Alsea, S.A.B. de C.V.
Annual Report 2008

Plain-text annual report

now is the time 2008 Annual Report s e r o t s 5 3 1 1 , • We achieved presence in the 5 latin american countries we had determined in our expansion strategy • Latin American markets represent a great growth opportunity: 117,700,000 potential customers • Increase of 123 corporate stores • 11.5% growth in sales Mexico • 584 domino’s pizza • 258 starbucks coffee • 107 Burger King • 10 popeyes • 27 chili’s grill & Bar • 4 california pizza Kitchen argentina • 41 Burger King • 3 starbucks coffee chile • 32 Burger King • 29 starbucks coffee coloMBia • 21 domino’s pizza • 1 Burger King Brazil • 18 starbucks coffee Because of our wide variety of options and Because we Belong to a sector that has great growth opportunities, owing to its characteristics, now is the time to invest in AlseA. Contents Financial highlights 02 • Messages from our Directors 04 • Day by day we form the best team 06 • Every second counts in our operation 10 • We develop our brands every minute 14 • Another year of growth 18 • Committed at all times 22 • To our Shareholders 24 • Letter from Independent Board Members 26 • Board of Directors 27 • Management’s discussion and analysis 28 • Internal Audit Committee Report 33 • Corporate Governance Committee Report 35 • Independent Auditors’ Report 37 • Consolidated Balance Sheets 38 • Consolidated Statements of Income 40 • Consolidated Statements of changes in Stockholders’ Equity 42 • Consolidated Statement of Cash Flows 44 • Consolidated Statements of Change in Financial Position 45 • Notes to Consolidated Financial Statements 46 time is a very important value for alsea, Both in the operation of each of our Brands as well as in the daily tasK of shared services. in the course of time and thanKs to the experience we have gained, we have created a Business model that produces returns second By second. 1 0 2 0 3 0 4 0 5 0 6 0 AlseA is the leADinG QuiCK seRviCe RestAuRAnt (QsR) AnD CAsuAl DininG oPeRAtoR in lAtin AmeRiCA, oPERATING BRANDS oF PRoVEN SuCCESS SuCH AS DoMINo’S PIZZA, STARBuCKS CoFFEE, BuRGER KING, CHILI’S GRILL & BAR AND CALIFoRNIA PIZZA KITCHEN. ITS MuLTI-uNIT oPERATIoN IS BACKED By ITS SHARED SERVICES CENTER, INCLuDING THE SuPPLy CHAIN THRouGH DIA, REAL ESTATE AND DEVELoPMENT SERVICES, AS WELL AS ADMINISTRATIVE SERVICES SuCH AS FINANCES, HuMAN RESouRCES AND TECHNoLoGy. 01: PEoPLE: ouR MoST IMPoRTANT VALuE our operation is founded on human talent 02: SuRPASSING CuSToMER ExPECTATIoNS WITH oPERATING ExCELLENCE serving one person at a time, while creating a full customer experience 03: BEING THE MARKET LEADER operating the largest numBer of restaurants 04: BEING THE BEST STRATEGIC PARTNER creating long-term sustainaBle Business relationships 05: GRoWTH, WHILE KEEPING THE CoMPANy AND ouR SHAREHoLDERS’ EQuITy SAFE attaining profitaBility through our value drivers 06: SoCIAL RESPoNSIBILITy positively impacting our environment 8 0 7 0 6 0 5 0 4 0 8 0 7 0 6 0 5 0 4 0 8 0 7 0 6 0 5 0 4 0 8 0 7 0 6 0 5 0 4 0 8 0 7 0 6 0 5 0 4 0 S E L A S T E N ) 2 ( A D T I B E D E T A D I L o S N o C T I F o R P T E N ) 3 ( C I o R S E R o T S F o R E B M u N 7,786.8 6,985.4 6,026.4 4,665.3 4,004.0 1,032.1 1,153.0 1,007.4 708.4 588.9 139.5 489.1 228.6 285.2 188.0 9.6% 14.9% 9.6% 18.7% 18.6% 1,135 989 865 728 626 finanCial highlights (1) CAGR (6) 2008 % 2007 % 2006 % 2005 % 2004 % Net Sales Gross Profit 18.1 7,786.8 100.0 6,985.4 100.0 6,026.4 100.0 4,665.3 100.0 4,004.0 100.0 21.4 5,005.5 64.3 4,661.7 66.7 3,959.9 65.7 2,896.2 62.1 2,307.5 57.6 operating Expenses 24.1 4,546.4 58.4 3,946.0 56.5 3,523.8 58.5 2,406.6 51.6 1,916.2 47.9 operating Income 4.1 459.1 5.9 715.7 10.2 436.1 7.2 489.6 10.5 391.3 9.8 EBITDA(2) 15.1 1,032.1 13.3 1,153.0 16.5 1,007.4 16.7 708.4 15.2 588.9 14.7 Consolidated Net Profit -7.2 139.5 1.8 489.1 7.0 228.6 3.8 285.2 6.1 188.0 4.7 Total Assets Cash 6,399.7 100.0 5,295.7 100.0 4,040.5 100.0 3,365.9 100.0 2,381.7 100.0 538.5 8.4 209.3 4.0 244.3 6.0 171.3 5.1 158.9 Liabilities with Cost 1,790.2 28.0 1,033.5 19.5 610.9 15.1 798.3 23.7 106.6 6.7 4.5 Major Sharejolde’s Equity 2,997.1 46.8 2,997.5 56.6 2,653.9 65.7 1,834.0 54.5 1,538.9 64.6 RoIC(3) RoE(4) RoA(5) Stock Price(7) Earnings per Share(7) 1.0 -10.7 Dividend paid per Share(7) Book Value per Share(7) 12.9 Shares outstanding (millions) (7) 9.6% 4.4% 2.4% 6.23 0.21 0.23 4.85 14.9% 16.7% 10.5% 9.6% 9.1% 6.2% 15.30 14.72 0.77 0.11 4.84 0.38 0.28 4.26 18.7% 16.9% 9.9% 6.94 0.51 0.19 3.24 18.6% 13.0% 8.6% 5.99 0.33 0.16 2.98 618.0 618.8 623.2 546.4 496.8 Number of Stores 16.0 1,135 989 865 Employees 19.0 21,024 19,200 16,797 728 13,629 626 10,483 (1) figures in millions of pesos, expressed in nominal pesos for 2008, and purchasing power as of december 31, 2007 for the other periods; except per share data, number of stores and employees. (2) eBitda: operating income before depreciation and amortization. (3) roic is defined as the operating income after taxes divided by the invested capital – net (total assets – cash and cash equivalents – liabilities without cost). (4) roe is defined as net profit divided by major shareholder’s equity. (5) roa is defined as net profit divided by total assets. (6) compound annual growth rate from 2004 to 2008. (7) for comparative purposes, the number of shares was adjusted based on the split of 4 to 1 carried out in 2007. 02 : AlseA 2008 annual report now is the time : 03 Messages froM our DireCtors: 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 0 0 1 1 1 2 1 3 1 4 1 5 1 now is the time to show our brand’s full strength: its almost 20-year-long leadership, its having significantly penetrated more than 130 cities—with almost 600 stores—and its outstanding customer acceptance. it is the most recalled fast food market and the only one in mexico that actually delivers on time. domino’s pizza is essentially a modern and innovative brand; we constantly prove this by creating ideas and value for our clients. [01] leonel Díaz managing director, domino’s pizza mexico now is the time to take advantage of alsea’s impressive growth, bolstered by the opening of 67 new starbucks coffee stores. including these units, we now have a total of 258 stores nationwide, located in 40 cities in 26 states, which allows for greater diversification in our service offer. this likewise strengthens our human talent’s profile and motivation. in fact, this year starbucks coffee was awarded the Best company to work for recognition in mexico, which reflects the professionalism and warmth of our people in each cup of coffee we serve. [02] Gerardo Rojas managing director, starbucks coffee méxico now is the time to build up the successes of the innovative strategies we implemented in Burger King, both in its value proposals as well as in the launching of new top quality products throughout the year. establishing product platforms for each segment will contribute to sales growth and enable us to increasingly satisfy consumer needs. [03] Javier Abarca managing director, Burger King méxico now is the time to affirm that alsea strongly participates in the casual dining segment. the growth of chili’s—now operating 27 units—has enabled us to strongly consolidate our position in this brand and the recent addition of california pizza Kitchen represents an excellent growth opportunity looking forward, with which we can increasingly offer customers a variety of alternatives that will surely guarantee our leadership in the sector. [04] Federico tejado managing director, casual dining california pizza Kitchen joined alsea in december and, as a result, now is the time to consolidate this alliance so that we can continue growing and strengthening the business, by improving the quality, efficiency and service we offer our clientele each day. to this end, it is essential that we have the support and trust of our shareholders, as well as the commitment and professionalism of our employees. [05] saúl Kahan managing director, california pizza Kitchen now is the time to gain strength and forge ahead with our growth objectives so as to improve both our operating capacity—serving 1,272 units of the different brands of our portfolio in 142 cities—as well as the service we provide to the entire supply chain, while generating economies of scale that will enable us to optimize the costs of our consumables and continue growing in alsea. [06] héctor orrico managing director, dia as a result of our having acquired domino’s pizza, we started up operations in the colombian market. thus now is the time to focus on making the operation of the existing domino’s pizza stores more efficient and on developing Burger King in colombia. i am confident that the human talent and commitment of the team members of this project will allow us to achieve the results we have set for ourselves. [07] Ricardo ibarra managing director, domino’s pizza & Burger King colombia now is the time to continue growing in argentina. during our first months of operation, we opened three starbucks coffee stores. this is the result of the trust shown by our strategic partners, which once again reinforces alsea’s good image and the proven success of its business strategy. [08] Diego Paolini managing director, starbucks coffee argentina now is the time to recognize that not only has alsea’s business model made it possible for us to continue growing at the expected profit rate, but to make inroads as well into new territories, such as our having opened Burger King in colombia, which strengthens our presence in argentina, chile and mexico. [09] Pablo de los heros managing director, Burger King argentina at year-end 2008 we had as many as 32 Burger King stores in chile. as a result, now is the time to begin to see the benefits of the synergy and critical mass model. we will continue to work hard to increase our market share and operating margins. [10] Juan Petito managing director, Burger King chile now is the time to consolidate alsea’s leadership position in the different categories in which we participate, taking advantage of our solid financial position at year-end 2008. having the necessary liquidity to address commitments going forward and the ability to carry out our vocation to grow will allow us to capitalize on future opportunities without risking the company’s healthy operation. [11] José Rivera Río chief financial officer now is the time to emphasize the quality of alsea’s personnel, who have gained strength in spite of the difficult changes surrounding us. we particularly wish to acknowledge the performance of our leaders, who daily develop the talent of our people. we would also like to underline the commitment and dedication of our more than 20,000 employees, whose professional performance has contributed to the growth of our brands, generated value and strengthened the business throughout 2008. [12] Rafael Cancino corporate director, human resources now is the time for alsea to continue looking ahead, always from the perspective of a successful future in its operations, in handling leading brands in the market, in the quality of the service it offers to its consumers and in the professionalism of its people. this vision enables us to define the right path to succeed in each of the segments and markets in which we operate. [13] sergio mirensky corporate director, strategic planning now is the time to prove that alsea is a solid company in terms of policies and procedures, effective internal control and best practices in its activities and operations. all these assets serve as a foundation to support the sustained growth of our brand portfolio, minimize risks and strictly adhere to our code of ethics. [14] mario sánchez corporate director, internal audit now is the time to reinforce and standardize key business processes, increasing their effectiveness and efficiency through technological support, and thereby making the company’s transformation and competitiveness easier. with this we will create new competitive advantages that will contribute towards alsea’s leadership and growth and add profit to each of its brands. [15] Alejandro wiencke olivares corporate director, processes & technology 04 : AlseA 2008 annual report now is the time : 05 DaY BY DaY We forM the Best teaM • 21,024 employees • 41% are women • 64% are younG people under the age of 25 Starbucks Coffee was acknowledged as the best place to work for in mexico DIA loads the trucks, which during 2008 traveled 2,300,000 kilometers, delivering ingredients and food products to the more than 1,270 stores it serves 0 0 5 0 : The fresh fruit and vegetables that will be used in the dishes served at California Pizza Kitchen are selected and picked up at the Central Supply Market : 0 3 5 0 Tomato planting is begun at the community greenhouse of Santa María Temaxcaltepec, oaxaca, financed by Fundación Alsea A.C. through Fondo para la Paz I.A.P. 0 0 6 0 : Starbucks Coffee Aeropuerto serves the first Macchiato of the day : 0 3 6 0 06 : AlseA 2008 annual report now is the time : 07 people are alsea’s most important value. we focus on having motivated and committed employees, who are satisfied with their achievements within the company. to this end, this year we gave more than 367,810,000 hours of training, investing 15,568,163 pesos. we are aware of the fact that however, at alsea we also value motivation and performance integration and diversity. as a result, satisfaction are decisive talent 41% of our employees are female drivers. and since our business and 182 of our employees have involves being constantly in touch special needs, who find a place with people, one of our priorities within our company to raise their is to encourage talent, particularly quality of life and that of their because our ability to surpass families. customer expectations depends on this. we want the common denominator of our operations to be people with most of our employees are young, a vocation of service and assistance dynamic, highly energized and excellence, and we aspire for all our productive, who have a passion for brands to be recognized as the best their work. we have the proper place to work in each of the structure and strategies to recruit, countries where we participate. train and retain the best talent and are continuously designing human resources programs that acknowledge and reward our people for generating value and service excellence for our clientele. The Domino’s Pizza stores receive from DIA part of the seven tons of cheese that they used throughout 2008 0 0 7 0 : The day’s first peak hour begins at Starbucks Coffee; 42,100,000 cups of coffee were sold in 2008 0 3 7 0 : The Teamwork Training Course commences, one of more than 2,950 courses we give our employees at the Training Center : 0 0 8 0 At this time on Thursdays we begin to receive supplier invoices at the Tláhuac SCA (Alsea’s Shared Services Center) : 0 0 9 0 08 : AlseA 2008 annual report now is the time : 09 • we supply 1,272 unitS on 369 RouteS • 3,529 deliveRieS per weeK in 142 cities • 2.3 million Kilometers traveled eVerY seConD Counts in our oPeration Safe Delivery Specialists at Domino´s Pizza make the first of approximately 40,000 daily deliveries : 0 3 9 0 The Starbucks Coffee Mexico stores prepare their café du jour, using part of the almost 6,000 kg of coffee they consume each week 0 0 0 : 1 Burger King Reforma 222 makes its checklist to start up operations and contribute to the sale of 16,310 hamburgers that Alsea’s Burger King stores sell per day 0 3 0 : 1 Alsea reports to the Mexican Stock Exchange that during 2008 it opened 146 total stores of its different brands 0 0 : 1 1 10 : AlseA 2008 annual report now is the time : 11 18 million kilograms of dough were delivered to 584 domino’s pizza establishments operating the brands of our portfolio is a complex process, which dia takes charge of through administrative processes as well as processes that develop increasingly efficient products and quality. all the activities performed at dia even though the cost of supplies (distribuidora e importadora alsea drastically went up during the year s.a. de c.v.) are linked to