Alsea, S.A.B. de C.V. Annual Report 2006

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FY2006 Annual Report · Alsea, S.A.B. de C.V.

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What’s next?

2006 Annual Report

www.alsea.com.mx
Yucatán 23, Col. Hipódromo Condesa, 06170. Mexico City +(52.55) 52.41.71.00

Shareholder’s Information

Investor Relations

Diego Gaxiola
Corporate Finance
ri@alsea.com.mx

Rodrigo Benet
Investor Relations
rbenet@alsea.com.mx

Tel. +(52.55) 52.41.71.58

Headquarters
Alsea S.A.B. de C.V.
Yucatán 23
Col. Hipódromo Condesa
06170, Mexico City
Tel +(52.55) 52.41.71.00

Independent Auditors
KPMG Cárdenas Dosal, SC
Boulevard Manuel Ávila
Camacho No. 176
11650 Mexico City
Tel. +(52.55) 52.46.83.00

+(52.55) 24.87.83.00

Information on Alsea’s stock
The shares of Alsea, S.A.B. de C.V. single
series, have been traded on the Mexican
Stock Exchange (Bolsa Mexicana de
Valores or BMV) since June 25, 1999.
Ticker symbol: BMV Alsea*

The Alsea 2006 Annual Report may include certain expectations regarding the
results of Alsea S.A.B. de C.V. and its subsidiaries. All such projections, which
depend on the judgment of the Company management, are based on up-to-
date, known information; however, expectations may vary as a result of facts,
circumstances and events beyond the control of Alsea and its subsidiaries.

This Annual Report is printed on environmentally
friendly paper containing at least 10% of post-
consumer ﬁber and with Elemental Chlorine Free
(ECF) bleaching papermaking.

We would like to extend our thanks to all our
clients, employees and staff who participated
in this Annual Report.

Boris G. Calva
IT Manager

Mauricio Rojas
Domino’s Pizza Client

Emilia Suárez
Popeyes Client

Dalia Sánchez
Marketing
Information
Manager

Valeria González Garza
Training Manager

Ma. Elena Pérez
Tax Planing Manager

Raquél Moscoso
Financial Analyst

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Cover: Elvira Vázquez Moreno.
Mexico City. Barista, Starbucks Coffee Masaryk

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D

Investors, analysts, suppliers,
employees and clients often
ask us this question.

The answer is very simple,

More territories,
more units,
more opportunities,
more results,
more ALSEA...

and the commitment to
make more people happy.

After 16 years of operations; the opening of 865 units; presence in four

countries; sales in excess of $5.8 billion pesos; close to 17,000 employees;

and more than 150 million satisﬁed customers per year, we would appear

to have reached our goal… But we still proudly say that the best of Alsea
is yet to come.

Alsea is the leading restaurant operator in Latin America
operating brands of proven success such as Domino’s
Pizza, Starbucks Coffee, Burger King, Popeyes Chicken &
Seafood and Chili’s Grill & Bar. Its multi-unit operation is
supported by its Shared Services Center, including the
supply chain through DIA, real estate and development
services, as well as administrative services such as
ﬁnance, human resources and technology.

Mission
Our reason for being
To ensure the success of the
Alsea brands, by employing a
synergy and critical mass
model, based on human talent
and social responsibility.

Vision
Where we are headed
To be the best and largest
restaurant operator with
proven success brands in
the countries in which we
participate.

“With people and for people”

Values
What makes us great
• People, our most
important asset
• Customer service
• Respect and loyalty
• Personal excellence
• Commitment
• Oriented to results

Strategic areas
We work for
• People are the most important
• To surpass the customer’s

expectations with operating
excellency

• To be the market leader
• To be the best strategic partner
• To grow while keeping the

Company and the shareholder’s
investment safe.
• Social responsibility

OUR BRANDS

“We make each pizza the best
experience of the day”

“The Starbucks Coffee Experience”

“Commitment and passion
towards the consumer”

“The best team, serving the best chicken”

“Make every moment a great one”

“Complete and on time”

Mexico
553 Domino’s Pizza
117 Starbucks Coffee
94 Burger King
17 Chili’s
9 Popeyes

new territories

Year 2006 undoubtedly
witnessed a large step in our
expansion towards Latin
America, with the acquisition
of all of the Burger King units in
Argentina and Chile, as well as
the successful opening of the
ﬁrst two Starbucks Coffee
units in Brazil. This progress
will serve as the fundamental
basis for the future of our
strategic growth plan towards
the year 2011.

Brasil
23 Domino’s Pizza
2 Starbucks Coffee

Chile
23 Burger King

Argentina
27 Burger King

CONTENTS

Financial Highlights

To our Shareholders

9 Alsea in Mexico

22 Management

10 Alsea in Latin America

23 Board of Directors

¿what’s next?

13 Our Clients

14 Our Employees

24 Management Discussion & Analysis

29 Audit Committee Report

17 New Opportunities

31 Corporate Practices Commitee’s Report

18 Alsea Shared Services

32 Consolidated Financial Statements

21 Social Responsibility

55 Shareholder’s Information

Financial Highlights

(1)

%CAGR (6)

2006

2005

2004

2003

2002

18.2

23.2

29.2

8.3

21.8

8.8

5,808,116

100

4,496,196

100

3,858,903

100

3,087,369

100

2,972,124

100

3,816,468 65.7

2,791,236

62.1

2,223,889 57.6

1,736,764

56.3

1,659,255

55.8

3,396,185 58.5

2,319,415

51.6

1,656,329 42.9

1,290,340

41.8

1,217,637

41.0

420,283

7.2

471,821

10.5

377,133

9.8

272,826

8.8

305,263

10.3

970,990 16.7

682,757

15.2

567,560 14.7

446,424

14.5

441,619

14.9

220,348

3.8

274,884

6.1

181,181

4.7

132,423

4.3

157,191

5.3

3,902,501

100

3,243,914

100

2,295,434

100

1,933,417

100

1,867,748

100

Net Sales

Gross Proﬁt

Operating Expenses

Operating Income

EBITDA (2)

Consolidated Net Proﬁt

Total Assets

Cash

Liabilities with Cost

479,331 12.3

769,355

23.7

235,447

6.0

165,055

5.1

153,161

102,708

6.7

4.5

221,272

11.4

234,211

12.5

161,623

8.4

192,784

10.3

Majority Shareholder’s Equity

2,558,087 65.5

1,767,498

54.5

1,483,157 64.6

1,303,062

67.4

1,221,972

65.4

EVA (3)

ROIC (4)

ROE (5)

68.2

2.3

Stock Price

Earnings per Share

Dividend paid per Share

Book Value per Share

Shares Outstanding (millions)

Number of Stores

Employees

14,650

15.8%

8.4%

58.89

1.45

1.13

16.42

155.8

865

16,797

151,808

23.2%

15.2%

27.74

2.04

0.77

12.94

136.6

728

13,629

141,627

26.2%

12.1%

23.95

1.31

0.63

11.93

124.2

626

10,483

75,971

22.1%

10.2%

9.60

1.18

0.41

11.16

116.8

560

7,336

74,707

20.4%

13.1%

7.35

1.32

0.09

10.29

118.8

518

6,950

(1) Figures in thousand of pesos, expressed in purchasing power as of December 31, 2006,
except per share data, number of units and employees.
(2) EBITDA is deﬁned as operating income before depreciation and amortization.
(3) EVA is deﬁned as the operating income - net invested capital (total assets - cash and
cash equivalents - liabilities without cost) times the cost of capital (considers an equity
cost of 17%).

(4) ROIC is deﬁned as the operating income divided by the net invested capital
(total assets - cash and cash equivalents - liabilities without cost).
(5) ROE is deﬁned as net proﬁt divided by total stockholders equity.
(6) Compounded annual growth rate from 2002 to 2006.

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2
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6
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2

Net Sales

EBITDA(2)

Consolidated
Net Proﬁt

EVA(3)

Majority
Shareholder’s
Equity

To Our Shareholders

Alberto Torrado Martínez
CEO

We surveyed several Alsea investors and analysts, with regards to
their primary concerns as to the future of our Company. This is what
you asked us:

generated by the growth of the brands,
which provokes the generation of
synergies and creates economies of scale
that permit us to take advantage of the
operative leverage, which have positive
repercussions on our results.

What is Alsea's strategy for its expansion
plan in Latin America for the next ﬁve
years?

In Alsea, we like to set goals and to reach
them. This is why we have a strategic plan
towards 2011, that proposes the challenge
of becoming the largest restaurant operator
of successful brands in the countries in
which we participate. In this sense, this plan
contemplates Alsea’s incursion into Brazil,
Argentina, Chile and Colombia, through
three of the brands in our portfolio: Domino’s
Pizza, Starbucks Coffee and Burger King,
whose objective is to strengthen our
position of leadership in Latin America.

Why does ALSEA think it is able to
successfully manage and exploit franchises
of different brands on a large scale and to
the maximum?

Through these years of operation, we have
learned that in Alsea, we are good at
replicating proven success concepts. This
has led us to become a catalyst for growth,
that carries an already proven formula to
its maximum exponent. We have
developed a unique business model in
which DIA, our distribution company,
assures the consistency of the products
that we offer to the customers of the
different brands of our portfolio, and
reduces dependence on third parties,
which contributes to always offering the
consumers the best experience.

It is important to mention that we
manage the brands independently and
never pit the growth of one against the
other. Each one focuses 100% on the stores'
customer service and operation. This way,
we permit Alsea to take charge of the
Company’s development and of all the
support necessary for its growth, through
the shared services center, granting the
required human resources, management
and technology services. Our business
model is based on the critical mass

Dear Shareholders: This time, we

wanted to do more than simply send

you a letter listing our achievements;

we wanted to hear your concerns

and share the response to some of

the questions posed. We consider

that this interview is the best way to

be close to you.

What is the biggest limitation you see
for future growth?

Without a doubt, it’s people. Through our
business model, we have assured the
economic sufﬁciency to comply with the
proposed growth plans; we have a
development system that locates the best
locations for the stores of the different
brands, but without a doubt, the most
important thing is to work with the right
people who can offer our customers the
service and quality that surpasses their
expectations. For this, the most important
strategic area is: “People are the most
important”, which requires us to focus on
recruiting the best personnel and to
furnish them with the best training and
development that assure their
permanence in the Company.

What do you think Starbucks Coffee will do
in 2009 with respect to the purchase
option it has, to increase its stake in the
Joint Venture for Mexico?

Starbucks Coffee International currently
owns 18% of the Joint Venture for Mexico,
while Alsea owns the remaining 82%.
Pursuant to the corresponding agreement,
Starbucks Coffee International has the
option of acquiring 32% of the capital stock,
to reach an equity share of 50%. This right
can be exercised in 2007 and 2008, under
the assumption that the brand
development plan is not fulﬁlled in Mexico,
but in accordance with the success this
brand has had, and the speed at which we
have been able to grow in the ﬁrst four
years of operation, we do not see this
happening. However, in 2009, Starbucks
can exercise this option, regardless of
whether the development plan is met.
We believe that it will do so when the
time comes.

Raquel Moscoso
Mexico City
IXE Casa de Bolsa
analyst for Alsea

Favorite Chili’s dish:
Chicken Crispers

Chili’s, What’s next?

According to our latest market studies, the
casual dining segment in Mexico is worth
more than $2 billion pesos; Alsea has a 9%
market share, which represents an attractive
opportunity for future growth.

Chili’s Santa Fe, Mexico City

ALSEA in Mexico, What’s next?

