to 12%), beer (from 26.5% to 30%), and soft drinks (from 1
peso per liter currently to 2 pesos). If such a large increase were implemented (which
is not part of our base case scenario), we would expect milk volumes to suffer again
(as seen in 2014) given the discretionary nature of milk consumption.
The potential impact would be relatively smaller compared to 2014 in our view since
the first round of increases took place alongside i) a significant increase in gasoline,
electricity, and public transport prices; ii) higher VAT in border regions; iii) higher
taxes across the board (for instance, on school tuitions); iv) a weaker employment
and wages situation (wage inflation was still lagging overall inflation then, now it is
higher); and v) remittances had not yet begun to pick up (and in MXN terms these are
up significantly). In summary, the tax reform was significantly more far-reaching and
came at a particularly inopportune moment.
page 14
Lala
01 September 2015
Key Drivers
1. A successful transition to becoming a higher value-added dairy

company
In a market where per capita consumption of milk has been stagnant for almost a
decade, a transition into higher growth and higher value-added categories will be a
key driver to not only accelerate revenue growth and diversify Lalas revenue base
but also to sustain consistent margin growth in the coming years.
The higher value-added categories not only carry a higher margin, but are also
expected to grow at a faster pace (ie, yogurt, cheese and chilled meats in Mexico
have had 5-year volume CAGRs of 3.6%, 2.5% and 3.5%, respectively, compared to
1.3% of milk).
Lalas dominant market share in drinking milk along with the most extensive cold
distribution network in Mexico (and relationships in the traditional channel) should
facilitate a transition to operate at the high end of the range of global dairy giants
such as Nestls Milk Products and Fonterras Consumer Products divisions. Lala has
made considerable progress on this front so far, successfully diversifying its revenue
base out of lower-margin and lower-growth fluid milk.
After a series of acquisitions and licensing agreements (Nutrileche, Mileche, Boreal,
Los Volcanes, Gelatinas Art, Borden Dairy, Parmalat, Nestl cheeses and yogurts,
Eskimo) and significant investments in new product development, milk's contribution
to total sales went from roughly 95% in 2001-2002 to 65% today. With value-added
segments growing in the double digits, we believe sales mix could reach 60%
milk/55% value-added products in the next 5 years.
On the flipside, redefining its product positioning in search of higher margins will not
be an easy task. The higher value-added segments are much more competitive,
featuring long-established global players in many categories who not only have
strong brands but also deep pockets to retaliate.
Liquid milk A lower growth and relatively commoditized cash cow

Fluid milk (fresh milk, UHT, flavored), remains the #1 revenue stream for Lala. With a
dominant market share of 34%, leading brands (Lala and Nutrileche), high barriers to
entry in both distribution/milk supply, and low maintenance capex requirements, the
milk business has become an extremely stable cash generating business for Lala and
still the largest segment in the dairy business in Mexico. Drinking milk in Mexico is a
US$4.4Bn market dominated by three players that concentrate more than 66% of
market share, as seen in chart 9 (Lala leads the market with a 34% share) and is
expected to grow at a value CAGR of 2.2% in the next 4 years according to
Euromonitor.
page 15
Lala
01 September 2015
Chart 9: Drinking Milk in Mexico - Market Shares (by value)
Chart 10: Drinking Milk in Mexico - Market Value (Ps$Mn)

80,000
Private label
1%
Others
16%
Santa Clara
2%
Unifoods
3%
Bristol-Myers
5%
page 16
75,000
Lala
34%
70,000
65,000
Liconsa
8%
60,000
Nestl
11%
Alpura
21%
55,000
50,000
2008
2009
2010
2011
2012
2013
Source: Euromonitor
Source: Euromonitor
Chart 11: Lala - Drinking Milk Market Share in Mexico (by value)
Chart 12: Drinking Milk Product Sales in Mexico by Category (by value,
2014)
34.5%
Flavored Powder
Milk Drinks
9%
34.0%
Powder Milk
12%
33.9%
33.5%
2010
2011
2012
2013
2014
Source: Euromonitor
Source: Euromonitor
A low growth business in our view. On the flipside, per capita consumption of
milk in Mexico has remained relatively constant (it has even fallen) over the last
decade as it has reached the mature part of its product life cycle, despite relatively
low consumption versus other countries, as seen in chart 14.
Flavored Milk
Drinks
6%
Non-Dairy Milk
4%
Milk
69%
Lala
01 September 2015
Chart 13: Liquid Cow Milk - Per capita consumption in Mexico (L)
page 17
Chart 14: Liquid Cow Milk - Per capita consumption (L, 2014)
45
140
120
40
100
80
35
60
40
30
20
0
25
20
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: US Census Bureau, Dairy World Markets and Trade, FAS, USDA
2015E
Source: US Census Bureau, Dairy World Markets and Trade, FAS, USDA
Considering Lalas large market share in milk and the maturity of this market, we see
limited growth for Lala in this category going forward. We believe per capita figures
will remain at relatively low levels in coming years unless we see a significant shift in
consumer habits (a change that could take generations).
In Mexico, consumers have a long-established preference for soft drinks that have a
significantly lower price point. The Mexican beverage market is therefore still
dominated by soft drink bottlers that not only have a much higher share of throat
(enjoying the highest per capita consumption globally), but also a dominant shelf
space presence in the traditional channel (where most of the per capita growth would
come from, in our view). In addition, higher growth dairy categories such as yoghurts
and non-dairy milk are competing for share.
Chart 15: Mexico Share of throat (2014, by volume)

Others
2%
Milk
8%
Juices
8%
Carbonated Soft
Drinks
29%
Chart 16: Mexico - Beverage Categories Volume Growth (2009-14 CAGR)

8%
Alcoholic
Drinks
14%
7.1%
6%
4.4%
4.3%
4.1%
4%
1.8%
2%
Bottled water
39%
1.1%
0%
-2%
Others
Source: Euromonitor, BTG Pactual research
Bottled
water
Juices
Overall
Beverages
Source: Euromonitor, BTG Pactual research
Alcoholic Carbonated
Drinks Soft Drinks
-1.7%
Milk
Lala
01 September 2015
Table 5: Mexico Beverages Companies - Points of Sale
Company
Points of Sale
Coca Cola (Arca + KOF)
1,222,725
Pepsi (Cultiba)
740,000
Lala
500,000
with limited pricing power Milk is still a fairly commoditized business, in our
view, despite the strong brand awareness of both Lala and Nutrileche (the second
and fourth most recognized brands in Mexico along with Coca and Bimbo at number
one and three, respectively; see table 6). As seen in chart 17, Lala commands a
limited premium vs industry prices, and overall prices have followed milk costs over
time, as seen in chart 10, despite high market concentration.
Table 6: Mexico - Top 10 Consumer Brands

Position
Company
Households that purchase brand
Frequency of purchase (times/year)
Coca-Cola
99%
82
Lala
98%
40
Bimbo
99%
35
Nutri Leche
77%
29
La Moderna
86%
21
Alpura
63%
25
Nescaf
96%
16
Pepsi
60%
24
Knorr
94%
15
10
Danone
92%
14
Source: Kantar World Panel
Chart 17: Mexico - Average fresh milk prices for consumers (Ps$/ 1 L carton)
Source: SAGARPA, Secretara de Economa
page 18
Lala
01 September 2015
page 19
Chart 18: Mexico - Average UHT milk prices for consumers (Ps$/ 1 L carton)
Source: SAGARPA
Chart 19: Mexico - Average milk price for consumers and estimated milk cost (Ps$/L, y/y growth)
12%
10%
8%
6%
4%
2%
0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-2%
Average milk cost
Source: SAGARPA, SIAP
Lala - Milk price
Alpura - Milk Price
San Marcos - Milk Price
Lala
01 September 2015
Chart 20: Lala - Average milk price for consumers and estimated milk cost (Ps$/L, y/y growth)
14%
12%
10.2%
10%
8%
6%
4%
1.8%
2%
0%
2004
2005
2006
2007
2008
2009
Average Lala milk price for consumers
2010
2011
2012
Average milk cost in Coahuila
Source: SAGARPA, SIAP
To a lesser degree, we believe subsidized milk producers like LICONSA, which

accounts for ~8% of the Mexican drinking milk market, have anchored prices by
selling milk at an average discount of 15%. For comparison purposes, we see that
KO bottlers price their products at a much higher premium relative to peers
(monetizing the premium of their brands) and have also been able to consistently
raise prices in line with inflation, as seen in chart 22. Having said that, helped by
relatively stable milk costs (discussed later in the report), Lala has delivered
consistent gross margins over time.
2013
2014
page 20
Lala
01 September 2015
page 21
Chart 21: Milk & CSDs - Price Comparisons (Ps$)

Mom and pop store
Milk and Substitutes (1L UHT)