defined owing to different reasons—such time schedules, as they are part as certain products depending of a logistics chain that is focused on the exchange rate and the on delivering the “full product on pressure in general on the price of time” at our 1,272 stores, on pre- commodities—thanks to our excellent established days and at specific relationship with suppliers and the hours. dia’s sales to third parties successful negotiations we had with increased 11.5% to 1.06 billion them, we obtained benefits for all pesos in 2008. our brands and part of this effect was offset by the cost of meals. to this end, the construction and kickoff of the hermosillo distribution center, in addition to the other four that are already operating in the country, will allow for even prompter delivery and an enhanced service for our stores. As many as 640 Starbucks Coffee volunteers participate in the reforestation of the national park, Bosque de los Remedios, where part of the 45,000 trees that we planted in 2008 were rooted 0 3 : 1 1 The last truck leaves the DIA Hermosillo Distribution Center, which has eight trucks that travel 252 delivery routes daily 0 0 2 : 1 California Pizza Kitchen Santa Fe gets ready to serve the first of over 214 salads that will be sold that day 0 3 2 : 1 our 27 Chili’s restaurants open their doors to the public 0 0 3 : 1 12 : AlseA 2008 annual report now is the time : 13 We DeVeloP our BranDs eVerY Minute • 91 million clients served throughout the year • 40 million pizzas sold at domino’s pizza • 42 millions of coffees sold at starBucKs coffee mexico Domino´s Pizza donated 80 pizzas for a get-together offered to the beneficiaries of the foundation Pro Zona Mazahua A.C. 0 3 3 : 1 0 0 4 : 1 DIA delivers 4 tons, part of the 32 tons of food that it donated in kind in 2008 Chili´s universidad is at 100% of its capacity, assisting part of the almost 2,300,000 clients it received during 2008 0 3 4 : 1 Domino´s Pizza Mexico distributes more than 100,000 pizzas daily, and this is the time of day with the greatest demand for delivery 0 0 5 : 1 14 : AlseA 2008 annual report now is the time : 15 29,053,205 clients served at Burger King the increase in the number of customers served, which this year totaled 91 million—16.6% more compared to last year—is the result of our intense efforts to improve each of the brands that make up our portfolio. at year-end, domino’s pizza mexico the growth of our latin american had 584 units, 425 of which are operations was one of our 2008 corporate stores, and was operating success stories, which we will in 136 cities throughout the country. consolidate in the years to come. we now have a total of 98 units in Burger King mexico is all ready four countries that we had defined in able to appreciate the results of our strategic plan: argentina, chile, its promotional strategies, the colombia and Brazil. launching of new items, as well as the implementation of customer on the other hand, chili’s continued service programs. we opened our to have an upward trend in sales first Burger King colombia store in and at year-end had 27 stores. the the city of Bogota. results of chili’s during the entire year of 2008 as well as those of sixty-three starbucks coffee mexico california pizza Kitchen in december stores were opened throughout the confirm the great opportunity that year, with which we now have a exists for us in mexico in the casual total of 258 units. we made inroads dining category. into 17 new markets: los cabos, villahermosa, tepic and others, in general, and in spite of the difficult with which we are now present in economic environment, we will 40 cities and 26 states. continue growing and developing the brands, with which we will consolidate our leadership position. 0 3 5 : 1 The four managers that run each California Pizza Kitchen restaurant in order to serve 670 diners a day are making sure that their customers are being waited on well Starbucks Coffee Nuevo León prepares Green Tea Frapuccino, one of the more than 87,000 coffee/tea combinations the brand offers worldwide 0 0 6 : 1 0 3 6 : 1 Chili’s and Fundación Alsea A.C. deliver a donation to the more than 2,000 children of the free meal foundation, Comedor Santa María A.C., who are part of the 79,823 people that have been benefited by their social responsibility programs 0 0 7 : 1 Burger King Chile serves a Combo Whopper, part of the 5,000,000 hamburgers it sold during 2008 16 : AlseA 2008 annual report now is the time : 17 • 11.5% SAleS GRowth in 2008 • 123 new corporate stores • acquisition of 25 domino’s pizza colomBia and california pizza Kitchen units another Year of groWth The higher abundance of the more than 51 million clinets that Starbucks Coffee México attended during 2008, starts now 0 3 7 : 1 SCA (Alsea’s Shared Services Center) releases the brands’ financial information 0 0 8 : 1 The new Domino’s Pizza commercial is aired on national television. The brand invested 5.7% of its income in advertising during 2008 0 3 8 : 1 California Pizza Kitchen Masaryk gets ready for the next CPKids Tour, in which Mexico City elementary school students participate 0 3 9 : 1 18 : AlseA 2008 annual report now is the time : 19 43,717 people were served during the first month of operation of Starbucks Coffee Alto palermo in Buenos Aires, Argentina in 2008, alsea reported net sales of we started up operations in 7.8 billion pesos, 11.5% higher than starbucks coffee in argentina last year’s. this increment is mainly and Burger King in colombia, and attributable to the addition of acquired domino’s pizza colombia. 123 corporate stores in the last at year-end, this segment had a twelve months, including the total of 98 units, with operations acquisitions of domino’s pizza in argentina, chile, colombia and colombia and—to a lesser extent— Brazil—the four countries we had california pizza Kitchen in mexico, defined in our strategic plan. as well as the startup of the starbucks coffee argentina and during the year, we invested almost Burger King colombia operations. 1.1 billion pesos—mostly in unit alsea had a record year in terms of existing stores and in renewing store openings, both in mexico as assets. growth, in the remodeling of our well as in latin america. in mexico, we achieved our expansion goal: by year-end we had 1,104 Qsr stores. our sound financial position at year-end, with a record cash level of more than 530 million pesos, gives us the solidity and certainty to face our debt maturity dates and continue to make progress with our growth plans. The Alto Palermo Starbucks Coffee store in Argentina posted a new sales record: 83 transactions in half an hour : 0 0 0 2 : 0 3 0 2 Burger King Minerva serves its combo number 100 of the day at its Auto King A group of friends get together on the terrace of CPK Masaryk with a BBQ Chicken Pizza. They form part of the 93,000 customers who have dined at that branch since April of 2008 0 0 : 1 2 : 0 0 2 2 Starbucks Coffee reports that more than 8,600,000 customers log on to the Internet at its stores 20 : AlseA 2008 annual report now is the time : 21 CoMMitteD at all tiMes Alsea’s Social Responsibility is everyone’s the mission of fundación alsea a.c. is to: Contribute towards responsibility. We devote time and effort to it every improving the quality of life of people in need through day, every hour and every second to help future comprehensive community development programs. generations inherit a better country. • 45,228 trees were planted • 61,867 toys were delivered • 8,033 individual pizzas were donated • 81,823 total Beneficiaries • 74 institutions were supported nationwide • $8,227,919 pesos in donations were channeled to different programs • 9,988 volunteers participated in community outreach activities we will continue to work for mexico and starting in 2009 we will focus our efforts on nutrition projects. the friends & family event of the starbucks coffee guanajuato store is held, one of the 17 new cities in mexico that the brand entered into during 2008 0 0 3 2 : : 0 3 3 2 domino´s pizza finishes its delivery day after approximately 4,000 pizzas are delivered every 30 minutes in the country starbucks coffee pilares—the store that produces the most sales for the brand on a daily basis—serves the last coffees of the day 0 0 4 2 : Burger King checks its meat purchase inventories, which in 2008 amounted to 1,900,000 kg : 0 3 0 0 22 : AlseA 2008 annual report now is the time : 23 to our shareholDers: now is the time to take a pause and analyze our results in these circumstances of great challenges. as a result of the programs we implemented throughout the year to adjust the company to the in a year marked by an international financial crisis, a notorious increase in basic supplies, the effects world’s economic situation, at year-end our financial situation was solid, with a record cash position of a devaluation and the beginning of a retraction in consumption and in the economic liquidity of of over 530 million pesos and a leverage level of 34%, which provides us with the solidity and the countries in which we operate, alsea had a record year in terms of openings and consolidating its certainty we need to forge ahead with our plans of a healthy operation and growth. operations—both in mexico as well as in latin america—with an increase of 123 corporate stores. in mexico alone, we consolidated our expansion strategy totaling 1,104 establishments. in view of the foregoing, we are able to confirm that now is alsea’s time, because the company is well positioned to achieve its expansion, leadership and customer services goals. we will face the this was not an easy task, as it required the support of all our people; innovating processes and challenges of 2009 with optimism and trust and put all our creativity, perseverance and diligence to products; and making quick adjustments in all the items of our cost and expense structure. we also work to continue making progress and obtain the best return for you, our shareholders. implemented a model to better plan our human resources at the senior management level and, as a result, we consolidated our leadership and decision-making processes to strengthen the company’s strategic areas. foremost in our minds, however, was to never forget the needs and tastes of all the sincerely, people who visited our establishments and consumed our products throughout the year. our latin american operations continued to present positive results in terms of sales and development plans. thanks to the trust of our strategic partners, we started up starbucks coffee operations in argentina and Burger King in colombia, as well as having acquired domino’s pizza colombia. at year-end, our latin american division had a total of 98 units, with operations in argentina, chile, colombia and Brazil—the four countries that we defined in our strategic plan. Alberto torrado Arturo Barahona chairman of the Board of directors chief executive officer 1 of the 186 tons of residue delivered by Alsea to be recycled is transported 0 0 : 1 0 The dough production line of the DIA Mexico City Distribution Center is producing the pre-cooked dough for the D4 pizza : 0 0 2 0 The La Florida Starbucks Argentina store wraps up the day 0 0 3 0 : Carlos wakes up to go to his training sessions as a Domino´s Pizza Specialist in Safe Delivery. This brand gave more than 162,000 hours of training to its delivery boys during 2008 0 3 4 0 : 24 : AlseA 2008 annual report now is the time : 25 letter froM inDePenDent BoarD MeMBers BoarD of DireCtors At Alsea we believe that it is an excellent idea for our Independent Board Members to write a message in the company’s Annual Report, as our Managing Directors do as well. They also have a lot to say about what Alsea is experiencing at present, and we wish to share their opinion with you. it is important to identify alsea’s current status: well-positioned brands in the process of being institutionalized, as a result of changes in management; a distribution and administrative services infrastructure that guarantees growth; operating knowledge of practically any segment of the restaurant business; and knowledge of today’s food market and future trends. additionally, the company has a managerial team with proven experience and, above all, with a permanent entrepreneurial approach. we can affirm that we have the ability to consolidate the company as the most important restaurant business in latin america, and our aspirations also include participating in the north american market. lastly, the time is ripe for us to strengthen our leadership in the markets in which we operate. sergio mario larraguivel today’s economic and financial environment presents challenges for companies that are putting their ability to respond, their business vision and their responsibility for employees, business partners, investors and society to the test. at alsea—both as a group as well as on an individual basis—we have made a commitment to sustain the leadership of our company, with social responsibility and with a corporate governance that instills trust among all the agents with whom we do business and who have believed in the potential of the company, its senior management and, above all, its people. salvador Cerón times like these motivate us to think about the future: how we can better serve our customers, by better identifying their expectations; and how to broaden our geographic coverage and get more people to know our service and brand offer. manuel Canal as independent members of the Board, we assume our responsibilities vis-à-vis investors by making sure that decisions are made with absolute impartiality and only after having analyzed in depth the related problems and opportunities. it is in this way that we support the company’s management so that it can follow through with the strategic plans that give the company life and projection going forward, particularly in times like these in which alsea’s development and operating capacity will enable it to move faster than other domestic and international players in the business arena. marcelo Rivero ChAiRmAn alberto torrado martínez CHAIRMAN oF THE BoARD oF DIRECToRS shareholder Board and staff memBers alberto torrado martínez CHAIRMAN oF THE BoARD oF DIRECToRS cosme alberto torrado martínez APPoINTED DIRECToR, LATIN AMERICA armando torrado martínez SHAREHoLDER fabián gerardo gosselin castro SHAREHoLDER federico tejado Bárcena MANAGING DIRECToR, CASuAL DINING arturo Barahona oyervides CHIEF ExECuTIVE oFFICER independent BoARd memBeRS José manuel canal hernando INDEPENDENT CoNSuLTANT marcelo rivero garza CHIEF ExECuTIVE oFFICER, GRuPo JuMEx salvador cerón aguilar PRESIDENT, STF CoNSuLTING GRouP sergio mario larraguivel cuervo CHIEF ExECuTIVE oFFICER, ANESLA S.A. DE C.V. SeCRetARieS guillermo díaz de rivera Álvarez PARTNER, DíAZ DE RIVERA y MANGINo, S.C. xavier mangino dueñas PARTNER, DíAZ DE RIVERA y MANGINo, S.C. Audit Committee CoRpoRAte GoveRnAnCe Committee José manuel canal hernando salvador cerón aguilar CHAIRMAN marcelo rivero garza MEMBER CHAIRMAN sergio mario larraguivel cuervo MEMBER sergio mario larraguivel cuervo sergio enrique mirensky montefiore MEMBER mario sánchez martínez TECHNICAL SECRETARy TECHNICAL SECRETARy 26 : AlseA 2008 annual report now is the time : 27 ManageMent’s DisCussion anD analYsis CoNSoLIDATED RESuLTS oF THE FuLL yEAR 2008 the following table provides a condensed income statement of alsea during 2008, in millions of mexican pesos (with the exception of earnings per share or “eps”), the percentage of net sales that each line represents, and the change in percentage for the full year 2008 when compared with the same period of 2007: net sales gross profit ebitda(1) operating income consolidated net income eps(2) 2008 Margin % 2007 Margin % Change % $7,786.8 100.0% $6,985.4 100.0% 5,005.5 1,032.1 459.1 138.5 0.2078 64.3% 13.3% 5.9% 1.8% n.a. 4,661.7 1,153.0 715.7 489.1 0.7690 66.7% 16.5% 10.2% 7.0% n.a. 11.5% 7.4% (10.5)% (35.9)% (71.5)% (73.0)% (1) eBitda: operating income before depreciation and amortization. (2) eps refers to the earnings per share of the