Mexico is the base of Alsea's operations and most surely in the
future, will continue to be the market with the highest growth
for our Company.

During 2006, upon celebrating the fourth
anniversary of the Starbucks Coffee brand
in Mexico, store number 100 was opened,
reafﬁrming that Starbucks Coffee Mexico
is one of the fastest growing markets.

402 corporate units and 151 sub-franchises
of Domino’s Pizza in Mexico at the end of
2006, and the remodeling of 34 units in
accordance with the brand’s new image
and its innovative way of serving the
customer in line with its new Mission.

Burger King Mexico grew 21% in its
units, equal to the opening of 16 units.

We acquired the remaining 40% of our
operations with the Chili’s Grill & Bar brand,
whose annual unit growth was 54%, equal
to six restaurants.

We achieved an increase of 80% in the
number of units with our brand, Popeye’s
Chicken & Seafood, and we refocused the
brand strategy, which began to generate
positive results.

What’s next? We have the goal of
reaching 1,276 units of our different
brands in Mexico at the end of 2011,
which means an average of 97
openings per year.

What’s next? In 2007, we set the goal
of opening more than one Starbucks
store in Mexico every week, to reach
182 units at the end of the year.

What’s next? We plan an average
opening of ten Burger King units per
year over the next ﬁve years.

What’s next? We will continue with the
innovation of products and
improvement in the quality of service
process in the Domino’s Pizza units
trough our renovation program “20/20”,
in order to maintain our position as
market leaders in the future.

What’s next? We expect a 35% growth
in the number of Chili’s Grill & Bar
units in 2007.

In the future, Alsea will increase its
presence in the casual dining market in
Mexico, by opening units, acquiring
existing brands and promoting new
brands, with which we plan to
consolidate our leadership position in
the markets in which we participate.

Chili’s restaurants is the goal set
for 2011, as part of the organic
expansion of this brand.

ALSEA in Latin America, What’s next?

In 2006, we decided to expand Alsea towards Latin America as one
of the main axles of the Company’s growth, which will accelerate
our development towards 2011 and permit us to carry Alsea’s
name to new territories, through the brands in our portfolio.

We acquired all of the Burger King units in
Argentina (27) and Chile (22), establishing
the bases to accelerate the brand’s growth
in such territories.

We signed the Joint Venture Agreement
to develop the Starbucks Coffee brand in
Brazil, with the opportunity of taking the
Starbucks experience to a country with
such a rich coffee-growing tradition.

Our operations in Latin America reached
sales in excess of $330 million pesos in
the eight months following this
purchase.

We successfully opened the ﬁrst two
Starbucks Coffee units in the City of
São Paulo.

What’s next? We deﬁne our expansion
strategy towards Latin America
through the incursion into four
countries - Brazil, Argentina, Colombia
and Chile - through the participation
of three brands: Domino’s Pizza,
Starbucks Coffee and Burger King,
in some of these countries.

What’s next? For 2007, we plan to
open six Burger King units in
Argentina and four more in Chile,
representing a combined growth
of 20%.

Burger King, What’s next?

With a potential market of approximately
280 million people in the countries
selected for our strategy in Latin America,
we are certain that the growth potential
for the Burger King brand has huge
dimensions.

Burger King 300. Guadalajara, Mexico

Diego Paolini
Chief Operating Ofﬁcer,
Burger King Latin America

Favorite Burger King
hamburger:
Double Whopper

The goal is to open an average
of eight Burger King units in
Argentina and Chile together
during the next ﬁve years, for
an annual compound growth
of 13%.

Burger King units in Argentina
and Chile is the goal that we
have set for the year 2011.

Mauricio Rojas
Mexico City

Favorite pizza:
Hawaiian Pizza

Christopher Rojas
Mexico City

Favorite pizza:
Pepperoni Max

Domino’s Pizza, What’s next?

In 2007, we will have 66 more units
operating under the “20/20” program,
in addition to the 34 we already have
at the end of 2006.

Domino’s Pizza Guadalupe Inn. Mexico City

Our clients, What’s next for them?

One of our most important objectives is our customers’
satisfaction. This is why in Alsea, we identify the constant
innovation of the products as a fundamental part of our
commercial strategy, focused on always surpassing the
consumers’ expectations.

During 2006, we initiated an ambitious
renovation program of the Domino's Pizza
units in Mexico, denominated “20/20”, which
includes a new store image, delivery
equipment, pizza boxes and uniforms; the
launching of a new menu at the national
level, with the introduction of other
specialties in pizzas and desserts, as well as
a line of salads to meet clients’ requirements.

As an integral part of this renovating
process of the Domino’s Pizza brand,
we started up a training program for the
employees, focused on improving our
image and our products, as well as the
communication with the consumers, to
increase service results.

What’s next? During the next ﬁve
years, as part of our strategic plan
for 2011, we will continue to renovate
the Domino’s Pizza units in Mexico,
and with the development of new
product lines that will offer different
flavor options, with the same quality
as always.

We invested in remodeling customer
service installations, such as the tables and
playgrounds in several of our Burger King
and Chili’s brands, so as to offer comfortable
spaces and improve the store image.

We were able to establish a closer
relationship with our Starbucks Coffee
clients, by opening more units every day,
giving them the possibility of enjoying
the Starbucks experience at a place
closer to them.

What’s next? We have established
new renovation policies for our assets
related to customer service, which will
translate into constant improvements
in our stores, so that they always
surpass our consumers’ expectations.

The “20/20” Domino’s Pizza renovation
plan does not only contemplate a
change of image in our stores; it also
contemplates a cultural transformation
of the brand, focusing all efforts on the
client's satisfaction, in accordance with
the brand’s new mission.

2,000

Domino’s Pizza employees will be
trained during 2007 as part of the
cultural transformation of the brand,
which seeks to surpass any consumer
expectation, by providing the highest
quality service.

Our employees, What’s next for them?

“People are the most important” establishes Alsea's strategic
plan in order to recruit, train and retain the best talent.
Employees are our most important asset.

At the end of 2006, personnel increased by
23%, to close the year with a total of 16,797
employees, reafﬁrming Alsea’s important
role as a generator of employment in
Mexico and more recently, in Latin America.

Recommendations derived from the
“People Project” were implemented,
to reduce the turnover of operative
employees in Domino’s Pizza.

Different steps were instrumented to
increase competitive compensation for
both the operative and administrative
employees.

Continuity was established for the deferred
compensation mechanisms to encourage
retention at the executive level.

We inaugurated Alsea’s state-of-the-art
employees training facility for the brands
of our portfolio. We will duplicate this
model throughout the Country.

We invested unprecedented resources to
strengthen the human resources structures
throughout the organization.

Starbucks Coffee Mexico recently obtained
recognition of second place among the 100
best companies to work for in Mexico. *

What’s next? We will start up a solid
process of development throughout
Alsea, to assure that all of the
employees have laid out their
success path.

What’s next? We will extend
successful practices in Alsea and focus
on the consumer of the Starbucks
Coffee brand, to conﬁrm the premise:
“People are the most important”.

* Granted by The Best Place to Work Institute.

Starbucks Coffee, What’s next?

In 2007, we will implement
the “Succession Program”,
to motivate the permanence
of our employees in the
Company.

Starbucks Coffee Plaza Caracol. Cancun, Mexico

Elvira Vázquez Moreno
Mexico City
Barista, Starbucks Coffee
Masaryk,

Favorite beverage:
Machiato Caramel

Daniela Ramírez
Mexico City
Barista, Starbucks Coffee
Pedregal

Favorite beverage:
Raspberry
Frappuccino

Starbucks Coffee Mexico employees
will graduate as Coffee Masters, which
will accelerate their development in
the organization and will contribute to
the promotion of a true coffee culture
in Mexico.

In addition to offering labor
development opportunities,
the “Succession Program” is
an instrument to assure the
growth of our people, as
the business grows.

Emilia Suárez
Mexico City
Popeye’s client

Favorite Food:
Chicken strips
with chips

Popeyes, What’s next?

In accordance with our market
studies in 2006, the chicken segment
in Mexico is worth more than
$6.0 billion pesos, which without a
doubt we see as a great opportunity.

Popeyes Coacalco, Mexico City

New opportunities, What’s Next?

Throughout this year, we have concentrated on promoting the
growth of our brands that have proven to be successful and we
have stressed the search for new development opportunities,
such as the case of the acquisitions of sub-franchisees of
Domino’s Pizza; other Burger King franchisees; the search for
opportunities in other segments and categories that currently
do not form a part of Alsea, such as sandwiches, Mexican food,
juices and salads, as well as the incessant search for a larger
share of the important chicken segment in Mexico.

At the end of this year, we acquired
the assets of a Domino’s Pizza
sub-franchisee who had six stores
in operation in Mexico City.

What’s next? We will continue to
search for new business opportunities
that permit Alsea to expand their
operations in Mexico, such as the
possible incursion into the Mexican
food category, that is worth more
than $3.7 billion pesos.

What’s next? We will continue to
analyze very closely, Alsea's possible
participation in the sandwich category,
which has recently shown strong
growth, reaching a value worth more
than $1.1 billion pesos.

In 2006, we opened four Popeye's units,
reaching a growth of 80% in units with
respect to the prior year. This was an
important step on the way to converting
us into a leading operator in the attractive
chicken consumption segment in Mexico.

What’s next? If the trend in the
results of our Popeye’s units
continues, we will redeﬁne the
strategic growth plan of this brand,
showing a substantial acceleration
in its development.

What’s next? We will increase our
market share in hamburgers, which
we estimate to be worth more than
$6.0 billion pesos.

In the future, we will seek to
consolidate ourselves as a strong
player in this segment; we will
increase our territorial presence
and offer a product and a service
that surpasses consumers’
expectations.

33%

Is the projected growth for
Popeye’s in the number of
units for 2007, representing
the opening of three
additional stores.

ALSEA Shared Services, Whats next?

The incorporation of the most innovative IT, distribution and
production systems has been an essential part of the Company’s
development. This is why we shall continue to modernize the
Alsea platform.

Several improvements were made in the
DIA distribution centers, including the
refrigeration chambers, freight maneuvering
patios and facilities, among others, to
assure excellent service in the matter of
supplying the brands in our portfolio.

We incorporated the purchasing and
customer service module into our
technological system, which will increase
the levels of quality with which DIA serves
the brands in our portfolio.

We concluded the “Integra Project”,
achieving the complete tie-in of our Burger
King and Chili’s Grill & Bar operations into
our technological platform and into the
model of Alsea’s shared services.

We concluded the inclusion of Burger King
and Chili’s Grill & Bar into Alsea's personnel
administration system, thereby automating
the personnel management processes.

What’s next? We began to develop
and implement a new processing
project called the Alsea Model, which
integrates, standardizes and aligns
the business components to comply
with the Company’s and its brands’
strategic objectives, permitting us to
reach the desired results and to
create value for the customers, by
optimizing the cost of such processes.

What’s next? We will make strong
investments in a new line of
production of par-baked dough, to
make production more efﬁcient,
which will translate into savings in
production costs.

What’s next? During 2007, we will
initiate the integration of the Burger
King Chile and Argentina processes,
into Alsea's technological platform,
to achieve greater efﬁciency in
processes, thereby increasing
productivity in our operations in
such countries.

DIA, What’s next?

During 2007, we will invest in our
Mexico city distribution center,
adding an additional 5,000 sq. meters
of warehouse space and refrigeration
chambers. Additionally, we will invest
in the construction of a new
Distribution Center in Hermosillo,
Mexico.