Lala
14.50
14.20
14.17
14.50
14.20
14.30
14.50
14.00
Alpura
15.00
15.00
13.08
15.00
14.60
15.00
14.50
15.00
Liconsa
NA
13.00
Sello Rojo
NA
Santa Clara
16.00
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
11.00
16.00
13.33
16.00
12.90
15.49
NA
14.50
14.50
NA
NA
15.00
15.00
15.00
NA
NA
8.25
15.50
12.90
NA
NA
NA
20.00
NA
20.80
21.40
20.90
NA
NA
NA
NA
NA
25.50
20.50
21.25
NA
NA
NA
NA
NA
23.90
20.50
21.25
NA
NA
12.42
35.50
36.90
32.98
31.50
NA
NA
NA
45.50
43.32
NA
NA
13.25
NA
24.50
21.35
NA
NA
12.50
12.30
12.30
NA
12.20
Parmalat by Lala
NA
Borden by Lala
NA
NA
NA
NA
15.00
NA
8.90
13.40
Bov (Organic)
NA
Biorganic (Organic)
Del Rancho (Organic)
Silk (Almond)
NA
Retailer's private label
Blue Diamond (Almond)
35.50
16.50
17.00
NA
43.00
21.00
22.00
Nutri Leche by Lala (Dairy Formula)
12.50
12.50
11.67
Forti Leche (Dairy Formula)
12.20
12.20
11.17
Coca-Cola
10.70
13.70
11.17
13.70
11.33
12.00
15.00
9.67
Pepsi
9.00
9.00
9.00
9.00
10.00
8.16
9.00
8.50
NA
6.50
NA
NA
6.42
6.00
NA $
6.33
Crush
4.45
NA
NA
NA
Retailer's private label
4.50
5.50
NA
NA
Ades (Soy)
NA
12.90
13.00
NA
NA
Dark Cola (1L)
Big Cola
NA
NA
NA
NA
5.83
NA
NA
NA
Note: Adjustments were made for those drinks that do not come in 1L presentations
Chart 22: Mexico - Average milk and CSDs prices (y/y growth)
15%
10%
5%
0%
-5%
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
Lala
Source: SAGARPA, KOF, AC Company Data
4Q12
1Q13
Coca Cola
2Q13
3Q13
Alpura
4Q13
1Q14
Inflation
2Q14
3Q14
4Q14
1Q15
2Q15
Lala
01 September 2015
page 22
Value-added dairy products: High margins with strong growth potential, but
very competitive
In order to sustain organic top line growth in the high single digits in the long term,
Lala will need to accelerate growth in the higher value-added segment in Mexico.
Processed dairy products such as yoghurt, cheese, cream, butter and ice
cream/desserts are categories that command higher margins and offer more
attractive growth prospects going forward, since most of these categories are sold at
significantly higher price points coming from product differentiation and constant
product innovation.
Table 7: Mexico - Dairy Categories

Category
Drinking Milk
Lala's Market Share (2014, %)
Lala's Market Share Position (2014, #)
Category's 2014-19E CAGR (by value)
34%
1.0%
14%
4.2%
23%
2.2%
Cheese2
3
Yoghurt and Sour Cream
Includes Nutri Leche, Parmalat, Borden and Mi Leche

Includes Los Volcanes and Nestl
3 Includes Nestl
Source: Euromonitor
1
2
Cheese and yogurt are the most relevant categories in processed dairy
productsLala is currently the market leader in smaller categories such as desserts
and cream with 46% and 50% market shares, respectively, but will need to grow in
bigger categories such as cheese and yogurts. Lalas dominant position in the fluid
milk category and strong commercial relationships in both the modern and traditional
channels coupled with its extensive distribution network should allow them to make
inroads, but both markets are very competitive and currently led by deep pocketed
players that have historically fought aggressively for market share. In addition, both of
these markets seem to offer limited consolidation opportunities given the high
concentration
in
yogurts,
and
the
large
diversification
in
channels/categories/producers in cheese.
Dairy byproducts account for 35% of Lala's sales (including beverages and others
that represent 5% of sales) and have been the main driver of top line growth. Cheese
and yogurts are the two largest categories within value-added dairy segments
(according to our estimates, these two categories comprise ~70% of Lalas ex-milk
sales). Lala has a relevant presence in both categories but does not have a leading
position in either of them (number 2 in both cheese and yogurt), providing room for
potential market share gains if Lala were to capitalize on its current distribution
platform and shelf space (especially in the traditional channel). Gaining market share
will not be easy in markets that are 1) more competitive and fragmented and 2)
dominated by long-established leaders.
Cheese
is
the
fastest
growing
category
and
provides
consolidation
opportunities due to high fragmentationThe cheese market in Mexico is the

largest processed category, worth ~US$4.1 Bn and has an expected top line CAGR
Lala
01 September 2015
of 4.2% in the next 5 years according to Euromonitor. Sigma Alimentos leads the
category with a market share of 18%, with a strong presence in the traditional
channel, followed by Lala, which leads the market of pre-packaged cheese in the
modern channel (with a 34% of value share).
The market is highly fragmented both in terms of channels and producers, with a
large presence of small local producers (most of which sell unpackaged cheese). Soft
cheese, with varieties such as Oaxaca and Panela, remains the most popular
category, accounting for 63% of total category sales and fragmentation is highest
within this segment with a large presence of small independent producers.
Lala has made significant progress in this category, increasing its share to 14% (from
11%) in the last year through the licensing agreement with Nestle (which included
yogurts and cheeses), and we expect this trend to continue as they expand into the
bulk cheese category (a category currently dominated by Sigma) in the next twelve
months after doubling capacity at its new Torreon complex.
Yogurt is more competitive and growth opportunities are limitedYogurt is the

second largest category within the processed dairy segment in Mexico, with a market
size of ~US$1.5 Bn. Yogurt is a relatively mature market in Mexico, with an expected
value CAGR of 1.4% in the next 5 years according to Euromonitor. The market is
highly concentrated in the hands of 4 players, who control almost 90% of the market,
and competition is intense both in terms of pricing and consistent product
rollout/innovation. Danone leads with a 28% share, followed by Lala with 23%, and
Yakult with 21%. Lala has been consistently gaining share over the past ten years
mainly through the introduction of new products/brands and made a significant jump
to 23% from 14% after acquiring the distribution/production rights of Nestle.
Consolidation opportunities in this category seem limited now due to its high
concentration, but we would not discard the possibility of further consolidation
between the big players due to the intense price competition seen in recent years.
2. Milk prices: unique business models adds price and cashflow

stability
Not surprisingly, milk cost is the biggest driver of margins for dairy companies globally
(accounting for more than 50% of COGS in the case of Lala). With feed costs (mostly
corn and soybean meal) accounting for almost two thirds of milk producers' costs,
milk prices have typically been highly correlated with grain prices (although prices
have not shown this correlation in recent years neither in Mexico nor globally).
High volatility of milk prices along with the commoditized nature of fluid milk has been
the main reason why dairy companies have struggled over time, but Lala's semivertical integration with milk producers (discussed later) has allowed the company to
page 23
Lala
01 September 2015
benefit from stable prices, steady and reliable supply of milk from milk producers with
high efficiency/productivity, and a favorable position to negotiate milk prices in a
market that shows semi-monopsony characteristics.
Lala benefits from a relatively efficient and stable milk production system
Dairy companies, especially in emerging markets, have struggled to secure high
quality raw milk and have been forced to pay high milk prices mainly due to
production inefficiencies resulting from a fragmented supply chain. Mexicos unique
market structure (i.e. vertically integrated with a production deficit) has resulted in
relatively
efficient
supply/demand
dynamics,
avoiding
big
movements
in
stocks/capacity that trigger high volatility in markets such as the US. Dairy companies
in Mexico have benefited from a consolidated milk production system that has made
significant progress in terms of productivity.
Although Mexico has a diverse set of milk producing technologies and efficiencies,
production has been increasingly concentrated in larger and more efficient players
(including Lalas suppliers). Following the lifting of price controls on milk in 1988 and
the NAFTA agreement in 1994, the milk producing industry went through a
consolidation period to become competitive and its efficiency improved significantly
over time, with the largest producers (responsible for more than 50% of total output)
showing productivity levels on par with US peers (lowest cost producers globally).
The largest producers were able to invest heavily in technology over time, benefiting
from long term visibility on demand that comes from being vertically integrated (or
semi-integrated in the case of Lala).
Chart 23: Milk Productivity (Ton/head)

12
10
8
6
4
2
0
Mexico - New Zealand
small
producers
European Mexico - large

Union
producers
Source: USDA, Foreign Agricultural Service
Canada
Lala
US
page 24
Lala
01 September 2015
page 25
Chart 24: Milk Production in Mexico (Mn liters)

12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: SIAP, SAGARPA
Milk prices still unaffected by plummeting international milk powder prices