last twelve months net Sales net sales increased 11.5% to 7,786.8 million pesos during 2008, compared to 6,985.4 million pesos in the previous operating income the operating income of the third quarter decreased 256.6 million pesos, mostly due to a lower ebitda and to the increase in depreciation and amortization as a result of our having acquired the assets related to the expansion plan. net income consolidated net income declined 349.6 million pesos, mostly due to the 256.6-million-peso decrease in operating income, the 157.3-million-peso increase in the comprehensive cost of financing, the 39.5-million-peso increase in other expenses, and the 12.1-million-peso negative effect in discontinued operations. these effects were partially compensated with the 115.3-million-peso decrease in income taxes. RESuLTS By SEGMENT the following table sets forth the net sales and ebitda by business segment, in millions of mexican pesos, for the full year 2008 and 2007; the contribution and margin that each line represents; as well as the change in percentage for the year ended december 31, 2008, when compared to the same period of 2007: Net Sales by Segment 2008 % Cont. 2007 % Cont. % Change food & Beverages mexico $5,738.7 73.7% $5,388.7 77.1% food & Beverages latin america 972.0 12.5% 641.8 9.2% distribution 2,955.1 37.9% 2,620.2 37.5% 6.5% 51.4% 12.8% 12.8% 11.5% year. this increase was attributable to revenue growth in our brands in mexico and latin america, as well as to the intercompany operations(3) (1,878.9) (24.1)% (1,665.3) (23.8)% increase in food distribution sales made to third parties. consolidated sales $7,786.8 100.0% $6,985.4 100.0% the sales growth in our brands was mostly due to the unit expansion, which represented an increase of 123 corporate stores, including the acquisition of 21 domino´s pizza in colombia and the 4 california pizza Kitchen. EBITDA by Segment 2008 % Cont. Margin 2007 % Cont. Margin % Change this was partially offset by the decline in same-store sales, mainly due to the vat change effect, and to a lower extent the consumption contraction at the end of the year. Gross profit during the last twelve months of 2008, gross income increased 343.8 million pesos, totaling 5,005.5 million pesos, with a gross margin of 64.3% compared to 66.7% in the year-ago period. the decrease in gross margin was mostly attributable to the change in the aforementioned vat rate and to the hike in the cost of the company’s main raw materials due to higher commodity prices and the devaluation of the peso in the fourth quarter of 2008. these effects were partially offset by the strategy of promotions and raising prices among our different brands. operating expenses operating expenses (excluding depreciation and amortization) increased 0.8 percentage points as a percentage of sales, from 50.2% during the twelve months of 2007, to 51.0% in the same period of 2008. this was mainly attributable to the operating leverage as a consequence of having lower same store sales, the above-inflation rise in expenses related to the cost of electric power and gas, the payment of office and store leases after the company sold certain assets in late 2007, the changes in the organizational structure to support future growth and the change in revenue mix. such effects were partially offset by operating efficiencies and the operating leverage generated by the growth in units. eBitdA food & Beverages mexico $714.4 69.2% 12.4% $837.1 72.6% 15.5% (14.7)% food & Beverages latin america 72.9 7.1% distribution other Businesses(3) 203.0 19.7% 41.8 4.1% 7.5% 6.9% n.a. 73.5 6.4% 11.5% (0.8)% 214.6 18.6% 8.2% (5.4)% 27.8 2.4% n.a. n.a. consolidated eBitda $1,032.1 100.0% 13.3% $1,153.0 100.0% 16.5% (10.5)% (3) for segment reporting purposes, intersegment operations are included in each of the segment operations. food and Beverages mexico during the full year of 2008, sales increased 6.5% to 5,738.7 million pesos, compared to 5,388.7 million pesos in the same period of 2007. this increase of 349.9 million pesos is attributable to the unit expansion during the last twelve months, which was partially offset by the decrease in same-store sales. ebitda dropped 14.7% during 2008, to 714.4 million pesos, compared to 837.1 million pesos in the year-ago period. this decline is mostly due to the decrease in same store sales, the price hike in our main raw materials due to the increase in commodities prices during the first half of the year and the depreciation of the peso during the fourth quarter, as well as to a lower extent the above-inflation rise in expenses related to the cost of electric power and gas. this was partially offset by operating efficiencies and the strategy of promotions and price increases among as a result of the aforementioned variations, ebitda dropped 10.5% to 1,032.1 million pesos in 2008, compared to the different brands. 1,153.0 million pesos in the previous year. the ebitda margin declined 3.2 percentage points, from 16.5% in 2007 to 13.3% during the full year of 2008. 28 : AlseA 2008 annual report now is the time : 29 Food and Beverages Latin America stores of all our brands, including the acquisition of Domino’s Pizza Colombia and California Pizza Kitchen, as well The Food & Beverages Latin America Division, presented an increase of 51.4% during the full year 2008, reaching as the startup of Starbucks Coffee Argentina and Burger King Colombia. The remaining 110.8 million pesos were 972.0 million pesos compared to 641.8 million pesos of the previous year. This was mostly due to the growth in invested in other items, particularly in the hermosillo distribution center. same-store sales as well as to the opening and acquisition of 37 units during the last twelve months, including the operations of Starbucks Coffee Argentina and Burger King Colombia. Recoverable Taxes - Net Ebitda of the Food & Beverages Latin America Division decreased 0.8%, totaling 72.9 million pesos. This decrease mostly attributable to the Value Added Tax balances in favor of Distribuidora e Importadora Alsea, S.A. de C.V. was mostly attributable to the start-up operations of Starbucks Coffee Argentina and Burger King Colombia, as well (“DIA” – Distribution segment), as well as the positive balance of profit taxes derived from the 2008 fiscal period. The 144.4-million-peso increase in recoverable taxes - net of taxes payable, as of December 31, 2008, was as to the price hike in our main raw materials as consequence of the depreciation of the various local currencies in relation to the U.S. dollar. These effects were partially offset with the increase in same store sales. Deferred Income Taxes Distribution The Deferred Income Tax went up from 197.9 million pesos as of December 31, 2007 to 293.0 million pesos as of year end 2008. This increase of 95.1 million pesos was mostly due to the recognition of tax losses, to the effect During the year 2008, distribution sales rose by 12.8% to 2,955.1 million pesos, compared to 2,620.2 million pesos of larger provisions for liabilities and to the tax on assets pending recovery. in the same period of 2007. This is attributable to a higher number of stores served, totaling 1,272 units as of December 31, 2008, compared to 1,156 units in the same period of last year, which represented a 10.0% increase. Accounts Payable Third-party revenues increased 11.5% to 1,064.8 million pesos and represented 13.7% of consolidated revenues. The 210.8-million-peso increase during the last 12 months in accounts payable is mainly attributable to unpaid Ebitda reached 203.0 million pesos compared to 214.6 million pesos in the year-ago period, which accounted balances related to the acquisition of California Pizza Kitchen outperformed in December of 2008, as well as to for a margin of 6.9%, and presented a 1.3 percentage points margin decrease as compared to same period of last larger provisions related with the growth of operations. year. The decreased margin is mostly attributable to the change in the revenue mix, in view of the fact that the fastest-growing brands are the ones with the lowest margin for DIA, as well as to the increase in costs due to the Discontinued Operations depreciation of the Mexican peso, and to a lower extent higher distribution expenses due to the increase in the The net decrease of assets minus liabilities is 24.4 million pesos, which is attributable to the reclassification of the price of Diesel and the redefinition for recovering corporate expenses. Popeyes brand in 2008 and 2007 as a discontinued operation, as well as to the recognition of the brand’s valuation. NON-OPERATING RESULTS Comprehensive Cost of Financing Debt As of December 31, 2008, Alsea’s total debt increased 756.7 million pesos to 1,790.2 million pesos, compared to 1,033.4 million pesos on the same date last year. This increase is mainly attributable to the development plan of The comprehensive cost of financing in 2008 went up to 194.4 million pesos, compared to 37.1 million pesos the company’s brands, acquisitions made in the last twelve months, as well as to working capital needs and by- during the previous year. This is attributable to the 89.0-million-peso increase in the foreign exchange loss, as a back fund operations. result of the depreciation of the local currencies vis-à-vis the US dollar, as well as to the 68.2-million-peso increase in interest paid - net, owing to more leverage and higher interest rates. Other Expenses - Net As of December 31, 2008, 63.1% of the debt was long term, compared to 67.6% in the year-earlier period. On the same date, 83.7% of the debt was denominated in Mexican pesos, 11.2% in US dollars, 4.8% in Chilean pesos, 0.2% in Argentine pesos and 0.1% in Colombian pesos. The company’s consolidated net debt—compared to 2007— This item increased 39.5 million pesos in 2008 compared to the previous year, mainly due to the write-off of increased 427.6 million pesos, totaling 1,251.7 million pesos as of December 31, 2008 compared to 824.1 million assets due to the closing of stores of the different brands, and severance payments as part of the restructuring pesos as of December 31, 2007. program to reduce operating expenses. Theses effects were partially offset with the profit obtained from selling the remaining real state assets. Taxes on Earnings Share By-back Program As of December 31, 2008, the company had a balance in the fund set aside for the 15.3-million share by-back, equal to approximately 193.9 million pesos in nominal terms. During the three months ended December 31, The tax on earnings of 53.1 million pesos decreased 115.3 million pesos in twelve months ended December 2008, the company bought back 725 thousand shares, equal to 4.6 million pesos. 31 of 2008, mostly as a result of the 452.8-million-peso decrease in earnings before taxes and the effect of deferred taxes. BALANCE SHEET Financial Ratios As of December 31, 2008, the company had complied with all the financial restrictions established in the long-term credit agreements. The Net Debt to Ebitda ratio of the last 12 months was 1.21 times, the total Liabilities to Stockholders’ Equity ratio was 0.98 times, and the Ebitda to Interest Paid ratio of the last 12 Store Equipment, Leasehold Improvements and Property, Trademarks, Goodwill and Pre-operatives. months was 8.32 times. The 469.6-million-peso variation in this line was attributable to the expansion program and to the acquisitions made during 2008. The Return on Invested Capital (“ROIC”)(4) decreased from 15.8% to 9.6% during the last twelve months ended December 31, 2008. The Return on Equity (“ROE”)(5) of the last 12 months ended December 31, 2008 was During the twelve months ended December 31, 2008, Alsea invested a total of 1,097.5 million pesos, of which 4.4% compared to 16.7% year over year. 986.7 million pesos were invested in store openings, renovation of equipment and the remodeling of the existing 30 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 31 RELEVANT FIGURES February 16, 2009 Internal audIt CommIttee report BRAND Stores 2008 Stores 2007 Change % Annual Change 411 0 195 0 107 32 29 0 9 23 0 806 21 8 29 154 989 14 21 63 3 0 9 3 1 1 4 4 123 8 10 18 5 146 3.4% N.A. 32.3% N.A. 0.0% 28.1% 10.3% N.A. 11.1% 17.4% N.A. 15.3% 38.1% 125.0% 62.1% 3.2% 14.8% 2007 Change 425 21 258 3 107 41 32 1 10 27 4 929 29 18 47 159 1,135 2008 8.32 x 1.21 x 0.98 x 9.6% 4.4% 2008 $4.85 Domino’s Pizza Mexico Domino’s Pizza Colombia Starbucks Coffee Mexico Starbucks Coffee Argentina Burger King Mexico Burger King Argentina Burger King Chile Burger King Colombia Popeyes Chili’s Grill & Bar California Pizza Kitchen Total Corporate Starbucks Coffee Chile Starbucks Coffee Brazil Total Associates (7) Sub-Franchisees Domino´s Pizza Mexico TOTAL STORES Financial Ratios EBITDA(1)/Interests paid Net debt/EBITDA(1) Total liabilities/Stockholders’ equity ROIC(4) ROE(5) Stock Ratios Book value per share EPS (ttm)(2) EV(6)/EBITDA(1) (ttm) Shares outstanding as of Float Stock Price as of quarter end 19.29 x 0.72 x 0.69 x 15.8% 16.7% 2007 $4.84 N.A N.A N.A 620 bps 1230 bps Change 0.1% (73.0)% N.A. (0.1)% 130 bps (59.3)% $0.2078 $0.7690 5.2 x 618.0 35.8% $6.23 9.1 x 618.8 37.1% $15.30 In compliance with the provisions of Articles 42 and 43 of Mexico’s Securities Market Law and the Audit Committee Regulation, I hereby inform you of the activities we carried out during the year ended December 31, 2008. While performing our work, we have kept in mind the recommendations established in the Code of Best Corporate Practices. We got together at least once every quarter and followed a work schedule to perform the activities described below. I. INTERNAL CONTROL We made sure that Management, while complying with its internal control responsibilities, had established general guidelines and the processes needed to apply and comply with such guidelines. Additionally, we followed up on the related comments and observations made by the External and Internal Auditors in the performance of their work. II. EXTERNAL AUDIT We recommended to the Board of Directors the engagement of the Group’s and its subsidiaries’ external auditors. In this regard, we verified their independence and the compliance with the personnel turnover requirements established by Law. Jointly, we analyzed with them their focus and work schedule, as well as their coordination with the Internal Audit Department. We constantly and directly stayed in touch to be informed of the progress they were making in their work, of any observations they might have and to take note of their comments on their revision of the quarterly and annual financial statements. We were promptly informed of their conclusions and reports on the annual financial statements. We authorized the fees paid to the external auditors for their auditing services and other services that are allowed, making sure that they did not interfere with their independence with respect to the company. While taking into account Management’s viewpoints, we evaluated its services corresponding to last year. III. INTERNAL AUDIT With the purpose of maintaining its independence and objectivity, the Internal Audit Department functionally reports to the Audit Committee. Accordingly: 1. We revised and approved in a timely manner its schedule and annual activity budget. 2. We received periodical reports on the progress of the approved work schedule, any changes they might have had, as well as the causes that brought on such changes. 3. We followed up on the observations and suggestions that they developed, as well as their timely implementation. 