Agustín Irigoyen
Managing Director,
Mexico City
Distribution Center

Six years
colaborating with
Alsea

Using the Alsea Model, we will
assure an orderly growth based
in process and technology, that
will contribute signiﬁcantly to
complying with the goals
established by the Company
for the future.

185

processes of the different operating
and administrative areas that
comprise Alsea and its brands will
be incorporated, standardized and
aligned throughout 2007.

18Remote communities

will be attended in
Oaxaca, Veracruz and
San Luis Potosi.

ALSEA Foundation, What’s next?

Fundación Alsea A.C. will help
9,500 poverty-stricken children,
teenagers and adults, through
Socios por Mexico.

Social responsibility, What’s next?

The Fundación Alsea A.C. (Alsea Foundation) will be characterized in

2007 by the increase in the coverage of the population it will beneﬁt,

in addition to being a year of great importance to afﬁrm the position

social responsibility of our brands.

In 2006, the Fundación Alsea A.C., along with
the Fondo para la Paz I.A.P. (The Peace Fund),
favored 2,157 families in the States of
Oaxaca, Veracruz and San Luis Potosi,
through the Socios por Mexico (Partners for
Mexico) program, delivering 450 dry toilets,
1,410 poultry farms, 315 ecological stoves
and 2,185 trained people in educational
workshops.

Through the Patronato Prozona Mazahua
A.C. (the Prozona Mazahua Sponsorship), we
beneﬁtted 40 indigenous families, in our
quest to ﬁght poverty and exclusion, and to
strengthen the ecological rescue of this
Mazahua indigenous zone in the states of
Mexico and Michoacan.

For the second consecutive year, through
the Mano Amiga Chalco S.C. (Helping Hand),
we delivered scholarships to more than 90
children, enabling an entire class to
continue its studies.

Starbucks Coffee reafﬁrmed its strong social
responsibility culture, continuing with the
following efforts:

• It helped to rehabilitate 14 children with
cancer, of the Institution Luz de Vida A.C.

• It planted more than 25,000 trees.

• It collected more than 31,000 toys from

Alsea’s collaborators and clients
throughout Mexico, to be donated to
Ministerios de Amor I.A.P. (orphanages).

Domino’s Pizza continued with its Por las
Calles (On the Streets) Program, through
the Fundacion Quiera A.C. (The Wish
Foundation), to aid 25 children who live on
the streets, so that once they have been
rehabilitated, they can join the Domino's
Pizza family.

Burger King helped rehabilitate 26 families
in the Centro de Rehabilitacion Infantil de
Occidente (Children’s Rehabilitation
Center) in Guadalajara and helped 380
children with speech and psychological
problems, for the Centro de Integracion
Tapalpa A.C. (Tapalpa Integration Center).

We reafﬁrm our commitment with
Mexico and will act in the areas of health,
education, human development and
natural disasters, with the participation
of our founding partners, shareholders,
sub-franchisees, suppliers, associates
and customers.

Management

Commited to our customers

Federico Tejado
Managing Director,
Domino’s Pizza

Gerardo Rojas
Managing Director,
Starbucks Coffee

Fabián Gosselin
Managing Director,
Burger King

Pablo de los Heros
Managing Director,
Burger King
Latin America

Martín Santos
Managing Director,
Popeyes Chicken &
Seafood

Ernesto Chacón
Managing Director,
Chili’s Grill & Bar

Commited to our brands

Cosme Torrado
Chairman of
the Board
of Directors

Alberto Torrado
Chief Executive
Ofﬁcer

José Rivera Río
Chief Financial
Ofﬁcer

Armando Torrado
Corporate Director,
Development

Juan Carlos Jallath
Corporate Director,
Human Resources
and Strategic
Planning

Mario Sánchez
Corporate Director,
Internal Audit

Héctor Orrico
Managing Director,
DIA

Board of Directors

President

Cosme Alberto Torrado Martínez / Chairman of the Board of Alsea

Shareholder Board and Staff Members

Alberto Torrado Martínez / Chief Executive Officer of Alsea

Armando Torrado Martínez / Development Director

Fabián Gerardo Gosselin Castro / Burger King Director

Federico Tejado Bárcena / Domino´s Pizza Director

Shareholder Board Members
Alberto Torrado Monge † / Honorary Chairman of the Board of Alsea

Independent Board Members

José Manuel Canal Hernando / Independent consultant

Marcelo Rivero Garza / Grupo Jumex, Chief Executive Officer

Salvador Cerón Aguilar / STF Consulting Group, Chairman

Sergio Mario Larraguivel Cuervo / CANIRAC, Chairman

Secretaries

Guillermo Díaz de Rivera Álvarez / Gutiérrez, Díaz de Rivera y Mangino, S.C., Partner

Xavier Mangino Dueñas / Gutiérrez, Díaz de Rivera y Mangino, S.C., Partner

Audit Committee

José Manuel Canal Hernando / Chairman

Marcelo Rivero Garza / Member

Corporate Governance Committee

Salvador Cerón Aguilar / Chairman
Alberto Torrado Monge † / Member

Sergio Mario Larraguivel Cuervo / Member

Mario Sánchez Martínez / Secretary

José Rivera Río Rocha / Secretary

† All of Alsea's employees will continue to follow the example and unconditional dedication of our
founder, Alberto Torrado Monge, who passed away on October 25, 2006. May he rest in peace.

Management Discussion & Analysis

Sales
Net sales increased 29.2% to $5,808.1 million pesos in 2006, compared with $4,496.2 million
pesos in the last year. This increase was attributable to revenue growth in all of our brands,
as well as the inclusion of Burger King Argentina and Chile.

The sales growth of the different brands, was due to two important factors: i) the addition
of 75 corporate stores and the acquisition of an additional 55 stores including the Burger
King Latin America operations; and ii) the 6.0% increase in same store sales due to the price
strategy implemented in relation to the application of the 0% VAT rate to food sales. The
openings and acquisitions previously mentioned provoked a change in the sales mix due to
the fact that the brands with higher revenues per unit, were the ones that contributed more
to the store count growth.

EBITDA
This year we achieved an increase of 42.2% to $971.0 million pesos, compared to $682.8 million
pesos in 2005. This increase was the result of higher revenues and the decrease of 360bps in the
cost of sales.

These variances were partially offset by the 34.9% increase in operating expenses (excluding
depreciation and amortization) equal to $737.0 million pesos. The EBITDA margin growth from
15.2% to 16.7% was due to the increase in gross profit margin which was partially offset by the
increase from 46.9% to 48.9% in operating expenses (excluding depreciation and amortization).

Operating Income
The operating income of 2006 declined $51.5 million pesos, due to the $339.8 million pesos
increase in depreciation and amortization. Out of this figure $244.1 million pesos, equivalent to
72% of the increase, corresponded mainly to the change in the useful lives of the leasehold
improvements of all of the Company brands. Before such change, the physical life of such
assets was being considered, as opposed to the commercial life. This is due to a new business
strategy that the Company has decided to implement as a part of its 2007-211 Strategic Plan.
Although the Company is aware that this single entry will impact its financial results, there will
be no important effect in the future. Likewise, and to a lesser degree, depreciation and
amortization also grew because of the fixed assets that were purchased with respect to the
expansion plan and the acquisitions that were carried out. Such variations were partially
offset by the $288.2 million pesos increase in EBITDA.

Net Income
Consolidated net income decreased $54.5 million pesos, mostly due to: i) the aforementioned
$51.5 million pesos decrease in operating income; ii) the $16.2 million pesos increase in the
comprehensive financing result; and iii) the $3.8 million pesos negative variation in other
expenses. These variations were partially offset by: i) the $13.0 million pesos decrease in the
loss from discontinued operations. ; ii) the $3.3 million pesos decrease in the income tax and
employee's statutory profit sharing reserve; and iii) the $0.6 million pesos increase in equity
interest in associated companies.

Management Discussion & Analysis

Results per Segment
The following table sets forth the sales and EBITDA per segment, in million of Mexican pesos
for the full year of 2005 and 2006.

Net Sales per Segment

2006

2005

% Change %

Food & Beverages

$ 4,575

78.7%

$ 3,595

79.9%

Food & Beverages Latin America

Distribution

Other Businesses (1)

334

2,245

1,336

5.8%

38.7%

23.0%

N.A.

2,033

1,013

N.A.

45.2%

22.5%

27.3%

N.A.

10.4%

31.8%

Intercompany Operations (2)

(2,682)

(46.2)%

(2,144)

(47.6)%

(25.0)%

Consolidated Net Sales

$ 5,808

100%

$ 4,496

100%

29.2%

EBITDA per Segment

Food & Beverages

Food & Beverages Latin America

Distribution

Other Businesses (1)

Consolidated EBITDA

2006

2005

% Change %

72.6%

705

195

971

3.9%

20.1%

3.4%

100%

454

N.A.

166

683

66.5%

N.A.

24.3%

9.2%

100%

55.3%

N.A.

17.5%

(47.6%)

42.2%

(1) Other Businesses includes the real state and service companies, as well as the operations of the holding company.

(2) For segment reporting purposes, intersegment operations are included in each of the segment operations.

Sales per Brand

Sales per brand

Domino´s Pizza

Starbucks Coffee

Burger King Mexico

Burger King Latin America

Popeyes

Chili’s

Total

2006

2005

% Change %

$ 2,699

655

939

334

240

55.0%

13.3%

19.1%

6.8%

0.9%

4.9%

$ 2,390

382

718

N.A

66.5%

10.6%

20.0%

N.A

0.8%

2.1%

$ 4,909

100%

$ 3,595

100%

12.9%

71.5%

30.8%

N.A

44.8%

215.8%

36.6%

Food & Beverages
During 2006, sales increased 27.3% to $4,575 million pesos, compared with $3,595 million
pesos in 2005. This increase of $980 million pesos is attributable to the opening of stores
and to the increase in same store sales.

EBITDA increased 55.3% during 2006 to reach $705 million pesos compared with $454
million pesos of last year. This EBITDA increase reflects higher revenues and the decrease
in the cost of sales due to the price strategy implemented in relation to the application of
0% VAT rate to food sales, better prices in some raw materials, the revenue mix and having
achieved a series of operating efficiencies. These variances were partially offset by the
increase in operating expenses, due to the growth in the number of stores, the increase in
personnel expenses, the expenses related to the 0% VAT rate effect and to the increase in
the prices above inflation in energy and gas.

Management Discussion & Analysis

Food & Beverages Latin America
The Food & Beverages Latin America division had a result during May to December, 2006 of
$334 million pesos in revenues and an EBITDA of $38 million pesos which represents an
EBITDA margin of 11.4%.

Distribution
Sales increased 10.4% to $2,245 million pesos versus $2,033 million pesos in the last year. This
increase of $212 million pesos is attributable to the higher number of stores served and the
increase in same store sales of the different brands of our portfolio. Third parties revenues
increased from $888 million pesos in 2005 to $890 million pesos in 2006, growth that was affected
by the acquisition of 46 stores during 2005 and in a lesser degree by the 6 stores acquired in
December, 2006.

EBITDA reached $195 million pesos versus $166 million pesos in 2005. This increase of $29 million
pesos is attributable to the increase in revenues, the decrease in cost of sales as a percentage of
sales due to the improvement in the price of some goods partially offset by the sales mix that had
a higher growth in sales of goods with lower margins like furniture and store equipment. The
operating expenses as a percentage of sales decreased due to the marginality obtained with the
sales increase.

