Alsea, S.A.B. de C.V. Annual Report 2012

Plain-text annual report

2 1 0 2 t r o p e R l a u n n A a e s l A In augmentation Annual Report 2012 www.alsea.com.mxGrowthStrengtheningResultsSustainability INVESTOR INFORMATION INVESTOR RELATIONS 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 2012 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. ABOuT ThIS REpORT Alsea presents its first 2012 comprehensive report, which reflects both the financial results as well as the actions taken during 2012 with respect to sustainability issues. For the second consecutive year we are presenting this report based on guidelines provided by the Global Reporting Initiative (GRI) methodology. It is a self-declared level B report, without external verification. Also, we are committed to ensuring that our operations and strategies are aligned with the United Nations’ Millennium Development Goals and the Principles of the Global Contract. This is why we are also presenting initiatives for supporting its 10 principles in this report. Enrique González Casillas Investor Relations ri@alsea.com.mx Phone: +52 (55) 5241-7035 Diego Gaxiola Cuevas CFO ri@alsea.com.mx Phone: +52 (55) 5241-7151 HEADQUARTERS Alsea S.A.B. de C.V. Av. Paseo de la Reforma #222, 3th. Floor Tower 1 Corporate Building Col. Juárez, Del. Cuauhtémoc ZIP Code 06600, México D.F Phone: +52 (55) 5241-7100 INDEPENDENT AUDITORS DELOITTE Galaz, Yamazaki, Ruiz Urquiza, S.C. Av. Paseo de la Reforma #489, 6th. Floor Col. Cuauhtémoc, Del. Cuauhtémoc ZIP Code 06500, México D.F. Phone: +52 (55) 5080-6000 SOCIAL RESPONSIBILITY: Ivonne Madrid Canudas responsabilidad-social@alsea.com.mx Phone: 52 41 71 00 ext. 7335 This Report is available in: www.alsea2012.com or in our App “Alsea 2012” (Downloadable in Itunes’s App Store). Our previous reports can be consulted in: www.alsea.com.mx FSC n o i t a c i n u m m o C e t a r o p r o C d n a l a n o i t a z i n a g r O f o n o i t a r o b a l l o c e h t h t i W n o t s u o H r o o C h t r a E l : t n i r P l i G o c i r e d e F : y h p a r g o t o h P . C S . s e r o d a ñ e s i D t t n i r P : n g i s e D 1 2 3 4 5 6 7 Shareholders letter Growth in augmentation Strengthening in augmentation Results in augmentation Shared value in augmentation MD&A and committee´s letters Financial statements 6 11 17 27 33 57 69 1 Letter to shareholdersAlsea (BMV: ALSEA*) is the leading restaurant operator in Latin America. The company has a portfolio of leading global brands in the Quick Service, Coffee Shop, and Casual Dining segments, including: Domino’s, Starbucks, Burger King, Chili’s, California Pizza Kitchen, P.F. Chang’s, Pei Wei and Italianni’s. At the end of 2012, the portfolio added up to a total of 1,421 units, with a presence in Mexico, Argentina, Chile, and Colombia. Its Business Model includes their Support Areas and supply chain. It has more than 27,600 employees. What do we want to be? “To be the best operator with leading brands in the segments and countries that we participate in” Mission To have a team that is committed to exceeding our clients expectations. “Touching people, enriching moments” Principles • The customer comes first To serve our customers with respect and a passion for excellence in service. • Respect and loyalty to our coworkers and the company To create a work atmosphere with a feeling of unity, tightness with the operation, that is respectful and without favoritism. • Personal excellence and commitment To always act in a way that is honest, simple, and fair, without putting personal interests first. • Results oriented To make decisions that are always oriented around the good of the company in order to improve results. 613 Mexico 584 Colombia 29 221 Mexico 107 Argentina 65 Chile 34 Colombia 15 472 Mexico 367 Argentina 64 Chile 41 36 Mexico 36 13 Mexico 13 Subfranchises 205 Associated 41 Subfranchises 2 834 Units QSR 472 Units Coffee Shops 2 ALSeA oPeRATeS ThE LARgEST MULTI-BRAnD PoRTfoLio of restaurants In LATIn AMeRICA MoRe ThAn MILLIon CUSToMeRS SeRveD A SUCCeSSFUL BuSinESS MoDEL SUPPoRTS oUR oPeRATIon 8 Brands 1,161 Corporate Units 260 Sub-franchise and Associated Units 27,619 employees Mexico Chile 1,172 Units 76 Units Colombia Argentina 44 Units 129 Units 9 Distribution Centers Distribution to more than 1,474 points of sale Structure of Support Areas The Business Model includes: •Support Areas: Finance, Technology and Systems, human Resources, and Real estate Development. •Supply Chain: Purchasing, Production, and Distribution. Strategic areas • Clients to exceed our customers’ expectations, through an unbeatable experience of our products, services, and image. • People to promote the personal and professional development of our coworkers. • Synergy to guarantee synergy by maximizing our critical mass and via collaboration with our strategic partners. • Results to ensure the profitable growth and sustainability of the company. • Social Responsibility to be recognized by customers and coworkers as a socially responsible company. 11 Mexico 10 Chile 1 2 Mexico 2 53 Mexico 53 Coming soon 2013 Brand: Subfranchises 12 115 Units Casual Dining Market: Brasil 3 income statement net Sales Gross Profit operating Income eBITDA (2) Consolidated net Profit Balance sheet Total Assets Cash Liabilities with Cost Major Shareholder´s equity Profitability metrics RoIC(3) Roe(4) Stock information Share Price earnings per Share Dividend per Share Book value per Share Shares outstanding (millions) operation number of Units employees CAgR(5) 10 years Annual growth % 2012 % 2011 % 18.4 20.2 13.2 15.8 13.6 10.9 15.9 26.7 27.1 76.0 43.2 69.7 4.2 26.1 (18.2) 51.0 13,519.5 100.0 10,668.8 100.0 8,747.8 797.3 1,608.6 401.8 64.7 5.9 11.9 3.0 6,881.2 453.1 1,123.1 236.8 64.5 4.2 10.5 2.2 9,771.2 100.0 9,374.2 100.0 932.6 3,317.2 4,520.6 9.5 33.9 46.3 739.4 4,056.5 2,993.9 7.9 43.3 31.9 220 bps 310 bps 8.6% 10.5% 83.1 66.5 nA 32.5 13.5 10.8 19.0 25.78 0.57 0.50 6.57 687.8 1,421 27,619 6.4% 7.4% 14.08 0.34 0.20 4.96 606.0 1,283 23,212 (1) Figures in millions of pesos and in IFRS, expressed in nominal pesos, 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)CAGR is defined as Compound Annual Growth Rate from 2003 to 2012. 4 Qsr Casual Dining SALES BY BRAnD 20% 26% 28% Coffee shops net Sales *million pesos EBiTDA(2) *million pesos 6% 2% 3% 5% Distribution and Production 10% 9 0 6 , 1 0 2 5 3 1 , 9 6 6 0 1 , 7 8 5 8 , 8 4 9 8 , 7 8 7 7 , 5 8 9 6 , 6 2 0 6 , 5 6 6 4 , 9 0 7 3 , 7 6 9 2 , 3 5 1 , 1 7 0 0 , 1 2 3 0 , 1 0 0 0 , 1 3 0 0 , 1 3 2 1 , 1 5 4 5 0 9 4 9 2 4 03 04 05 06 07 08 09 10 11 12 03 04 05 06 07 08 09 10 11 12 5 once again I am quite honored to present you with our financial results and Alsea’s principal successes during the year, which continue in AugMEnTATion, since the established goals for growth have been exceeded and consolidated. however, before presenting the scenario for the year and explaining its reach, I would particularly like to thank each one of our employees, clients, strategic partners and investors, who again provided us with the support and trust necessary to continue creating greater value for our shareholders. environment, Without a doubt, one important factor in obtaining these results was the country’s macroeconomic which, throughout 2012, was propitious for the in consumption. sustained Added to this favorable environment, our efficient business model and the strength of each of our brands, as well as the different strategies implemented, were determining factors in reaching our goals. improvement 13,519 Mxnm in Sales 10.5% growth in Same Store Sales 43.2% increase in EBiTDA 11.9% EBiTDA margin 138 net openings next I would like to share with you the goals and achievements in AugMEnTATion that Alsea reported during 2012: 83.1% Share price growth 2nd Year in the iPC index 6 • We added a ninth brand to our portfolio, with an agreement to develop and operate The Cheesecake Factory in Latin America. This brand, which is the global industry leader, without a doubt will be a new project that will bring innovation and synergy to our Business Model. ExPAnSion AnD STREngThEning •We strengthened our portfolio by adding in the Italianni’s brand, which is the absolute leader in Mexico in the Italian food segment. This acquisition will allow Alsea to increase its total market share by entering into this important segment. •We acquired the exclusive rights to operate the Master Franchise of Burger King in Mexico, in a strategic partnership with BKW. This operation, which includes the acquisition of 97 restaurants, will provide major synergies that will benefit the brand’s profitability. •We consolidated our operations in South America with the start-up of P.F. Chang’s operations in Chile, and the signature of an exclusivity agreement for the brand in Brazil, which will be the fifth country in which we operate and a fundamental part of our expansion strategy. We will also open units of this brand in Argentina and Colombia during 2013, which will enable our pace of growth in the region to continue in AugMEnTATion. fabián gosselin Castro Chief executive officer 7 Letter to shareholdersfinAnCiAL RESuLTS •Total sales were 13.5 billion pesos, which translates into growth of 27% over 2011. This growth was mainly due to the 10.5% increase in same-store sales, and to the expansion during the year of 138 units in our portfolio. • The Company’s eBITDA margin rose 140 basis points, for an increase of 43% it closed at 1.6 billion pesos, which is a record in our history. This major achievement was due to efficient management that focused on generating higher profitability in the portfolio, added to continuous growth in the operation of our most successful brands. • Another favorable result during the year was the generation of net income of 402 million pesos a year-over-year increase of 70% , which clearly reflects the Company’s commitment to each of our shareholders. •Due to the early debt payments during the year and higher cash flow generation, we closed the year with one of the lowest debt levels in the history of the Company: a net Debt/eBITDA ratio of 0.96x. Thanks to this solid financial position, we will be able to face the challenges and projects outlined for Alsea in 2013. • I want to finish this section on our results talking about our share price, which, during 2012 recorded an annual increase of more than 83%, closing at $25.78; this places us as one of the most highly profitable issuers in the Mexican market. This achievement was possible thanks to the market’s ongoing interest in us, backed by our solid results and growth. In addition to the foregoing, in 2012 our shareholders received a dividend equal to one share for every 37.52 shares in control. Also in relation to our shares, I want to thank all of you for the trust and interest in the follow- on offering that we carried out at the end of the year; the demand for this placement exceeded the total value of the transaction by five times. 8 SuSTAinABiLiTY •At Alsea, we have worked over the years to position Social Responsability as a strategic part of the business. •In 2012, Alsea was awarded the Socially Responsible Company badge by the Mexican Philantropic Center (CeMeFI A.C.). We also reaffirmed our commitment to the principles of the United nations Global Compact, and for the first time we present that addresses report an the creation of financial value for our shareholders, as well as our social and environmental performance. integrated •As we are concerned with child malnutrition in our country, we support the initiative “It’s on me”, a social movement that contributes with Mexican children in food poverty situation to have access to an adequate balanced diet, through the construction and operation of dinning rooms for children, called “nuestro Comedor”. In 2012 we started up 2 dining rooms in estado de México, which serve 400 children daily. I would like to thank all of our employees, clients, strategic partners and shareholders for yet another year of trust and interest in our company, and invite you to join us in continuing in AugMEnTATion our successes during this year 2013, since ThE BEST iS YET To CoME. Respectfully, • our main challenges will be to continue aligning our efforts and processes for the development of the communities where we operate, encourage better quality of life for our employees, protection of the environment through our energy efficiency continue likewise program and to promoting Responsible Consumption. fabián gosselin Castro Chief executive officer 9 Letter to shareholders10 GRoWTh In AUGMenTATIon 11 Letter to shareholdersintegration of italianni’s During 2012, we acquired and added the operation of Italianni’s in Mexico. The efficiency and strength of our Business Model allowed us to successfully integrate the brand into our portfolio. 12 unIts, In tHe CasuaL DInInG seGMent i S T n u 5 1 1 I s t n u 5 5 I s t n u 4 4 I s t n u 7 3 I s t n u 1 3 08 09 10 11 12 CAGR= 38.8% *CAGR = Compound Annual Growth Rate (2008-2012). 8th brand in operation 13 Growth in augmentation Acquisition of 97 units inclusion of 206 subfranchises tHe sIsteM In MeXICo Has a totaL of unIts 8 oPeRAToRS Joint Venture having the exclusive rights to operate and develop the brand in Mexico allows us to achieve greater market penetration, reaching the leadership position that characterizes the brand. 14 M A S TER 20 YEARS An C h i S E R f 15 Growth in augmentation16 STRenGThenInG In AUGMenTATIon 17 Letter to shareholderseXPAnSIon STRATeGY for CasuaL DInInG In SouTh AMERiCA 18 MarKet WITh oveR PeoPLe exclusivity for: P.f. Chang´s in the region In July 2012, we opened the first P.F. Chang’s unit in South America. Taking advantage of synergies and leverage from our business model, we also signed the exclusivity rights for P.F. Chang´s in Brazil, an important market for the growth strategy in the region. 