4. The proposal of hiring an External Consultant was approved to support Internal Audit functions. IV. FINANCIAL INFORMATION, ACCOUNTING POLICIES AND REPORTS DELIVERED TO THIRD PARTIES We revised the quarterly and annual financial statements of the company with the persons in charge of preparing them, and recommended to the Board of Directors their approval and authorization to be published. As part of this process, we took into account the opinion and observations of the external auditors. Upon issuing our opinion on the financial statements, we made sure that the criteria, and accounting and information policies used by Management to prepare the financial information were adequate and sufficient, and that they were applied consistent with the previous fiscal year. As a result, the information presented by Management reasonably reflects the financial situation, operating results and changes in the company’s financial (4) ROIC is defined as operating income after taxes (ttm) divided by operating investment, net (total assets – cash and situation for the year ended December 31, 2008. temporary investments – non-interest bearing liabilities. (5) ROE is defined as net income (ttm) divided by stockholders’ equity. (6) EV is defined as market value plus net debt plus minority interest, and considers the price per share at the closing of each quarter. (7) Associated stores are defined as any operation that is recognized by means of the equity method. Our review also included the quarterly reports that are prepared by Management and presented to the stockholders and public in general, as well as any other financial information required by existing regulations. We made sure that such information was prepared based on the same accounting criteria that are used to prepare the annual information. To conclude, we recommended to the Board that the publication of this information be authorized. 32 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 33 Corporate GovernanCe CommIttee report We verified the proper accounting recording of the purchase of Domino’s Colombia and the sale of Popeyes that February 16, 2009 will take place during the first quarter of 2009. To the Board of Directors of ALSEA, S.A. DE C.V.: V. COMPLIANCE WITH REGULATIONS, LEGAL ASPECTS AND CONTINGENCIES We confirmed the existence and reliability of the controls established by the company to ensure compliance with the different legal provisions it is subject to, and made sure that these provisions were properly disclosed in the financial information. In compliance with Articles 42 and 43 of Mexico’s new Securities Market Law, and on behalf of the Corporate Governance Committee, I am pleased to present you with my report on the activities we carried out during the year ended December 31, 2008. While performing our work, we have kept in mind the recommendations contained in the Code of Best Corporate Practices. We periodically revised the company’s tax, legal and labor contingencies and supervised the effectiveness of the procedure that was established to identify and follow up on such contingencies, as well as their proper disclosure In order to comply with the responsibilities of this Committee, we performed the following activities: and recording. VI. CODE OF CONDUCT With the support of the Internal Audit Department, we made sure that the personnel was complying with the Code of Conduct in effect in the Group, and that the corresponding sanctions were being applied in cases in which breaches were found. VII. ADMINISTRATIVE ISSUES We conducted the Committee’s regular meetings with Management to be informed of the company’s performance as well as of the relevant and unusual activities and events. We also met with the external and internal auditors, without the presence of Management members, to comment on the development of their work and any limitations they might have had, as well as to facilitate any private communication they might want to have with the Committee. When deemed advisable, we requested the support and opinion of independent experts. Likewise, no significant possible non-compliances with operating policies, the internal control system and the accounting recording policies came to our knowledge. 1. During this period, we did not receive any requests for exemption in accordance with the provisions of Article 28, fraction III, section f) of the new Securities Market Law. It was therefore not necessary for us to make any recommendation in this regard. 2. Likewise, during this period, we did not receive any requests for exemption in accordance with the provisions of Article 28, fraction III, section f) of the new Securities Market Law. It is therefore not necessary for us to make any recommendation in this regard. 3. Twice a year we revised the 2008 Performance Evaluation of relevant executives, as well as Management’s proposal to pay their variable compensation. 4. In the Board of Directors’ Meeting it was agreed to send the 2005 SOP proposal to the Stockholders’ Meeting to set a new maturity date for December 2009. 5. We analyzed a proposal to grant the “2008 Deferred Bonus Plan” (PILA), depending on the personal evaluation of all the participants. We recommended that this proposal be authorized. 6. We presented an annual 4% salary raise for store personnel and no raise for the staff personnel of our Business Units and Corporate Areas. We held executive meetings with the exclusive participation of the Committee members, and during such meetings 7. We were presented with a hR Planning proposal for implementation in all our Business Units and Corporate agreements and recommendations for Management were established. Areas. The proposal was approved. The Chairman of the Audit Committee reported to the Board of Directors on a quarterly basis the activities that were carried out. The work we performed was duly documented in minutes that were prepared after each meeting, and which were revised and approved in a timely manner by the members of the Committee. Sincerely, Chairman of the Audit Committee José Manuel Canal Hernando 8. On a quarterly basis, we were presented with the Control Board that allowed us to follow up on the strategic objectives. Additionally, we performed a first review of the 2009-2013 Strategic Plan, which also includes brand guidelines. The complete analysis was presented at the Board of Directors’ Meeting of December 11, 2008, and it was requested that we made sure that the financial forecasts complied with the stockholders’ orders. 9. On a quarterly basis, we followed up on the progress made in the “Alsea Model” Processes Project, which is already at the implementation stage. 10. We established the general premises to prepare the 2009 budget. The 2009 budgets of each of Alsea’s divisions were revised in order to validate them and so that we could make a recommendation to the Board of Directors. The budget and all its components were approved by the Board of Directors in its meeting held December 11, 2008. 11. We revised the CEO’s report with the changes vs. budget for each quarter of 2008 and the entire fiscal year 2008, with the effects of each of Alsea’s companies, in order to validate them and be aware of the main variations before presenting them to the Board of Directors. In all cases we recommended the authorization of such reports and of the financial results. 34 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 35 Independent audItors’ report 12. All the acquisition initiatives that were presented to us by Management were evaluated; during this period the acquisition of Domino’s Pizza Colombia and California Pizza Kitchen was authorized, since it was considered that they were in alignment with Alsea’s growth strategy. The association with PF Changs was also approved, and Management was requested to present the 2009 budget for approval purposes once the contract has been signed. 13. We recommended the authorization of the dividend payment as per the established policy, i.e. 30%. To the Board of Directors and Stockholders Alsea, S. A. B. de C. V.: 14. The Stock Trading Plan results were presented quarterly and during the fourth-quarter meeting the 2009-2011 We have examined the accompanying consolidated balance sheets of Alsea, S. A. B. de C. V. and subsidiaries as of Stock Trading Plan was approved with its respective quarterly metrics for 2009 and annual metrics for the December 31, 2008 and 2007 and the related consolidated statements of income and of changes in stockholders’ periods of 2010 and 2011. The quarterly metrics shall be revised and adjusted, if necessary, on a quarterly equity for the years then ended and the consolidated statements of cash flows and changes in financial position basis during fiscal year 2009. for the years ended December 31, 2008 and 2007, respectively. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 15. We were presented with the restatement of the Shareholder’s Cost applied at the end of each quarter of 2008, using the methodology authorized by the Board of Directors, and we suggested that a rate of 17.5% be used at financial statements based on our audits. the end of the period. 16. On a quarterly basis we were presented with a summary of the risk management operations through “Forward Exchange Rates” (peso/dollar) carried out during the year. These operations have been conducted as authorized, i.e. in alignment with the objective of covering the foreign exchange risk of the operation in accordance with the authorized budget. Lastly, I would like to mention that as part of the activities we have carried out, including the preparation of this report, we have at all times listened to and taken into account the viewpoint of all the relevant senior managers, and no significant differences of opinion have existed. Corporate Governance Committee Salvador Cerón Aguilar Chairman We conducted our audits in accordance with auditing standards generally accepted 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 that they are prepared in accordance with Mexican Financial Reporting Standards. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures contained in the financial statements. An audit also includes assessing the 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 17(f) to the consolidated financial statements, in 2007, a subsidiary company of Alsea filed an appeal to comply with the injunction sentence (“Amparo”) related to Valued Added Tax, with no final resolution yet issued. Additionally, there are certain contingencies that are disclosed in the subparagraphs (e) and (g) of the same note. During 2008, accounting changes were made as disclosed in note 2(y) to the consolidated financial statements. 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, 2008 and 2007, and the results of their operations and the changes in their stockholders’ equity for the years then ended and their cash flows and changes in their financial position for the years ended December 31, 2008 and 2007, respectively, in conformity with Mexican Financial Reporting Standards. KPMG CARDENAS DOSAL, S. C. Jaime Sanchez Mejorada Fernández February 17, 2009. 36 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 37 ALSEA, S. A. B. DE C. V. AND SUBSIDIARIES ConsolIdated BalanCe sheets December 31, 2008 and 2007 (Thousands of Mexican pesos- note 2(y)) ASSETS Current assets: Cash Accounts receivable, net: Customers less allowance for doubtful accounts of $11,932 in 2008 and $4,456 in 2007 Recoverable valued added-tax and other recoverable taxes Other Inventories, net (note 5) Prepaid expenses 261,896 664,340 44,360 361,524 111,083 214,514 593,487 95,272 235,252 79,052 2008 2007 2008 2007 $ 538,480 209,327 Current installments of long-term debt (note 10) $ LIABILITIES AND STOCkHOLDERS’ EqUITy Short-term liabilities: Supliers Associated companies (note 4) Accounts payable and accrued liabilities Accruals (note 11) Income tax payable and employees’ statutory profit sharing 660,080 536,729 67,939 162,045 473,041 65,860 334,550 487,032 42,790 47,473 376,806 139,420 Total current liabilities 1,965,694 1,428,071 Total current assets 1,981,683 1,426,904 Long-term debt, excluding current installments (note 10) 1,130,098 698,900 Investment in shares of associated companies (note 6) 28,884 22,874 Store equipment, leasehold improvements and property, net (note 7) 3,044,911 2,748,352 Goodwill of subsidiary companies, net (note 8) 219,979 217,612 Intangible assets, less accumulated amortization of $551,500 in 2008 and $ 411,958 in 2007 (note 9) 782,325 611,618 Deferred income taxes and employee statutory profit sharing and related to reinvestment of profits (note 15) Discontinued operations (note 2 (c)) 292,989 48,962 197,920 70,441 Other liabilities Employee benefits (note14) Discontinued operations (note 2(c)) 43,028 26,445 4,675 15,425 19,437 1,800 Total liabilities 3,169,940 2,163,633 Stockholders’ equity (note 16): Majority stockholder’s equity Capital stock Additional paid-in capital Retained earnings Reserve for repurchased shares 534,017 1,228,880 1,121,906 110,322 534,364 1,090,334 1,226,657 140,739 Currency translation adjustment in foreing subsidiaries and associated companies 1,946 5,389 Majority stockholders’ equity 2,997,071 2,997,483 Minority interest 232,722 134,605 Total stockholders’ equity 3,229,793 3,132,088 Commitments and contigencies (note 17) See accompanying notes to consolidated financial statements. $ 6,399,733 5,295,721 $ 6,399,733 5,295,721 38 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 39 Mr. José Rivera Río Rocha Chief Financial Officer Mr. Arturo A. Barahona Oyervides Chief Executive Officer Mr. Abel Barrera Fermín Corporate Comptroller ALSEA, S. A. B. DE C. V. AND SUBSIDIARIES ConsolIdated statements of InCome Years ended December 31, 2008 and 2007 (Thousands of Mexican pesos- note 2(y)) Net sales Cost of sales Gross profit Operating expenses Operating income Other (expenses) income, net (note 13) Comprehensive financing result (note 12) Equity in the results of operations of associated companies (note 6) Income from continuing operations, before income tax Income tax (note 15) Income before discontinued operations Loss from discontinued operations, net (note 2(c)) Consolidated net income Minority interest Majority net income Net earning per share (note 2 (w)) See accompanying notes to consolidated financial statements. 2008 2007 $ 7,786,843 2,781,324 6,985,403 2,323,697 5,005,519 4,661,706 4,546,432 3,946,010 459,087 715,696 (34,973) 4,500 (194,400) (37,065) (2,027) (2,653) 227,687 680,478 53,148 168,409 174,539 512,069 (35,008) (22,928) 139,531 489,141 10,752 10,706 128,779 478,435 0.21 0.77 $ $ 40 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 41 Mr. José Rivera Río Rocha Chief Financial Officer Mr. Arturo A. Barahona Oyervides Chief Executive Officer Mr. Abel Barrera Fermín Corporate Comptroller ALSEA, S. A. B. DE C. V. AND SUBSIDIARIES ConsolIdated statements of ChanGes In stoCkholders’ equIty Years ended December 31, 2008 and 2007 (Thousands of Mexican pesos- note 2(y)) Capital Stock Additional paid-in capital Legal reserve Retained earnings Retained earnings Total Reserve for repurchased shares translation effect from foreing entities majority stockholder’s equity Minority Interest Total stockholders’ equity Balance as of December 31, 2006 $ 536,623 1,090,334 45,572 860,490 906,062 118,738 2,118 2,653,875 68,694 2,722,569 Increase in minority interest Repurchase of shares (note 16) Appropriation to legal reserve Increase in reserve for repurchased shares (note 16) Dividends declared ($0.30 per share) (note 16) Comprehensive income - (2,259) - - - - - - - - - - - - - - 10,988 (10,988) - - - - (67,999) - - - - (90,000) (90,000) 90,000 (67,840) (67,840) 478,435 478,435 - - - - - - - - 55,205 55,205 (70,258) - - (67,840) - - - - (70,258) - - (67,840) 3,271 481,706 10,706 492,412 Balance as of December 31, 2007 534,364 1,090,334 56,560 1,170,097 1,226,657 140,739 5,389 2,997,483 134,605 3,132,088 Increase in minority interest Repurchase of shares (note 16) Appropriation to legal reserve Increase in reserve for repurchased shares (note 16) Dividends declared in shares ($0.23 per share) (note 16) Comprehensive income - (5,331) - - - - - - - - - - - - - - 23,922 (23,922) - - - - (120,417) - (90,000) (90,000) 90,000 - - - - - 87,365 87,365 (125,748) - - - - - (125,748) - - 128,779 128,779 - (3,443) 125,336 10,752 136,088 Balance as of December 31, 2008 $ 534,017 1,228,880 80,482 1,041,424 1,121,906 110,322 1,946 2,997,071 232,722 3,229,793 See accompanying notes to consolidated financial statements. 