Still, production levels in Mexico are well below its demand (a deficit of ~200 million
liters annually), making it the fourth largest milk importer globally (largest milk powder
importer globally). Milk powder imports have grown significantly since tariffs were
completely lifted on imports, but prices locally have been relatively unaffected since
milk powder currently accounts for only 12% of the total milk market. Milk powder
prices have hit six-year lows on the back of weak demand in China/Russia, with
market expectations of lower prices set to persist for some time. In this scenario, we
expect imports to accelerate and pressure market milk prices (and margins),
assuming the government does not impose any tariffs.
Chart 25: Mexico - Powder Milk / Total Milk Share (%, by value)
13%
12%
11%
10%
2008
Source: Euromonitor
2009
2010
2011
2012
2013
Lala
01 September 2015
Chart 26: Dairy Imports to Mexico, by type (2014, K Ton)
Fresh milk
and cream
5%
Others
33%
Powdered
skim milk
33%
Chart 27: Dairy Imports to Mexico, by origin (2014, K Ton)
Holland
2%
Ireland Chile
3%
3%
New
Zealand
7%
Argentina Uruguay
1%
2%
Others
6%
USA
76%
Cheese
17%
Powdered Powdered
whey whole milk
1%
11%
Source: Administracin General de Aduanas
page 26
Source: Administracin General de Aduanas
Chart 28: Lala - Average Milk Price for Consumers vs Corn International Prices (y/y growth, 6-month lag)
Source: SAGARPA, SIAP, Bloomberg
If prices fall, Lala would benefit less than competitorsMilk distributors that are
vertically integrated such as Lala and Alpura use little powder milk, with most of the
consumption coming from government subsidized Liconsa and global processed
dairy producers like Danone. Companies like Lala might not see the full benefit of
lower prices given its semi-vertical integration with raw milk producers. At the same
time, we believe dairy companies that have the full benefit of lower milk powder
Lala
01 September 2015
prices could become more aggressive on pricing as they pass through part of the
benefits to consumers. This potential impact takes us to the next question.
Chart 29: Lala - Average Milk Price for Consumers vs Powder Milk International Prices (y/y growth, 6-month lag)
Source: SAGARPA, SIAP, Bloomberg
Is Lalas relationship with suppliers a win-win?

We believe it is in the long run, but we understand potential conflicts of interest could
raise some concerns. Lala currently sources roughly two thirds of its milk needs from
related parties (out of ~1,000 suppliers, 40% are shareholders of Lala) at prices that
are negotiated at arms length on a one-on-one basis according to management.
But relationship has been mutually beneficial.Lalas unique relationship with
suppliers has allowed it to enjoy the benefits that come with vertical integration such
as high stability in milk costs, favorable negotiating terms with unrelated suppliers,
and high barriers to entry while avoiding the burden of owning a highly capitalintensive asset. At the same time, long-term visibility on demand has allowed
suppliers to make investments in technology and improve productivity (productivity of
suppliers at La Laguna is on par with US peers, with yields per cow close to 32
liters/day vs an average of 12 liters/day nationwide).
The question is how much of these productivity improvements are passed through to
Lala, since both parties are benefiting from the mutual relationship, especially in a
market where feed costs are coming down. Given the limited disclosure on this front,
it is difficult to determine, but 1) Lala benefited from stable milk prices at a time when
commodity prices were rising sharply in 2013 and 2) milk producers' share in Lala is
reportedly of higher value relative to its farms (aligning incentives with minority
shareholders). A potential decline in milk prices derived from growing milk powder
imports will be a good test to see if Lala is willing to squeeze its related parties
returns at some point.
page 27
Lala
01 September 2015
3. New management upside/downside isn't priced-in: difficult to price

but we see upside risks
New management has yet to be tested After Lalas high turnover in management
since the IPO (naming three different CEOs and two different CFOs since early
2013), we expect the market to keep a close eye on the development of newly
appointed CEO Scott Rank and CFO Gabriel Fernandez.
It is too early to assess at this point how much of an impact a change at the C-level
management will have on Lalas strategic direction and execution since 1) it is still a
closely held company in which the chairman and largest shareholder Eduardo Tricio
has the last word on strategic decisions (especially when it comes to expansion to
new markets/M&A) and 2) Antonio Hernandez, its current COO with more than 27
years of experience at Lala, has held his position for a long time. Furthermore, there
is also the possibility that former CEO Alejandro Rodriguez Bas (who was appointed
when Lala IPOed) left since he was not given enough leeway to run the company.
but we are optimistic. Scott Rank could Walmartize Lala Having said that, we
are optimistic about recent management changes and we believe the market has not
priced the potential upside from a possible culture transformation, which we
acknowledge is difficult to measure. First of all, the new management team got off on
the right foot and has built goodwill with investors already, after delivering a solid set
of results since they took over.
Secondly, we believe Scott Rank can bring part of the Walmart culture to Lala, a very
process-oriented execution in all areas such as new business/product development,
supply chain efficiencies, and tight cost controls. Following several years of focusing
on top line growth (both in terms of M&A in the US and product innovation/SKU
proliferation in processed dairy), we believe there will be significant room for
improvements in some areas, especially in costs.
There are several examples today that reflect part of this culture already. And in his
limited communication with the market, Scott has set out Lalas strategy into three
pillars: 1) a strong focus on top line growth (especially in higher value-added
products), 2) operating efficiency, which is currently focused on integration of
upstream transportation and plant operations, and 3) resuming growth through M&A
or JVs (discussed in later section).
Organic growth already acceleratingWith regards to organic growth in Mexico,

Scott has emphasized opportunities to improve commercial relationships across all
channels. With the assumption that there are significant opportunities to improve goto-market execution and cross selling, the company has not only begun aligning
commercial strategies and best practices across production/distribution/sales, but is
also investing heavily in technology (i.e. new software, PDAs for sellers). This new
strategy is already yielding positive results, explaining the acceleration in value-added
product sales in 2Q15.
page 28
Lala
01 September 2015
and efficiency gains are already boosting margins A strong focus on

efficiency is also yielding results after investing more than Ps$3,500 million since
2013 in 1) distribution (i.e. increasing ownership from 37% to 60% in primary fleet and
adding 700 units in secondary fleet) and 2) production (consolidating plants and
increasing capacity in Torreon and Irapuato currently halfway through the process).
A relevant part of the strong gross margin seen in 1H15 was a reflection of efficiency
gains from investments made last year. Lastly, in our meeting with CFO Gabriel
Fernandez, we got the impression that he sees relevant saving opportunities in
SG&A. Gabriel has relevant experience in implementing zero-based budgeting across
different regions while working at Mars and P&G, making us bullish on potential
savings going forward.
Table 8: Lala - Expected efficiencies (Ps$Mn)
2015E
EBITDA-level efficiency gains (bps)
EBITDA-level efficiency gains (Ps$ Mn)
EBITDA margin
90 bps
430
13.10%
2016E
EBITDA-level efficiency gains (bps)
EBITDA-level efficiency gains (Ps$ Mn)
EBITDA margin
100 bps
497
14.10%
Presentation of 5-year plan could be a catalystNew management has not

formally unveiled its 3- or 5-year strategic plan yet to the market (although already
discussed internally), but we expect a more open communication going forward in
terms of specific revenue/returns/margin targets. In our view, the market should react
positively as current management will be given the benefit of the doubt, considering
Scotts vast experience in the Mexican retail market and solid reputation, and the
positive quarterly results delivered since they took over.
page 29
Lala
01 September 2015
page 30
4. Growth via M&A/JVs and moves into new categories: Another

optionality that is not priced in. An acquisition in the US seems the
most likely option.
A plethora of options to acquire
Like most staple companies in Mexico with a dominant position in its market, Lala is
now facing the challenge of looking for new sources of growth and is currently sitting
on about 8 billion pesos in cash, mostly raised during the IPO in 2013, in addition to
potential leverage (an additional Ps$20 billion if it levers up to 2x EBITDA).
It has been analyzing a plethora of options since then, which range from expansion to
other Latin American markets, to leveraging on its expertise in dairy, and to exploring
acquisitions in related refrigerated categories in Mexico (since dairy companies would
likely be ruled out by antitrust authorities) where Lala can leverage on its leading
distribution/sales/brand platform Tables 5 and 6 show a list of some potential
candidates.
Table 9: M&A Targets for Lala in Mexico

Category
Milk
Market Size (US$ Bn) 5-year volume CAGR

4.4
1.3%
Cheese
4.1
2.5%
Yogurt/Sour Milk
1.5
3.6%
Chilled Meats
1 For
1.4
some private companies, estimates were made
Source: Bloomberg, BTG Pactual research
3.5%
Target
Sello Rojo
San Marcos
Group's Revenues (US$ Mn)
248
84
Qualtia Alimentos
290
Chilchota
136
None, >95% of the market is dominated by Lala, Alpura, Sigma and multinationals
Bafar
553
Qualtia Alimentos
290
Saljamex
76
Capistrano
69
Lala
01 September 2015
page 31
Table 10: Milk M&A Targets for Lala in LatAm