Non-operative Results
Comprehensive Financing Result
The $47.9 million pesos comprehensive financing result increased $16.2 million pesos compared
with 2005, due to a $8.8 million pesos increase in interest expenses net, a $1.9 million pesos
negative variation in the foreign exchange loss and the $5.5 million pesos decrease in the result
on monetary position.

Income Tax & Employees' Statutory Profit Sharing
Income Taxes went up $4.7 million pesos compared to the previous year. The actual Income Tax
rate was 34% in 2006 and 28% in 2005.

The Employees' Profit Sharing reserve of $2.8 million pesos during the twelve months ended
on December 31, 2006 had a decrease of $8.0 million pesos compared to the $10.8 million pesos
in the same period of last year.

Discontinued Operations
The item of Discontinued Operations had a positive variance of $13.1 million pesos,
ammounting $8.9 million pesos as of the end of 2006 versus $22.0 million pesos in 2005.

Minority Interest
The minority interest reached $6.2 million pesos in 2006 compared to $3.7 million pesos in
2005. This variance mostly reflects the effect of the increase in net income of Starbucks
Coffee Mexico, partially offset by the acquisition of the remaining 40% of Grupo Aldi carried
out in May of 2006.

Management Discussion & Analysis

Balance Sheet
Equipment, Leasehold Improvements and Property, net
The $354.6 million pesos variation is the result of an increase in store equipment, leasehold
improvements, computer, transportation and production equipment due to the expansion
plan and the acquisitions performed along the year.

During 2006 Alsea invested in capital expenditures a total of $1,133.1 million pesos. Out of this
figure $344.4 million pesos were invested in acquisitions and $788.7 million pesos were invested
in store openings, the renovation of equipment and store image renewal of some of our brands,
as well as improvements to the distribution centers and to a lower extent in real state.

Suppliers
The $94.3 million pesos increase in suppliers was due to the growth in the Company operations,
and the increase of 3 days in suppliers reaching 42 days as of the end of 2006, compared with 39
days at the end of last year.

Accounts Payable and Accrued Liabilities and Accruals
The $82.9 million pesos increase in accounts payable, was mainly due to the expenses related
to the 0% VAT rate effect to food sales, and the provision of the expenses related with the stock
option plan granted to some executives of the Company.

Debt
As of December 31, 2006 long-term debt of the Company was $346.4 million pesos, and short-term debt
was $132.9 million pesos, compared with $447.0 and $322.3 million pesos, respectively, as of December
31, 2005. At the end of 2006, 95% of the debt was denominated in Mexican Pesos and the remaining 5%
in Chilean Pesos. The net debt of the company decreased $360.5 million pesos to reach $243.8 million
pesos in 2006 as compared to $604.3 million pesos at the end of 2005.

Stock Repurchase Program
As of December 31, 2006, the Company had a balance of 17,431 shares for an approximately $1.0 million
pesos in nominal terms. During 2006, the company sold a net of 253,000 shares, for approximately $11.0
million pesos.

Financial Ratios
The current asset-to-liability ratio was 1.0 times, and the quick ratio was 0.8 times. The Company
increased its accounts receivable in 1 day to reach 9 days; inventory turnover decrease to 9 times;
and the suppliers account increased in 3 days to end the year in 42 days.

As a consequence of the decrease in the operative income due to the change in the useful life
of certain assets, previously mentioned, the Economic Value Added (“EVA”) decreased 90.4% to
$14.7 million pesos as of the end of 2006, compared with $151.8 million pesos obtained in the last
year. Due to the same reason Return Over Invested Capital (“ROIC”) decreased from 23.2%, to
15.8% in 2006.

Excluding the previously mentioned change in the useful life of certain assets, the EVA
generation was $239.9 million pesos in 2006, and the ROIC was 23.8%. Also excluding such effect,
Earnings per share was $3.0 pesos per share representing a 50% increase.

Management Discussion & Analysis

Outstanding Figures

Brand
Domino’s Pizza Mexico
Starbucks Coffee Mexico
Burger King Mexico
Burger King Argentina
Burger King Chile
Popeyes Chicken & Seafood
Chili’s Grill & Bar
Spoleto
Total Corporate Stores

Domino’s Pizza Brazil
Starbucks Coffee Brazil
Total Associate Stores

Domino’s Pizza Mexico
Total Sub-Franchisees
Total Stores

Stores
2006
402
117
94
27
23
9
17
N.A.
689

23
2
25

151
151
865

Financial Ratios

EBITDA / Interest Paid

Net Debt / EBITDA

Total Liabilities / Stockholders´ Equity

ROIC (1)

Stores
2005
387
76
78
N.A.
N.A.
5
11
2
559

27
N.A.
27

142
142
728

2006

16.8 x

0.25 x

0.49 x

15.8%

Variation
15
41
16
27
23
4
6
(2)
130

(4)
2
(2)

9
9
137

2005

14.8 x

0.9 x

0 .75 x

23.3%

EVA (2) (million pesos)

14.6

$ 151.8

Stock Ratios

Book Value per Share

EPS (ttm)

EV (3) / EBITDA (ttm)

Shares Outstanding (million)

Float

Stock Price

2006

$ 16.42

$ 1.45

9.8 x

155.8

36%

2005

12.9

2.0

6.8 x

136.6

28%

$ 58.89

$ 27.74

(1) ROIC is defined as operating income divided by invested capital (total assets -cash - non interest bearing liabilities).

(2) EVA is defined as the operating income - net invested capital times the cost of capital (considers a 17% cost of equity)

(3) EV is defined as market value, plus net debt, plus minority interest.

% Growth
3.9%
53.9%
20.5%
N.A.
N.A.
80.0%
54.5%
N.A.
23.3%

(14.8%)
N.A.
(7.4%)

6.3%
6.3%
18.8%

Variation

N.A.

(750 bps)

(90.4%)

Variation

32.4%

(27.5%)

N.A.

14.1%

800 bps

112.3%

Audit Committee Report

February 26, 2007

To the Board of Directors of ALSEA, S.A.B. de C.V.

In compliance with Articles 42 and 43 of the new Stock Market Law and with the Audit
Committee Regulations, I hereby submit to you the report on the activities we carried out
during the year ended December 31, 2006. In the development of our work, we have kept in
mind the recommendations contained in the Best Corporate Practices Code. The Company's
Statutory Examiner was invited to and attended our work sessions. We met at least
quarterly and based on a work program, we carried out the following activities:

Internal Control
We assured that Management, in compliance with its Internal Control responsibilities, had
established the overall guidelines and processes necessary for their application and compliance.
We also followed up on the comments and observations expressed by the External and Internal
Auditors in the course of their work.

External Audit
We recommended that the Board of Directors contract the External Auditors of the Group and
its subsidiaries. To this end, we obtained assurance as to their independence and compliance
with the personnel rotation requirements established in the Law. We analyzed their focus and
work program with them, as well as their coordination with the Internal Audit area.

We kept in constant and direct contact, to stay abreast of the progress of their work and their
observations, and to take note of their comments on their review of the quarterly and annual
financial statements. We received their conclusions and reports on the annual financial statements
in good time.

We authorized the fees paid to the External Auditors for audit services and other permitted

services, assuring that they did not interfere with their independence from the Company.

Taking Management's viewpoints into account, we evaluated their services corresponding to

the prior year.

Internal Audit
To maintain their independence and objectivity, the Internal Audit area reports to the Audit
Committee. Consequently:
• We reviewed and approved their program and annual budget of activities, in due time.
• We received periodic reports on the state of completion of the approved work program,

the variances that could have arisen, and the causes that originated such variances.

• We followed up on the observations and recommendations they developed, and on their

timely implementation.

Financial Information, Accounting Policies and Reports to Third Parties
With the persons responsible for their preparation, we reviewed the Company's quarterly and
annual financial statements and recommended that the Board of Directors approve such
statements and authorize their publication. As part of this process, we took the opinion and
observations of the External Auditors into account.

When issuing our opinion on the financial statements, we assured that the criteria, accounting
policies and the information utilized by Management to prepare the financial information were
adequate and sufficient and that they had been applied in a manner consistent with the prior year.
Consequently, the information presented by Management reflects fairly, the Company's financial
position, its results of operations and the changes in its financial position for the year ended
December 31, 2006.

Our review also included the quarterly reports prepared by Management, to be presented to
the shareholders and to the public at large, as well as any other financial information required
by current regulations. We verified that the reports were prepared utilizing the same accounting
criteria as those used to prepare the annual information. In conclusion, we recommended that
the Board of Directors authorize their publication.

Compliance with Standards, Legal Aspects and Contingencies

We confirmed the existence and reliability of the controls established by the Company, to assure
compliance with the different legal provisions to which it is subject, assuring that such controls
were duly disclosed in the financial information.

We periodically reviewed the Company's different tax, legal and labor contingencies and
considered the efficiency of the procedure established for their identification and follow-up, as
well as their correct disclosure and recording.

Code of Conduct
With the support of Internal Audit, we assured personnel's compliance with the Group's
Code of Conduct, as well as the application of the corresponding sanctions in the cases of
violations detected.

Related Party Transactions
We reviewed that the transactions with related parties were the result of transactions required
by the business, at market values and that they had been clearly expressed in the financial
statements. For this purpose, we sought the support of the Internal Audit and of the transfer
pricing review carried out by the External Auditors.

Administrative Aspects
We held regular meetings of the Committee with Management, to stay abreast of the Company's
activities and relevant and unusual events.

We also met with the External and Internal Auditors, without the presence of Management,
to discuss the development of their work, any limitations they might have had, and to facilitate
any private communication they might want to have with the Committee.

When we considered it advisable, we requested the support and opinion of independent
experts. We also were not aware of any possible significant non-compliances with operating
policies, the internal control system and accounting record policies.

We held executive meetings with the exclusive participation of the Committee members,

establishing agreements and recommendations for Management.

The President of the Audit Committee delivered quarterly reports on the activities developed,

to the Board of Directors.

The work we carried out was duly documented in the minutes prepared at each meeting,

which were reviewed and timely approved by the Committee members.

Very truly yours,

Audit Committee
José Manuel Canal Hernando / Chairman

Corporate Practices Committee’s Report

February 20, 2007

To the Board of Directors of ALSEA, S.A.B. DE C.V.:

In compliance with Articles 42 and 43 of the new Securities Market Act, and on behalf of the
Corporate Governance Committee, I hereby submit to you, the report on the activities we
carried out during the year ended December 31, 2006. In the development of our work, we have
kept in mind, the recommendations contained in the Best Corporate Practices Code. We met
quarterly, to assure compliance with our responsibilities.

To comply with the responsibilities of this Committee, we carried out the following activities:

1. We carried out a detailed review of the evaluation of the performance of the Chief Executive
Officer and of his executive team, recommending the authorization of the performance
bonus, with no observations.

2. We received the proposal for the overall remunerations for the Chief Executive Officer and
for the executive directors, included for this 2006, a variable bonus with deferred payments
referenced on the behavior of the price of Alsea's share during this same period and subject
to the performance evaluation. Such consideration replaced the so-called Stock Option Plan
for employees, whose functioning rules had been approved at the time by the Board of
Directors and by the Company's General Shareholders´ Meeting in compliance with the
current legal provisions and circulars.

3. During this period, at no time did we receive any request whatsoever for exemption in
accordance with the terms of article 28, section III, clause f) of the new Stock Market Law;
consequently, it was not necessary to make any recommendation whatsoever in this
sense, to the Board of Directors.