42 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 43 Mr. José Rivera Río Rocha Chief Financial Officer Mr. Arturo A. Barahona Oyervides Chief Executive Officer Mr. Abel Barrera Fermín Corporate Comptroller ALSEA, S. A. B. DE C. V. AND SUBSIDIARIES ConsolIdated statement of Cash flows Years ended December 31, 2008 (Thousands of Mexican pesos- note 2(y)) Operating activities: Income from continuing operations, before income tax $ 227,687 2008 Items relating to investing activities: Depreciation and amortization Effects from associated companies, net Gain or loss on sale of fixed assets Interest income Valuation effects of financial instruments Items relating to financing activities: Interest expense Subtotal Customers Inventories Suppliers Income taxes payable Other assets and liabilities Net cash provided by operating activities Investing activities: Interest received Store equipment, leasehold improvements and property Trademark rights and preoperating items Investment in shares of subsidiaries and associated companies Disincorporation of subsidiary Acquisition of subsidiary Net cash used in investment activities Cash to be obtained from financing activities Financing activities: Bank loans received and payment of loans, net Interest paid Minority interest contribution Repurchase of shares Net cash provided by financing activities Net increase in cash Adjustments to cash flow to reflect foreing exchange fluctuations Cash: At beginning of year At end of year See accompanying notes to consolidated financial statements. 572,980 2,027 79,143 8,634 5,535 124,078 1,020,084 (45,819) (123,803) 85,848 (293,359) 213,425 856,376 (8,634) (569,812) (399,168) (8,037) (15,523) (93,806) (1,094,980) (238,604) 739,929 (120,864) 87,363 (125,748) 580,680 342,076 (12,923) 209,327 $ 538,480 ALSEA, S. A. B. DE C. V. AND SUBSIDIARIES ConsolIdated statements of ChanGe In fInanCIal posItIon Years ended December 31, 2007 (Thousands of Mexican pesos- note 2(y)) Operating activities: Consolidated net income Add charges (deduct credits) to operations not requiring (providing) funds: Depreciation and amortization Labor obligations Equity interest in associated companies Deferred income tax and employees’ statutory profit sharing Funds provided by operations (Net investing in) net financing from operating accounts: Customers, net and prepaid expenses Inventories Associated companies Suppliers, accounts payable, accrued liabilities and other liabilities Taxes payable and employees’ statutory profit sharing Funds used in operating activities Financing activities: Increase in capital stock and minority interest, net Repurchase of shares Loans, net Dividends declared Funds provided by financing activities Investing activities: Acquisition of store equipment, leasehold improvements and property Acquisition and disincorporation of subsidiary and associated companies, net Cumulative translation effect from foreing entities Intangible and other assets Funds used in investing activities Decrease in cash Cash: At beginning of year At end of year See accompanying notes to consolidated financial statements. 2007 $ 489,141 437,253 6,953 2,653 (119,018) 816,982 (116,397) (8,943) 26,194 222,646 (335,552) (212,052) 55,205 (70,258) 536,174 (67,840) 453,281 (720,477) 8,476 3,271 (383,114) (1,091,844) (33,633) 242,960 $ 209,327 Mr. José Rivera Río Rocha Chief Financial Officer Mr. Arturo A. Barahona Oyervides Chief Executive Officer Mr. Abel Barrera Fermín Corporate Comptroller Mr. José Rivera Río Rocha Chief Financial Officer Mr. Arturo A. Barahona Oyervides Chief Executive Officer Mr. Abel Barrera Fermín Corporate Comptroller 44 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 45 ALSEA, S. A. B. DE C. V. AND SUBSIDIARIES notes to ConsolIdated fInanCIal statements December 31, 2008 and 2007 (Thousands of Mexican pesos- note 2(y)) (Translation from original issued in Spanish) These financial statements have been translated from the original Spanish language for the convenience of foreign English-speaking readers only. The operating income of the acquired companies is included in the consolidated financial statements as of the date of acquisition. On February 17, 2009, the Board of Directors authorized the issuance of the accompanying consolidated financial statements and notes thereto. In accordance with the General Corporations Law and the Company’s bylaws, the Stockholders are empowered to modify the financial statements after their issuance. The accompanying financial statements will be submitted for approval at the next Stockholders’ Meeting. The financial statements have been prepared in accordance with Mexican Financial Reporting Standard (FRS) in force at the balance sheet date (note 2 (y)). b) Development of the Burger King trademark in Colombia- In October 2008, continuing with the expansion strategy in Latin America through a subsidiary in which Alsea will participate with 84.9%, an agreement has been reached with Burger King Corp. to develop the Burger King brand in Bogota, Colombia . The current partners of Alsea in Domino’s Pizza Colombia will participate with the remaining 15.1%. The agreement contemplates a plan to develop 20 stores over the next 5 years. (1) Description of business and significant transactions- Description of business- Alsea, S. A. B. de C. V. and Subsidiaries (Alsea or the Company), are mainly engaged in operating fast-food stores, “QSR”, and casual restaurants, “Casual Dining”. In Mexico, Alsea operates Domino’s Pizza, Starbucks Coffee, Burger King, Popeyes (on discontinued operation) and Chili’s Grill & Bar, and since December 2008, it operates California Pizza Kitchen. The operation of its multi-units is supported by its Shared Service Center, which includes a supply chain through its distribution division (DIA), real estate and development services, as well as administrative services such as finance, human resources and technology. Since 2006, the Company operates Starbucks Coffee in Brazil in association with Café Sereia do Brasil Participaçoes, S. A. and Starbucks Coffee International. In Chile and Argentina, Alsea operates Burger King and since 2007, Starbucks Coffee in those countries in association with Starbucks Coffee International. In Colombia, it operates Domino’s Pizza and Burguer King since June and November 2008, respectively. Significant transactions- a) Acquisitions - Acquisition of 65% of California Pizza Kitchen- In December 2008, through a subsidiary, the Company acquired 65% of Grupo Calpik, S.A.P.I, de C.V. (Grupo Calpik), a company which forms part of Grupo BGM. Grupo Calpik currently has four units of California Pizza Kitchen and is the exclusive developer and franchiser of the brand for the Mexican territory. - Acquisition of Domino´s Pizza Colombia- In June 2008, the acquisition was arranged with 75% of the capital stock of Dominalco, S.A. (Domino´s Pizza Colombia or Dominalco). Domino´s Pizza Colombia has a presence in that country for 20 years and today has 21 stores operating in four cities, Bogota, Medellin, Cali and Pereira. A condensed balance sheet of the businesses acquired is shown as follows: Condensed balance sheet Current assets Store equipment, leasehold improvements and property Franchise rights Current liabilities Stockholders’ equity $ $ $ $ 84,835 93,359 50,129 228,323 111,908 116,415 228,323 The business acquisitions were recognized under the purchase method. The cost of entities acquired was determined based on the cash paid. Furthermore, the excess of the cost of the units acquired over net assets acquired and liabilities assumed was reassigned to the fair value of the net assets. There is a contingent price for the acquisition of Dominalco, which is subject to certain rules that require, mainly, obtain direct benefits from future Dominalco profits in a one-year period as of the date of acquisition. c) Agreement for the termination of the contract of the master franchise of “Popeye’s” trademark- In September, 2008, the Company entered into an agreement with AFC Enterprises, Inc. Popeyes Chicken & Buscuits, to terminate the master franchise contract for operation of the “Popeyes” trademark in Mexico. The agreement establishes the conditions to disincorporate the 10 stores in operation in a period of no more than six months. AFC Enterprises, Inc. will continue to operate the “Popeyes” trademark in Mexico and will assist the Company in the transfer of the 10 stores to a new franchiser, in order to continue with the growth of the trademark in Mexico (note 2 (c)). d) Starbucks joint venture (2007), Chile and Argentina In October 2007, Alsea entered into a joint venture agreement to operate and develop the Starbucks Coffee trademark in Argentina and participate in the operation of Starbucks Coffee in Chile. In Chile, the Company entered into a joint venture agreement with Starbucks Coffee International, acquiring 18% of the shares of Starbucks Coffee Chile, S.A. (Starbucks Chile), with 21 stores in operation at the time of this agreement. While in Argentina, Alsea acquired 82% of the shares of Starbucks Coffee Argentina, S.R.L. (Starbucks Argentina). e) Merger In August 2007, Distribuidor Internacional de Alimentos, S.A. de C.V. was merged into Distribuidora e Importadora Alsea, S.A. de C.V., with the latter as the surviving company. f) Share split In February 2007, having carried out all the necessary procedures and updated its share registration at the National Securities Registry, Alsea’s four-to-one share split became effective without modifying the capital stock. (2) Summary of significant accounting policies- The preparation of financial statements requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include, but are no limited to, the carrying amount of property, plant and equipment, intangible assets and goodwill; valuation allowances for accounts receivable, inventories, deferred income tax assets; valuation of financial instruments; and assets and obligations related to employee benefits. Actual results could differ from those estimates and assumptions. For disclosure purposes, “pesos”, “$” or MXP means Mexican pesos, and “dollars” or “US$” means U.S. dollars. The financial statements for the year ended on December 31, 2007 were reclassified in order to conform them to the presentation of 2008, mainly for the discontinued operations specified in note 2(c). Following are the significant accounting policies applied in the preparation of the accompanying financial statements: (a) Recognition of the effects of inflation- The accompanying consolidated financial statements have been prepared in accordance with Mexican Financial Reporting Standards (FRS) in effect as of the balance sheet date and include the recognition of the effects of inflation on the financial information through December 31, 2007, based on the National Consumer Price Index (NCPI) published by Banco de México. Cumulative inflation percentage and index of the three preceding years at December 31, 2008 and 2007 are presented in the next page. 46 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 47 December 31 NCPI Inflation 2008 2007 2006 2005 133.761 125.564 121.115 116.301 Yearly Cumulative 6.53% 3.67% 4.14% 3.33% 15.01% 11.56% 7.61% 3.33% (b) Principles of consolidation- The consolidated financial statements include the financial statements of Alsea, S. A. B. de C. V. and of the 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 consolidation was based on the financial statements of the subsidiary companies. The principal operating subsidiaries are as follows: Shareholding percentage 2008 2007 Activity Operating companies: Café Sirena, S. de R. L. de C. V. 82.00% 82.00% Starbucks Coffee stores Operadora de Franquicias Alsea, S. A. de C. V. 99.99% 99.99% Domino’s Pizza stores Burger King and Popeye’s Gastrosur, S. A. de C. V. 99.99% 99.99% Chili’s Grill & Bar restaurants Fast Food Sudamericana, S. A. 99.99% 99.99% Burger King stores in Argentina Café Sirena S.R.L Fast Food Chile, S. A. Dominalco, S.A. Operadora Alsea en Colombia, S. A. Grupo Calpik, S.A.P.I de C.V. 82.00% - Starbucks Coffee stores in Argentina 99.99% 99.99% Burger King stores in Chile 75.00% 84.99% 65.00% - Domino’ Pizza stores in Colombia - Burger King stores in Colombia - California Pizza Kitchen restaurants Distribuidora e Importadora Alsea, S. A. de C. V. 99.99% 99.99% Food distribution Associated companies: Starbucks Coffee Chile, S.A. 18.00% 18.00% Starbucks Coffee stores in Chile. Starbucks Brasil Comércio de Cafés, Ltda. 11.06% 11.06% Starbucks Coffee Stores in Brasil. The investment in shares of associated companies is valued by the equity method (see note 6). (c) Discontinued operations- In September 2008 Operadora y Procesadora de Pollo, S. A. de C. V. was discontinued for which purposes a formal disinvestment plan was designed. At December 31, 2008, the consolidated net result for discontinued operations amounts to $(35,008). Condensed financial information on the discontinued operation is shown below: As consequence of the low profitability of the Popeyes´ trademark, at December 31, 2007 Alsea recognized an impairment loss of long-lived assets used in Popeyes´ operations. This impairtment loss generated an expense of $23,302, recognized in other expenses and an increase of $6,525 to the deferred income tax provision. In 2008, as a consequence of the agreement for the termination of master trademark contract to determine the new recoverable value of long-lived assets, it was opted to calculate that value through the sales price, and therefore no impairment was determined (note 1(c)). In November 2007, Alsea sold its 50% ownership of Cool Cargo, S.A. de C.V, a company engaged in providing transportation services to Distribuidora e Importadora Alsea, S.A. de C. V. This operation generated a gain of $5,447. In April 2007, the remaining 50% ownership of DeLibra, Ltda. associated company, was sold, which as from December 2006, was recognized as a discontinued operation. This operation generated a gain of $5,460. The effects of the above operations were included as discontinued operations in the Statement of Income. (d) Currency translation of foreign subsidiaries- To consolidate the financial statements of foreign subsidiaries that operate on an independently of the Company (located in Argentina, Chile, Brazil and Colombia, which represent 12% and 5% of consolidated net income in 2008 and 2007, respectively) were consolidated applying the Company’s same accounting policies. As from 2008, the financial statements of consolidated foreign operations are translated into the reporting currency by initially determining if the functional currency and the currency for recording the foreign operations are different and then translating the functional currency to the reporting currency, using the historical exchange rate or the exchange rate in force at the year end and the inflation index for the country of origin, depending on whether the information derives from an inflationary or non-inflationary economy. Through 2007, the financial statements of consolidated foreign subsidiaries were adjusted for inflation in their currency of origin based on the inflation of each country and expressed in the currency of purchasing power at the end of the year, and were subsequently translated to Mexican pesos at the exchange rate in force at the end of the year for balance sheet and statement of income. The effects of currency translation are shown in stockholders’ equity. (e) Cash equivalents- Cash equivalents includes deposits in checking accounts, foreign currencies and investments 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 the comprehensive financing result. (f) Derivative financial instruments- Alsea uses derivative financial instruments (DFI) denominated forwards and swaps in order to reduce the future and present risks and adverse fluctuations in exchange and interest rates, not diverting resources from the operations and the expansion plan and to have the certainty under the future cash flows of the Company, which also helps to keep a strategy for debt costs. DFI are used only for hedging purposes through which it undertakes to exchange cash flows at predetermined future dates, on the nominal value of reference and are valued at the fair value. DFI operations are carried out under a master agreement in a format standardized by ISDA (International Swap Dealers Association) form, which is duly formalized by legal representatives of the Company and of the financial institutions. In some cases, the Company has entered into agreements with financial institutions in line with the requirements of the ISDA, which agreements specify the conditions that require offering guarantees for marging calls if the market value (mark-to-market) exceeds certain established credit limits. The Company has the policy to monitor the volume of operations contracted with each institution in order to avoid the marging calls. Balance sheet Current assets Fixed assets Other assets Liabilities Results Income Costs Operating expenses Loss before income tax 2008 2007 DFIs are contracted on the local market with the following financial entities: Banco Nacional de Mexico, S.A., Banco Santander, S.A., Merril Lynch Capital Services, INC, UBS Bank Mexico y BBVA Bancomer, S.A. $ $ $ $ 7,394 30,221 11,347 (4,675) 44,287 53,597 19,984 47,603 1,569 38,037 30,835 (1,800) 68,641 61,866 21,431 55,587 (18,548) (39,938) Valuation In the case of cash flow hedging, the effective portion of gains or losses on hedging instruments is recognized under comprehensive income or loss in stockholders’ equity and is reclassified into income in the same period or periods in which the predicted transaction affects them. The ineffective portion is recorded immediately in the results of the period under comprehensive financing result. The valuation of the effective portion generated from the aforementioned instruments is recorded every month in the Company’s financial statements. Positions in derivative financial operations At December 31, 2008, the Company has hedges to purchase US dollars for an amount of US$ 2,635 thousand, with an average exchange rate of MXP$ 10.56 for each US dollar. The type and the amount of derivative products covered are aligned with management’s internal policy specified by the Company’s Practice Societary Committee, which provides an approach to meet the needs for covering foreign currency without carrying out speculative operations. 