Country
Drinking Milk Market Size (US$ Bn) 5-year volume CAGR
Target
LBR
Tirolez
Brazil
Mexico
8.8
4.4
3.0%
1.3%
Venezuela
1.5
0.4%
Colombia
1.6
0.4%
Jussara
Chile
1.0
0.9
-0.2%
3.9%
1,300
NA
230
Vigor
1,872
Italac
700
Sello Rojo
248
San Marcos
84
Indulac
49
Convelac
NA
Colanta
Argentina
Group's Revenues (US$ Mn)
1,000
La Sbana
400
Alpina
910
Mastellone
1,534
SanCor
NA
Watt's
606
Soprole
615
Colun
500
Surlat
50
Tonicorp (Arca Continental)
340
Reybanpac
200
Dos Pinos
846
Ecuador
0.7
0.5%
Guatemala
0.7
4.5%
Costa Rica
0.3
1.8%
Dos Pinos
846
Conaprole
NA
Uruguay
0.3
1.4%
Per
0.2
4.2%
Bolivia
0.2
4.6%
1 For
Ecolat
2,088
Alicorp
2,214
Pil Andina
some private companies, estimates were made
Growing through M&A in Latam dairy and/or related categories in Mexico has
been challenging so farNow an acquisition in the US looks like a probable
outcome
Lala has not pulled the trigger yet due to a lack of options and/or managements
financial discipline in Latam or related categories. Management has taken a
conservative approach as of late, maybe triggered by the relatively difficult
experience of Lala after the acquisition spree in the US. Some investors, however,
have grown impatient as the cash raised in the IPO has been sitting in the balance
sheet. Lala has reacted and seems to be making a concerted effort to speed up the
process. Scott Rank has made it one of his top priorities, and a specialized team
dedicated solely to M&A/new business development has been put in place (no much
information provided about the new team yet).
NA
Grupo Gloria
346
Lala
01 September 2015
M&A conditions for Lala could improve in the medium term in South America
but risky in current market conditions Expanding to other dairy markets in Latin
America has been a challenge given the limited synergies and risk of venturing into
new markets. Management has emphasized they will be looking for targets that will
be margin accretive from the get-go, which would eliminate most of the dairy
operators with a large proportion of commoditized milk products and leave only
players with a high share of processed dairy and/or dominant market shares. These
profitable/stable operations are usually not for sale (or valuation expectations are
unrealistic).
The few assets that have been up for sale, like BRFs dairy assets (which Lala
analyzed closely according to press reports), have been sold in competitive bids that
demand high valuations (Lactalis bought it for BRL$1.8bn at an estimated valuation of
11.5 EV/EBITDA 14). Moreover, most of the Mexican companies venturing into
South America have struggled historically (especially in Brazil). On the other hand,
the wait might pay off, since many of these markets are sailing through rough macro
conditions. Valuations should be more reasonable and several international players
might be willing to sell some of their operations if tough macro conditions persist.
while growing organically in adjacent categories in Mexico might make more

sense Growing in related categories in Mexico such as cold cuts/meat and
beverages has also been analyzed, since Lala can leverage its scale and distribution,
especially in refrigerated products. But again, the few targets worth chasing are either
not up for sale and/or valuation expectations are through the roof. Missed
opportunities include the ice cream assets that Grupo Herdez bought from Nestle for
Ps$1bn in December 2014 at a high valuation of 12x EV/EBITDA for a business that
still requires significant capex.
Table 11: Global Chilled Processed Meats M&A
Date
Target
Acquirer
Aug-15 Elaborados Crnicos
Sigma Alimentos
May-15 Applegate Farms
Hormel Foods
Value (US$ Mn)
EV/Sales
EV/EBITDA
775
2.3x
Nov-14 Primo Group Holdings
JBS
1,258
0.8x
10.0x
May-14 Hillshire Brands
Tyson
8,397
2.1x
13.4x
May-14 Pinnacle Foods
Hillshire Brands
6,556
9.6x
Nov-13 Campofrio
Alfa
705
0.3x
6.3x
Oct-13 Vion
Darling
2,172
0.9x
7.5x
May-13 Smithfield
WH Group
6,955
0.5x
9.2x
Mar-13 Freybe Gourmet Foods
Premium Brands
55
0.7x
May-11 Aidells Sausage
Hillshire Brands
Jan-11 Cesare Fiorucci
Campofrio
Jun-10 Keystone Foods
Marfrig
87
0.9x
228
0.6x
1,260
0.2x
page 32
Lala
01 September 2015
Figure 1: Chilled Processed Food in Mexico - Market Shares (by value,

2014)
Bimbo
2%
Figure 2: Chilled Processed Food in Mexico - Main Players
Others
(<2% ea.)
15%
Capistrano
4%
page 33
Sales (2014) EBITDA (2014) EBITDA margin

Sigma
Sigma
49%
Saljamex
5%
71,465
8405
12%
9,126
907
10%
Bafar
Qualtia
Qualtia
12%
8,116
Saljamex
Capistrano
721
9%
1,276
3
1,163
Bafar
13%
Source: Euromonitor
Includes international operations

Includes snacks business
3 Estimate
1
2
We dont discard the possibility of Lala analyzing assets such as Bafar and Qualtia,
but growth in related categories might be less expensive and less risky by growing
organically and leveraging on its own brands. Lala has already been testing the
waters with pilots in cold cuts under the Nutri Deli brand, with positive results so far.
Chart 30: Chilled Processed Meats in Mexico - Y/Y Volume Growth

6%
Chart 31: Chilled Processed Meats in Mexico Market (Ps$ Bn)

25
24
5%
23
4%
21
3.2%
3%
19
2%
17
1%
15
2010
Source: Euromonitor
2011
2012
2013
2014
2009
Source: Euromonitor
2010
2011
2012
2013
2014
Lala
01 September 2015
An acquisition or reintegration of assets is starting to look more likely, but

could be received with skepticism by investors Lastly, there is the US, a market
where Lala has some history. In an acquisition spree that began with the purchase of
Wells Dairy in 2007, Lala made a series of acquisitions in 2008-2009 that increased
its size by an estimated 70% (US revs reaching more than 40% at the peak). Lala
spent an estimated US$800mn in this period by acquiring Promised Land Dairy,
Farmland Dairies, and National Dairy (the most relevant one at a ticket of US$450
million according to press reports).
Eventually, however, Lala decided to spin off the US assets (under the newly created
company Laguna Dairy) in June 2013, mainly since many of these assets were still
struggling. Even though there is no information available with regards to valuation, we
believe Lala was able to buy at bargain prices at a time when US milk producers were
suffering due to a combination of plummeting milk prices and high feed costs.
Since then, however, industry conditions have improved significantly as milk prices
have rebounded and feed costs have declined consistently (although we have little
visibility on how much margins have improved, if they actually have, so far for Lala).
Considering that Lala is very familiar by now with the US dairy market and, more
specifically, the Laguna Dairy assets, reintegrating some of these assets or acquiring
related dairy assets (mostly processed/higher value added) in the US seems
increasingly possible.
How a reintegration would be received by the market is up in the air depending on
structure/valuation, but we would expect some degree of skepticism unless Lala is
able to acquire the processed dairy segment of Laguna Dairy (which accounts for an
estimated 20-30% of the business according to management).
Spinning off the processed segment will not be easy due to the high integration with
the commodity business but we do not discard the possibility. In addition, the
integration/turnaround of Laguna Dairy has turned out to be tougher than expected in
the commoditized milk business, where profits/returns are extremely low and likely in
need of relevant capex investments delayed due to rough years. And as discussed
previously, the outlook for milk prices is currently deteriorating rapidly due to slowing
Chinese demand.
page 34
Lala
01 September 2015
Valuation
DCF-based YE2016 TP of Ps$46/share
Attractive risk/reward reflects free optionality
Like the majority of consumer stocks in Mexico, Lala is not cheap based on any
valuation metric, especially after the recent rally (stock up 29.9% YTD vs. -0.5% for
the IPC). But we believe the risk/reward of buying at current prices is still attractive
when we consider factors such as:
1)
Valuations look fair relative to Mexican staples peers and global dairy
companies, despite the fact that, in our view, forward looking multiples in
2016/2017 do not capture any of the potential upside from a) a potential
culture transformation by new management and b) an imminent M&A move.
In other words, we believe the market has not priced in any of the potential
benefits since these are extremely difficult to price at this point; and
2)
The risk/reward is attractive at current prices when we look at the DCFbased TPs in our bearish (10.6% downside), base (24.6% upside), and
bull case (35.4% upside) scenarios. Our base case scenario assumes
revenue and EBITDA CAGR of 6.6% and 9.6%, respectively (EBITDA
margin expansion of 200bps). Our base case scenario numbers are roughly
in line with Bloomberg consensus (as seen in table 12). Our bear case
scenario shows sales and EBITDA CAGR of only 4.4% (assuming flat
EBITDA margins) while our bullish case scenario implies revenue and
EBITDA (margin expansion of 300bps) CAGR of 7% and 11.5%,
respectively.
Table 12: Lala - BTG Pactual vs. Consensus Estimates (Ps$ Mn)
2015
Revenues
EBITDA
Net Income
2016
2017
BTG Pactual
48,043
51,243
54,680
Consensus
48,337
51,453
54,470
% Difference
-0.6%
-0.4%
0.4%
BTG Pactual
6,591
7,232
7,936
Consensus
6,499
7,135
7,668
% Difference
1.4%
1.4%
3.5%
BTG Pactual
3,946
4,276
4,708
Consensus
3,815
4,212
4,581
% Difference
3.4%
1.5%
2.8%
Source: BTG Pactual research, Bloomberg
We are setting our YE2016 at Ps$46/share, implying a total return of 24.6% from
current prices. Our TP is based mainly on a DCF with a 50/50 weighting in our base
and bull case scenario in order to partially capture the value of the optionality
discussed throughout the report. Table 13 shows a summary of our model and the
main assumption for our DCF in our base case scenario.
page 35
Lala
01 September 2015
Chart 32: Lala - 12MF Historical P/E
Chart 33: Lala - 12MF Historical EV/EBITDA
page 36
Lala
01 September 2015
page 37
Table 13: Lala DCF Valuation Summary (Ps$ Mn)