19 Strengthening in augmentationnew Brand The Cheesecake factory in LatAm In February 2013, we signed the master franchise agreements for Mexico and Chile with a commitment of 12 openings in the next 8 years. Additionally, there is the option of signing exclusive contracts with Argentina, Brazil, Colombia, and Peru. 20 exclusivity option: 21 Strengthening in augmentationnew image During 2012 the brand consolidated its different communication and product strategies, achieving DoUBLe-DIGIT growth in same-store sales. During 2013, the store’s new image will be implemented for our operation in Mexico and Colombia, which will allow us to build a closer relationship with our consumers. More tHan PiZZAS soLD In 2012 22 GeneRATeD 28% oF aLsea saLes 472 units Starbucks 10 Years We are celebrating the 10th Anniversary of the brand in Mexico, which has become the brand with the biggest share of Alsea’s total sale. At the end of 2012, Starbucks operated in more than 49 cities in Mexico. 10 years enriching moments 23 Strengthening in augmentationChili´s 20 years Chili’s has been in Mexico for 20 years, and under Alsea’s operation for 7 years. With Chili’s, we entered the Casual Dining segment for the first time. Under Alsea, the brand served more than 4 MiLLion ConSUMeRS during 2012, achieving the most significant growth in Same Store Sales for our operations in Mexico. 20 years Sharing Moments 24 WE SERVED More tHan SATiSfiED CLIenTS At CPK we seek the extraordinary At California Pizza Kitchen, 2012 was a year for seeking the extraordinary and achieving operational successes that generated greater investment value. During the year, total sales for the brand achieved a growth of over 9%, driven mainly by growth in the average ticket, as a result of the acceptance that the different product platforms presented during the year. 25 Strengthening in augmentation26 ReSULTS In AUGMenTATIon 27 Letter to shareholdersCapex MILLIon PeSoS units and acquisitions We acquired the operation of Italianni’s in Mexico and invested in new units. 28 Technology and systems We improved oracle eRP system and made them more efficient. Distribution and logistics Warehouse Managment System (WMS) and Transportation Management System (TMS). Maintenance During the year we invested more than 154 million pesos in maintenance capex for our stores. our organizational structure During 2012 we focused on consolidating our organizational structure, developing new capabilities, and making changes aligned with sustainable growth. Integration of the operation for all countries under Ceo management. Reorganization for all support areas, with the result of synergies and critical mass. evolution of our Supply Chain, by integrating all of its areas. AnnUAL GRoWTh UnITS 27 units in QSR 49 units in Coffee Shops 62 units in Casual Dining our business mix for 2012 10 16 % 46 28 QSR Coffee Shops Casual Dining Distribution and Production 29 Results in augmentation(Margin Expansion) Results SALeS $13,519.5 million pesos annual growth SAMe-SToRe SALeS full-year (84 Corporate) Units eBITDA $1,608.6 million pesos Growth 43.2% Margin + 140 bps vs prior year neT InCoMe $401.8 million pesos annual growt h Profitability STRenGThenInG our ProfItaBILItY MetrICs 30 RoIC Roe sHare PrICe $25.78 83.1% annuaL GroWtH $14.08 ALSEA* 2nd ConseCutIve Year In tHe IPC InDeX $25.78 AVER AgE D A I LY oPeRATIon Dec. 31, 2011 Dec. 31, 2012 follow-on transaction Share Price $21.50 53.49 million Common shares issued Amount of the transaction $1.15 billion pesos With the proceeds, we prepaid debt which added to the cash flow generation reached during the year, we were able to reached a ratio of: 31 Results in augmentation32 ShAReD vALUe In AUGMenTATIon 33 Letter to shareholdersBoard of Directors 2012 Chairman Alberto Torrado Martínez Shareholder Board Alberto Torrado Martínez Chairman Cosme Torrado Martínez shareholder Armando Torrado Martínez shareholder Fabián Gerardo Gosselin Castro Chief executive officer Federico Tejado Bárcena Ceo starbucks Mexico Secretary Xavier Mangino Dueñas Partner Díaz de rivera y Mangino s.C. Audit Committee Iván Moguel Kuri Chairman Julio Gutiérrez Mercadillo Member Raúl Méndez Segura Memeber elizabeth Garrido López secretary independent Board Marcelo A. Rivero Garza Chairman, Brain strategic Insight Julio Gutiérrez Mercadillo Chairman, Grupo Metis Raúl Méndez Segura Chairman, Grupo Green river Iván Moguel Kuri Partner Chevez, ruiz, Zamarripa y Cia, s.C. León Kraig eskenazi Director & Partner de IGnIa Partners, LLC. Corporate governance Committee Julio Gutiérrez Mercadillo Chairman Marcelo A. Rivero Garza Member León Kraig eskenazi Member elizabeth Garrido López secretary Alsea’s solid structure for corporate governance contributes to our development and long-term viability. We comply with laws and regulations regarding anticompetitive behavior, antitrust or monopolistic practices, therefore we have never been sanctioned. via the Committees, we are able to identify and manage possible economic, labor, environmental, and community risks that we are exposed to on a daily basis in our operations. Alsea participates in: The compensation framework for members of Alsea’s board is fixed, and is calculated as a function of attendance at Board meetings and the meetings of the Committees that each advisor belongs to, their participation in deliberations, and the effectiveness of the strategic decisions they make. Participation in organizations and Associations: At Alsea, we contribute to the development of public policies on issues that could have an effect on our operations, always within the framework of the law and adhering to the highest ethical standards. •Consejo de la Comunicación, as members of the board we actively participate in campaigns that promote social benefits. •CAnIRAC [Cámara nacional de la Industria de Restaurantes y Alimentos Condimentados], whose goal is to provide a scope for the Mexican restaurant industry’s potential, as well as helping it build processes with intelligence, care, and proper management in order to maximize its opportunities in the Mexican economy. •The American Chamber of Commerce, as a guest member of the Tax Committee and the Real estate Development Committee. 34 To Alsea S.A.B. de C.V. general Shareholders’ Meeting Dear Shareholders: Since the IPo, Alsea, like other companies in the national business community, has considered the implementation of best practices in matters of corporate governance as one of its most important goals. Is not just talking about its obligation to comply with applicable laws on the matter, but rather of building greater safety and trust among its shareholders, which in turn generates greater efficiency in its operations and decision making, and that makes it more competitive. Public companies directed by someone other than the person presiding over the Board of Administration are becoming more and more frequent. This shows great progress in institutionalization, as well as a commitment to form and adopt better practices for the benefit of all shareholders. At Alsea, our Board of Members has the invaluable support of various Committees, which are solely made up of independent advisors. This ensures that its composition is optimally balanced, and this has been reflected in its high level of professionalism, efficiency, and neutrality, which each day brings greater benefits to society and consequently to its shareholders. Alsea has a methodology for selecting and evaluating independent Members, with orientation procedures and formulas for renewing positions that are in accordance with the highest international standards of corporate governance. Through this, we seek at all times to comply with the company’s own goals, and carry them out with great efficiency, and achieve the highest professionalism and institutionalization in making the decisions that the greatest administration board of the Company is in charge of making, meaning the Board of Directors. Current markets and shareholders, meaning all of you, seek greater efficiency in asset management, but you also want to contribute to a healthy market development and its long-term sustainability. Therefore, you seek public companies to invest in that not only fulfill your economic expectations, but above all, that contribute to the elevation of social, community, and cultural values, with a genuine concern for protecting the environment. This can only be achieved through a clear strategy like the one Alsea has, which includes developing and maintaining high levels of responsibility and good practices of corporate governance. Sincerely, Alberto Torrado Martínez Chairman of the Board 35 For us, Social Responsibility is an attitude that is incorporated in all aspects of our business planning and operation. It is what guarantees that we will generate not only favorable economic results, but also comply with and exceed the expectations of all of our stakeholders, as well as carrying out our operations in a way that does not have a negative impact on the environment. In order to ensure this, we work through four commissions that have representatives from all of our business units, which meet bimonthly. Additionally, the actions generated in these commissions are supervised and approved by the Social Responsibility Committee, which is constituted by the President of the Board of Administration and the highest ranking officials of all of Alsea’s business units. The committee meets quarterly to define our Social Responsibility strategy. This process ensures that the ideas and proposals that the commissions work on, get to the highest decision-making levels of our company. Committee of Social Responsibility Responsible Consumption employees 36 r u m e s n ployees C o m E investors S h a r e Responsible Consumption h o l d e r s Quality of Life Committee of Social Responsibility Community Support s r e d i v o r P y c n g o v e r n m e n t n go´ Co s e t e Environment p m o ies Media C m mu ni t Mission and values Code of Conduct Sustainability Plan Support Team Communication and Dialogue At Alsea we promote openness and transparency with all of our stakeholders. The information and feedback that we receive from them allows us to detect new areas of opportunity for improving our performance. In order to facilitate this communication, we offer the follow- ing channels: *Phone line for complaints and transparency 37 Social Responsibility As part of the human Capital Model, we promote a culture based on ethical principles and standards, and through our Code of Conduct and our policy for health and safety at work, we ensure the integrity and safety of all of our coworkers. We promote a culture of equity and diversity, and any act of discrimination for reasons of age, color, disability, marital status, race, religion, sex, and sexual orientation are sanctioned by our Code of Conduct. The Correct Line is our open line of communication, through which collaborators can express their complaints and comments. All the information that comes in is processed and responded to promptly. DIfferentLY aBLeD PeoPLe WorK for aLsea averaGe Hours of traInInG Per WorKer of WorKers Have HaD PerforManCe evaLuatIons of our WorKers are unIonIZeD In a LaBor orGanIZatIon GroWtH In eMPLoYee CreatIon over tHe PrevIous Year 38 Hours of traInInG ProvIDeD for tHe Year Years oLD Is tHe averaGe aGe of our WorKers of tHe aDMInIstratIve eMPLoYees traIneD In aCCountInG anD antICorruPtIon PoLICIes anD ProCeDures 39 Social ResponsibilityAt Alsea we want to reward our workers fairly, by providing wages and benefits that go beyond legal requirements, such as additional vacation days, support for external training, flexible policies for mothers, savings fund, savings account, coupon books, life insurance and major medical expenses, and ideal workplaces that promote an atmosphere of credibility, respect, impartiality, and pride. We promote the health of our people through our program “Ciudad Salud”; a health promotion marketplace, which offers discounts on vaccines, discussions on health, and checkups for our workers and their family members. 40 Total no. of employees (Mexico and Latin America) Men 57.3% Women 42.7% % of men and women who hold Executive positions at Alsea (Board President, Ceo, vPs, executives and Assistant Directors) Men 87.5% Women 12.5% Employees with a permanent contract (full and part time) By age: Under age 30: 76% From 30 to 50: 23% over age 50: 1% We promote practices that generate a positive impact and mitigate negative impacts throughout our value chain, such as our equality in employment Program that seeks out and eradicates gender-based wage differences, which immediately reduced worker turnover rates . 41 Social Responsibility We are committed to balanced lifestyles, therefore we seek to offer options and information to our customers about responsible decision making for their wellness. •Selecting the best ingredients, guaranteeing the quality and safety standards for our processes, and ensuring that the social, environmental, and economic life cycle implications are positive. We achieve this through: •Providing nutrition facts information for our main food and beverage products. •Promoting recreational activities and physical activity within the family. The Starbucks race was carried out for the second consecutive year, with 6,000 people registering. SUPPLIeRS hAve SIGneD The SoCIAL ReSPonSIBILITY LeTTeR, In WhICh TheY ProMIse to resPeCt: HuMan rIGHts WorKers’ rIGHts, safetY anD HeaLtH CIvIL ProteCtIon LaW feDeraL envIronMentaL reGuLatIons antICorruPtIon 42 SUPPLIeS CoMe FRoM PRovIDeRS All our brands have a program that measures our customers’ level of satisfaction. We listen and offer solutions that are immediate, consistent and appropriate adhering to a process for attending to, and resolving complaints established by the company for all its brands. no incidents involving the failure to comply with regulations in marketing materials, including advertising, promotion, and sponsorship. no complaints with respect to improper management of the privacy of our consumers’ personal data. 43 Social Responsibility We obtained the In tHe natIonaL aWarDs for enerGY savInGs BY tHe enerGY savInG trust Achieving greater efficiency and reducing our energy consumption continues to be the main objective of our environmental policy. in 2012 we achieved: •720 establishments where we replaced lighting with high-efficiency lighting equipment. •500 establishments where we installed equipment for monitoring and automating energy use. •Results: 6,600 ton reduction in Co2 for the year.1 •9.1% reduction in energy consumption. Total MJ consumption: 375,974,298* Yearly MJ savings: 34,180,315 1 The methodology used to calculate this savings was from the ePA, the environmental Protection Agency. www. epa.gov/cleanenergy * The total energy consumption considers the incorporation of 40 Italianni’s establishments, which during 2012 began adapting to our environmental policy requirements. 