48 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 49 At December 31, 2008, the Company had contracted the following financial instruments: Institution Thousands of US dollars Average exchange rate at settlement date Maturing in Merrill Lynch UBS 1,500 $ 2,135 10.3400 10.7078 2009 2009 During the years 2008 and 2007, the Company recorded an expense (income) in the results of $18,067 and $1,871, respectively, corresponding to fluctuations in exchange and interest rates from the date on which transactions were entered into to the settlement date. (g) Embeded derivatives- The Company reviews the contracts it enters into to identify the existence of embeded derivatives. Identified embeded derivatives are subject to assessment for determining compliance with the required conditions. If conditions are met, they are segregated from the host contract and valued at its fair value. Where the embeded derivative is classified as being for trading purposes, the gain or loss from changes in fair value is recognized in the year’s income. Embeded derivatives designated for hedging purposes recognize changes in fair value according to the type of hedge as follows: (1) for fair value hedges, fluctuations of both embeded derivative and the hedged item are reflected at fair value and recognized in the year’s income; (2) for cash flows hedges, the effective portion of the embeded derivative is temporarily recognized in comprehensive income and reclassified into income when the hedged item affects them; the ineffective portion is immediately recognized in income. (h) Inventories and cost of sales- At December 31, 2008 inventories are stated at the historical cost determined by the last-in-first-out method. Inventory values so determined do not exceed market values and are not below realizable value. Inventories at December 31, 2007 are shown at their original cost updated through such date based on NCPI factors, or at replacement cost of inventories at sales’ date. Cost of sales represents the replacement cost of inventories at the time of their sale, increased, as applicable, for reductions in the replacement cost or net realization value of inventories during the year and, through 2007 expressed in constant pesos of purchasing power at December 31, 2007. (k) Intangible assets- Represent payments made to third parties for the right to use brands under which the Company operates its stores, pursuant to franchisee or association agreements. Amortization is calculated by the straight-line method at annual rates ranging from 5% to 15%. The rights to use of these brands expire as follows: Brands Domino’s Pizza (Mexico) (Colombia) Starbucks Coffee (Mexico) (Mexico) (Argentina) (Mexico) (*) (Argentina) (Chile) Burger King Popeye’s (discontinued) Chili’s Grill & Bar California Pizza Kitchen Expiration date 2025 2016 2021 2012 2024 2012 2028 2042 2015 2017 (*) Each of the above trademark stores is valid for a 20-year term, as from the date on which each point of sale begins operations. Under said agreements, the Company has certain obligations to do and not to do, including investments in capital and opening of new points of sale. The association agreement signed by Starbucks Coffee International (SCI) and Alsea in 2008, allows SCI to increase its equity in the capital stock in Café Sirena, until it reaches 50%, only in the event a number of Starbucks Coffe stores are not opened. That option was not exercised at December 31, 2008, but may be exercised as from 2009, irrespective of whether or not those goals are met. The Company records the necessary allowances for inventory impairment arising from inventory damage, obsolescence, slow-movement or other causes, indicating that realization of goods will be below their cost. Pre-operating and installation expenses are related to the opening of new points of sale in various zones. Amortization is computed by the straight-line method over one year, from the date on which each point of sale begins operations. (i) Store equipment, leasehold improvements and property- Store equipment, leasehold improvements and property are initially recorded at their acquisition cost, and through December 31, 2007 adjusted for inflation by using factors derived from NCPI. Depreciation of store equipment, leasehold improvements and property is determined 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% The maintenance expenses and small repairs are expensed as incurred. (j) Goodwill of subsidiary and associated companies- Goodwill represents the excess of the purchase price of businesses acquired over the fair value of net assets acquired. In determining these amounts, intangible assets acquired with no recoverable value are eliminated. Goodwill must be tested for impairment at least annually. (l) Impairment of long-lived assets, store equipment, leasehold improvements, property, goodwill and other intangible assets- The Company periodically evaluates the values of long-lived assets, (store equipment, leasehold improvements, property, goodwill and other intangible assets), to determine whether there is indication of potential impairment. The recovery value represents the amount of potential net income expected to be generated as a result of assets used or disposed of. If the restated values are deemed excessive the Company records the necessary estimations to reduce them to the recovery value. Assets to be disposed are reported in the balance sheets at the lower of the carrying amount or realization value. Assets and liabilities of a group classified as available for sale are shown separately in the balance sheet. (m) Accruals- Based on management estimates, the Company recognizes liability provisions for present obligations in which the transfer of assets or rendering of services is virtually inevitable and an arises as a consequence of past events, mainly for supplies and other personnel payments These provisions have been recorded based on management’s best estimate of the amount needed to settle the present obligation; however, actual results may differ from the provisions recognized (see note 11). (n) Employee benefits- Termination benefits for reasons other than restructuring and retirement to which employees are entitled are recorded in the results of the year, based on actuarial computations using the projected unit credit method, considering projected salaries or the projected cost of those benefits (see note 14). The actuarial gain or loss is directly recorded in the results for the period as accrued. Other compensation to which employees may be entitled are expensed in the year in which it becomes payable. 50 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 51 (o) Income Taxes (Income Tax (IT), Asset Tax (AT), Flat Rate Business Tax (IETU)), and Employee’s Statutory Profit Sharing (ESPS)- IT, IETU and ESPS payable for the year are determined in conformity with the tax provisions in effect. (w) Earnings per share- Earnings per share equal the year’s net income divided by the weighted average of shares in circulation during the year. The provisions for IT or IETU, and as from January 1, 2008 deferred ESPS, are charged to income for the year as incurred. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to timing differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and in the case of income taxes, for operating loss and asset tax (AT) carryforwards, and tax credits. Deferred tax and ESPS assets and liabilities are measured 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 and ESPS assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In order to determine if deferred IT or deferred IETU should be recorded, entities must identify the bases used to be reverse in the future all differences arising from deferred taxes, and must evaluate the likelihood of payment or recovery of each tax. In the case of ESPS, through December 31, 2007, deferred ESPS was recognized only for timing differences arising from the reconciliation of book income to income for profit sharing purposes, for which it was reasonably estimated that a future liability or benefit would arise and there was no indication that the liabilities or benefits would not materialize. (p) Inflation adjustment of capital stock, other stockholder contributions and retained earnings- Through December 31, 2007, the inflation adjustment of capital stock, other stockholder contributions and retained earnings, was determined by multiplying stockholder contributions and retained earnings by factors derived from the NCPI, which measure accumulated inflation from the dates such contributions were made or such retained earnings arose through year end 2007, date on which change was effected to a non-inflationary economy in accordance with FRS B-10 “Effects of Inflation”. The amounts thus obtained represented the constant value of stockholders’ equity. (q) Additional paid in capital- Represents the excess difference between payment of subscribed shares and the nominal value of those shares, less expenses related to the placement of shares. (r) Cumulative effect of deferred income tax- Until December 31, 2007, this item represented the effect of recognition of cumulative deferred taxes as of the date on which the respective FRS was adopted, and was shown under retained earnings from inception. (s) Revenue recognition- The Company recognizes revenue from the sale of food when the products are delivered to the customers; service revenue is recognized as the services are rendered. The Company recognizes estimations for losses from recovery of accounts receivable included in operating expenses and returns and discounts, which are deducted from sales. (t) Comprehensive financing result (CFR)- The CFR includes interest, foreign exchange gains and losses, the effect of derivate financial instruments, and until December 31, 2007 monetary 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 charged to income for the year. Monetary position in 2007 was determined by multiplying the difference between monetary assets and liabilities at the beginning of each month, including deferred taxes, by inflation at year end. The resulting amount represents the monetary gain or loss for the year arising from inflation, applied to for the results of the year. (u) Use of estimates- Preparation of the financial statements requires management to make 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, as well as the reported amounts of revenue and expenses for the year. Actual results may differ from those estimates and assumptions. (v) Contingencies- Significant contingency-related liabilities or losses are recorded when a liability has likely been incurred and there are reasonable elements for its quantification. When a reasonable estimation cannot be made, qualitative disclosure is provided in the notes to the consolidated financial statements. Contingent revenue, earnings and assets are not recognized until their realization is assured. (x) Comprehensive income- Represents the result of the Company’s overall activities in the year and it is comprised of net income and the cumulative translation effect of foreign entities applied directly to stockholders’ equity. (y) Accounting changes- The Mexican Board for Research and Development of Financial Reporting Standards (Consejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera or CINIF) has issued the following FRS effective for years beginning after December 31, 2007. Early application is not permitted. FRS B-10 “Effects of inflation”- FRS B-10 supersedes Statement B-10 “Recognition of the effects of inflation on the financial information” and its five amendment documents, as well as the related circulars and Interpretation of Financial Reporting Standards (IFRS) 2. The principal considerations established by this FRS are described on the next page. (I) Recognition of the effects of inflation – An entity operates in a) an inflationary economic environment when cumulative inflation over the immediately preceding 3-year period is equal to or greater than 26%; and b) non- inflationary economic environment, when inflation over the aforementioned period is less than 26%. For case a), comprehensive recognition of the effects of inflation is required, (as with superseded Statement B-10). For case b), the effects of inflation are not recognized; however, at the effective date of this FRS and when an entity ceases to operate in an inflationary economic environment, the restatement effects determined through the last period in which the entity operated in an inflationary economic environment (in this case 2008), must be kept and shall be reclassified on the same date and using the same procedure as that of the corresponding assets, liabilities and stockholders’ equity. Should the entity once more operate in an inflationary economic environment, the cumulative effects of inflation not recognized in the periods where the environment was deemed as non-inflationary should be recognized retrospectively. (II) Price index – the use of the National Consumer Price Index (NCPI) or the change in the value of the Investment Unit (UDI) may be used for determining the inflation for a given period. (III) Valuation of inventories and of foreign machinery and equipment – The option to use replacement costs for inventories and specific indexation for foreign machinery and equipment is no longer allowed. (Iv) Equity adjustment for non-monetary assets (RETANM from Spanish) - As from the date of enactment of this FRS, the unrealized portion of the equity adjustment for non monetary assets, which is maintained in stockholders’ equity, should be identified to be reclassified to income (loss) for the year when the originating item is realized. The realized portion, or the total when it is not practical to identify the unrealized portion, should be reclassified to retained earnings. (v) Monetary Position Gains or Losses (included in Deficit/Excess in Equity Restatement - REPOMO from Spanish) is reclassified to retained earnings on the effective date of this FRS. The consolidated financial statements at 2007 are expressed in constant pesos of December 31, 2007, on which date the comprehensive method for recognition of the effects of inflation was applied for the last time. FRS D-3 “Employee benefits”- FRS D-3 supersedes Statement D-3, “Labor Obligations”, the sections applicable to Employee Statutory Profit Sharing (ESPS) of Statement D-4 and IFRS 4. The principal considerations established by this FRS are: (I) Elimination of recognition of an additional liability and the related intangible asset or any comprehensive item as a separate element of stockholders’ equity. (II) Employee benefits are classified in four principal categories; direct short-term and long term, termination and post-employment benefits. FRS D-3 establishes a maximum five-year period for recognizing unamortized items while actuarial gains or losses may be recognized as earned or incurred. Unlike termination benefits, post-employment benefits actuarial gains or losses may be immediately recognized in results of operations or amortized over the expected service life of the employees. (III) The use of nominal rates and the incorporation of the term salary increases due to promotions. 