4. We reviewed two proposals from Senior Management, for a new, high-level organizational
structure. We recommended certain adjustments to the proposals, which were submitted
to the Board of Directors for their authorization.

5. Transactions with related parties during the year under review were analyzed by the Audit

Committee and submitted to the Board of Directors.

In closing, I would like to mention that as part of the activities we carried out, including the
preparation of this report, we have at all times listened to and considered the viewpoint of the
relevant directors, there being no difference of opinion to mention.

Corporate Governance Committee
Salvador Cerón Aguilar / President

Consolidated Financial Statements
Alsea, S.A.B. de C.V. and Subsidiaries

December 31, 2006 and 2005
(With Independent Auditors' Report)
(Translation from Spanish Language Original)

Table of Contents

Independent Auditors' Report

Consolidated Financial Statements:

Balance Sheets

Statements of Income

Statements of Changes in Financial Position

Statements of Changes in Stockholders' Equity

40 Notes to Financial Statements

Independent Auditors' Report

(Translation from Spanish Language original)

February 20, 2007

To the Board of Directors and Stockholders
Alsea, S.A.B. de C.V.:

(Thousands of Mexican pesos)

We have audited the accompanying consolidated balance sheets of Alsea, S.A.B. de C.V. and
Subsidiaries as of December 31, 2006 and 2005 and the related consolidated statements of
income, stockholders' equity and changes in financial position for the years then ended. These
consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing standards in Mexico.
Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement and are prepared in
accordance with Mexican Financial Reporting Standards. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the financial reporting standards used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

As mentioned in note 7 to the consolidated financial statements, in accordance with management's
new market strategy, which involves image renewal of the trademarks that Alsea operates, during
2006, the useful life of the assets mentioned in said note was adapted to the current conditions of
business operations. The effect of this change generated an operating expense of $244,085 and an
increase of $56,692 to the deferred income tax benefit.

In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Alsea, S. A. B de C. V. and Subsidiaries as of December
31, 2006 and 2005, and the results of their operations, the changes in their stockholders' equity
and the changes in their financial position for the years then ended in conformity with Mexican
Financial Reporting Standards.

KPMG CARDENAS DOSAL, S. C.

Javier Morales Ríos

Consolidated Balance Sheets

ALSEA, S.A.B. de C.V. and Subsidiaries
December 31, 2006 and 2005
(Thousands of Mexican pesos of constant purchasing power as of December 31, 2006)

Asset

Current assets

Cash

Accounts receivable:

Clients less allowance for doubtful accounts

of $6,539 in 2006 y $4,514 in 2005

Recoverable taxes

Other

Associated companies ( note 4)

Inventories, net (note 5)

Prepaid expenses

Total current assets

2006

2005

235,447

165,055

164,558

190,002

43,870

619

218,216

60,528

913,240

116,722

222,513

72,596

15,670

140,095

79,508

812,159

Investment in shares of associated companies (note 6)

9,243

3,898

Equipment, leasehold improvements and property, net (note 7)

2,163,775

1,809,133

Goodwill of subsidiary companies, net (note 8)

209,740

Intangible assets, less accumulated amortization of $342,064

in 2006 and $185,341 in 2005 (note 9)

508,573

388,538

Deferred income tax, employees' statutory profit sharing

and long-term taxes on retained earnings (note 15)

Intangible assets for labor obligations (note 14)

Other assets, net

Discontinued operations

85,843

6,003

–

6,084

–

8,398

7,179

4,869

See accompanying notes to consolidated financial statements.

3,902,501

3,243,914

Liabilities and Stockholders' Equity

Short-term liabilities

Current installments of long-term debt (note 10)

Suppliers

Associated companies ( note 4)

Accounts payable and accrued liabilities

Accruals (note 11)

Taxes payable and employees' statutory profit sharing

Discontinued operations

Total short-term liabilities

Long-term debt, excluding current installments (note 10)

Other liabilities

Labor obligations (note 14)

Deferred income tax, employees' statutory profit sharing

and long-term taxes payable on retained earnings (note 15)

Total liabilities

Stockholders' equity (note 16):

Majority stockholders' equity

Capital stock

Additional paid-in capital

Retained earnings

Reserve for repurchase of shares

Cumulative translation effect from foreign entities

2006

2005

132,900

413,597

18,322

49,871

197,352

84,666

–

896,708

346,431

17,055

18,005

322,343

319,336

4,267

68,670

95,690

72,850

5,068

888,224

447,012

762

14,094

–

1,278,199

44,205

1,394,297

517,258

1,050,985

873,349

114,453

2,042

477,459

366,706

820,845

102,109

379

Majority stockholders' equity

2,558,087

1,767,498

Minority interest

Total stockholder's equity

Commitments and contingencies (note 17)

66,215

2,624,302

82,119

1,849,617

3,902,501

3,243,914

José Rivera Río Rocha

Chief Financial Officer

Alberto Torrado Martínez

Abel Barrera Fermín

Chief Executive Officer

Corporate Comptroller

Consolidated Statements of Income

ALSEA, S.A.B. de C.V. and Subsidiaries
Years ended December 31, 2006 and 2005
(Thousands of Mexican pesos of constant purchasing power as of December 31, 2006)

Net sales

Cost of sales

Gross profit

Operating expenses

Operating income

2006

2005

5,808,116

1,991,648

4,496,196

1,704,960

3,816,468

2,791,236

3,396,185

2,319,415

420,283

471,821

Comprehensive financing result (note 12)

(47,920)

(31,681)

Other expenses, net (note 13)

(20,830)

(17,065)

Income from continuing operations, before income taxes

and employees' statutory profit sharing

351,533

423,075

Income tax and employees' statutory profit sharing (note 15):

Income tax

Employees' statutory profit sharing

120,920

2,772

116,211

10,822

Total income tax and employees' statutory profit sharing

123,692

127,033

Income from continuing operations, before equity interest

in associated companies

227,841

296,042

Equity interest in associated companies (note 6)

1,399

798

Income from continuing operations

229,240

296,840

Loss from discontinued operations, net of taxes

(8,892)

(21,956)

Income before minority interest

220,348

274,884

Minority interest

Net income

Net earnings per share (note 2(w))

See accompanying notes to consolidated financial statements.

6,218

3,702

214,130

271,182

1.45

2.04

José Rivera Río Rocha

Chief Financial Officer

Alberto Torrado Martínez

Abel Barrera Fermín

Chief Executive Officer

Corporate Comptroller

Consolidated Statements of Changes in Financial Position

ALSEA, S.A.B. de C.V. and Subsidiaries
Years ended December 31, 2006 and 2005
(Thousands of Mexican pesos of constant purchasing power as of December 31, 2006)

Operating activities:

Income before minority interest

Add charges (deduct credits) to income not requiring

(providing) funds:

2006

2005

220,348

274,884

Depreciation and amortization of trademarks

550,707

210,930

Write-off of investment and cancellation of goodwill

of subsidiary companies, net

Equity interest in associated companies

Deferred income tax and employees' statutory profit sharing

Funds provided by operations

Net financing from (investing in) operating accounts:

Clients, net and prepaid expenses

Inventories

Associated companies

Suppliers, accounts payable, accrued liabilities and other accounts payable

Taxes payable and employees' statutory profit sharing

Funds provided by (used in) operating activities

Financing activities:

Increase in capital stock and minority interest, net

Repurchase of shares

(Payment) increase of loans, net

Dividends declared

Funds provided by financing activities

Investing activities:

Acquisition of equipment, leasehold improvements and property

Discontinued operations, net

Acquisition of subsidiary and associated companies

Translation effect from foreign entity

Intangible and other assets

Goodwill, net

Funds used in investing activities

–

(1,399)

(130,048)

639,608

90,097

(59,622)

25,932

105,020

112,785

274,212

701,427

12,873

(320,044)

(161,626)

232,630

(355,048)

–

(369,887)

1,663

(352,786)

–

(1,076,058)

11,543

(798)

(59,837)

436,722

(65,306)

56,064

(15,504)

81,314

(156,214)

(99,646)

20,963

5,581

627,360

(104,130)

549,774

(444,833)

17,236

(144,513)

–

(162,009)

(140,831)

(874,950)

Increase in cash

Cash:

At beginning of year

At end of year

70,392

11,900

165,055

153,155

235,447

165,055

See accompanying notes to consolidated financial statements.

José Rivera Río Rocha

Chief Financial Officer

Alberto Torrado Martínez

Abel Barrera Fermín

Chief Executive Officer

Corporate Comptroller

Consolidated Statements of Changes in
Stockholders' Equity

ALSEA, S.A.B. de C.V. and Subsidiaries
Years ended December 31, 2006 and 2005
(Thousands of Mexican pesos of constant purchasing power as of December 31, 2006)

Capital
stock

Additional
paid-in
capital

Statutory
reserve

Balances as of December 31, 2004

451,201

280,883

23,123

Decrease in minority interest

Increase in equity (note 16)

Repurchase of shares (note 16)

Appropriation to statutory reserve

Dividends declared ($0.76 per share) (note 16)

Comprehensive income

–

25,936

322

–

85,823

–

7,921

–

Balances as of December 31, 2005

477,459

366,706

31,044

Decrease in minority interest

Increase in equity (note 16)

Repurchase of shares (note 16)

Appropriation to statutory reserve

Dividends declared ($1.19 per share) (note 16)

Comprehensive income

–

39,270

684,279

529

–

12,883

–

Balances as of December 31, 2006

517,258

1,050,985

43,927

See accompanying notes to consolidated financial statements.

Retained earnings

Retained
earnings

Total

Reserve for
repurchase
of shares

Cumulative
translation
effect from
foreign
entities

Total
majority
stockholders'
equity

Minority
interest

Total
stockholder's
equity

630,670

653,793

96,850

379

1,483,106

169,213

1,652,319

–

(7,921)

–

(104,130)

271,182

–

5,259

–

(90,796)

111,759

5,581

–

(104,130)

271,182

–

111,759

5,581

–

(104,130)

3,702

274,884

789,801

820,845

102,109

379

1,767,498

82,119

1,849,617

–

(12,883)

–

(161,626)

214,130

–

12,344

–

1,663

–

(22,122)

723,549

12,873

–

(161,626)

–

6,218

222,011

723,549

12,873

–

(161,626)

215,793

829,422

873,349

114,453

2,042

2,558,087

66,215

2,624,302

José Rivera Río Rocha

Chief Financial Officer

Alberto Torrado Martínez

Abel Barrera Fermín

Chief Executive Officer

Corporate Comptroller

Notes to the Consolidated Financial Statements

ALSEA, S.A.B. de C.V. and Subsidiaries
December 31, 2006 and 2005
(Thousands of constant Mexican pesos as of December 31, 2006)
(Translation from Spanish Language Original)

These financial statements have been translated from Spanish Language original, only for convenience
of foreign English speaking readers.

On February 20, 2007, the Board of Directors authorized issuance of the accompanying consolidated
financial statements and notes thereto.

1. Description of business and significant transactions-

Alsea, S.A.B. de C.V. and Subsidiaries (“Alsea” or the “Company”) are mainly engaged in operating
fast-food stores and restaurants. In Mexico, Alsea operates Domino's Pizza, Starbucks Coffee,
Burger King, Popeyes Chicken & Seafood and Chili's Grill & Bar. The operation of its multi-units is
supported by its distribution division (DIA). As from 2006, the Company operates Starbucks Coffee
in Brazil in association with Café Sereia do Brasil Participações, S.A. and Starbucks Corporation
Inc.; as well as Burger King in Chile and Argentina.