44 In order to strengthen our environmental policy, we included dry urinals to save water in our establishments, as well as high-efficiency lights and automation equipment. Total water consumption 1,268,419 cubic meters. Water savings from urinals in new stores: total cubic meters per year 3,800. All of Alsea’s water consumption comes from the public water system. In order to mitigate our environmental impact, in 2012 we identified the kind of wastes that our operation generates. PaPer CarDBoarD GLass aLuMInuM LaMInate PLastIC Pet DIsHes trasH orGanIC Waste 0.33% 13.33% 2.79% 0.64% 0.76% 0.63% 1.11% 0.12% 50.76% 29.52% During 2013 we will focus our efforts on recovering this waste and generating alliances that allow us to recycle them or reuse them in the best way possible. We promote the use of recyclable materials in all of our brands, using tablecloths, napkins, carry-out bags, pizza boxes, and cup holders made from recyclable materials. Domino’s napkins are made from 100% recyclable materials and the plastic bags used for deliveries are Biodegradable. We ProMote tHe ProPer seParatIon anD reCYCLInG of Waste aMonG our ConsuMers anD CoWorKers In 2012, we extended our used vegetable oil collection program for the oil that we produce. This oil will be used for the generation of Biodiesel. During 2013 we will continue valuing initiatives that seek to reduce our ecological footprint, which is why we are evaluating various practices such as: Totals 47,617 Cubic meters of oil 47.6 Truckloads of oil 4.8 •Renewable energy sources. •Waste reduction and recycling programs. •The use of more efficient solar and gas heaters. •The inclusion of green vehicles in our fleets. 45 Social ResponsibilityWe are PEoPLE 46 Fundación Alsea A.C. reaffirms its commitment to ensuring food security in vulnerable communities and the promotion of human development through education. In 2012 we supported the initiative “va por mi cuenta”, a movement that through Alsea’s participation, as well as its brands and all the people willing to contribute toward ending child malnutrition in our country. This goal, in the first phase, will be achieved through the construction and operation of child dining rooms which we call “nuestro Comedor” and which are managed by our operating partner Comedor Santa María, A.C., guaranteeing a positive nutritional impact on vulnerable child populations. Additionally, with the movement we seek to raise consciousness about the serious problem of malnutrition due to the lack of access to adequate, varied, sufficient, and uncontaminated food. The FoLLoWInG WAS AChIeveD BY The enD oF 2012: ThE oPERATion of TW o Dining RooMS LoCateD In tHe CHaLCo anD MetePeC In tHe estaDo De MÉXICo ThE DELiVERY of 18,615 nUTRITIoUS MeALS, BeneFITInG totaL raIseD $5,786,200.45 Pesos In 2013 We eXPeCT To ConSTRUCT 3 Dining RooMS CHILDren Per DaY 47 Social ResponsibilityIn DonatIons In KInD oF GRAInS CoLLeCteD WItH tHe CaMPaIGn “SEMiLLAS QuE L L EnAn V iDA S ” In FInAnCIAL DonatIons Through Fundación Alsea A. C. and our business units’ various community support programs, we achieved the following: voLunteereD, 303% MoRe T hAn tHe PrevIous Year MoRe ThAn 100,000 PeoPLe BenefIteD 48 For the 9th consecutive year Fundación Alsea supports Mano Amiga Chalco, located in one of the communities that lags behind the most in education in the estado de México. Providing education to: fIrst Year MIDDLe sCHooL stuDents seConD Year MIDDLe sCHooL stuDents “voCatIonaL testIMonIes II” WAS heLD, WITh 500 STuDEnTS froM MIDDLe anD HIGH sCHooLs The alliance with Fondo para la Paz has been strengthened in order to combat extreme poverty in 12 communities in the state of oaxaca by: offerInG aCCess to BasIC serv ICes CarInG for anD PreservInG tHe envIronMent DeveLoPMent of soCIaL CaPItaL eMPoWerInG WoMen reDuCInG CHILD MaLnutrItIon 49 Social ResponsibilityDisclosure Description Strategy and Analysis Page 1.1 statement from the most senior decision maker of the organization about the relevance of sustainability to the organization and its strategy 6-9 and 35 organizational Profile 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 name of the organization Primary brands, products, and/or services operational structure of the organization Location of organization’s headquarters number of countries where the organization operates, and names of countries with either major operations or that are specifically relevant to the sustainability issues covered in the report nature of ownership and legal form Markets served. scale of the reporting organization 2 2 and 3 2-3 and 29 Inside backpage 2 and 3 Inside backpage 2 and 3 2 and 5 significant changes during the reporting period regarding size, structure, or ownership 3, 7, 12-14, 20-21, 29 2.10 awards received in the reporting period 9 and 44 Report Parameters 3.1 3.2 3.3 3.4 3.6 3.7 3.8 3.9 reporting period Date of most recent previous report reporting cycle Contact point for questions regarding the report or its contents Boundary of the report state any specific limitations on the scope or boundary of the report Basis for reporting on joint ventures, subsidiaries, leased facilities, outsourced operations, and other entities that can significantly affect comparability from period to period and/or between organizations Inside backpage Inside backpage Inside backpage Inside backpage 2 and 3 2 and 3 In 2012, Alsea operated the brand Starbucks in Mexico, Argentina and Chile, under a joint venture agreement. Data measurement techniques and the bases of calculations, including assumptions and techniques underlying estimations applied to the compilation of the indicators and other information in the report 44 3.10 explanation of the effect of any re-statements of information provided in earlier reports, and the reasons for such re-statement There are no re-statements of the information provided in earlier reports 50 Disclosure Description 3.11 significant changes from previous reporting periods in the scope, boundary, or measurement methods applied in the report Page There are no significant changes from previous reporting periods 3.12 table identifying the location of the standard Disclosures in the report 50-54 governance, Commintments and Engagement 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.12 4.13 4.14 4.16 Governance structure of the organization Indicate whether the Chair of the highest governance body is also an executive officer for organizations that have a unitary board structure, state the number of members of the highest governance body that are independent and/or non-executive members 29 and 34 35 34 Mechanisms for shareholders and employees to provide recommendations or direction to the highest governance body 36 and 37 Linkage between compensation for members of the highest governance body, senior managers, and executives (including departure arrangements), and the organization's performance (including social and environmental performance) 35 Processes in place for the highest governance body to ensure conflicts of interest are avoided 35 Process for determining the qualifications and expertise of the members of the highest governance body for guiding the organization's strategy on economic, environmental, and social topics 35 Internally developed statements of mission or values, codes of conduct, and principles relevant to economic, environmental, and social performance and the status of their implementation 2 and 3 Procedures of the highest governance body for overseeing the organization's identification and management of economic, environmental, and social performance, including relevant risks and opportunities, and adherence or compliance with internationally agreed standards, codes of conduct, and principles. 35-37 Processes for evaluating the highest governance body's own performance, particularly with respect to economic, environmental, and social performance 34 externally developed economic, environmental, and social charters, principles, or other initiatives to which the organization subscribes or endorses 9 and inside backpage Memberships in associations (such as industry associations) and/or national/international advocacy organizations in which the organization: * Has positions in governance bodies; * Participates in projects or committees; * Provides substantive funding beyond routine membership dues; or * views membership as strategic List of stakeholder groups engaged by the organization. approaches to stakeholder engagement, including frequency of engagement by type and by stakeholder group 34 37 37 Economic Performance indicators EC6 EC8 Policy, practices, and proportion of spending on locally-based suppliers at significant locations of operation 43 Development and impact of infrastructure investments and services provided primarily for public benefit through commercial, in-kind, or pro bono engagement. 47-48 51 GRI index Disclosure Description Page global Compact Principles Environmental Performance indicators En3 En5 En6 En8 En16 Direct energy consumption by primary energy source 44 energy saved due to conservation and efficiency improvements 44 Initiatives to provide energy-efficient or renewable energy based products and services, and reductions in energy requirements as a result of these initiatives 44-45 total water withdrawal by source total direct and indirect greenhouse gas emissions by weight 44 44 En22 total weight of waste by type and disposal method 45 En26 Initiatives to mitigate environmental impacts of products and services, and extent of impact mitigation 44-45 Social: Labor Practices and Decent Work Performance indicators total workforce by employment type, employment contract, and region Benefits provided to full-time employees that are not provided to temporary or part-time employees, by major operations education, training, counseling, prevention, and risk-control programs in place to assist workforce members, their families, or community members regarding serious diseases average hours of training per year per employee by employee category Percentage of employees receiving regular performance and career development reviews Composition of governance bodies and breakdown of employees per category according to gender, age group, minority group membership, and other indicators of diversity 41 40 40 38 38 41 LA1 LA3 LA8 LA10 LA12 LA13 52 Principle 7: support a precautionary approach to environmental challenges. Principle 8: undertake initiatives to promote environmental responsibility. Principle 9: encourage the development and diffusion of environmentally friendly technologies. Principle 1: support and respect the protection of internationally proclaimed human rights. Principle 2: Make sure that they are not complicit in human rights abuses. Principle 6: uphold the elimination of discrimination in employment and occupation. Disclosure Description Page global Compact Principles Social: human Rights Performance indicators hR4 hR6 hR7 total number of incidents of discrimination and actions taken 38 operations identified as having significant risk for incidents of child labor, and measures taken to contribute to the elimination of child labor operations identified as having significant risk for incidents of forced or compulsory labor, and measures to contribute to the elimination of forced or compulsory labor hR9 total number of incidents of violations involving rights of indigenous people and actions taken Principle 1: support and respect the protection of internationally proclaimed human rights. Principle 2: Make sure that they are not complicit in human rights abuses. Principle 4: uphold the elimination of all forms of forced and compulsory labour. Principle 5: uphold the effective abolition of child labour. Principle 6: uphold the elimination of discrimination in employment and occupation. alsea has no risk for incidents of child labor since it complies with the labor legislation of all the countries where it operates alsea avoids any activity that poses any risk for incidents of forced or compulsory labor alsea does not report any incidents of violation involving rights of indigenous people Social: Society Performance indicators So2 So3 So7 Percentage and total number of business units analyzed for risks related to corruption 66-67 Percentage of employees trained in organization's anti-corruption policies and procedures total number of legal actions for anti-competitive behavior, anti-trust, and monopoly practices and their outcomes 39 34 Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery. 53 GRI index Disclosure Description Page global Compact Principles Social: Product Responsibility Performance indicators total number of incidents of non-compliance with regulations and voluntary codes concerning health and safety impacts of products and services during their life cycle, by type of outcomes Alsea has no incidents concerning health and safety impacts of our products and services type of product and service information required by procedures, and percentage of significant products and services subject to such information requirements 42 total number of incidents of non-compliance with regulations and voluntary codes concerning product and service information and labeling, by type of outcomes Alsea has no incidents regarding information and labeling of our products and services Principle 1: support and respect the protection of internationally proclaimed human rights. total number of incidents of non-compliance with regulations and voluntary codes concerning marketing communications, including advertising, promotion, and sponsorship by type of outcomes 43 total number of substantiated complaints regarding breaches of customer privacy and losses of customer data 43 PR2 PR3 PR4 PR7 PR8 With our actions and performance Alsea contributes to the fulfillment of the following Millenium goals: ThE MiLLEnniuM DEVELoPMEnT goALS goal 1 eradicating extreme poverty and hunger goal 2 achieving universal primary education goal 3 Promoting gender equality and empowering women goal 7 ensuring environmental sustainability goal 8 Developing a global partnership for development 54 Human Rights Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights. Principle 2: Make sure that they are not complicit in human rights abuses. Labour Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining. Principle 4: The elimination of all forms of forced and compulsory labour. Principle 5: The effective abolition of child labour. Principle 6: The elimination of discrimination in respect of employment and occupation. Environment Principle 7: Businesses should support a precautionary approach to environmental challenges. Principle 8: Undertake initiatives to promote greater environmental responsibility. Principle 9: Encourage the development and diffusion of environmentally friendly technologies. Anti-Corruption Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery. 55 56 MD&A AnD CoMMITTee´S LeTTeRS 57 Financial statementsConSoLiDATED RESuLTS foR ThE fuLL YEAR 2012 The following table shows a condensed Income Statement in millions of pesos (except ePS). The margin for each item represents net sales, as well as the percentage change in the year ended December 31, 2012, in comparison with the same period of 2011. This information is presented according to the International Financial Reporting Standards (IFRS), and is presented in nominal terms. 