52 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 53 (Iv) ESPS, including deferred ESPS, is presented in the statement of income as ordinary operations, preferably under Management considers that the initial effects of this new FRS will not give rise to significant effects. “other income and expenses”. Furthermore, FRS D-3 establishes that the asset and liability method should be used for determining deferred ESPS; any effects arising from the change in method are recognized in retained earnings, without restatement of prior years’ financial statements. As a result of adopting this FRS in 2008, intangible assets of $4,411 shown in the balance sheet at December 31, 2007 were eliminated against additional liabilities recorded. Additionally, amortization of unamortized items as from 2008 was changed to a profit of approximately $7,131. FRS D-4 “Income Tax”- FRS D-4 supersedes Statement D-4, “Accounting for income and asset taxes and employees’ statutory profit sharing” and Circulars 53 and 54. The principal considerations established by this FRS are: b) FRS B-8, “Consolidated and combined financial statements” – This FRS replaces Bulletin B-8, “Consolidated and Combined Financial statements and valuation of permanent investment in shares”, and establishes the general rules for preparing and presenting consolidated and combined financial statements, as well as for the disclosures included in those financial statements, including: (I) The obligation to consolidate companies with specific purposes (EPE from Spanish) when an entity has control. (II) The option, under certain rules, to file non-consolidated financial statements when the controlling company is a subsidiary with no minority interest or when the minority shareholders do not object to the fact that consolidated financial statements are not being issued. (III) Considers the existence of the right to potential votes that can be exercised or transferred to the entity as holder (I) The balance of the cumulative IT effects resulting from the initial adoption of Statement D-4 in 2000 is and that can change its participation in decision making at the time of evaluating the existence of control. reclassified to retained earnings at January 1, 2008, unless identified with any other comprehensive item pending reclassification. The effect totaling $78,868 was originally included into to retained earnings. (Iv) Additionally, the regulations related to valuation of permanent investments are transferred to another statement. (II) The accounting treatment of ESPS (current and deferred) is transferred to FRS D-3. . Management considers that the initial effects of this new FRS will not give rise to significant effects. FRS B-2 “Statement of cash flows”- FRS B-2 supersedes Statement B-12, “Statement of changes in financial position” and paragraph 33 of Statement B-16. The principal considerations established by this FRS are as follows. (I) Instead of the statement of changes in financial position, the financial statements shall include the statements of cash flows for all the periods presented comparatively with those of the current year, except for financial statements of periods prior to 2008. (II) Cash inflows and cash outflows are reported in nominal currency units, thus not including the effects of inflation. c) FRS C-7, “Investment in associated companies and other permanent investments” – This FRS establishes the rules for recognition of investments in associated companies, and of other permanent investments over which there is no control, joint control or significant influence. The main changes with respect to the former standard are: (I) It establishes the obligation to value Especial Purposes Entities (EPE) with significant influence through the equity method. (II) Considers the existence of the right to potential votes that can be exercised or transferred to the entity as holder and that can change its participation in decision making at the time of evaluating the existence of significant influence. (III) Two alternative preparation methods (direct and indirect) are established, without stating preference for either method. Furthermore, cash flows from operating activities are to be reported first, followed by cash flows from investing activities and lastly by cash flows from financing activities. (III) It establishes a specific procedure and a limit to recognize the losses of its associated company. Management considers that the initial effects of this new FRS will not give rise to significant effects. (Iv) Captions of principal items are to be reported gross, with certain exceptions; this FRS requires disclosure of the composition of items considered cash equivalents. Accordingly, the Company presents the statement of changes in financial position for 2007 as issued and the statement of cash flows for 2008 under the indirect method. FRS B-15 “Translation of foreign currencies”- FRS B-15 supersedes Statement B-15, “Foreign currency transactions and translation of financial statements of foreign operations”. The principal considerations established by this FRS are: d) FRS C-8, “Intangible Assets” – Replaces Bulletin C-8 and establishes the general rules for initial and subsequent recognition of intangible assets acquired individually through the acquisition of a business or that are generated internally in the regular course of the company’s operations. The main changes in this standard are: (I) It includes the definition of intangible assets, establishing that the separation condition is not the only condition required for an asset to be identifiable. (II) It specifies that subsequent expenses for research and development projects in progress should be recorded as expenses as accrued, if they form part of the research phase, or as intangible assets, if they meet the criteria in place to be recognized as such. (I) Replaces integrated foreign operation and foreign entity concepts for those of recording, functional and reporting (III) It describes in further detail the treatment for the exchange of an asset, in conformity with the provisions of currencies, requiring that translation be made based on the economic environment in which the entity operates, regardless of its dependency on the holding company. international regulations and of other FRS’s. (II) Includes translation procedures for instances where the recording and reporting currencies differ from the functional currency and provides for the option not to conduct such translation in companies not subject to consolidation or valuation based on the equity method. (III) Requires recognizing the accounting changes produced by the initial application of this standard based on the prospective method; that is, in a non-inflationary economic environment, without modifying the translation already recognized in the consolidated financial statements of prior periods, at the time of issue. (z) New accounting pronouncements- The CINIF has established the FRS specified below, in effect for years starting on January 1, 2009, without the option for early application. a) FRS B-7, “Acquisitions of Businesses” – Replaces Bulletin B-7 and establishes the general valuation and disclosure rules for initial recording at the acquisition date of net assets acquired as a result of a business acquisition, reiterating that acquisitions of businesses must be recorded through the purchase method. (Iv) It eliminates the assumption that the useful life of an intangible asset may not exceed a period of twenty years. Management considers that the initial effects of this new FRS will not give rise to significant effects. (3) Foreign currency position- Monetary assets and liabilities denominated in dollars from the United States of America (dollars) as of December 31, 2008 and 2007 were as follows: Thousands of dollars Assets Liabilities Net liability position 2008 9,205 44,238 2007 4,594 17,331 (35,033) (12,737) The foreing exchange rate in relation with the dollar as of December 31, 2008 and 2007 was $13.31 and $10.86, respectively. At February 17, 2009, date of issuance of these financial statements, the exchange rate was $14.52. 54 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 55 The exchange rates used in the different foreing currency translation processes with respect to the reporting currency at December 31, 2008 and at the date of issuance of the financial statements, are as follows: (7) Store equipment, leasehold improvements and property- This item includes the following: Country of origin Currency Exchange rate Argentina Chile Colombia Argentinian Peso (ARP) Chilean Peso (CLP) Colombian Peso (COP) The following currencies were used for translation purposes: At the year end Issuance 4.09 0.02 0.006 3.86 0.02 0.006 Currency Foreign operation (*) Country of Origin Recording Functional Reporting Fast Food Sudamericana, S. A Café Sirena, S. R. L. Fast Food Chile, S. A. Dominalco, S. A. Operadora Alsea en Colombia, S. A. Argentina Argentina Chile Colombia Colombia ARP ARP CLP COP COP ARP ARP CLP COP COP MXP MXP MXP MXP MXP The Company’s functional currency is the Mexican peso. The Company has investments in subsidiaries resident abroad, whose functional currency is not the Mexican peso; therefore, in order to incorporate the results and financial position of foreign operations into consolidation, those figures are translated into MXP. Buildings Store equipment Leasehold improvements Transportation equipment Computer equipment Production equipment Office furniture and equipment $ 2008 133,452 1,550,891 2,022,795 129,260 225,086 185,140 2007 157,059 1,370,577 1,665,546 120,165 170,021 163,243 92,098 57,395 4,338,722 3,704,006 Less accumulated depreciation (1,775,698) (1,509,295) Land Construction in progress (*) 2,563,024 2,194,711 61,864 99,442 420,023 454,199 $ 3,044,911 2,748,352 (4) Balances and transactions with associated companies- (*) Relates primarily to the opening of stores and restaurants to be completed in 2009. Accounts payable to associated companies as of December 31, 2008 and 2007 are as follows: Accounts payable: Starbucks Coffee International (*) $ 67,939 $ 42,790 2008 2007 Alsea kicked off a program to sell non-strategic assets, the purpose of which is to increase the Company’s profitability by investing the resulting resources obtained in the expansion plan of its portfolio’s different trademarks both in Mexico and in Latin America. As part of this program in 2007, Alsea concluded the sale of its former main offices, as well as the final sale and long-term lease agreements of the new corporate offices. These transactions gave rise to a gain of $5,613 which were recorded in other expenses. (*) This balance is mainly due to the acquisition of inventories and fixed assets and payments for the right to open “Starbucks Coffee” stores in Mexico. (8) Goodwill of subsidiaries companies - As mentioned in note 2 (c), in 2007, Cool Cargo, S.A. de C.V. is no longer included as an associated company; in that same year, the services contracted with that company amounted to $15,542. As of December 31, 2008 and 2007, goodwill is comprised as follows: (5) Inventories- This item includes the following: Food and beverages Containers and packaging Other Obsolescence allowance 2008 235,900 42,748 88,056 2007 218,068 10,069 10,029 (5,180) (2,914) Alsea, S. A. B. de C. V. West Alimentos, S. A. de C. V. Operadora DP de México, S. A. de C. V. Dominalco, S.A. Less accumulated amortization 361,524 235,252 (9) Intangible assets- $ $ $ 2008 124,912 90,061 19,619 2,367 236,959 (16,980) 2007 124,912 90,061 19,619 - 234,592 (16,980) $ 219,979 217,612 (6) Investment in shares of associated companies- Intangible assets as of December 31, 2008 and 2007 include the following: At December 31, 2008 and 2007, this caption is represented by of direct equity participation in the capital stock of the companies listed below: Starbucks Brasil Comércio de Cafés, Ltda. Starbucks Coffee Chile, S. A. Equity in stockholders’ equity 2008 2007 Equity in income for 2008 $ $ 18,140 10,744 28,884 11,182 11,692 22,874 (1,079) (948) (2,027) Trademarks Pre-operating expenses Franchise rights and rights to the use of commercial facilities Licenses and developments Total Balances as of December 31, 2007 $ 532,757 189,669 188,266 112,884 1,023,576 Acquisitions 70,843 127,811 66,505 45,090 310,249 Less accumulated amortization (216,240) (167,219) (92,067) (75,974) (551,500) Balances as of December 31, 2008 $ 387,360 150,261 162,704 82,000 782,325 During 2008, Alsea increased its investment in franchise rights mainly due to the acquisition of the Domino’s Pizza 56 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 57 stores in Mexico and Colombia, for the rights to open “Starbucks Coffee” stores in Mexico and Argentina and Burger King in Colombia, as well as for the acquisition of California Pizza Kitchen. Pre-operating expenses are directly related to the opening of new points of sale. (13) Other expenses, net- This item is comprised as follows: (10) Long-term debt- Unsecured long-term loans in Mexican pesos are as follows: Unsecured loans 2008-2012 8.81%-12.71% $ 1,790,178 1,033,450 Maturing in Average annual interest rate 2008 2007 (Loss) gain on fixed asset disposals, net ESPS Other expenses, net Organizational restructuring accrual 2008 (32,759)* 6,820 3,894 (12,928) (34,973) $ $ 2007 8,210 (3,899) 189 - 4,500 Less current installments Long-term debt 660,080 334,550 $ 1,130,098 698,900 * Includes an accrual for early leasehold improvements amortization amounting to $28,743. Annual maturities of long-term debt are as follows: (14) Labor obligations- year 2010 2011 2012 Amount $ $ 667,348 168,750 294,000 1,130,098 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 income for the year in which such services are rendered, based on actuarial computations. The Company has not set up a trust to cover those benefits. The actuarial calculations are summarized below: Benefits 2008 Termination Retirement Total Bank loans establish certain obligations to do and not to do, and to keep certain financial ratios. As of the date of the financial statements, all such obligations had been complied with. Defined benefit obligations (projected in 2007) $ Transition obligation and unamortized items 24,848 6,745 18,933 10,591 43,781 17,336 24,334 4,897 (11) Accruals- Accruals are comprised as follows: Salaries and other employee payments Supplies and others Total Balances as of December 31, 2007 Increases charged to operations Payments Balances as of December 31, 2008 $ $ 82,571 63,412 (89,504) 294,235 387,402 (265,075) 376,806 450,814 (354,579) 56,479 416,562 473,041 (12) Comprehensive financing result- This