2016 E
EBIT
2017 E
2018 E
2019 E
2020 E
2021 E
2022 E
2023 E
2024 E
5,985
6,580
7,208
7,898
8,651
9,330
9,991
10,623
1,915
2,106
2,306
2,527
2,768
2,986
3,197
3,399
3,616
EBIAT
4,069
4,475
4,901
5,371
5,882
6,345
6,794
7,224
7,683
(+) D&A
1,247
1,355
1,456
1,557
1,664
1,778
1,899
2,028
2,165
268
106
148
(204)
(218)
(230)
(242)
(259)
(277)
(2,306)
(2,187)
(2,033)
(2,161)
(2,298)
(2,443)
(2,599)
(2,765)
(2,943)
3,279
3,748
4,472
4,563
5,031
5,449
5,852
6,227
6,628
3,045
3,231
3,579
3,391
3,471
3,491
3,480
3,438
75,194
3.0%
3.2%
3.5%
3.3%
3.4%
3.4%
3.4%
3.4%
73.5%
(-) Tax
32%
(-) Change in NWC

(-) CapEx
FCF to the Firm
Present Value of FCF's @ 7.7% WACC
Weight of FCF's
DCF
Net Debt (Cash)
Minority Interest
Equity Value
102,320
6,591
(7,116)
91,380.78
1,095
(6,882)
108,340
1,095
2,474
85,594
Implied Target Price (MXN$/Share)
$44
13.0x
Current Market Price (MXN$/Share)
$36.93
# of Shares (Mn)
11,299
Lala
01 September 2015
page 38
We present a summary of our model below, including the assumptions for our bear,
base, and bull scenarios.
Table 14: Lala Model Summary Bear Scenario

2010
Revenues
2011
35,214
2012
2013
2014 E
2015 E
2016 E
2017 E
2018 E
2019 E
2020 E
2021 E
37,992
40,345
43,156
44,993
48,043
50,282
52,649
54,889
57,241
59,710
7.9%
6.2%
7.0%
4.3%
6.8%
4.7%
4.7%
4.3%
4.3%
4.3%
4.3%
4,389
4,101
4,885
5,147
5,471
6,591
7,096
7,430
7,746
8,078
8,427
8,793
-6.6%
19.1%
5.4%
6.3%
20.5%
7.7%
4.7%
4.3%
4.3%
4.3%
4.3%
1,222
10.8%
1,107
12.1%
1,241
11.9%
2,579
12.2%
3,082
13.7%
3,946
14.1%
4,185
14.1%
4,369
14.1%
4,538
14.1%
4,711
14.1%
4,889
14.1%
5,078
y/y growth
-9.4%
12.1%
107.8%
19.5%
28.1%
6.1%
4.4%
3.9%
3.8%
3.8%
3.9%
Net Margin
2.9%
3.1%
6.0%
6.8%
8.2%
8.3%
8.3%
8.3%
8.2%
8.2%
8.2%
y/y growth
EBITDA
y/y growth
EBITDA Margin
Net Income
Capex
890
y/y growth
62,303
977
1,506
1,233
2,978
2,725
2,263
2,106
1,921
2,003
2,090
2,181
9.8%
54.2%
-18.1%
141.6%
-8.5%
-17.0%
-6.9%
-8.8%
4.3%
4.3%
4.3%
Source: BTG Pactual research, Company Data
Table 15: Lala Model Summary Base Scenario

2010
Revenues
2011
35,214
2012
2013
2014 E
2015 E
2016 E
2017 E
2018 E
2019 E
2020 E
2021 E
37,992
40,345
43,156
44,993
48,043
51,243
54,680
58,099
61,749
65,646
7.9%
6.2%
7.0%
4.3%
6.8%
6.7%
6.7%
6.3%
6.3%
6.3%
6.3%
4,389
4,101
4,885
5,147
5,471
6,591
7,232
7,936
8,664
9,455
10,315
11,108
-6.6%
19.1%
5.4%
6.3%
20.5%
9.7%
9.7%
9.2%
9.1%
9.1%
7.7%
1,222
10.8%
1,107
12.1%
1,241
11.9%
2,579
12.2%
3,082
13.7%
3,946
14.1%
4,276
14.5%
4,708
14.9%
5,153
15.3%
5,632
15.7%
6,150
15.9%
6,620
y/y growth
-9.4%
12.1%
107.8%
19.5%
28.1%
8.4%
10.1%
9.4%
9.3%
9.2%
7.6%
Net Margin
2.9%
3.1%
6.0%
6.8%
8.2%
8.3%
8.6%
8.9%
9.1%
9.4%
9.5%
y/y growth
EBITDA
y/y growth
EBITDA Margin
Net Income
Capex
890
y/y growth
69,808
977
1,506
1,233
2,978
2,725
2,306
2,187
2,033
2,161
2,298
2,443
9.8%
54.2%
-18.1%
141.6%
-8.5%
-15.4%
-5.1%
-7.0%
6.3%
6.3%
6.3%
Table 16: Lala Model Summary Bull Scenario

2010
Revenues
2011
35,214
2012
2013
2014 E
2015 E
2016 E
2017 E
2018 E
2019 E
2020 E
2021 E
37,992
40,345
43,156
44,993
48,043
51,483
55,193
59,059
63,217
67,692
7.9%
6.2%
7.0%
4.3%
6.8%
7.2%
7.2%
7.0%
7.0%
7.1%
6.9%
4,389
4,101
4,885
5,147
5,471
6,591
7,266
8,562
9,398
10,312
11,313
12,233
-6.6%
19.1%
5.4%
6.3%
20.5%
10.2%
17.8%
9.8%
9.7%
9.7%
8.1%
1,222
10.8%
1,107
12.1%
1,241
11.9%
2,579
12.2%
3,082
13.7%
3,946
14.1%
4,299
15.5%
5,132
15.9%
5,647
16.3%
6,209
16.7%
6,820
16.9%
7,373
y/y growth
-9.4%
12.1%
107.8%
19.5%
28.1%
8.9%
19.4%
10.1%
9.9%
9.9%
8.1%
Net Margin
2.9%
3.1%
6.0%
6.8%
8.2%
8.3%
9.3%
9.6%
9.8%
10.1%
10.2%
y/y growth
EBITDA
y/y growth
EBITDA Margin
Net Income
Capex
890
y/y growth
72,329
977
1,506
1,233
2,978
2,725
2,317
2,208
2,067
2,213
2,369
2,532
9.8%
54.2%
-18.1%
141.6%
-8.5%
-15.0%
-4.7%
-6.4%
7.0%
7.1%
6.9%
Lala
01 September 2015
P/E seems the best multiple to use in the case of Lala When we look at
comparable valuation, our preferred metrics for Mexican staples are free cash yields
and EV/EBITDA, but in the case of Lala we believe P/E is the most adequate. Free
cash flow yields have become more relevant in recent years as many investors are
looking for potential dividend players among highly defensive names. But in the case
of Lala, we dont believe free cash flow yield is the most suitable valuation metric
considering it is going through an abnormally high capex period due to large
investments in operating efficiencies/upstream logistics consolidation. P/E multiples
are not perfect either when we take into consideration Lalas idle cash balance,
generating low yields, but they do seem more comparable.
On a free cash yield basis, Lala looks relatively expensive to peers. But considering
that capex will normalize following efficiency investments, free cash flow yields look
closer to peers. Companies like KOF seem to be showing the highest yields, but
currency risks are much higher considering its strong exposure to South America.
When we look at P/E multiples, Lala is trading in line with industry averages. It is
trading roughly in line with Mexican staple peers (KOF, Bimbo, and Gruma being the
most relevant) and at a premium of 25% to regional peers (mainly explained by its
Mexican exposure premium, in our view).
Relative to global dairy companies, it also trades roughly in line with the average
(trading at a discount to higher value-added dairy companies and a premium to
commodity dairy producers).
When looking at historical multiples, Lala is trading at a premium of 5.7% to its
average, which seems justified considering the strong inflection we have seen in
earnings growth in the past couple of quarters and potential catalysts.
Where should Lala be trading at? Our view is that considering 1) Lalas strong
earnings momentum in the medium term, which yields an earnings CAGR of 15% in
the next 5 years (relative to 8% of Mexican peers), 2) its highly defensive business
model and 3) potential upside from a positive impact from change in management
and potential M&A, Lala should be trading in the high end of 20-25x earnings where
high quality staple names in Mexico have been trading at. At our TP of Ps$46, Lala
would be trading at 25x P/E 16.
page 39
Lala
01 September 2015
Table 17: LatAm Food and Beverages - FCF

yield
FCF yield
2016
2017
Lala
3.7%
4.4%
Kof
5.1%
6.5%
Arca Continental
5.0%
5.6%
Femsa
6.2%
7.4%
Ambev
5.0%
5.8%
Ccu
1.4%
4.6%
Andina
7.9%
10.9%
Concha y Toro
4.7%
5.2%
Bimbo
4.0%
5.4%
Herdez
5.0%
6.3%
Gruma
4.5%
5.0%
Alicorp
3.7%
5.4%
Minerva
-0.2%
4.1%
JBS
-5.6%
8.5%
Marfrig
4.3%
5.1%
BRF
4.7%
5.3%
M Dias Branco
6.7%
9.3%
Source: Bloomberg
page 40
Lala
01 September 2015
page 41
Table 18: LatAm Food and Beverages Comps
Stock
Country
Lala
MX
Coca-Cola Femsa
MX
Arca Continental
MX
Femsa
MX
AmBev
BR
CCU
CL
Andina
CL
CL
Vina Concha y Toro
Beverages - Latin America Average
Bimbo
MX
Herdez
MX
Gruma
MX
Alicorp
PE
Nutresa
CO
Minerva
BR
JBS
BR
Marfrig
BR
Brasil Foods
BR
M. Dias Branco
BR
Food - Latin America Average
Market Cap Current Price