2012 Margin% 2011 Margin% Change% net sales $13,519.5 100.0% $10,668.8 100.0% 26.7% Gross Income 8,747.8 64.7% 6,881.2 64.5% 27.1% eBITDA(1) 1,608.6 11.9% 1,123.1 10.5% 43.2% operating income net Income ePS(2) 797.3 $401.8 0.5726 5.9% 3.0% 453.1 $236.8 n.A. 0.3440 4.2% 2.2% n.A. 76.0% 69.7% 66.5% (1) eBItDa is defined as operating income before depreciation and amortization. (2) ePs is earnings per share for the last 12 months. SALES net sales increased 26.7% to 13,519.5 million pesos during the full year 2012, in comparison with 10,668.8 million pesos in the same quarter of the prior year. This increase of 2,850.7 million pesos reflects the growth in sales of the food and beverage segments in Mexico and South America, mainly due to the 10.5% growth in same-store sales, to the increase in the number of units and to a lesser extent, to the growth in the distributor’s revenues from third parties. Growth in brand sales was due to the increase in same-store sales for the operations in Mexico and South America, as a result of additional orders served and a higher average ticket, because of the commercial and communication strategies implemented by each brand, as well as the fact that there was a net increase of 84 corporate stores in the last twelve months and sustained improvement in consumer behavior. gRoSS PRofiT During the full-year 2012, gross income increased 1,866.6 million pesos to 8,747.8 million pesos, with a gross margin of 64.7%, compared with 64.5% recorded in 2011. The improvement of 0.2 percentage points in the gross margin is mainly attributed to the appreciation of the peso against the dollar over the last twelve months, as well as to the positive effect from the businesses mix in which the business units with the highest sales growth are those that generate lower costs as a percentage of sales. This effect was partially offset by the increased cost of some inputs, and to a lesser extent, to the discount strategies implemented among some brands. increase of 2,851 million pesos gross margin of 64.7 % 58 oPERATing ExPEnSES operating expenses (excluding depreciation and amortization) decreased 1.1% as a percentage of sales, dropping from 54.0% during the full-year 2011, to 52.9% in the same period of 2012. That improvement can be attributed mainly to the margin from growth in same-store sales, to the increase in the number of units, and to a lesser extent, to operating efficiencies achieved during the period. These effects were partially offset by the aforementioned business mix in which the units with larger sales growth are those that generate higher expenses as a percentage of sales. EBiTDA eBITDA increased 43.2%, to 1,608.6 million pesos for the full year 2012, in comparison with the 1,123.1 million pesos in full-year 2011. eBITDA margin presented an expansion of 1.4 percentage points, rising from 10.5% in full-year 2011, to 11.9% in 2012. This increase was mainly due to the margin from the growth in same-store sales for the Company’s different brands, and to a lesser extent as a consequence of the business mix, in which the units with the highest growth are those that have a higher eBITDA margin as a percentage of sales. In addition to the above, margin expansion is a result of the improvement in the cost resulting from the initiatives and business strategies handled from brands and to a less extent, to the operating efficiencies achieved during the year as a result of improvements in the operating model. oPERATing inCoME For the full-year 2012, operating income showed an increase of 76.0%, equivalent to 344.2 million pesos, closing at 797.3 million pesos, in comparison with the 453.1 million pesos in the same period of 2011. The foregoing was mainly due to the increase of 485.5 million pesos in eBITDA, which was offset by the 133.1 million pesos increase in depreciation and amortization due to the Company’s expansion plan over the last twelve months. The operating margin increased 170 basis points versus the same period of the previous year, mainly as a consequence of the eBITDA margin expansion previously mentioned. nET inCoME net consolidated income rose 69.7%, increasing from 23.8 million pesos in full- year 2011, to 401.8 million pesos for full-year 2012. The 165.0 million pesos increase was mainly due to the increase of 344.2 million pesos in operating income and to the increase of 4.2 million pesos in the participation the results of associated companies. Those variations were partially offset by the increase of 112.1 million pesos in tax on earnings, and to the 71.3 million pesos increase in the all-in result of financing. EARningS PER ShARE earnings per share “ePS”(2) for the twelve months ended December 31, 2012, increased to 0.5726 pesos, in comparison with 0.3440 pesos for the twelve months ended December 31, 2011. Decrease of 110 bps in Margin 1,609 of EBiTDA million pesos Margin of 11.9 % 69.7 % vs. 2011 earnings per share 0.21 0.17 0.25 0.33 08 09 10 11 12 0.57 59 MD&A RESuLTS BY SEgMEnT earnings per share “ePS”(2) for the twelve months ended December 31, 2012, increased to 0.5726 pesos, in comparison with 0.3440 pesos for the twelve months ended December 31, 2011. net sales by segment net Sales by Segment 2012 % Cont. 2011 % Cont. % Var. Food and Beverages – Mexico $8,752.2 64.7% $7,083.8 66.4% 23.6% Food and Beverages– South America 3,416.3 25.3% 2,401.7 22.5% 42.2% Distribution and Production 4,032.4 29.8% 3,395.6 31.8% 18.8% Intercompany operations (3) (2,681.4) (19.8)% (2,212.3) (20.7)% 21.2% Consolidated net Sales 13,519.5 100.0% 10,668.8 100.0% 26.7% Food and Beverages Mexico Food and Beverages South America Distribution and Production 65% 25% 10% eBItDa by segment eBITDA by Segment 2012 % Cont. Margin 2011 % Cont. Margin % Var. Food and Beverages – Mexico $1,307.3 81.3% 14.9% $840.1 74.8% 11.9% 55.6% Food and Beverages – South America 214.3 13.3% 6.3% 198.7 17.7% 8.3% 7.8% Distribution and Production 78.4 4.9% 1.9% 39.6 3.5% 1.2% 97.9% others(3) 8.7 0.0 n.A. 44.7 0.0 n.A. (80.5)% Consolidated EBiTDA 1,608.6 100% 11.9% 1,123.1 100% 10.5% 43.2% (3) for the purpose of information by segment, these operations were included in each respective segment. food and Beverages – Mexico Sales for the full-year 2012 increased 23.6% to 8,752.2 million pesos, in comparison with 7,083.8 million pesos in the same period of 2011. This positive variation of 1,668.4 million pesos is mainly attributable to the growth in same-store sales for the segment in Mexico and to the net opening of 48 corporate units from its various brands over the last twelve months. eBITDA increased 55.6% during the full-year 2012 to 1,307.3 million pesos, compared with the 840.1 million pesos reported in the same period of the prior year. That increase is attributed to the margin generated by the increase in same-store sales, by the cost improvement resulting from the initiatives and business strategies implemented in different brands and to a lesser extent, to the effect due to the aforementioned business mix. food and Beverages – South America At the end of 2012, the Food and Beverages–South America division represented 25.6% of Alsea’s consolidated sales and was comprised of Burger King operations in Argentina, Chile and Colombia, as well as Domino’s Pizza Colombia, Starbucks Coffee Argentina and PF Chang´s Chile with a total of 208 units. This division saw a 42.2% increase in sales, totaling 3,416.3 million pesos, in comparison with 2,401.7 million pesos during 2011. This increase of 1,014.6 million pesos was Food and Beverages Mexico Food and Beverages South America Distribution and Production 81% 14% 5% 1,668 growth million pesos 14.9 % EBiTDA margin 1,015 growth million pesos 60 mainly due to the increase in same-store sales in the South America division and to the net opening of 36 corporate units over the last twelve months. For the full-year 2012, eBITDA for the Food and Beverages – South America division increased 7.8% to 214.3 million pesos, in comparison with 198.7 million pesos in the same period of the prior year. This positive variation was mainly attributable to growth in the number of units in operation and to a lesser extent by the reduction in the effect of new business as a result of the consolidation of the brands in the region. These effects were partially offset by the creation of a tax provision due to a difference in tax rates and a liability to pay labor, conducted in the fourth quarter of 2012. Distribution and Production net sales during the full-year 2012 increased 18.8% to 4,032.4 million pesos, in comparison with 3,395.6 million pesos in the same period of 2011. The foregoing is due to the growth in same-store sales of the brands in Mexico and to the increase in the number of units served over the last twelve months, supplying a total of 1,474 units as of December 31, 2012, in comparison with 1,367 units during the same period of the prior year, which was an increase of 7.8%. Sales to third parties increased 14.3% to 1,331.8 million pesos, mainly driven to the increase in same-store sales of Burger King and Domino’s Pizza System in Mexico, and to the additional units attended, due to the integration of Italianni´s brand in to Alsea´s Business Model. eBITDA increased 97.9% during the full-year 2012, ending with 78.4 million pesos, in comparison with 39.6 million pesos in the same period of the prior year. This increase of 38.8 million pesos is attributed primarily to growth in same-store sales, the increase in the number of units in operation and the reduction of the effect of new business. The eBITDA margin presented an expansion of 70 base points, mainly due to lower costs as a result of the business mix and efficiencies and operating leverage achieved during the year. non-oPERATing RESuLTS All-in Cost of financing The all-in cost of financing for the full-year 2012 increased to 189.3 million pesos, in comparison with 118.1 million pesos during the same period of the prior year. This increase of 71.2 million pesos can be mainly attributed to the increase of 67.0 million pesos in net interest paid as a result of the loans acquired for the acquisition of Italianni’s, and to a lesser extent to the decreased of 4.2 million pesos in exchange rate result. Tax on Earnings Taxes on earnings of 219.1 million pesos increased 112.1 million pesos in comparison with the full-year 2011, which is a result of the 277.2 million pesos increase in earnings before taxes at the close of 2012 and to a lesser extent to the effect caused by South American operations, as some countries have higher tax rates than Mexico. BALAnCE ShEET Store Equipment, improvements to Leased Locations and Properties, Brand use Rights, goodwill and Pre-operations The increase of 1,965.6 million pesos in this line was mainly due to the acquisition of the Italianni’s operation in Mexico and to a lesser extent, to the acquisition of assets and opening of new stores as a part of the expansion program over the last twelve months. This was partially offset by the amortization and depreciation of assets in accordance with accounting policies and to a lesser extent, to the write-off of assets due to unit closures. EBiTDA of 214 million pesos 1,474 units attended Effective tax rate of 35.3 % 61 MD&A During the twelve months ended December 31, 2012, Alsea made capital investments of 2,751.0 million pesos. From the 95.0% of total investments, equal to 2,614.9 million pesos, 1,765.0 million pesos were earmarked for the Italianni’s acquisition and 849.9 million pesos for unit openings, equipment refurbishing, and remodeling existing stores for the different brands that the Company operates. The remaining 136.1 million pesos were earmarked for other items, notably logistics improvement projects, as well as software licenses, among other items. inventories Inventory increased from 403.1 million pesos at December 31, 2011, to 550.4 million pesos at December 31, 2012. This increase of 147.3 million pesos is mainly attributable to the increase in some inputs due to a price opportunity that arose, allowing those inputs to be acquired in advance, to Alsea’s consolidation of Italianni’s inventory as a consequence of the acquisition and, to the inventory in advance strategy generated for the operations in Argentina as a result of the import problems presented in this country. Inventory also increased because of the increase of units in operation. other Current Assets The decrease in the other Current Assets account of 2,184.2 million pesos at December 31, 2012, is mainly due to the fact that at the end of 2011 there was a deposit made to an escrow as part of the process for the acquisition of Italianni’s, completed in February 2012. Taxes Payable – net The increase in the account Taxes Payable– net of Taxes Recoverable, of 89.5 million pesos at December 31, 2012, can be attributed mainly to the increase in income tax payable, partially offset by a higher vAT recoverable. Deferred income Tax Deferred income tax increased from 692.4 million pesos at December 31, 2011, to 778.8 million pesos at December 31, 2012. This increase of 86.4 million pesos occurred mainly as a consequence of the effect of the differences in financial depreciation rates and tax rates, and to recognition of tax losses. Suppliers Suppliers increased from 1,021.4 million pesos at December 31, 2011, to 1,129.6 million pesos at December 31, 2012. This variation of 108.2 million pesos was created principally as a consequence of better negotiating conditions, which translates into an increase of 2 payable days, which rose from 43 to 45 days over the last twelve months and to a lesser extent, by a larger number of units in operation. 