item is comprised as follows: Interest expenses, net Foreign exchange (loss) gain, net Favorable monetary effect (1) 2008 (115,444) (83,914) 4,958 2007 (47,225) 5,097 5,063 (194,400) (37,065) $ $ (1) In 2008, it corresponds to the favorable effect on monetary position arising from the subsidiaries established in Argentina, which, in conformity with FRS B-10 and the inflation level accumulated in the preceding three years, are considered to be operating in an inflationary economic environment. Current net liability $ 18,103 8,342 26,445 19,437 The net cost for the period is comprised as follows: Labor cost Financial cost Amortization of transitory obligation Net cost for the period Benefits 2008 Termination Retirement Total $ $ 14,745 1,331 (8,980) 4,022 1,151 1,849 18,767 2,482 9,871 685 (7,131) 835 7,096 7,022 14,118 11,391 Following is a reconciliation of defined benefit obligations (DBO) at the beginning of 2008 and at the end of that year: Initial DBO balance Labor cost of current services Financial cost Actuarial gains and losses for the period Advance reductions and severance payments Benefits paid Other Final DBO balance At December 31, 2008, vested obligations total $351. Benefits 2008 Termination Retirement $ $ 20,125 14,745 1,331 (21,087) 16,771 (7,108) 71 24,848 14,383 4,052 1,151 (651) - (2) - 18,933 58 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 59 The main assumptions used in the determination of the net cost for the period of said plans were as follows: Discount rate Salary increase rate Average expected labor life (years) * Includes future compensation levels. Benefits 2008 8.0% 9.4%* 7.4 2007 9.0% 0.5% 7.3 (15) Income Tax (IT), Asset Tax (AT), Flat Rate Business Tax (IETU) and Employees’ Statutory Profit Sharing (ESPS)- On October 1, 2007, new laws were published a number of tax loss were revised, and a presidential decree was issued on November 5, 2007, all of which came into effect as from January 1, 2008, the most important change are: (i) the derogation of the AT Law and (ii) the introduction of a new tax (Flat Rate Business Tax or IETU) which is based on cash flows and limits certain deductions, as well tax credits are granted mainly with respect to inventories, salaries, taxed for IT and social security contributions, tax losses arising from accelerate deduction, recoverable AT and deductions related to investments in fixed assets, expenses and deferred charges and expenses. On the basis of the foregoing, as from 2008, companies must pay the higher of IETU and IT. When IETU is payable, said payment is considered final and not subject to recovery in subsequent years. The IETU rate is 16.5% for 2008, 17% for 2009 and 17.5% for 2010 and subsequent years. Under tax legislation in effect at December 31, 2007, companies were required to pay the higher of IT and AT. Both taxes recognize the effects of inflation. The Company determines IT on a consolidated basis. Given that in accordance with Company estimates that the tax payable in the following years is the IT, deferred tax at December 31, 2008 and 2007 was calculated on the basis of IT. The expense for income tax is comprised as follows: IT on tax bases Deferred IT 2008 2007 $ $ 160,180 287,649 (107,032) (119,240) 53,148 168,409 The tax expense attributable to income before IT differed from the amount that would have been computed by applying the Mexican rate of 28% in 2008 and 2007, 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 Valuation allowance changes Other, net Effective consolidated IT rate 2008 2007 28% 8% (9%) 0% (9%) 5 % 23% 28% 2% 1% 1% (8%) 1% 25% Deferred tax (assets) liabilities: Allowance for doubtful accounts Liability accruals Advance payments from customers Net operating tax loss carryforward, net of valuation allowance Recoverable AT Store equipment, leasehold improvements and property Other assets Prepaid expenses IT 2008 2007 $ (3,152) (1,248) (139,954) (118,736) (301) (1) (70,268) (42,415) (70,169) 21,597 11,175 (52,632) (42,388) (65,284) 78,257 3,646 Net deferred tax (asset) liability (293,487) (198,386) Income tax payable on reinvested earnings 498 466 Asset recognized in the balance sheet $ (292,989) (197,920) The valuation allowance at December 31, 2008 and 2007 was of $159,196 and $161,009, respectively. The net change in the valuation reserve at December 31, 2008 and 2007 was a reduction of $1,813 and an increase of $49,837, respectively. At December 31, 2008 and 2007, the Company generated a deferred ESPS asset, which was fully reserved by management due to of the uncertainty of its realization. The Company has not recorded a deferred tax liability related to the undistributed profits of its subsidiaries, recorded by the equity method, arising in 2008 and previous years, since it currently does not expect said undistributed profits to revert and become taxable in the near future. Said deferred liability will be recognized at the date on which the Company expects to receive said undistributed profits and when they are taxable, as in the case of the sale or disposal of its investment in shares. (16) Stockholders’ equity- The main features of stockholders’ equity are described below: (a) Capital stock structure- In November 2006, the stockholders agreed to carry out a share restructuring, dividing the minimum fixed (Class I) and variable (Class II) portions of the capital stock. The Company executed a four-to-one split, without modifying the capital stock. This split went into effect in February 2007, when registration of Alsea shares was updated at the National Securities Registry. Capital stock and additional paid-in capital are shown below (see notes 1(a) and 1 (b)): Balances as of December 31, 2006 623,105,196 $ 536,623 1,090,334 Thousands of pesos Number of shares Capital stock Additional paid - in capital 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, 2008 and 2007 are shown below: Shares repurchased in 2007 (4,448,400) (2,259) - Balance as of December 31, 2007 618,656,796 534,364 1,090,334 Shares repurchased in 2008 (10,662,200) (5,331) - April 2008, decree and payment of dividends in shares 9,967,388 4,984 138,546 Balances of December 31, 2008 617,961,984 $ 534,017 1,228,880 In April 2008 and 2007, dividends were declared in the amount of $143,530 and $67,840, respectively. 60 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 61 The minimum fixed portion of capital stock is comprised of Class I shares, and the variable capital stock is comprised of Class II shares, which shall, at no time, exceed ten times the minimum capital stock with no withdrawal rights. (d) As a result of a service agreement, until December 31, 2007, the Company was required to pay compensation based on net food sales. That compensation ranges from 2.5% to 5.25% (note 17(f)). As of December 31, 2008, the subscribed fixed and variable capital stock are comprised of 617,961,984 common, nominative shares with no par value, are shown below: Number of shares Description Amount 489,157,480 Fixed capital stock 144,140,828 Variable capital stock (15,336,324) Repurchased shares (nominal value) 617,961,984 Nominal capital stock Increase for inflation adjustments (note 2(p)) Capital stock as of December 31, 2008 $ $ 244,578 72,070 (7,668) 308,980 225,037 534,017 The National Banking and Insurance Commission established a procedure enabling companies to repurchase their own shares, for which a “stock repurchase reserve” should be set up, and chargeable to retained earnings. The total of repurchased shares should not exceed 5% of the total released shares, and these shares must be replaced in a maximum period of one year and will not be included in the dividend payment. In 2008 and 2007, the Company repurchased 10,662,200 and 4,448,400 shares amounting to ($125,748) and ($70,258), respectively. Contingent liabilities: (e) Alsea is involved in a number of lawsuits and claims arising from 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. (f) Through its subsidiary Operadora de Franquicias Alsea, S. A. de C. V. (OFA), Alsea filed in 2007 and 2008 an appeal compliance with the injuction sentence relative to application of the 0% value added tax (VAT) rate to the sale of food products. Application of this rate generated a favorable VAT balances for OFA, for which a refund is expected (note 17(d)). (g) In September 2008, Alsea was notified of a law suit related to the acquisition of Italiannis, which did not take place because the seller failed to comply with the respective conditions and obligations. The suit basically seeks compulsory compliance with the terms of the agreement. Alsea considers this stance to be invalid, and has filed a countersuit and started the necessary legal procedures to defend itself. The consequences of the litigation cannot be determined presently by the Company and its legal advisors, and therefore no reserve has been recorded in the financial statements at December 31, 2008. (18) Financial information per segment- Alsea organizes its business segments into three operating divisions, namely the sale of food and beverages in Mexico and South America, and distribution services. These divisions share the same management. The Company’s own available repurchased shares are reclassified to capital contributions. Segment information is as follows (amounts in millions of pesos): (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, and consists of offering Company’s officers the right to receive the appreciation rights on certain shares (the difference between the price of shares at the beginning of the plan ($5.70) and the fair value of the option ($8.48) payable in shares. At a General Stockholders’ Meeting, the Board agreed to assign 5,886,524 shares to this plan, to be managed through a trust. At the 2006 year end, the officers exercised 20% of the rights acquired at that date ($1.05 per share) and the remaining 80% can only be exercised at the end of the plan. For the year ended December 31, 2007, Alsea modified the stock option plan for its executives, replacing it with a deferred compensation paid in cash. At December 31, 2008, total provision for the 2005 share purchase plan totaling $7,719 is recorded under the “provisions” caption. (c) Restrictions on stockholders’ equity- I) Five percent of net income for the year must be appropiated to the the legal reserve, until it reaches one-fifth of the Company’s capital stock. As of December 31, 2008, the legal reserve amounts to $80,482. II) Dividends paid out of retained earnings are tax-free to the extent those dividends arise from the CUFIN (after tax earnings account). Distributions in excess of these amounts are subject to 28% income tax rate on the amount resulting from multiplying the dividend paid by the factor of 1.3889. The tax arising from dividends not paid from CUFIN is payable by the Company and may be offset against the IT for the year in which it is paid or the two subsequent years. (17) Commitments and contingencies- Commitments: (a) The Company leases the facilities that house its stores and distribution centers, as well as certain equipment under limited-term lease agreements. In December 2007, was concluded the definitive agreements of sale and long-term lease, of their corporate offices. Rental expenses amounted to $601,941 and $459,175 in 2008 and 2007, respectively. Rental expenses for 2009 are estimated to amount $748,105. The aforementioned expenses were established at fixed prices and increase annually based on the NCPI. (b) The Company has commitments under the agreements supporting the trademarks acquired (note 2(k)). (c) The Company has commitments arising in the normal course of business as a result of agreements signed for the supply of raw materials, some of which establish contractual penalties for noncompliance. Food and Beverages Mexico South America Distribution Eliminations Consolidated 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 External income $5,738 5,389 972 642 1,065 955 11 - $7,786 $6,986 - - - - 1,890 1,665 (1,890) (1,665) - - 5,738 5,389 972 642 2,955 2,620 (1,879) (1,665) 7,786 6,986 5,024 4,552 899 569 2,752 2,406 (1,921) (1,693) 6,754 5,834 Inter-business income Operating costs and expenses Depreciation and amortization 450 359 Operating income $264 478 Other income statement items Majority net income 69 4 40 33 28 29 175 185 26 16 8 573 436 20 $459 $716 (330) (238) $129 $478 Assets $5,093 4,423 672 269 961 589 (1,274) (1,076) $5,452 $4,205 Investment in associated companies Investment in fixed assets and intangibles - - 29 23 - - - - 29 23 628 869 223 140 69 61 (2) (3) 918 1,067 Total assets $5,721 5,292 924 432 1,030 650 (1,276) (1,079) $6,399 $5,295 The result for discontinuation of Food and Beverages is ( $34,134) and the net consolidated result for discontinuation is ($35,008). 62 : AlseA 2008 ANNUAL REPORT Now IS ThE TIME : 63 (19) Pro forma information on business acquisitions- Condensed pro forma consolidated financial information is shown below as if the acquisitions of Domino´s Pizza Colombia and Calpik had been completed in 2008 and 2007 (see note 1(a)). December 31, 2008 Pro forma adjustments (unaudited amounts) Pro forma figures (unaudited amounts) 96,977 (8,977) (8,977) (711) (8,266) 7,883,820 165,562 130,554 10,041 120,513 0.20 December 31, 2007 Pro forma adjustments (unaudited amounts) Pro forma figures (unaudited amounts) 90,748 (16,266) (16,345) (1,347) (14,998) 7,076,151 495,803 472,796 9,359 463,437 0.75 Base figures 7,786,843 174,539 139,531 10,752 128,779 0.21 Base figures 6,985,403 512,069 489,141 10,706 478,435 0.77 $ $ $ $ Income Income from continuous operations Consolidated net income Minority interest Majority net income Net earnings per share Income Income from continuous operations Consolidated net income Minority interest Majority net income Net earnings per share (20) Subsequent events- In January 2009, Starbucks Coffee International “SCI” confirmed that it would not take the purchase option this year, for which it has the right to increase its participation in Starbucks Coffee México from 18% to 50%. Under the agreement, the effective date for SCI to exercise that option is September 2012. INVESTOR INFORMATION INvESTOR RELATIONS Diego Gaxiola Cuevas Corporate Finance ri@alsea.com.mx Tel. (5255) 5241 7158 HEADqUARTERS Alsea S.A.B. de C.v. Av. Paseo de la Reforma 222 - 3er piso Torre 1 Corporativo Col. Juárez, Del. Cuauhtémoc C.P. 06600, México D.F. Tel. (5255) 5241 7100 INDEPENDENT AUDITORS KPMG Cárdenas Dosal, S.C. Boulevard Manuel Ávila Camacho # 176 C.P. 11650 México D.F. Tel. (5255) 5246 8300 INFORMATION ON ALSEA’S STOCK The single series shares of Alsea S.A.B. de C.V. have been traded on the Mexican Stock Exchange (Bolsa Mexicana de Valores or BMV) since June 25, 1999. Ticker Symbol: BMV Alsea* Alsea’s 2008 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’s Management, are based on currently known information; however, expectations may vary as a result of facts, circumstances and events beyond the control of Alsea and its subsidiaries. SEIzE THE MOMENT COME HAvE COFFEE WITH US! Valid in all Starbucks Coffee stores in Mexico and the United States of America All efforts are important, and although the press run of this report is relatively small, we reiterate our commitment to the environment by using environmentally-safe materials. The following are savings resulting from the use of recycled fiber. We used 617.4 lb of paper -meaning 10% recycled material- thereby allowing us to: 1 tree preserved for the future 252 gal wastewater flow saved 28 lbs solid waste not generated 7,656,800 BTUs energy not consumed This report was printed on Cougar paper, FSC certified, elementally chlorine and acid-free. PhOTOGRAPh: DESIGN: Frank Lynen Mr. José Rivera Río Rocha Chief Financial Officer Mr. Arturo A. Barahona Oyervides Chief Executive Officer Mr. Abel Barrera Fermín Corporate Comptroller 64 : AlseA 2008 ANNUAL REPORT www.alsea.com.mx Av. Paseo de la Reforma 222-3er piso Torre 1 Corporativo Col. Juárez, Del.Cuahtémoc C.P. 06600, México D.F. Tel. (5255) 5241 7100 

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