(US$Mn)
(Local FX)
LALAB.MM
5,395
36.93
KOFL.MM
14,885
120.93
AC*.MM
8,994
94.00
FEMSAUBD.MM
31,378
147.68
ABEV3.BZ
84,684
19.10
CCU.CI
3,999
7521.40
ANDINAB.CL
2,763
2346.10
CONCHA.CL
1,250
1162.40
Ticker
BIMBOA.MM
HERDEZ*.MM
GRUMAB.MM
ALICORC1.PE
NUTRESA.CO
BEEF3.BR
JBSS3.BR
MRFG3.BR
BRFS3.BR
MDIA3.BR
Food & Beverages - Latin America Average

11,822
1,058
5,653
1,119
2,838
602
12,010
945
16,997
2,147
P/E
2015E
23.2x
23.0x
20.4x
25.9x
20.5x
19.4x
20.6x
15.5x
20.9x
42.33 29.7x
41.24 20.1x
219.99 21.0x
4.29 13.0x
19600.00 10.8x
11.12
7.6x
14.46
4.6x
6.43 (144.3x)
69.06 21.6x
67.09 15.8x
16.0x
18.3x
2016E
21.4x
21.6x
19.9x
28.7x
18.7x
17.5x
17.3x
14.2x
19.9x
EV / EBITDA
2015E
2016E
12.9x
11.6x
10.4x
10.0x
11.2x
10.8x
16.2x
14.4x
13.6x
12.4x
9.5x
8.6x
8.6x
7.8x
11.3x
10.3x
11.8x
10.8x
26.8x
17.8x
18.3x
10.6x
9.8x
10.9x
9.9x
10.8x
16.2x
14.3x
15.0x
13.1x
11.0x
13.2x
8.6x
5.9x
6.3x
6.1x
5.0x
11.3x
10.7x
9.6x
12.5x
10.5x
11.5x
7.5x
5.2x
5.7x
5.7x
4.5x
9.8x
9.0x
8.6x
17.3x
10.6x
9.6x
Lala
01 September 2015
page 42
Table 19: Global Dairy Comps
Company
Lala
Nestl
Danone
Almarai
China Mengniu Dairy
Saputo
Yakult
Whitewave
Fonterra
Vietnam Dairy
Parmalat
Bel
Dean Foods
Dairy Crest
Average
Country
Mexico
Switzerland
France
Saudi Arabia
China
Canada
Japan
USA
New Zealand
Vietnam
Italy
France
USA
United Kingdom
Ticker
LALAB MM Equity
NESN SW Equity
DANOY US Equity
ALMARAI AB Equity
CIADF US Equity
SAP CN Equity
2267 JP Equity
WWAV US Equity
FSF NZ Equity
VNM VN Equity
PLT IM Equity
FBEL FP Equity
DF US Equity
DCG LN Equity
Market Cap
Us$ Mn
5,395
233,989
40,541
13,425
8,316
9,163
9,942
8,224
4,998
5,397
4,742
2,624
1,587
1,243
EBITDA Margin
2013
2014
11.9% 12.2%
17.6% 17.8%
13.3% 14.7%
27.9% 27.0%
6.8%
7.8%
10.6% 10.3%
8.8%
8.7%
9.4% 11.0%
7.6%
4.2%
26.1% 22.4%
8.3%
8.1%
11.7% 11.0%
3.4%
1.8%
6.9%
4.7%
12.2%
EV/EBITDA
2015E 2016E
12.9x 11.6x
14.1x 13.4x
12.0x 11.1x
17.2x 15.0x
10.6x 9.4x
12.4x 11.4x
NA
NA
19.7x 16.4x
10.3x 8.8x
11.5x 10.2x
7.5x 6.7x
NA
NA
6.1x 6.1x
9.9x 9.4x
P/E
2015E 2016E
23.2x 21.4x
21.1x 19.7x
19.0x 17.4x
25.4x 21.3x
17.1x 15.0x
20.3x 18.0x
NA
NA
40.9x 34.0x
16.2x 12.2x
17.5x 15.7x
20.6x 17.8x
NA
NA
16.2x 16.2x
15.0x 13.7x
11.5% 12.0x 10.8x 21.1x 18.5x
Lala
01 September 2015
Company Description
Lala is the leading milk and dairy products company in Latin America and among the
largest in the world (see table 20). In Mexico, its main market, Lala has a very strong
share and in Latin America, the company is still in the process of growing its footprint.
Table 20: Top Global Dairy Companies

Position
Company
Country of headquarters Dairy turnover (Us$ Bn, 2013)
Nestl
Switzerland
Danone
France
28.3
20.2
Lactalis
France
19.4
Fonterra
New Zealand
15.3
Firesland Campina
Netherlands
14.9
Dairy Farmers of America USA
14.8
Arla Foods
Denmark / Sweden
12.5
Saputo
Canada
8.8
Dean Foods
USA
8.6
10
Yili
China
7.6
11
Unilever*
Netherlands / UK
7.5
12
Meiji
Japan
7.4
13
DMK
Germany
7.1
14
Mengniu
China
7.0
15
Sodiaal
France
6.6
16
Bongrain
France
5.9
17
Kraft
USA
5.8
18
Muller*
Germany
5.0
19
Schreiber Foods*
USA
5.0
20
Morinaga Milk Industry
Japan
4.8
Lala
Mexico
3.3
* Estimate
Source: Rabobank
Lala operates 18 production plants (16 in Mexico and 2 in Central America), 165
distribution centers (160 in Mexico and 5 in Central America) and more than 6,500
delivery routes that reach more than 500,000 points of sale, which makes Lalas
chilled distribution network the largest in Mexico. The company has a strong
presence both in the traditional and modern channel.
page 43
Lala
01 September 2015
Chart 34: Lala Distribution Network
page 44
Chart 35: Lala - Sales by Channel (LTM 2Q15)
18
16 in Mx, 2 in CAm
Production Plants
Modern
51%
Traditional
49%
165
160 in Mx, 5 in Cam
Distribution Centers
>6,500
Delivery Routes
>500,000
Points of Sale
51% of Lalas sales are through the modern and 49% through the traditional channel.
Lalas five top retail clients, which are modern retail chains, comprise almost 40% of
the companys consolidated net sales and with the recent consolidation in the retail
industry, these customers have gained more bargaining power.
Chart 36: Lala - Revenue Breakdown (LTM 2Q15)
Chart 37: Lala Estimated Cost of Sales Breakdown (LTM 2Q15)
Milk
65%
Liquid Milk >95%