2,751 of Capex during 2012 million pesos 2 days of suppliers 62 Bank Debt and Local Bonds At December 31, 2012, Alsea’s total debt had decreased by 1,582.0 million pesos, closing at 2,474.5 million pesos, in comparison with 4,056.5 million pesos on the same date of the previous year. The Company’s net consolidated debt compared with the fourth quarter of 2011 decreased 1,775.3 million pesos, closing at 1,541.9 million pesos on December 31, 2012, compared with the 3,317.2 million pesos in the same quarter of the previous year. This decrease is mainly attributable to prepayment of ALSeA11 local bond with the proceeds of the equity placement made, and to the cash flow generated by the Company over the last twelve months. At December 31, 2012, 84.0% of the debt was long term, and on that same date 98.0% of the debt was denominated in Mexican pesos and 2.0% in Argentinean pesos. The following table shows the amount of total debt in millions of pesos at December 31, 2012, as well as the maturity dates by year: Debt structure Short term Long term 16% 84% Debt Structure Maturities by Credit Maturities per Year Bank Loan Spread Balance 4T-12 2013 2014 2015 2016 Banamex $600 1.40% $588 60 53 8 $525 1.20% $525 $300 1.50% $99 $737 1.40% $737 147 BBvA hSBC hSBC Santander $533 1.25% $488 91 BBvA Francés RC 18.75% $35 35 Citibank Chile RC 0,74% $3 3 162 105 8 147 91 - - 162 158 82 184 91 - - 204 210 - 258 216 - - Maturities by year $2,475 $397 16% $513 21% $677 27% $888 36% figures in Mexican million pesos Considers a tIIe of 4.84 % rC= revolving Credit Share Repurchase Program At December 31, 2012, the Company had a cero balance in the repurchase fund. During the twelve months ended December 31, 2012, the Company had purchase and sale operations totaling 13.3 shares, for an approximate amount of 212.6 million pesos. financial Ratios At December 31, 2012, the covenants established in the Company’s credit contracts were as follows: the net debt to eBITDA ratio for the last twelve months was slightly below 1.0x and the twelve-month eBITDA to twelve-month interest paid ratio was 6.6x. 8 8 8 7 7 6 3 1 5 7 9 3 13 14 15 16 WACD * = 6.17 % *TiiE = 4.84% net Debt / EBiTDA 0.96 x 63 MD&A RoiC = 8.6 % RoE = 10.5 % The net Return on Invested Capital (“RoIC”)(4) increased from 6.4% to 8.6% over the twelve months ended December 31, 2012. The Return on equity (“Roe”) (5) for the twelve months ended December 31, 2012, was 10.5% in comparison with 7.4% for the same period in the prior year. Average trading per day of 1.3 million shares Stock Market indicators ALSeA* at December 31, 2012 closed with 687.8 million shares in circulation at a price of 25.78 pesos per share, which is a 83.1% increase over the share price at the end of 2011, and with a free float of 47.3%. The ev/eBITDA for the last twelve months was 12.2x. The average daily trading during 2012 was of 1.3 million shares. hedge Profile The Chief Financial officer, in conjunction Treasury Manager, manages risk as a function of mitigation of present and future risk, no diverting resources from operation, and the expansion plan, and having certain future cash flows with which a strategy can be formed regarding the cost of debt. The instruments will only be used for hedging purposes. 70 % of the Company´s needs in uS dollars were hedged During 2012, hedge derivatives in US dollars matured for 103.3 million dollars, at an average rate of 12.97 pesos per dollar. As a result of this coverage, there was an exchange rate profit of 19.1 million pesos. For 2013 Alsea has hedges to purchase dollars for approximately 44.7 million US dollars, with an average exchange rate of 12.84 pesos per dollar. 64 Corporate governance Committee´s Annual Report To the Board of Directors of Alsea, S.A.B. de C.V.: February 18, 2013 In compliance with articles 42 and 43 of the Security Market Law and in the name of the Corporate Governance Committee, I present to you our report on the activities we carried out during the year ended December 31, 2012. In the development of our work, we kept present the recommendations contained in the Corporate Best Practice Code. To comply with the responsibilities of this committee, we carried out the following activities: 1. During this period we did not receive any request for dispensation according to article 28, section III, paragraph f) of the Securities Market Law so that it was not necessary to make any recommendation in this sense. 2. This committee presented and approved the Strategic Plan of Distribuidora e Importadora Alsea, S.A. de C.v. (DIA). 3. This Committee presented and approved the Investment Plan for Brazil. 4. The quarterly and accrued results of the 2012 Stock exchange Plan were presented. An authorization to improve the float of Alsea was requested from the General Management, therefore guaranteeing the permanence in the IPC. Furthermore, it was requested to present the proposal of key strategies to increase the price of the share. 5. We were presented with the update of the shareholder cost applicable at the end of each quarter of 2012 using the methodology authorized by the Board of Directors and it is approved to continue using the rate of 16.0%. The delegated director of Latin America was asked to present to this committee a clear strategy to minimize the impact of a negative change in the Argentinean macroeconomic situation. 6. We were presented quarterly with the summary of risk management operations through “forwards of the exchange rate” (peso-dollar) done during the year. Said operations have been executed as authorized, in other words complying with the objective of covering the exchange risk of the operation based on the authorized budget. 7. The results of the evaluation of relevant executives of 2012 were presented. This committee requested a document containing the itemization of the results of the relevant executives, as well as the amount to be disbursed for them. 8. The results of the inquiry of organizational Climate of Alsea 2012 with the Great Place to Work methodology were presented. 9. A synthesis of the work plan for the development of the replacement tables of the General Management was presented. This Committee asked human Resources that, at the end of the evaluations of the candidates selected, they be sent for evaluation. 10. The Corporate Department of human Resources presented the strategy for the Compensation 2013 for managerial levels; this committee recommended the approval of said strategy. 11. The organizational structure of Alsea 2013 was presented, which will be communicated at the beginning of March to be implemented as of April 1. It was recommended to take it to the Board of Directors for approval; Lastly, I would like to mention as part of our activities, including the preparation of this report, the fact that at all times we have listened and taken into account the viewpoint of the relevant executives, without any notable difference of opinion. Sincerely, Chairman of the Corporate Governance Committee Julio gutierrez Mercadillo 65 Audit Committee´s Annual Report To the Board of Directors of Alsea, S.A.B. de C.V: February 18, 2013 In fulfillment of the provisions of Articles 42 and 43 of the Stock Market Law and the Rules of the Audit Committee, I hereby inform you of our activities during the year ending December 31, 2012. During the performance of our work, we kept in mind the recommendations set out in the Code of Best Corporate Practices and, in accordance with a work program developed from the Committee Rules, we met at least once every quarter to perform the following activities: I. RISK ASSeSSMenT We reviewed, with the Administration and the external and Internal Auditors, the critical risk factors that could affect Company operations, and determined that they had been appropriately identified and managed. II. InTeRnAL ConTRoL We ensured that the Administration, in fulfillment of its responsibilities regarding internal control, had established the appropriate policies and procedures. In addition, we followed up on the comments and observations in this respect developed by the external and Internal Auditors in the performance of their work. III. eXTeRnAL AUDIT We recommended that the Board of Directors hire some external auditors for the Group and subsidiaries for fiscal year 2012. To this end, we made sure of their independence and compliance with the requirements of the law. Together with them we analyzed their approach and work program. We maintained constant and direct communication with them to stay informed on the progress of their work, their observations, and to take note of their comments on the review of the annual financial statement. We were promptly informed of their conclusions and reports on the annual financial statement and followed up on the implementation of the observations and recommendations that arose from their work. We authorized the fees paid to the external auditors for auditing services and other permitted services, ensuring that this would not interfere with their independence from the company. Taking account of the Administration’s point of view, we performed the evaluation of its services for the previous year, and began the process of evaluation for the year 2012. Iv. InTeRnAL AUDIT To maintain its independence and objectivity, the Internal Audit area reports functionally to the Audit Committee. In due course, we revised and approved its annual program of activities. To produce this, Internal Auditing participated in the risk identification process, the establishment of controls, and their verification. We received periodic reports regarding the progress of the approved work program, changes that might have occurred, and the reasons for the same. We followed up on the observations and suggestions that arose and their appropriate implementation. v. FInAnCIAL InFoRMATIon, ACCoUnTInG PoLICIeS, AnD ThIRD PARTY RePoRTS We reviewed, together with the persons responsible, the process of preparation of the quarterly and annual financial statements for the Company, and recommended to the Board of Directors that it approve and authorize them for publication. As part of this process, we took into consideration the opinion and observations of the external auditors and ensured that the criteria, accounting policies, and information used by the Administration to prepare the financial information were adequate and sufficient and had been applied consistently with those for the previous year. As a consequence, the information presented by the Administration reasonably reflects the Company’s financial situation, operational results, and changes in financial situation for the year ending December 31, 2012. We also revised the quarterly reports prepared by the Administration to be presented to the shareholders and the general public, verifying that they were prepared using the same accounting criteria used to prepare the annual information. We verified that there was a comprehensive process that provides reasonable security for its contents. In conclusion, we recommend that the Board authorize its publication. 66 our review also includes the reports and any other financial information required by the Mexican Regulatory Bodies. We reviewed and confirmed that the Company, starting from 2012, adopted and implemented for the preparation of its Financial Statements the accounting framework set out in the International Financial Reporting Standards issued by the International Accounting Standards Board (IFRS and IASB, respectively), considering as part of this process the opinion and observations of the external auditors. Therefore we conclude from the foregoing that the Company has fulfilled the requirements set out by the Mexican national Banking and Securities Commission. vI. 