Significant transactions-

a) Primary public offering

In April 2006, Alsea increased its capital stock, issuing 16,257,200 Class II common shares. The net
resources provided by this primary public offering increased the stockholders' equity, as indicated
in note 16.

b) Acquisitions

Continuing with the market growth of fast-food and restaurants, Alsea mainly carried out the
following acquisitions during 2006 and 2005:

–

In May 2006, Alsea reached a 100% interest in the equity of Gastrosur S.A de C.V (Gastrosur)
(formerly Grupo Alimentos y Diversión, S.A de C.V.) by acquiring 40% of the minority interest
shares. Gastrosur has exclusive rights to the use of Chili's Grill & Bar trademark in some Mexican
states. In August 2005, Alsea had acquired 60% of Gastrosur equity ( see note 16).

In April 2006, Alsea acquired 100% of the shares representing the capital stock of Restaurants
Sudamericana, L.C. the holding entity of Fast Food Sudamericana, S.A de C.V. (Burger King
Argentina), Fast Food Chile S.A (Burger King Chile) and RS Management, Inc. ( see note 9).

In August 2005, Alsea reached a 100% interest in the equity of SC de Mexico, S. A. de C. V. (SC de
Mexico) by acquiring 21.95% of the minority interest shares. SC de Mexico holds 82% of the
outstanding shares of Café Sirena, S. de R.L. de C.V., a subsidiary that operates the Starbucks
Coffee stores in Mexico (see note 16).

In July 2005, Alsea acquired 100% of the shares representing the capital stock of Operadora de
Franquicias Alsea, S. A. de C. V. (formerly Operadora Dopitam), a subfranchisee of Domino's
Pizza in the Mexican State of Tamaulipas.

In May and April 2005, Alsea acquired Alipronto, S. A. de C. V. and Geboy del Norte, S.A. de C.V.,
franchisees of Burger King Corporation; these entities were merged with West Alimentos, S. A.
de C. V. in the same year (see note 8).

Below is a condensed balance sheet of the business acquired for the years ended December 2006
and 2005:

2006

2005

Condensed balance sheet
Current assets
Store equipment, leasehold improvements and property
Franchisee rights
Deferred income tax
Other assets

Short-term liabilities
Long-term liabilities

Majority stockholders' equity
Minority stockholders' equity

Goodwill

87,678
175,847
64,298
19,351
–

347,174

68,069
40,420

238,685
–

347,174

–

69,487
142,882
–
–
38,342

250,711

74,127
31,952

120,779
23,853

250,711

140,831

The business acquisitions were accounted for the purchase method. The acquisition cost was
determined based on cash payment and there was no contingent consideration at the date of each
acquisition. Furthermore, the excess of cost over net assets and liabilities acquired was reassigned
to the fair value of the net assets.

The operating income of the acquired companies is included in the consolidated financial statements
as of the date of acquisition.

Joint venture involving the development of Starbucks Coffee in Brazil

In May 2006, Alsea entered into a joint venture agreement to develop the Starbucks Coffee
trademark in Brazil with Cafés Sereia do Brasil Participações, S. A. and Starbucks Corporation Inc.,
by incorporating Starbucks Brasil Comércio de Cafés, Ltda. (Joint Venture Company), beginning
operations in November 2006.

d) Merger

In March 2005, the merger of Operadora West, S.A. de C.V. (Operadora West), into Alsea, S.A. de C.V. was
concluded. Operadora West was Burger King Corporation's franchisee and most of its shares were
acquired by Alsea in 2004; therefore, Operadora West was the merged entity leaving Alsea, S.A. de C.V.
as the surviving entity. For these purposes, the Company obtained authorization from Burger King
Corporation and confirmation from the Ministry of Finance (see note 16).

2. Summary of significant accounting policies-

(a) Financial statement presentation and disclosure-

The accompanying consolidated financial statements have been prepared in conformity with
Mexican Financial Reporting Standards (FRS), which require recognition of the effects of inflation
on the financial information, and are stated in thousands of Mexican pesos of constant purchasing
power as of December 2006, based on the Mexican National Consumer Price Index (NCPI) Published
by Banco de Mexico.

On May 31, 2004, the Mexican Institute of Public Accountants, A.C. formally transferred the
responsibility for issuance of accounting standards in Mexico to the Mexican Board for Research and
Development of Financial Reporting Standards (CINIF), an independent entity in terms of its equity
and operations. Therefore, the bulletins of generally accepted accounting principles in Mexico
(Mexican GAAP) issued by the Mexican Institute of Public Accountants, A.C., were transferred to the
CINIF, which renamed and integrated them to the FRS structure, provided they are not modified,
superseded or repeal by new standards issued by the CINIF.

(b) Principles of consolidation-

The consolidated financial statements include the financial statements of Alsea, S.A. de C.V. and
those subsidiary companies in which it holds a majority interest (over 50%) and/or over which it has
control. All significant intercompany balances and transactions have been eliminated in
consolidation.

The principal operating subsidiaries are as follows:

Operating:
Café Sirena, S. de R. L. de C. V.
Operadora de Franquicias Alsea, S.A. de C.V.
(formerly Operadora Dopitam)

Ownership

2006

2005

Activity

82.00%

Starbucks Coffee stores

99.99%

Domino's Pizza
Burger King and Popeyes
Chicken & Seafood stores

Gastrosur, S. A. de C. V.
(formerly Grupo Alimentos y Diversión, S. A. de C. V.)
Restaurants Sudamericana, L.C.
Distribuidor Internacional de Alimentos, S.A. de C.V.

99.99%
99.99%
99.99%

60.00%
–
99.99%

Chili's Restaurants
Burger King stores in South America
Food distribution

Associated:
Cool Cargo, S.A. de C.V.
Starbucks Brasil Comércio de Cafés, Ltda.
De Libra, Ltda.

50.00%
11.06%
50.00%

50.00%
–
50.00%

Transportation services
Starbucks Coffee stores in Brazil
Domino's Pizza stores in Brazil

The investment in shares of associated companies is valued by the equity method (see note 6).

The investment in shares of De Libra, Ltda. is valued by the equity method; however, due to formal
plans to withdraw this investment, as from December 2006, the equity in income of this associated
company is shown as discontinued operations in the statement of income.

In October 2006, Alsea sold the shares of Rio con Pasta, S.A. de C.V., a subsidiary engaged in operating
the Spoleto trademark in Mexico; this operation generated a loss of $1,247 shown as discontinued
operations in the statement of income.

Due to the above, the 2005 consolidated financial statements have been reclassified for comparison
purposes.

(d) Currency translations of foreign subsidiaries-

Consolidation of the financial statements of foreign subsidiaries operating on an independent
basis (located in Argentina and Chile, representing 5% of consolidated net sales) was conducted
applying the same accounting policies; and have been adjusted applying the inflation of the
country in which they operate and are expressed in currency of constant purchasing power of
those countries and, subsequently, translated into Mexican pesos at the exchange rate prevailing
at year end (balance sheet and income statement accounts). The “Cumulative translation effect of
foreign entity financial statements” shown in stockholders' equity represents the effect of
translation.

(e) Presentation of prior year's amounts-

Figures of prior years' financial statements, are expressed in pesos of a constant purchasing power,
using factors derived from NCPI. The factors used in 2006 and 2005 were 1.0405 and 1.0333,
respectively.

(f) Cash-

Includes all checking accounts, foreign currency and other highly liquid instruments. At the date of the
consolidated financial statements, interest income and expenses, and foreign exchange gains and
losses are included in operating income, under comprehensive financial result.

(g)

Inventories and cost of sales-

Valued at the last-in-first-out method; therefore the replacement cost of inventories has been
updated to the cost of last purchase. Inventory values thus determined do not exceed market
values. Cost of sales represents the replacement cost of inventories at the time of their sale and is
expressed in constant pesos as of the most recent year-end.

The Company provides for the necessary allowances for inventory impairment arising from
damaged, obsolete, slow-moving inventories or other causes, evidence that realization of goods
will be below their cost.

(h) Equipment, leasehold improvements and property-

Equipment, leasehold improvements and property are initially recorded at acquisition cost and
adjusted for inflation by applying NCPI factors. Depreciation on equipment, leasehold improvements
and property is calculated by management using the straight-line method over the estimated useful
lives of the assets, at the annual rates shown below:

Buildings
Store equipment
Leasehold improvements
Transportation equipment
Computer equipment
Production equipment
Office furniture and equipment

Rates

5%
6% to 33%
10% to 20%
25%
30%
10% to 20%
10%

( 10% until 2005)
( 5% to 10% until 2005)

(i) Goodwill of subsidiaries and associated companies-

Goodwill represents the excess of cost over the fair value of net assets acquired. In determining
these amounts, intangible assets acquired with no recoverable value are eliminated, and the
remainder is adjusted using NCPI factors. In accordance with accounting pronouncements, goodwill
is no longer amortizable and must be tested for impairment.

(j)

Intangible assets-

Trademarks represent payments made to third parties for the right to use trademarks under which
the Company operates its stores, pursuant to franchisee or association agreements. Adjusted for
inflation by applying NCPI factors to the historical cost; amortization is calculated using the straight
line method at annual rates from 5% to 15%. The rights to the use of these trademarks expire as
follows:

Trademark

Expiration date

Domino's Pizza
Starbucks Coffee
Burger King
Popeyes Chicken & Seafood
Chili's Grill & Bar

2025
2021
2024
2042
2015

The Company has certain obligations, under said agreements, among others, investments in capital
and opening of new points of sale. The association agreement signed between Starbucks Coffee
International (SCI) and Alsea allows SCI to increase its capital stock in Café Sirena, until it reaches 50%.
This option can be exercised in 2007 and/or 2008 in the event of failure to meet certain goals, mainly the
opening of new points of sale. As from 2009, SCI can increase its participation up to 50% irrespective of
whether or not said goals were met.

Pre-operating expenses and leasehold improvements relate to the opening of new points of sale in
various zones, and are reported at adjusted values using NCPI factors. Amortization over restated
values is computed by the straight-line method over one year, from the date that each point of sale
starts operations.

(k)

Impairment of long-lived assets, equipment, leasehold improvements, property, goodwill and
other intangible assets-

The Company periodically evaluates the restated values of long-lived assets, equipment, leasehold
improvements, property, goodwill and other intangible assets, to determine whether there are
indications of potential impairment. The recoverable value represents the present value of the cash
flows associated to the generating unit, applying an appropriate discount rate, expected to be
generated as a result of assets used or disposed of. If the carrying amount of an asset exceeds its
estimated net revenues, an impairment charge is recognized in the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported in the
balance sheets at the lower of the carrying amount or realizable value.

(l) Accruals-

The accruals recognized in the balance sheet represent present obligations, in which the use of economic
resources or the rendering of services is virtually assured and arises as a consequence of past events, mainly
supplies and other amounts payable to employees. These provisions have been recorded, based on
management's best estimate of the amount needed to settle present obligation; however, actual results could
differ from the provisions recognized (see note 11).

(m) Income tax (IT) and asset tax (AT), and employees' statutory profit sharing (ESPS)-

Provisions for IT and ESPS are charged to operations for the year as incurred. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as
tax loss carryforwards and unused tax credits. Deferred tax assets and liabilities are calculated using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period in which such changes are enacted.

Deferred ESPS is recognized only for temporary differences arising from the reconciliation between
book income for the year and the ESPS tax base, from which it may be reasonably estimated that a
future liability or benefit will arise and there is no indication that the liabilities or benefits will not
materialize.