Milk
55%
Lala Revenues
Ps$46 Bn
Other Dairy Products

30%
Non-Dairy Beverages and Others

6%
Powder Milk <5%

Lala COGS
Ps$29 Bn
Packaging
20%
Others
25%
Source: Company Data, BTG Pactual estimates
Lala
01 September 2015
Chart 38: Lala - Consolidated Sales (Ps$ Mn)
page 45
Chart 39: Lala - Consolidated EBITDA and EBITDA Margin (Ps$ Mn)
44,993
45,000
EBITDA
EBITDA Margin
6,000
40,000
5,471
13.0%
35,000
5,000
12.5%
30,000
4,000
12.0%
3,000
11.5%
25,000
20,000
2,000
15,000
11.0%
1,083
1,000
10,000
5,000
10.5%
2000
2006
2009
2010
2011
2012
2013
2014
10.0%
2009
2010
2011
2012
2013
2014
Lala
01 September 2015
History
In 1949, a group of small dairy farmers from the La Laguna agricultural region of
northern Mexico formed a union in Torreon. Soon afterwards, they started collecting
and pasteurizing milk with the two facilities that were built in the decade of the 50s,
one in Torren, Coahuila and one in Gmez Palacio, Durango.
In 1960, an automatic milking system was implemented in the unions facilities,
improving milk productivity and quality. In this decade, the company expanded its
operations into central Mexico and was the first in the country to introduce carton
packaging for milk, leaving glass bottles behind.
In the 1970s, the company expanded into northeastern and southern Mexico both
through greenfield investments and through M&As. The UHT milk aseptic process,
through which dairy products get an extended shelf life, was introduced in the 1980s,
enabling Lala to store and distribute these products without refrigeration.
The Lala brand gained strength in the 1990s through significant investments in
marketing campaigns and the introduction of new products and presentations. In this
decade the company also expanded into western Mexico.
Since 2000, Lala has experienced a period of rapid growth, both organically and
through M&A. Several facilities and brands were acquired, including Nutrileche,
Mileche, Boreal, Los Volcanes, Gelatinas Art, Borden Dairy and the license for the
Parmalat brand in Mexico. In this decade, Lala successfully achieved a nationwide
presence in Mexico and expanded into Guatemala and the United States.
A few months before making its IPO in 2013, Lala divested its Borden Dairy business
in the United States through a spin-off, creating a new company known as Laguna
Dairy, which currently remains independent from Lala. This decision was based on
Bordens lower growth and more competitive market with considerably lower returns
than Lalas main markets.
In 2013, Lala also entered into a license agreement with Nestl to manufacture and
distribute its branded yogurts and cheeses in Mexico for a period of 20 years. At the
beginning of 2014, the federal government imposed a new tax on high calorie food.
Bottlers, snacks manufacturers and other food and beverages companies were
severely affected, but because the new tax exempted most dairy products, only about
2% of Lalas product portfolio was affected by this tax.
At the end of 2014, Lala strengthened its presence in Central America with the
acquisition of Eskimo, a Nicaraguan dairy company.
In 65 years, Lala has evolved from a small union in northern Mexico that only
produced milk to a company that markets and sells a large portfolio of branded and
value-added products across Mexico and in some parts of Central America.
page 46
Lala
01 September 2015
IPO and use of proceeds

In October, 2013, Lala made its initial public offering, raising 14.1 billion pesos
(US$1.08 billion) by offering 21.4% of its shares outstanding. The deal was eighttimes subscribed and came in a boom of Mexicos stock market.
The IPO came in at Ps $27.50 a share (at the higher end of the $23.50-$27.50
expected range), which represented an implied valuation of 22.1x P/E 2014.
Net proceeds from the IPO have been used for investments in primary and secondary
fleets, consolidation of their distribution model, reconfiguring production assets,
development of new routes, increase of their refrigerated distribution capacity, loan
repayment and M&A in Mexico and Central America.
Product portfolio
Lala sells a broad range of products under more than 25 brands in the milk, cheese,
yogurt, butter, margarine, desserts, fruit drinks and juices and cold cuts categories.
100% of Lalas sales come from branded products.
According to Kantar World Panel, Lala and Nutrileche are the second and fourth most
recognized consumer brands in Mexico. Lala, which targets consumers of all income
segments, is the companys flagship brand and Nutrileche, the companys second
largest brand, caters to the mid/ low-income class segments.
Their broad product portfolio comprises more than 600 SKUs in the following
categories:
Milk: Whole, skim, half-skim, fat-free, lactose-free, extra calcium, with fiber,
condensed, milk for babies, flavored milks for kids and milk flavored with fruit juice
Cheese: Panela, panela light, Oaxaca, Oaxaca light, cottage, cottage light,
manchego and American
Yogurt: Spoonable (plain, light plain, fruit, light fruit, with fruit for kids, with cereal,
probiotic and fiber-enhanced) and drinkable (plain, light plain, fruit, light fruit, with fruit
for kids, lactose-free fruit, probiotic and fiber-enhanced fruit and smoothies)
Other dairy products: Cream (sour, light sour and sweet), butter, margarine (original
and salt-free), milk jelly, pudding, rice pudding and custard
Non-Dairy Products: Fruit drinks, orange juice and jelly
Cold Cuts (Nutri Deli brand): Meat sausages, turkey sausages and turkey ham
page 47
Lala
01 September 2015
License agreements
Parmalat: In 2004, Lala acquired Parmalat Mexico. This purchase included
Parmalats milk production facility in Mexico and the exclusive license agreement for
use of the brand (production, commercialization and distribution) in the country until
2019. Under the agreement, Lala is required to pay Parmalat Spa royalties for use of
the brand. In 2019, the agreement will be renewed automatically provided that its
terms and agreements have been met. Of Parmalats global product portfolio, only
milk is sold in Mexico by Lala. More than 10 years after leaving the Mexican market,
Parmalat Spa returned by acquiring Quesos Esmeralda in 2015.
Nestl: In 2013, Lala entered into an exclusive license agreement with Nestl for the
manufacture and distribution of certain refrigerated products (namely cheese and
yogurt) under the Nestl brand in Mexico. This agreement expires in 2033 and may
be renewed subject to certain conditions.
page 48
Lala
01 September 2015
page 49
Management and Ownership Structure

Eduardo Tricio Haro has been the Chairman of the Board of Lala since 2000 and a
member of the Board for more than 27 years. Lalas board of directors is comprised
of 10 members, four of whom are independent. Lalas senior management team is
also comprised of 10 members:
Table 21: Lala Members of the Board of Directors
Table 22: Lala Senior Management Team
Name
Charge
Name
Eduardo Tricio Haro
Chairman
Scot Rank Crawford
Chief Executive Officer
Arqumedes Adriano Clis Ordaz
Member
Gabriel Fernndez Ares de Parga
Chief Administrative and Finance Officer
Marcelo Fulgencio Gmez Ganem
Member
Ricardo Arista Puigferrat
Director of Technical Processes
Juan Carlos Larrinaga Sosa
Member
Antonio Hernndez Astorga
Director of Operations
Jos Manuel Tricio Cerro
Member
Jos Luis Chavarra Alarcn
Director of Logistics & Services
Pablo Roberto Gonzlez Guajardo
Independent Member
Alejandro Zenteno Snchez
Director of Human Resources
Rafael Robles Miaja
Independent Member
Pablo Crdoba Njera
Director of Marketing
Blanca Avelina Trevio de Vega
Independent Member
Rafael de Jess Garza Juregui
Director of Sales - Retail
Juan Pablo del Valle Perochena
Independent Member
Miguel Angel Fuertes Bojorges
Director of Sales Commerce
Efran Tapia Crdova
Secretary
Efran Tapia Crdova
General Counsel
Chart 40: Lala Ownership Structure
Minority
1%
Free
float
21%
Control
group
78%
Charge
Lala
01 September 2015
Lala
page 50
Lala
Income Statement (MXNmn)