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 various legal requirements to which it is subject, ensuring that they were properly disclosed in the financial information. We periodically reviewed the various legal, fiscal, and labor contingencies existent within the company, monitoring the efficacy of the procedure established for their identification and tracking, as well as their proper disclosure and recording. vII. ADMInISTRATIve ASPeCTS We held regular meetings with the Administration to keep ourselves informed on the functioning of the Company and relevant or unusual activities or events. We also met with the external and internal auditors to discuss the progress of their work and any constraints they might have encountered, and to facilitate any private communication they wished to have with the Committee. In cases where we deemed it appropriate, we sought the support and opinion of independent experts. Similarly, we had no knowledge of any significant non-compliances in operational policies, internal control systems, or accounting records policies. We held executive meetings with the exclusive participation of Committee members, during which we established agreements and recommendations for the Administration. The President of the Audit Committee reported our activities to the Board of Directors on a quarterly basis. our work was duly documented in records prepared for each meeting, which were appropriately reviewed and approved by the members of the Committee. Sincerely, Chairman of the Audit Committee ivan Moguel Kuri 67 68 FInAnCIAL STATeMenTS ALSEA, S.A.B. DE C.V. AnD SuBSiDiARiES Consolidated financial statements for the years ended December 31, 2012 and 2011, and Independent auditors’ report Dated March 29, 2013 Independent auditor´s report Consolidated financial statements of financial position Consolidated statements of Income Consolidated statements of comprehensive income Consolidated statements of changes in stockholders´equity Consolidated statements of cash flows notes to the consolidated financial statements 70 72 74 75 76 78 80 69 Letter to shareholdersTo the Board of Directors and Stockholders Alsea, S. A. B. de C. V. (Thousands of Mexican pesos) We have audited the accompanying consolidated financial statements of alsea, s. a. B. de C. v. and subsidiaries (the Group), which comprise the consolidated statements of financial position as at December, 2011, the consolidated statements of income, changes in stockholders’ equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the consolidated financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International financial reporting standards (Ifrs), and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in ac- cordance with International standards on auditing. those standards require that we comply with ethical requirements and plan and per- form the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. the procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. an audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of alsea, s. a. B. de C. v. and subsidiaries as at December 31, 2011, and the consolidated results of their operations and the consolidated cash flows for the year then ended, in accordance with International financial reporting standards. Emphasis of Matter Without qualifying our opinion, we draw attention to the following: as described in note 1(e) and as a result of court rulings issued in December 2009; november 2010, and at December 31, 2011, alsea has established the necessary arrangements to finalize the acquisition of Italcafé, s. a. C. v., thus ending the legal disputes faced in previous years with no detriment to the parties involved. on the other hand, in february 2012, the acquisition was finalized amounting $1,765,000 plus other additional costs, which means that as of that date control over the assets and liabilities acquired was duly transferred to the Group. as mentioned in note 1(b), in May 2011, alsea finalized the placement of debt stock in the amount of $1,000,000 on the Mexican market. In December, 2012, alsea amortized in advance the total amount of said debt instrument through the resources obtained from the issued stock by alsea in December, 2012, amounting $1,150,000. KPMG CarDenas DosaL, s. C. Jaime sánchez Mejorada March 29, 2013 70 independent auditors’ report to the Board of Directors and Shareholders of Alsea, S.A.B. de C.V. We have audited the enclosed consolidated financial statements of alsea, s.a.B. de C.v. and subsidiaries (the entity), which include the consolidated statements of financial position at December 31, 2012 and the consolidated statements of comprehensive income and other comprehensive income, of changes in stockholders’ equity and of cash flows for the year ended on that date, as well as a summary of the significant accounting policies and other explanatory notes. Management responsibility for the consolidated financial statements the entity’s Management is responsible for preparing and providing a fair presentation of the accompanying consolidated financial sta- tements in accordance with the International financial reporting standards issued by the International accounting standards, and the internal control considered necessary by the entity to prepare consolidated financial statements that are free of material misstatement due to fraud or error. Responsibility of the independent auditors our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with International auditing standards. those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. an audit involves performing procedures to obtain evidence supporting the amounts and disclosures in the financial statements. the procedures selected depend on the auditor’s judgment, including the assessment of the risk of material misstatement of the consolidated financial statements due to fraud or error. In making those risk assessment, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. an audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates prepared by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence obtained by us is sufficient and appropriate to provide a basis for our opinion. opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of alsea, s. a.B. de C. v. and subsidiaries as of December 31, 2012, and its financial performance and its cash flows for the year ended on that date, in accordance with International financial reporting standards issued by the International accounting standards. other matters the financial statements of alsea, s.a.B. de C.v. and subsidiaries for the year ended on December 31, 2011 and January 1, 2011 were audited by other auditors that expressed an unqualified opinion on said consolidated financial statements on March 29, 2013. Galaz, Yamazaki, ruiz urquiza, s. C. Member of Deloitte touche tohmatsu Limited C. P. C. francisco torres uruchurtu March 29, 2013 71 alsea, s.a.B. de C.v. and subsidiaries Consolidated statements of financial position at December 31, 2012 and 2011 and January 1, 2011 (date of transition) (figures in thousands of Mexican pesos) Assets notes 2012 2011 Date of transition $ Current assets Cash and cash equivalents Customers, net value added tax and other recoverable taxes other accounts receivable Inventories, net advance payments Guarantee deposits total current assets 6 7 8 9 10 932,594 $ 339,481 272,254 196,450 550,394 184,201 - 2,475,374 739,379 $ 219,350 243,736 166,228 403,130 128,631 2,262,800 4,163,254 640,203 207,224 218,037 39,482 352,325 95,233 - 1,552,504 Long term assets Guarantee deposits 10 110,020 86,991 78,168 Investment in shares of associated company 11 40,296 30,394 20,783 store equipment, leasehold improvements and property, net Intangible assets, net 12 12 3,924,108 3,472,420 2,994,123 2,418,830 928,695 914,626 Deferred income taxes 23b 828,965 692,420 544,474 total long-term assets 7,322,219 5,210,920 4,552,174 Total assets $ 9,797,593 $ 9,374,174 $ 6,104,678 see accompanying notes to the consolidated financial statements. fabián gosselin Castro Chief executive officer Diego gaxiola Cuevas Chief financial officer Alejandro Villarruel Morales Corporate Controller 72 Liabilities and stockholders’ equity notes 2012 2011 Date of transition Current liabilities Current maturities of long-term debts suppliers accounts payable and accumulated liabilities Provisions Income taxes taxes arising from tax consolidation total current assets Long-term liabilities Long-term debts, not including current maturities Debt instruments other liabilities taxes arising from tax consolidation employee retirement benefits total long-term liabilities Total liabilities Stockholders’ equity Capital stock Premium on share issue retained earnings reserve for repurchase of shares other comprehensive income items stockholders’ equity attributable to the controlling interest non-controlling interest Total stockholders’ equity 15 $ 396,647 $ 1,129,612 185,333 $ 1,021,424 229,524 710,548 18 15 16 22 24 209,669 661,735 189,749 6,885 2,594,297 2,077,833 - 58,787 186,569 51,210 2,374,399 117,633 571,730 87,638 7,089 1,990,847 2,877,667 993,531 24,924 162,724 31,750 4,090,596 120,092 364,592 37,032 2,606 1,464,394 668,000 694,834 37,962 127,720 22,498 1,551,014 4,968,696 6,081,443 3,015,408 $ 403,339 $ 362,461 $ 2,466,822 1,173,693 564,201 (87,347) 4,520,708 308,189 4,828,897 1,092,047 1,118,767 383,903 36,750 2,993,928 298,803 3,292,731 362,080 1,086,415 1,031,772 363,833 - 2,844,100 245,170 3,089,270 Total liabilities and stockholders’ equity $ 9,797,593 $ 9,374,174 $ 6,104,678 73 alsea, s.a.B. de C.v. and subsidiaries Consolidated Statements of income for the years ended on December 31, 2012 and 2011 (figures in thousands of Mexican pesos) net sales $ 13,519,506 $ 10,668,771 notes 2012 2011 Cost of sales Leases Depreciation and amortization operating costs and expenses other expenses (income) - net Interest income exchange gain - net Interest expenses equity in results of associated company Income before income taxes Income taxes Consolidated net income Comprehensive income for the year attributable to: non-controlling interest Controlling interest 21 11 23 net basic gain per share (cents per share) 25 see accompanying notes to the consolidated financial statements. 4,771,721 1,066,583 794,867 6,098,830 9,804 (47,043) (8,719) 245,104 607,967 3,787,599 827,370 661,780 4,846,801 (92,154) (20,687) (12,911) 151,692 334,973 12,978 8,805 620,945 343,778 219,147 107,017 401,798 $ 236,761 36,880 $ 27,118 364,918 $ 209,643 0.57 $ 0.34 $ $ $ $ fabián gosselin Castro Chief executive officer Diego gaxiola Cuevas Chief financial officer Alejandro Villarruel Morales Corporate Controller 74 alsea, s.a.B. de C.v. and subsidiaries Consolidated statements of comprehensive income for the years ended on December 31, 2012 and 2011 (figures in thousands of Mexican pesos) 2012 2011 Consolidated net income $ 401,798 $ 236,761 other comprehensive items: financial instrument valuation Conversion of foreign operations total comprehensive income for the period, net of income taxes Comprehensive income for the year attributable to: net income of controlling interest non-controlling interest see accompanying notes to the consolidated financial statements. (9,963) 9,166 (114,134) 277,701 27,584 273,511 $ $ 240,821 $ 246,393 36,880 $ 27,118 fabián gosselin Castro Chief executive officer Diego gaxiola Cuevas Chief financial officer Alejandro Villarruel Morales Corporate Controller 75 alsea, s.a.B. de C.v. and subsidiaries Consolidated statements of changes in stockholders’ equity for the years ended on December 31, 2012 and 2011 (figures in thousands of Mexican pesos) Contributed capital Retained earnings other comprehensive income items Effect of Capital Stock Premium on issuance of shares Repurchased shares Reserve for repurchase Legal Retained financial of foreign controlling non-controlling stockholders’ Valuation of conversion Total Total of shares reserve earnings instruments operations interest interest equity Balances at the start of 2011 (transition date) $ 368,362 $ 1,086,415 $ (6,282) $ 363,833 $ 86,051 $ 945,721 $ - $ - $ 2,844,100 $ 245,170 $ 3,089,270 Increase in non-controlling interest repurchased shares, net (note 24) Premium on share subscription (note 24) transfer of legal reserve Cash dividends (note 24) Comprehensive income - - - - - - - - - - - - - - 26,515 26,515 - 5,632 381 - 20,070 - - - - 20,451 - - - - - 5,632 - - 20,451 5,632 - - - 7,560 (7,560) - - - - - - - - (122,648) - (122,648) - (122,648) - - - - 209,643 9,166 27,584 246,393 27,118 273,511 Balances at December 31, 2011 $ 368,362 $ 1,092,047 $ (5,901) $ 383,903 $ 93,611 $ 1,025,156 $ 9,166 $ 27,584 $ 2,993,928 $ 298,803 $ 3,292,731 1,090 5,901 180,298 - (1,090) - 186,199 - 186,199 - - - 7,125 (7,125) - - - - - - - - repurchased shares, net (note 24) transfer of legal reserve (note 24) Business acquisition and purchase of non-controlling interest (note 1d and 14) - - - share dividends (note 24) 8,233 300,669 (15,262) - - - - - - - (15,262) (494) (15,756) - - (308,902) - - - - - Cash dividends declared by a subsidiary (note 24) - - - - - - - - - (27,000) (27,000) Placement of shares (note 1d) 26,744 1,088,278 - - - - - - 1,115,022 - 1,115,022 Comprehensive income - - - - - 364,918 (9,963) (114,134) 240,821 36,880 277,701 Balances at December 31, 2012 $ 403,339 $ 2,466,822 $ - $ 564,201 $ 100,736 $ 1,072,957 $ (797) $ (86,550) $ 4,520,708 $ 308,189 $ 4,828,897 see accompanying notes to the consolidated financial statements. 