(n) Labor obligations-

Compensation upon termination of employment (seniority premiums and severance) for reasons
other than restructuring, to which employees are entitled in accordance with the law, are charged
to operations for the year in which such services are rendered, based on actuarial computations
using the projected unit credit method (see note 14).

Other compensations to which employees are entitled are charged to income in the year as
incurred.

(o) Restatement of capital stock, other stockholder contributions and retained earnings-

This adjustment is determined by multiplying stockholder contributions and retained earnings by
factors derived from the NCPI, which measure accumulated inflation from the dates on which the
contributions are made or generated to the most recent year end. The resulting amounts represent
the constant value of stockholders' equity.

(p) Additional paid-in capital-

Represents the excess of the payments for subscribed shares over their par value, less related
expenses.

(q) Cumulative deferred income tax-

Represents the effect of recognition of cumulative deferred taxes as of the date on which the
accounting standard was adopted, reported in retained earnings.

(r) Revenue recognition-

The Company recognizes revenue from the sale of food when the products are delivered to the
clients; service revenue is recognized when the services are rendered. The Company provides
reserves for returns and discounts. These reserves are deducted from sales.

(s) Derivative financial instruments-

As from 2006, Alsea uses derivative financial instruments (forwards) to reduce the risk of adverse
fluctuations in exchange rates. These derivatives are valued at fair value and require that the
Company exchange cash flows at underlying value in give future dates.

Fair value changes in derivatives are temporarily recognized under comprehensive income and
reclassified to operations when the hedged item are realized. The ineffective portion of the fair value of
derivatives is immediately recognized in operations, reported under comprehensive financing result.

(t) Comprehensive financing result (CFR)-

The CFR includes interest income and expense, foreign exchange gains and losses, and monetary
position gains and losses.

Transactions in foreign currency are recorded at the exchange rate prevailing on the date on which
such transactions are entered into or settled. Foreign currency assets and liabilities are translated
at the exchange rate in effect at the balance sheet date. Exchange differences arising from assets
and liabilities denominated in foreign currencies are reported in operations for the year.

Gains or losses on monetary position are determined by multiplying the difference between
monetary assets and liabilities at the beginning of each month, including deferred taxes, by
inflation factors toward year end. The resulting amount represents the monetary gain or loss for
the year arising from inflation, reported in operations for the year.

(u) Use of estimates-

The preparation of the financial statements requires that management makes estimates and
assumptions affecting the amounts reported for assets and liabilities, disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates and assumptions.

(v) Contingencies-

Liabilities for contingent losses are recorded when it is probable that a liability has been incurred and
the amount of the assessment and/or remediation can be reasonably estimated. When a reasonable
estimation cannot be made, qualitative disclosure is provided in the notes to the consolidated financial
statements. Contingent revenues, earnings and assets are not recognized until their realization is
assured.

(w) Earnings per share-

Earnings per share equal the year's net income divided by the weighted average of outstanding
shares during the year.

(x) Comprehensive income-

Represents the result from the Company's overall activities during the year and is comprised of
net income and the cumulative translation effect of foreign entities applied directly to
stockholders' equity.

(y) New accounting pronouncements -

The CINIF has issued the following new statements: FRS B-3 "Statement of Income" superseding the
bulletin B-3 that modifies the general rules for presentation of the statement of income; FRS B-13
"Subsequent Events" superseding the bulletin B-13 and paragraphs 62 to 70 of the bulletin C-9, that
establishes the accounting treatment when such events should be recognized and when they
should only be disclosed; FRS C-13 "Related Parties" superseding the bulletin C-13 establishes the
minimum disclosure rules applicable to operations with related parties, and FRS D-6 "Capitalization
of Comprehensive Financing Result", modifying the bulletins C-6 and B-10 that establishes
mandatory capitalization of the comprehensive financing result directly related with fixed asset
acquisitions, which was previously optional.

The issued FRS went into effect on January 1, 2007, without a provision for early application,
except for FRS D-6. The Company management considers that the adoption of these FRS will have
no significant effect on the Company's financial statements.

3. Foreign currency exposure-

Monetary assets and liabilities denominated in U.S. dollars (dollars) as of December 31, 2006 and
2005 were as follows:

Assets
Liabilities

Thousands of dollars

2006

10,471
15,622

2005

2,790
5,431

Net liability position

(5,151)

(2,641)

The exchange rate of the peso to the dollar, as of December 31, 2006 and 2005, was $10.87 and $10.71,
respectively. At February 20, 2007, the exchange rate was $10.97

As of December 31, 2006 and 2005, the Company's position of non-monetary assets and liabilities of
foreign origin or whose replacement cost may only be determined in dollars corresponds mainly to
store equipment and inventories.

Following is a summary of transactions carried out with foreign entities, for the years ended
December 31, 2006 and 2005:

Food purchases
Equipment purchases
Royalties

Thousands of dollars

2006

61,019
3,005
17,196

2005

57,171
2,329
14,786

4. Balances and transactions with associated companies-

Accounts receivable and payable to associated companies as of December 31, 2006 and 2005 as
follows:

Accounts receivable:
De Libra, Ltda.
Cool Cargo, S. A. de C. V.

Accounts payable:
Starbucks Coffee International
Cool Cargo, S. A. de C. V.

2006

2005

619
–

619

16,562
1,760

18,322

14,957
713

15,670

4,267
–

4,267

Freight services contracted from Cool Cargo amounted to $14,965 in 2006 and $14,135 in 2005.

Inventories-

Include the following:

Food and beverages
Containers and packaging
Other
Less allowance for obsolete items

2006

2005

205,492
10,373
7,333
(4,982)

131,377
8,257
5,361
(4,900)

218,216

140,095

Investment in shares of associated companies-

Includes direct interest in the capital stock of the companies listed below:

Equity

2005

3,898
–

3,898

Equity interest in the

results of operations

for the year

2006

2005

1,398
1

1,399

798
–

798

(4,274)

(7,645)

(21,311)

2006

5,854
3,389

9,243

6,084

Cool Cargo, S. A. de C. V.
Starbucks Brasil Comércio de Cafés, Ltda.

De Libra, Ltda. (see note 2(c))

7. Equipment, leasehold improvements and property-

Include the following:

Buildings
Store equipment
Leasehold improvements
Transportation equipment
Computer equipment
Production equipment
Office furniture and equipment

2006

153,618
1,114,518
1,207,830
107,348
179,247
146,329
44,633

2005

117,797
791,166
947,948
97,190
137,585
133,745
25,026

2,953,523

2,250,457

Less accumulated depreciation

(1,246,681)

(755,466)

Land
Constructions in progress (*)

1,706,842

1,494,991

71,340
385,593

65,424
248,718

2,163,775

1,809,133

(*) Relates primarily to the opening of stores, restaurants and the corporate office building, which

is to be completed in 2007.

In accordance with management's new market strategy, which involves image renewal of the
trademarks that Alsea operates, during 2006, the useful life of leasehold improvements, store
equipment and pre-operating expenses was adapted to the current conditions of business
operations. The effect of this change generated an operating expense of $244,085 and an increase of
$56,692 to the deferred income tax benefit.

8. Goodwill of associated and subsidiary companies-

As of December 31, 2006 and 2005, the goodwill of associated and subsidiary companies is comprised
as follows:

Alsea, S. A. B. de C. V. (*)
West Alimentos, S. A. de C. V.
Operadora D. P. de México, S. A. de C. V.

Less accumulated amortization

2006

120,400
86,797
18,908

226,105
(16,365)

2005

120,400
86,797
18,908

226,105
(16,365)

209,740

(*) Due to the mergers carried out in 2006 and 2005, the goodwill originally recorded in subsidiary

companies is now recognized in Alsea.

Intangible assets-

Intangible assets as of December 31, 2006 and 2005 include the following:

Franchisee

rights and

rights to

the use of

Licenses

Pre-operating commercial

and

Trademarks

expenses

facilities

developments

Total

Balances as of December 31, 2005
Acquisitions
Less accumulated amortization

257,012
241,194
(190,629)

65,195
79,623
(107,520)

28,191
106,662
(12,925)

38,140
34,620
(30,990)

388,538
462,099
(342,064)

Balances as of December 31, 2006

307,577

37,298

121,928

41,770

508,573

Alsea increased its investment in trademarks mainly due to the acquisition of Restaurants
Sudamericana, L.C. (Burger King Argentina and Chile) and to the rights to open “Starbucks Coffee”
stores.

10. Long-term debt-

Unsecured long-term debt in Mexican pesos is as follows:

Unsecured loans
Less current installments

Long-term debt

Maturing in

Average annual
interest rate

2007 – 2012

6.50% – 7.46%

2006

2005

479,331
(132,900)

769,355
(322,343)

346,431

447,012

Maturities of long-term debt as of December 31, 2006 are as follows:

Year

2008
2009
2010
2011
2012

Amount

71,877
94,458
99,258
71,250
9,588

346,431

Bank loans establish certain restrictive covenants, the most significant of which refer to limitations
on dividend payments and compliance with certain financial ratios. As of the date of the financial
statements, all such covenants have been complied with.

11. Accruals-

Accruals are comprised as follows:

Salaries and
other employee
benefits

Other

Total

Balances as of December 31, 2005
Increases charged to operations
Payments

Balances as of December 31, 2006

35,960
94,039
(59,339)

59,730
114,232
(47,270)

95,690
208,271
(106,609)

70,660

126,692

197,352

12. Comprehensive financing result-

Comprise the following:

Interest expenses, net
Foreign exchange loss, net
Gain (loss) on monetary position

13. Other expenses, net-

2006

2005

(46,244)
(2,186)
510

(37,426)
(255)
6,000

(47,920)

(31,681)

2006

2005

Loss on fixed asset disposals, net
Allowance for impairment, goodwill and business disinvestments
Other (expense) income, net

(16,372)
–
(4,458)

(21,713)
(15,463)
20,111

(20,830)

(17,065)

14. Labor obligations-

Liabilities pertaining to seniority premiums and severance upon termination of employment for
reasons other than restructuring, to which employees are entitled in accordance with the law, are
charged to operations for the year in which such services are rendered, based on actuarial
computations.

The Company has not set up a trust to cover these benefits. The actuarial calculations are
summarized below:

Seniority

premiums

Severance

Total

2006

2005

2006

2005

2006

2005

Accumulated benefit obligations
Transition obligation and

unamortized items

Projected benefit obligation
Additional liability

3,239

1,817

15,162

12,892

18,401

14,709

289
3,528
138

388
2,205
–

(6,688)
8,474
5,865

(9,401)
3,491
8,398

(6,399)
12,002
6,003

(9,013)
5,696
8,398

Accrued liability

3,666

2,205

14,339

11,889

18,005

14,094

Net periodic cost is as follows:

Seniority

premiums

Severance

Total

2006

2005

2006

2005

2006

2005

Service cost
Interest cost
Amortization of transition obligation

728
103
(97)

411
57
98

8,955
396
1,050

7,279
371
1,321

9,683
499
953

7,690
428
1,419

Net periodic cost

734

566

10,401

8,971

11,135

9,537

Discount rate
Increase salary rate
Amortization period of average
transition obligation (years)

4.5%
0.5%

4.5%

7.1

5.7

7.2

6.9

15. Income tax (IT), asset tax (AT), employees' statutory profit sharing (ESPS) and tax loss

carryforwards-

The Company determines IT and AT on a consolidated basis. In conformity with the IT Law, tax
consolidation was determined at 100% of the equity interest subject to consolidation of Mexican
controlled companies including the holding company.