Revenue
Operating expenses (ex depn)
EBITDA (BTG Pactual)
Depreciation
Operating income (EBIT, BTG Pactual)
Other income & associates
Net Interest
Abnormal items (pre-tax)
Profit before tax
Tax
Profit after tax
Abnormal items (post-tax)
Minorities / pref dividends
Net Income (local GAAP)
Adjusted Net Income
Tax rate (%)
Per Share
EPS (local GAAP)
EPS (BTG Pactual)
Net DPS
BVPS
Cash Flow (MXNmn)
Net Income
Depreciation
Net change in working capital
Other (operating)
Net cash from operations
Cash from investing activities
Cash from financing activities
Bal sheet chge in cash & equivalents
Balance Sheet (MXNmn)
Cash and equivalents
Other current assets
Total current assets
Net tangible fixed assets
Net intangible fixed assets
Investments / other assets
Total assets
Trade payables & other ST liabilities
Short term debt
Total current liabilities
Long term debt
Other long term liabilities
Total liabilities
Equity & minority interests
Total liabilities & equities
Company Profile:
Lala is a milk and dairy products company that targets
consumers of all ages and socioeconomic levels. The company
operates in Mexico, which is its main market and where it has a
very strong market share, and in Central America, where it is
still in the process of growing its footprint.
12/2010
12/2010
12/2010
12/2010
-
12/2011
12/2011
12/2011
12/2011
-
Financial ratios
EBITDA margin
Operating margin
Net margin
RoE
RoIC
EBITDA / net interest
Net debt / EBITDA
Total debt / EBITDA
Net debt / (net debt + equity)
12/2012
40,345
(35,630)
4,885
(916)
3,969
(156)
(182)
0
3,631
(1,961)
1,670
(395)
(34)
1,241
1,636
54
12/2012
0.50
0.66
0.00
5.40
12/2012
1,636
916
1,584
(243)
3,497
(1,501)
(2,870)
12/2012
607
6,322
6,929
9,559
1,244
9,518
27,251
4,436
1,408
5,844
2,541
5,237
13,621
13,630
27,251
12/2013
43,156
(38,054)
5,147
(933)
4,213
119
(79)
0
4,253
(1,432)
2,821
(206)
(37)
2,579
2,785
34
12/2013
1.04
1.13
0.99
8.05
12/2013
2,785
933
(1,006)
9,117
11,623
(1,308)
738
7,835
12/2013
8,442
6,634
15,076
9,934
1,224
100
26,333
3,551
646
4,197
81
1,851
6,128
20,204
26,333
12/2014
44,993
(39,651)
5,471
(1,001)
4,470
(188)
270
0
4,552
(1,436)
3,116
0
(34)
3,082
3,082
32
12/2014
1.25
1.25
0.01
9.31
12/2014
3,082
1,001
(571)
(541)
2,970
(3,428)
(665)
(1,246)
12/2014
7,196
8,037
15,234
12,361
2,231
100
29,926
4,446
31
4,477
50
2,098
6,625
23,301
29,926
12/2015E
48,043
(41,527)
6,591
(1,143)
5,448
159
227
0
5,834
(1,847)
3,988
0
(42)
3,946
3,946
32
12/2015E
1.59
1.59
0.52
10.07
12/2015E
3,946
1,143
(273)
(79)
4,736
(2,703)
(1,909)
(249)
12/2015E
6,947
8,695
15,642
13,921
2,426
110
32,100
4,691
0
4,691
65
2,132
6,888
25,212
32,100
12/2016E
51,243
(44,062)
7,232
(1,247)
5,985
98
240
0
6,322
(2,001)
4,321
0
(45)
4,276
4,276
32
12/2016E
1.73
1.73
0.80
10.97
12/2016E
4,276
1,247
268
1,377
7,168
(2,306)
(1,973)
1,441
12/2016E
8,388
7,817
16,205
14,980
2,511
114
33,811
4,070
0
4,070
65
2,207
6,342
27,469
33,811
12/2017E
54,680
(46,799)
7,936
(1,355)
6,580
98
283
0
6,961
(2,203)
4,758
0
(50)
4,708
4,708
32
12/2017E
1.90
1.90
1.04
11.80
12/2017E
4,708
1,355
106
2,564
8,734
(2,187)
(2,566)
1,348
12/2017E
9,736
8,075
17,812
15,812
2,599
118
36,341
4,422
0
4,422
65
2,284
6,771
29,570
36,341
12/2013
11.9%
9.8%
6.5%
16.7%
28.8%
65.2x
-1.5x
0.1x
-61.8%
12/2014
12.2%
9.9%
6.8%
14.3%
31.4%
-20.3x
-1.3x
0.0x
-44.0%
12/2015E
13.7%
11.3%
8.2%
16.5%
31.8%
-29.0x
-1.0x
0.0x
-37.5%
12/2016E
14.1%
11.7%
8.3%
16.4%
32.1%
-30.2x
-1.2x
0.0x
-43.5%
12/2017E
14.5%
12.0%
8.6%
16.7%
33.9%
-28.0x
-1.2x
0.0x
-48.6%
Source: Company reports and BTG Pactual estimates. Valuations: based on the last share price of that year(E)
based on share price as of 31 August 2015
Lala
01 September 2015
page 51
Required Disclosures
This report has been prepared by BTG Pactual US Capital LLC.
The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results.
BTG Pactual
Rating
Buy
Neutral
Sell
Definition
Coverage *1
IB Services *2
Expected total return 10% above the companys sector

average.
Expected total return between +10% and -10% the
companys sector average.
Expected total return 10% below the companys sector
average.
43%
45%
51%
46%
6%
29%
1: Percentage of companies under coverage globally within the 12-month rating category.
2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
Absolute return requirements
Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed:
a) a Buy rated stock must have an expected total return above 15%
b) a Neutral rated stock can not have an expected total return below -5%
c) a stock with expected total return above 50% must be rated Buy
Analyst Certification
Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that:
(i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to BTG
Pactual US or its affiliates, as the case may be;
(ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities
discussed herein.
The research analyst responsible for this report is registered/qualified as a research analysts by FINRA.
It is possible that research analysts contributing to this report are employed by a non-US broker-dealer. In this case the analysts will not be registered/qualified as research analysts under FINRA
rules and therefore will not be subject to the restrictions contained in the FINRA rules regarding communications with a subject company, public appearances, and financial interest in the securities
of the subject company.
Part of the analyst compensation comes from the profits of BTG Pactual US or its affiliates as a whole and/or its affiliates and, consequently, revenues arisen from transactions held by BTG Pactual
US or its affiliates.
Statement of Risk
Downside risks include, but are not limited to: 1) Slower than expected topline growth due to a highly penetrated dairy market in Mexico, 2) Stronger competition from Danone, Sigma and other
peers, 3) Capital allocation risks in the form of bad M&A, 4) Volatility of raw materials.
Valuation Methodology
Grupo Lala SAB de CV [MXLALA] (Primary) - Our Discounted Cash Flow-based target price for Lala is Ps$46, discounted at a Weighted Average Cost of Capital of 7.7% The Weighted Average
Cost of Capital is comprised of a cost of debt of 5.2% and a cost of equity of 9.5%.
Company Disclosures
Company Name
Lala 1, 2, 4, 6, 18, 19, 20
Reuters
LALAB MM
12-mo rating
Buy
Price
MXN36.93
Price date
1-9-2015
1. Within the past 12 months, BTG Pactual US or its affiliates has received compensation for investment banking services from this company/entity.
2. BTG Pactual US or its affiliates expect to receive or intend to seek compensation for investment banking services and/or products and services other than investment services from this
company/entity within the next three months.
4. This company/entity is, or within the past 12 months has been, a client of BTG Pactual US or its affiliates, and investment banking services are being, or have been, provided.
6. BTG Pactual US and/or its affiliates receive compensation for any services rendered or presents any commercial relationships with this company, entity or person, entities or funds which
represents the same interest of this company/entity.
18. As of the end of the month immediately preceding the date of publication of this report, neither BTG Pactual US nor its affiliates or subsidiaries beneficially owned 1% or more of a class of this
company`s common equity securities.
19. Neither BTG Pactual US nor its affiliates or subsidiaries have managed or co-managed a public offering of securities for the company.
20. Neither BTG Pactual US nor its affiliates or subsidiaries engaged in market making activities in the subject companys securities at the time this research was report was published.
Lala
01 September 2015
Lala
Stock Price (MXN)
Price Target (MXN)
50.0
40.0
30.0
20.0
10.0
Buy
Neutral
Sell
No Rating
Source: BTG Pactual and Economatica. Prices as of 01 September 2015
1-Sep-15
1-Jun-15
1-Mar-15
1-Dec-14
1-Sep-14
1-Jun-14
1-Mar-14
1-Dec-13
1-Sep-13
1-Jun-13
1-Mar-13
1-Dec-12
1-Sep-12
0.0
page 52
Lala
01 September 2015
page 53
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Lala
01 September 2015
page 54
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Equity Research

BTG Pactual Global Research

12m Price Target

RIC: LALAB MM, BBG: LALAB MM

Lala is transitioning into becoming a higher value-added dairy company, a

New management could transform the culture. We are optimistic about

Trading Data and Return Forecasts

potential changes as Scott Rank could Walmartize Lala in positive ways: a

very process-oriented execution in all areas such as new business/product

development, supply chain efficiencies, and tight cost controls.

After more than two years exploring inorganic growth opportunities we

In line valuations, but premium warranted... Expect a re-rating

Price Target (MXN)

Stock Price (MXN)

however, we believe an expansion to the US is the most likely scenario.

expectations from sellers normalize in struggling markets. At this point,

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 51

Chart 1: Lala - Consolidated Sales (Ps$ Mn)

Chart 2: Lala - Consolidated EBITDA and EBITDA Margin (Ps$ Mn)

Source: Company Data

Chart 3: Dairy - Global Comparables Sales and EBITDA margins

Source: Bloomberg, Company Data

Source: Company Data

Chart 4: Lala - Revenue Breakdown (LTM 2Q15)

Chart 5: Lala Estimated Cost of Sales Breakdown (LTM 2Q15)

Liquid Milk >95%

Other Dairy Products

Powder Milk <5%

Non-Dairy Beverages and Others

Source: Company Data

Source: Company Data

Chart 6: Lala - Sales by Channel (LTM 2Q15)

Chart 7: Lala Distribution Network

Source: Company Data

Table 1: Mexico - Dairy Categories

Lala's Market Share (2014, %)

Lala's Market Share Position (2014, #)

Category's 2014-19E CAGR (by value)

Yoghurt and Sour Cream

Includes Nutri Leche, Parmalat, Borden and Mi Leche

Table 2: Lala Financials Summary (Ps$ Mn,

Table 3: Lala EV Components (Ps$ Mn)

(+/-) Net Debt (Cash)

(+) Minority Interest

Table 4: 2015-18 expected CAGR

Source: Company Data, BTG Pactual research

Chart 8: Lala Ownership Structure

Source: Company Data

Source: Company Data, BTG Pactual research

Source: BTG Pactual research

Lala is transitioning into becoming a higher value-added dairy company, a

New management could transform the culture. We are optimistic about

1. Not your typical dairy company. Unique market and company

2. Earnings are strong and should remain so in the medium term

3. We are optimistic about potential changes in culture that new

4. High Mexico exposure relative to Mexican staple names

Mexican staples peers and global dairy

1. Accelerating organic top line growth in Mexico will not be easy

2. Limited visibility on milk costs

3. A weak Peso could squeeze margins

4. Risks of capital allocationLala might be forced to take on higher

5. High management turnover could continue

1. A successful transition to becoming a higher value-added dairy

Liquid milk A lower growth and relatively commoditized cash cow