76 Contributed capital Retained earnings other comprehensive income items Premium on Capital Stock issuance of Repurchased shares shares Reserve for repurchase of shares Legal reserve Retained earnings Valuation of financial instruments Effect of conversion of foreign operations Total Total controlling non-controlling stockholders’ interest interest equity Balances at the start of 2011 (transition date) $ 368,362 $ 1,086,415 $ (6,282) $ 363,833 $ 86,051 $ 945,721 $ - $ - $ 2,844,100 $ 245,170 $ 3,089,270 Increase in non-controlling interest - - - - - - - - 26,515 26,515 repurchased shares, net (note 24) Premium on share subscription (note 24) transfer of legal reserve Cash dividends (note 24) Comprehensive income repurchased shares, net (note 24) transfer of legal reserve (note 24) Business acquisition and purchase of non-controlling interest (note 1d and 14) - 5,632 381 - 20,070 - - - - 20,451 - - - - - 5,632 - - 20,451 5,632 - - - 7,560 (7,560) - - - - (122,648) - - - - - - - (122,648) - (122,648) - - - - 209,643 9,166 27,584 246,393 27,118 273,511 Balances at December 31, 2011 $ 368,362 $ 1,092,047 $ (5,901) $ 383,903 $ 93,611 $ 1,025,156 $ 9,166 $ 27,584 $ 2,993,928 $ 298,803 $ 3,292,731 1,090 5,901 180,298 - (1,090) - - - 7,125 (7,125) - - - 186,199 - 186,199 - - - - (15,262) - - - - - (15,262) (494) (15,756) share dividends (note 24) 8,233 300,669 - - (308,902) - - - - - Cash dividends declared by a subsidiary (note 24) - - - - - - - - (27,000) (27,000) Placement of shares (note 1d) 26,744 1,088,278 - - - - - 1,115,022 - 1,115,022 Comprehensive income - - - - 364,918 (9,963) (114,134) 240,821 36,880 277,701 Balances at December 31, 2012 $ 403,339 $ 2,466,822 $ - $ 564,201 $ 100,736 $ 1,072,957 $ (797) $ (86,550) $ 4,520,708 $ 308,189 $ 4,828,897 - - - - - - - - - - - - - - fabián gosselin Castro Chief executive officer Diego gaxiola Cuevas Chief financial officer Alejandro Villarruel Morales Corporate Controller 77 alsea, s.a.B. de C.v. and subsidiaries Consolidated statements of cash flows for the years ended on December 31, 2012 and 2011 (figures in thousands of Mexican pesos) Cash flows from operating activities Consolidated net income adjustment for: Income taxes equity in results of associated company financial costs Investment income Cancellation of store equipment and property estimations for the period Long-term depreciation and amortization Cost of purchase of non-controlling interest effect of valuation of financial instruments Changes in working capital Customers recoverable taxes other accounts receivable Inventories advance payments Guarantee deposits suppliers taxes payable other liabilities Labor obligations notes 2012 2011 $ 401,798 $ 236,761 19 219,147 (12,978) 245,104 (47,043) 64,200 90,005 811,298 (11,748) (9,963) 1,749,820 (79,917) (758) (23,263) (100,418) (38,332) (23,029) 80,640 (220,337) 85,066 19,460 107,017 (8,805) 151,692 (20,687) 34,099 207,138 670,000 - 9,166 1,386,381 (10,809) (25,699) (126,745) (49,480) (8,823) (37,622) 272,415 (167,200) 17,514 9,253 net cash flows provided by operating activities 1,448,932 1,259,186 Cash flows from investing activities Interest collected store equipment, leasehold improvements and property Intangible assets. Guarantee deposits reimbursement of guaranty deposit Purchase of non-controlling interest 10 10 net cash flows arising from business acquisitions net cash flows used in investing activities 1e and 14 47,043 (921,123) (220,542) - 2,262,800 (15,262) (1,765,000) (612,084) 20,687 (939,845) (235,904) (2,262,800) - - - (3,417,862) (Continued) 78 Cash flows from financing activities Bank loans amortization of bank financing Issue of debt instruments amortization of debt instrument Increase in capital stock, net of premium and expenses incurred for share issue Interest paid Dividends paid other items repurchase of shares, net notes 2012 2011 15 1b and 16 24 75,092 (750,168) - (1,000,000) 1,115,022 (245,104) - (27,000) 186,199 2,706,233 (537,317) 1,000,000 (700,000) - (151,692) (122,648) 26,515 26,083 net cash flows (used in) provided by financing activities (645,959) 2,247,174 net increase in cash and cash equivalents 190,889 88,498 Cash and cash equivalents at beginning of year 739,379 640,203 exchange effects on value of cash 2,326 10,678 Cash and cash equivalents at end of year $ 932,594 $ 739,379 see accompanying notes to the consolidated financial statements. (Continued) fabián gosselin Castro Chief executive officer Diego gaxiola Cuevas Chief financial officer Alejandro Villarruel Morales Corporate Controller 79 alsea, s.a.B. de C.v. and subsidiaries notes to the consolidated financial statements for the years ended on December 31, 2012 and 2011 and January 1st., 2011 (transition date) (figures in thousands of pesos) 1. Activity, main operations and significant subsequent events - alsea, s.a.B. de C.v. and subsidiaries (alsea or the entity) was incorporated as a variable income stock company on May 16, 1997 in Mexico. the entity’s domicile is Paseo de la reforma no. 222, tercer piso, Col. Juárez, Delegación Cuauhtémoc C.P. 06600, México, D.f. for disclosure purposes in the notes to the consolidated financial statements, reference made to pesos, “$” or MXP is for thousands of Mexican pesos and reference made to dollars is for us dollars. operations alsea is mainly engaged in operating fast food restaurants “Qsr”, cafeteria and casual dining units “Casual Dining”. In Mexico, the entity operates the brands Domino’s Pizza, starbucks, Burger King, Chili’s Grill & Bar, California Pizza Kitchen, P.f Chang’s China Bistro and Pei Wei asian Diner, and began operating the Italianni’s brand in March 2012. In order to operate its multi-units, the entity has the support of its shared service center, which includes the supply chain through Distribuidora e Importadora alsea, s.a. de C.v. (DIa), real property and development services, as well as administrative services (financial, human resources and technology). In Chile and argentina, it operates the Burger King brand and beginning in 2007 it began operating starbucks in association with starbucks International. In Colombia, it has operated the Domino’s Pizza and Burger King brands since 2008. In May 2011, alsea signed an agreement with PfCCB International, Inc. for the exclusive development and operation of P.f. Chang’s China bistro in argentina, Colombia and Chile, the latter country in which it opened its first P.f. Chang’s unit in 2012. Main operations a. Agreement to purchase the Burger King master franchise in Mexico.- In December 2012, alsea signed a strategic as- sociation agreement with Burger King Worldwide, Inc. (“BKW”) to acquire the master franchise of the BurGer KInG® brand in Mexico for a 20-year exclusivity. under the strategic association agreement signed by alsea and BKW, the BKW subsidiary will merge with operadora de franquicias alsea s.a. de C.v. (“ofa”), a subsidiary of alsea, with the latter as the surviving company and operator of 203 BurGer KInG® restaurants in Mexico. once the merger goes into effect, BKW will sell the ofa shares to alsea, which means that after the transactions in question are finalized, alsea will retain 80% of ofa and BKW will retain the remaining 20%. this merger is subject to the approval of the federal Competition Commission (CfC). the most important rights and responsibilities acquired by alsea through ofa are: i.- operating control over the BurGer KInG® brand throughout Mexico, ii.- the acquisition of 97 BurGer KInG® restaurants for operation of a total of 203 units, iii.- exclusivity in Mexico for a 20-year period, iv.- Collection of royalties from its sub-franchisees; and v.- a development plan that contemplates new BurGer KInG® corporate stores and sub-franchisees for the following 20 years. b. Early amortization of the total “ALSEA 11” debt instrument.- In May 2011, alsea finished placing debt instruments for a total of $1,000 million pesos in the Mexican market. the resources obtained from that issuance were used mainly to prepay the debt instruments issued in December 2009 and March 2010 for $300 and $400 million pesos, respectively. In December 2012, alsea amortized in advance the total amount of said debt instrument “aLsea11”. the payment was for approximately $1,004.7 million pesos, which included interest accrued. said issue was settled with part of the resources obtained from the capital issue performed by the entity, which helped to improve the cost of the debt and the maturity profile. (note 16) 80 c. Capital issue.- In December 2012, alsea issued stock worth 1,150 million pesos, which included the over-allotment option. the issue was carried out in the Mexican market through the Mexican stock exchange (BMv for its initials in spanish) and the foreign market through a private offer in accordance with regulation “s” of the us securities act of 1933. the final placement price according to the books was 21.50 pesos per share, which resulted in the placement of approximately 53.49 million shares. as a result of the issue and the exercise of the over-allotment option, alsea’s subscribed and paid in capital will be comprised of 687’759,054 (six hundred and eighty seven million , seven hundred and fifty nine thousand, fifty four) Class I, sole series, common shares, with no par value. the entity used the resources derived from this issue to prepay the debt instrument with ticker code aLsea’11, which matures in 2014, as a result of which the leverage level for this transaction decreases (net Debt to eBItDa) from 1.9x to 1.2x with figures at september 2012. (note 24) d. Acquisition of 35% of grupo Calpik, S.A.P.i. de C.V. and 10.64 % of Panadería y Alimentos para food Service, S.A de C.V..- In June 2012, the entity finalized the acquisition of the remaining 35% shares of Grupo Calpik, a company that holds the exclusive rights to develop and operate California Pizza Kitchen restaurants in Mexico. the book entry for that acqui- sition gave rise to a charge to stockholders’ equity of $15,262. additionally, in october 2012, the entity acquired the remaining 10.64% shares of Panadería y alimentos para food service, a company that distributes food brands mainly to Café sirena, s de r.L. de C.v. , which operates starbucks in Mexico. the book entry for said acquisitions gave rise to a decrease in the entity’s non-controlling interest of $15,172 and $11,748, respectively. (note 24) e. Agreement to acquire italianni’s restaurants and the exclusive rights to develop and operate that brand of restaurants in Mexico.- the process for the Italianni’s acquisition concluded in february 2012 at a final price of $1,765 million pesos. Italianni’s is a leading Italian food chain in Mexico with more than 52 units in over 20 states. the brand is known for offering top quality products and services thanks to its experienced operating team and a philosophy based on high service values. (note 14) f. Acquisition of the master license and exclusive development rights for operating the Pei Wei Asian Dinner (Pei Wei) brand in Mexico.- as part of its expansion plan, in october 2011, alsea signed an exclusive development and master license agreement to operate the Pei Wei brand in the entire Mexican territory. the agreement stipulates the obligation to open three units in the first 18 months and the right to a 10-year exclusivity agreement, with a commitment to open 50 units and the right to extend the term. the first restaurant commenced operations in December 2011. the concept behind the brand is an asian food menu operating in Mexico under a business model of sit-down, to go and home delivery service, thus adding value to the brand. Pei Wei is the leading asian food brand in the us under the “fast Casual” category, which means that by signing the agree- ment, alsea becomes the pioneer in Mexico operating under this concept. g. new agreements signed with Starbucks Coffee international (SCi) for Mexico, Argentina and Chile.- In october 2011, alsea established new accords with sCI to develop the brand. alsea currently holds 82% shareholding over the starbucks Mexico and starbucks argentina subsidiaries and sCI holds the remaining 18%. shareholding over the subsidiary in Chile is 82% for sCI and 18% for alsea. 81 under the initial agreements, sCI has the option to increase its shareholding in the Mexico and argentina subsidiaries by up to 50% and for the Chilean subsidiary alsea has the option to increase its shareholding by up to 49%. In light of the new agreements signed with sCI to develop the brand, alsea has committed to develop more than 300 new units for the Mexico and argentina markets in the next five years. If the proposed openings plan is achieved and all the agreed terms are met, sCI will waive its right to increase its shareholding in the Mexico and argentina subsidiaries. the agreements also include an extension of alsea’s rights to develop the brand in Mexico for an additional five years, which means that they could extend to february 2027. h. Agreement for development and exclusive operation of the brand P.f. Chang’s China Bistro in Argentina, Chile and Colombia - In May 2011, alsea signed the exclusive development agreement and it bought a franchise to operate and develop P.f. Chang’s brand restaurants in argentina, Chile and Colombia. as part of the agreement, alsea will open 7 restaurants in argentina and 5 in Chile and Colombia over the next ten years. i. incorporation of Panadería y Alimentos para food Service, S. A. de C. V.- Panadería y alimentos para food service, s. a. de C. v. was incorporated in november 2010 and started operating in september 2011 to continue the vertical development of the entity. alsea invested in the incorporation and development of a new plant that produces sandwiches and bread that is supplied to starbucks and the other alsea brands. the business model contemplates the central plant located in Lerma, state of Mexico, where 100% of Pastry and Bakery goods are to be produced and 65% of sandwiches will be assembled. In addition to that plant, there are three regional assembly centers located in the DIa Monterrey, Cancun and Hermosillo facilities for as- sembly of the regional sandwiches. Significant subsequent events Acquisition of the exclusive rights to develop the P.F. Chang’s China Bistro brand in Brazil. - In January 2013, the entity signed a Development and operation agreement for the exclusive development of the P.f. Chang’s China Bistro brand in Brazil. the agreements contemplate the opening of 30 units in the next 10 years. P.f. Chang’s is the leading brand in the Casual asian food segment in the us with more than 225 operating units. It currently has points of sale in Mexico, Puerto rico, Canada, Kuwait, Beirut, Chile, Hawaii, the Philippines and the united arab emirates. In order to introduce P.f. Chang’s into the Brazilian market, a development and expansion strategy was designed based on the successful business model used to operate the brand portfolio in south america. that model has made it possible to position alsea as the leading Casual and fast-food operator in Latin america. With Brazil operations as the new path for growth, the entity will work towards generating greater diversification and profitability of its portfolio. Alsea signs the rights to the exclusive development and operation of The Cheesecake Factory® restaurants in Mexico. alsea signed an agreement to be the exclusive developer and operator of the Cheesecake factory® restaurants in Mexico and Chile, which also contemplates the option for argentina, Brazil, Colombia and Peru, thus becoming the strategic partner of the prestigious brand in the entire region. the agreement initially contemplates the development of 12 openings between Mexico and Chile in the following eight years with 10-year agreements per restaurant, and a right to extend that period to an additional 10 years. the Cheesecake factory® chain is considered the best seller per unit in its category. the brand focuses on providing customers with top quality products and services. Its operations include 162 restaurants under the the Cheesecake factory® brand in over 35 states of the united states of america operating under a franchise license. 