For the years ended December 31, 2006 and 2005, the Company determined a net consolidated
taxable income of $704,047 and $447,741, respectively.

The expense attributable to income before IT and ESPS differed from the amount computed, by
applying the Mexican rate of 29% and 30% in 2006 and 2005, respectively, as a result of the
following items:

Expected IT rate
Non-deductible expenses
Effects of inflation, net
Effects of enacted changes in tax laws and rates
Other, net

Effective consolidated IT rate

2006

29%
2%
1%
1%
1%

34%

2005

30%
1%
1%
(2%)
(2%)

28%

The tax effects of temporary differences that gave rise to significant portions of the deferred tax
assets and deferred tax liabilities, as of December 31, 2006 and 2005, are shown below:

Deferred tax (assets) liabilities:

Allowance for doubtful accounts
Accruals
Advance payments from clients
Net operating tax loss carryforward, net of the valuation allowance
Recoverable AT
Inventories
Equipment, leasehold improvements and property
Other assets
Prepaid expenses

Net deferred tax (asset) liability

Income tax payable on retained earnings
Deferred ESPS

2006

2005

(1,823)
(55,936)
(1,258)
(53,473)
(17,858)
21,340
(65,424)
80,578
7,545

(86,309)

466
–

(1,299)
(24,643)
(8,872)
(29,492)
(15,045)
22,370
37,093
49,526
15,988

45,626

1,307
(2,728)

(Assets) liabilities recognized in the balance sheets

(85,843)

44,205

The valuation allowance amounted to $111,172 and $101,079 in 2006 and 2005, respectively.

IT and ESPS charged to income are analyzed as follow:

Current
Deferred

Total

2006

230,495
(109,575)

ESPS

1,597
1,175

2005

ESPS

163,968
(47,757)

13,298
(2,476)

120,920

2,772

116,211

10,822

The Company's subsidiaries have unamortized tax losses of $235,814, which, restated for inflation,
may be carried forward to offset taxable income in the ten succeeding years

Beginning January 1, 2007 the amendments to the AT Law went into effect, which provides a
reduction in the tax rate from 1.8% to 1.25%, without deducting liabilities from the AT tax base.

In conformity with the tax amendments published on December 1, 2004, the IT rates were changed
to 29% for 2006, and 28% for 2007. As a result of these changes, during the years ended December
31, 2006 and 2005, the Company recognized a decrease in net deferred tax of $ 2,445 and $10,004,
respectively, which was charged or credited to the results of operations for each year.

From 2005, inventories are deductible at the time they are sold. Rules are in place for the taxation
of inventories at December 31, 2004 in future periods that depend on each particular entity
circumstances, which led to the deferred liability shown in the previous page.

16. Stockholders' equity-

The principal characteristics of stockholders' equity are described below:

(a) Structure of capital stock-

Capital stock and additional paid-in capital are shown below (see notes 1(a) and 1 (b)):

Number of
shares

Balances as of December 31, 2004
January 2005, increase and payment of shares issued in 2004
March 2005, merger of Operadora West into Alsea
August 2005, acquisition of the minority

124,222,344
286,554
9,737,166

interest of SC de México
Shares repurchased in 2005

2,172,068
154,750

Amount

Capital
stock

451,201
–
20,775

5,161
322

Additional
paid-in
capital

280,883
5,082
82,679

(1,938)
–

Balances as of December 31, 2005
April 2006, primary public offering increased

the stockholders' equity. The related expenses
of $31,766, were offset in the additional paid-in capital

April 2006, stock option plan for executives
May 2006, acquisition of the minority interest

of Gastrosur (formerly Grupo Alimentos y Diversión)

Shares repurchased in 2006

136,572,882

477,459

366,706

16,257,200
1,471,631

1,260,586
253,000

33,636
3,030

2,604
529

649,593
1,225

33,461
–

Balances of December 31, 2006

155,815,299

517,258

1,050,985

In April 2006 and 2005, dividends were declared in the amount of $161,626 and $104,130,
respectively.

The minimum fixed portion of capital stock is represented by Class I shares, and the variable
capital stock is represented by Class II shares, which in no event shall exceed ten times the
minimum capital stock with no withdrawal rights.

As of December 31, 2005, the subscribed fixed and variable capital stock, represented by
155,815,299 common, registered shares with no par value, are as follows:

Number
of shares

122,289,370
33,543,360
(17,431)

Description

Fixed capital stock
Variable capital stock
Repurchased shares

155,815,299

Nominal capital stock

Inflation adjustments to remeasure
accumulated inflation (note 2(o))

Amount

244,578
67,087
(35)

311,630

205,628

Capital stock as of December 31, 2006

517,258

In November 2006, the stockholders agreed to carry out a share restructuring, dividing the
minimum fixed portion (Class I) and variable (Class II) of the capital stock; the Company executed
a four-to-one split, without modifying the capital stock. Consequently, the current shares of
122,289,370 (Class I) and 33,543,360 (Class II) were canceled, and exchanged for 489,157,480 and
134,173,440 shares, respectively. This split went into effect in February 2007, date in which
authorization from the National Registry of Shares was obtained.

The National Banking and Insurance Commission established a procedure enabling companies to
repurchase their own shares in the market. Accordingly, a “stock repurchase reserve”, chargeable
to retained earnings, must be provided for. In 2006, the Company repurchased 253,000 shares
amounting to $12,873.

The Company's own available repurchased shares are reclassified to contribute capital.

(b) Stock option plan for executives-

Alsea established a stock option plan for its executives. The plan started in 2005 and expires on
December 31, 2009. The executives obtained the benefit of receiving the appreciation rights for
certain shares (the difference between the price of shares at the beginning of the plan ($22.80) and
the fair value of the option ($33.93) payable in shares. At the General Stockholders' Meeting, the
Board agreed to assign 1,471,631 shares to this plan, to be managed through a trust.

At the 2006 year end, the executives exercised 20% of the rights acquired at that date ($4.20 per
share) and the remaining 80% can only be exercised at the end of the plan.

As of December 31, 2006, the total liability of $15,675 arising from the plan is recorded as part of
accruals.

I. Five percent of net income for the year must be appropriated to the statutory reserve, until it
reaches one-fifth of the Company's capital stock. As of December 31, 2006, the statutory reserve
amounts to $43,927.

II. Dividends paid out of retained earnings will be tax-free to the extent those dividends arise from the
CUFIN (after tax earnings account). Distributions in excess of these amounts are subject to a 28%
income tax rate on the amount resulting from multiplying the dividend paid by a factor of 1.3889. The
tax incurred on non-CUFIN dividends will be payable by the Company and may be offset against the
corporate IT for the two succeeding years.

17. Commitments and contingencies-

Commitments:

a) The Company leases the facilities in which its stores and distribution centers are located, as well
as certain equipment under limited-term lease agreements. Rental expense amounted to $328,228
and $210,160 in 2006 and 2005, respectively. Rental expenses for 2007 are estimated to amount to
$449,894. Aforementioned expenses were established at fixed prices and increase annually based
on the NCPI.

b) The Company has some commitments related to the provisions set forth by the contracts for the

trademarks acquired (note 2(j)).

The Company has commitments arising in the normal course of business as a result of raw material
supply agreements, some of which establish contractual penalties for noncompliance.

d) As a result of a service agreement, the Company is required to pay a compensation based on net

food sales. This compensation ranges from 2.5% to 5.25%.

Contingent liabilities:

Alsea and subsidiaries are involved in a number of lawsuits and claims arising in the ordinary
course of business. The final outcome of these matters is not expected to have a significant
adverse effect on the Company's financial position.

18. Financial information by segments-

Alsea organizes its business segments into three operating divisions namely: the sale of food and
services, distribution services and other business; the management of these divisions is carried
out by the same administration.

Segment information is as follows (amounts in millions of pesos):

Food and Beverages

Mexico

South America

Distribution

Others

Eliminations

Consolidated

2006

2005

2006

2005

2006

2005

2006

2005

2006

2005

Revenue from:

Third parties

4,571

3,589

Inter-business

4,575

3,595

334

–

334

890

1,355

2,245

888

1,145

2,033

1,323

1,336

–

5,808

4,496

994

(2,682)

(2,145)

–

1,013

(2,682)

(2,145)

5,808

4,496

Operating costs

and expenses

3,870

3,141

296

2,050

1,867

1,320

1,020

(2,699)

(2,215)

4,837

3,813

Depreciation

and amortization

Operating income

499

206

177

277

171

143

(19)

(1)

551

420

211

472

Other income

statement items

Net consolidated

income

(206)

(201)

$ 214

271

Assets

2,780

2,745

533

625

612

3,787

3,132

(4,572)

(3,849)

3,153

2,640

Investment in

associated companies

Investment in assets

660

–

482

–

735

600

Total assets

3,446

3,227

541

656

639

3,832

3,227

(4,572)

(3,849)

3,903

3,244

19. Pro forma information on business acquisitions-

Condensed pro forma consolidated financial information is shown below, as if the acquisitions
had been completed at the beginning of 2006 and 2005 (see note 1(b)).

Income
Income from continuing operations
Consolidated net income
Minority interest
Majority interest net income

Net earnings per share

Income
Income from continuing operations
Consolidated net income
Minority interest
Majority net income

Net earnings per share

December 31, 2006

Pro forma adjustments

Pro forma figures

Base figures

(unaudited amounts)

5,808,117
229,240
220,348
6,218
214,130

1.45

150,158
(4,040)
(4,040)
–
(4,040)

5,958,275
225,200
216,308
6,218
210,090

1.42

December 31, 2005

Pro forma adjustments

Pro forma figures

Base figures

(unaudited amounts)

4,496,196
275,529
274,884
3,702
271,182

2.04

557,678
(7,317)
(1,879)
2,533
(4,412)

5,053,874
268,212
273,005
6,235
266,770

2.01

José Rivera Río Rocha

Chief Financial Officer

Alberto Torrado Martínez

Abel Barrera Fermín

Chief Executive Officer

Corporate Comptroller

Shareholder’s Information

Investor Relations

Diego Gaxiola
Corporate Finance
ri@alsea.com.mx

Rodrigo Benet
Investor Relations
rbenet@alsea.com.mx

Tel. +(52.55) 52.41.71.58

Headquarters
Alsea S.A.B. de C.V.
Yucatán 23
Col. Hipódromo Condesa
06170, Mexico City
Tel +(52.55) 52.41.71.00

Independent Auditors
KPMG Cárdenas Dosal, SC
Boulevard Manuel Ávila
Camacho No. 176
11650 Mexico City
Tel. +(52.55) 52.46.83.00

+(52.55) 24.87.83.00

This Annual Report is printed on environmentally
friendly paper containing at least 10% of post-
consumer ﬁber and with Elemental Chlorine Free
(ECF) bleaching papermaking.

We would like to extend our thanks to all our
clients, employees and staff who participated
in this Annual Report.

Boris G. Calva
IT Manager

Mauricio Rojas
Domino’s Pizza Client

Emilia Suárez
Popeyes Client

Dalia Sánchez
Marketing
Information
Manager

Valeria González Garza
Training Manager

Ma. Elena Pérez
Tax Planing Manager

Raquél Moscoso
Financial Analyst

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Mexico City. Barista, Starbucks Coffee Masaryk

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What’s next?

2006 Annual Report

www.alsea.com.mx
Yucatán 23, Col. Hipódromo Condesa, 06170. Mexico City +(52.55) 52.41.71.00