82 2. Bases for presentation a. Adoption of international financial Reporting Standards. as of January 1, 2012, the entity adopted the International financial reporting standards (Ifrs) and the amendments and inter- pretations thereto issued by the International accounting standards Board (IasB) in effect as of December 31, 2012. therefore, it applied Ifrs 1, first-time adoption of International financial reporting standards. these consolidated financial statements have been prepared in accordance with the standards and interpretations issued and enacted at the date of their issuance. - Transition to IFRS the consolidated financial statements at December 31, 2011 were the last statements prepared in accordance with Mexi- can financial reporting standards (Mfrs). those reports differ in certain areas in relation to the Ifrs. In preparing the consolidated financial statements at December 31, 2012 and 2011 and for the years ended on those dates, the entity’s Management has changed certain methods of accounting presentation and valuation applied under the Mfrs accounting standards to comply with the Ifrs. the comparative figures at December 31, 2011 and for the year ended on that date were modified to reflect adoption of said standards. the entity’s date of transition, which is defined as the beginning of the earliest period for which the entity is presenting comparative information, is January 1, 2011. (“date of transition”) the reconciliations and descriptions of the effects of transition from Mfrs to Ifrs on the statements of financial position, of income and of other comprehensive income are explained in note 32. b. Bases for presentation the entity’s consolidated financial statements have been prepared on the historical cost basis, except for certain financial instru- ments that are valued at fair value, as explained in further detail in the section on accounting policies. i. historical cost the historical cost is generally based on the fair value of the consideration paid in exchange for assets. ii. Fair value the fair value is defined as the price to be received from the sale of an asset, or to be paid on the transfer of a liability in an orderly transaction between participants of the market at valuation date. 83 c. Bases for consolidation of the financial statements the consolidated financial statements include those of the entity and the subsidiaries over which it holds control. Control is obtained when the entity has the power to govern the financial and operating policies of an entity in order to benefit from its operations. the shareholding in its capital stock is as follows: Subsidiary and/or associate operations 2012 2011 Date of transition Shareholding percentage (%) Panadería y alimentos para food service Distribution of alsea brand foods Café sirena, s. de r.L de C.v. operadora de franquicias alsea, s.a. de C.v. operadora y Procesadora de Productos de Panificación s.a. de C.v. Gastrosur, s.a. de C.v. fast food sudamericana, s.a. fast food Chile, s.a. starbucks Coffee argentina, s.r.L Dominalco, s.a. servicios Múltiples empresariales aCD s.a. de C.v. sofoM e.n.r asian Bistro Colombia, s.a.s asian Bistro argentina s.r.L. operadora alsea en Colombia, s.a. asian food Ltda. Grupo Calpik, s.a.P.I. de C.v. especialista en restaurantes de Comida estilo asiática, s.a. de C.v. Distribuidora e Importadora alsea, s.a. de C.v. Italcafe, s.a. de C.v. operator of the starbucks brand in Mexico operator of the Burger King brand in Mexico operator of the Domino’s Pizza brand in Mexico operator of the Chili’s Grill & Bar brand in Mexico operator of the Burger King brand in argentina operator of the Burger King brand in Chile operator of the starbucks brand in argentina operator of the Domino’s Pizza brand in Colombia operator of factoring and financial Leasing in Mexico operator of the P.f. Chang’s brand in Colombia operator of the P.f. Chang’s brand in argentina operator of the Burger King brand in Colombia operator of the P.f. Chang’s brand in Chile operator of the California Pizza Kitchen brand in Mexico operator of the P.f. Chang’s and Pei Wei brands in Mexico Distributor of foods and production materials for the alsea and related brands operator of Italianni’s brand Grupo amigos de san Ángel, s.a. de C.v. operator of Italianni’s brand Grupo amigos de torreón, s.a. de C.v. operator of Italianni’s brand Grupo amigos de Perisur, s.a. de C.v. operator of Italianni’s brand associate: 100.00% 82.00% 89.36% 82.00% 89.36% 82.00% 99.99% 99.99% 99.99% 99.99% 99.99% 99.99% 99.99% 99.99% 99.99% 99.99% 99.99% 99.99% 99.99% 99.99% 99.99% 82.00% 82.00% 82.00% 95.00% 95.00% 95.00% 99.99% 99.99% 99.99% 100.00% 100.00% 100.00% 100.00% - - 95.00% 95.00% 95.00% 100.00% 100.00% - 99.99% 65.00% 65.00% 99.99% 99.99% 99.99% 99.99% 99.99% 99.99% 100.00% 89.77% 93.86% 94.88% - - - - - - - - starbucks Coffee Chile, s.a. (1) operator of the starbucks brand in Chile 18.00% 18.00% 18.00% (1) the investment in shares of associate company was valued through the equity method (see note 11). 84 the balances and transactions between the consolidated entities have been eliminated. the results of subsidiaries acquired in the year are included in the consolidated statements of comprehensive income and other comprehensive income as of the date of acquisition. the non-controlling interest in subsidiaries is identified separately from the entity’s investments in them. the non-controlling interests may be initially value either at their fair value or at the proportional equity of non-controlling interests on the fair value of the identifiable net assets of an acquired entity. the selection of the valuation base is done individually for each op- eration. after the acquisition takes place, the book value of the controlling interests represents the amount of those interests upon initial recognition, plus the portion of subsequent non-controlling interests of the statement of changes in stockholders’ equity. the comprehensive income is attributable to non-controlling interests, even if it results in a deficit. i. Subsidiaries - subsidiaries are all entities (including special purpose entities sPes) over which the entity has the power to govern the operating and financial policies, generally as a result of holding more than half of their voting rights. the existence and effects of potential voting rights that can be presently exercised or are convertible, are considered when evaluating whether or not the entity controls the other entity. the subsidiaries consolidate as from the date on which control thereof is transferred to the entity, and they stop consolidating as from the date on which said control is lost. In accordance with the previous standards Interpretations Committee (sIC) sIC 12, sPes are deemed to consolidate when the substance of the relationship between the entity and the sPes indicate that they are controlled by the entity. the accounting policies of the subsidiaries have been modified to the extent necessary to ensure consistency with the policies adopted by the entity. ii. Associates - associates are all entities over which the entity exercises significant influence but not control. Generally speaking, those are entities over which shareholding is between 20% and 50% of the voting rights. Investments in as- sociates are initially recorded at historical cost and subsequently through the equity method. the entity’s investment in associates includes goodwill (net of accrued impairment loss, if any) identified at the time of acquisition. Changes in the Entity’s equity in existing subsidiaries the changes in investments in the entity’s subsidiaries that do not give rise to loss of control are recorded as stockholders’ equity transactions. the book value of the entity’s investments and non-controlling interests is adjusted to reflect the changes in invest- ments in subsidiaries. any differences between the amount for which non-controlling interests are adjusted and the fair value of the consideration paid or received are recorded directly in capital and are attributed to the entity’s owners. When the entity losses control over a subsidiary, the related gain or loss on disposal is calculated as the difference between (i) the sum of the fair value of the consideration received and the fair value of any interest retained and (ii) the prior book value of assets (including goodwill) and the subsidiary’s liabilities and any non-controlling interest. amounts previously recorded under other comprehensive income related to the subsidiary are recorded in the same manner as disposals of relevant assets and liabilities (i.e. they are reclassified to income or are directly transferred to retained earnings). the fair value of any investments retained in the former subsidiary at the date of control loss is considered the fair value of initial recognition for subsequent accounting treatment, as established in Ias 39, Financial Instruments: Recognition and Measurement, or, when applicable, the cost of initial recognition of an investment in an associate or an entity under joint control. 85 3. Summary of the main accounting policies the enclosed accompanying consolidated financial statements comply with the Ifrs issued by the IasB. Preparation of these consolidated financial statements requires the entity’s Management to prepare certain estimates and use certain assumptions to value different consolidated financial statement line items and to make the necessary disclosures. However, actual results could differ from those estimates. after applying its professional judgment, the entity’s Management considers that the estimates and assumptions used were appropriate under the circumstances (see note 4). the main accounting policies followed by the entity are described below: a. Reclassifications the consolidated financial statements for the year ended on December 31, 2011 have been reclassified under certain captions to adjust their presentation to that for 2012. b. financial instruments i) financial assets Initial recognition the financial assets covered by Ias 39 are classified as financial assets at fair value with changes in income, loans and accounts receivable, investments held to maturity, financial investments available for sale, or as derivative instruments designated as hedging instruments in an effective hedge, as the case may be. the entity determines the classification of financial assets at the time of their initial recognition. all financial assets are initially recognized at their fair value plus, in the case of financial assets not accounted for at fair value with changes in income, the transaction costs that are directly attributable. fixed asset purchases or sales that require delivering the related assets in a period of time specified by a standard or market convention (conventional purchases-sales or regular way trades) are recognized at the date of the purchase-sale, i.e., the date on which the entity agrees to purchase or sell the asset. after their initial recognition, financial assets or liabilities are valued at each balance sheet date according to their clas- sification, either as assets measured at fair value or at amortized cost. Subsequent measurement Loans and accounts receivable are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. after their initial recognition, those financial assets are measured at amortized cost using the effective interest method, less any impairment in value. the amortized cost is calculated considering any discounts or premiums on acquisition, and any commissions or costs that are an integral part of the effective interest rate. amortization of the effective interest rate is recognized in the consolidated statements of income as financial income. any losses resulting from impairment in value are recognized in the consolidated statements of income as part of the financial cost. Cancellation of accounts a financial asset (or, if applicable, part of a financial asset or part of a group of similar financial assets) is canceled from the accounts when: a) the contractual rights to receive cash flows generated by the asset have expired; 86 b) the contractual rights over cash flows generated by the asset have been transferred, or an obligation to pay a third party the entirety of such cash flows without a significant delay through a pass through arrangement has been assumed, and i. all risks and benefits inherent to ownership of the asset have been substantially transferred; or ii. all risks and benefits inherent to ownership of the assets have not been transferred or retained substantially, but control thereof has been transferred. When the contractual rights to receive cash flows generated by an asset have been transferred, or a transfer agreement has been signed, but not all risks and benefits inherent to ownership of the asset have been substantially transferred or retained, nor has control thereof been transferred, the asset must continue to be recognized to the degree of the continued involvement of the entity in regard to the asset. In that case, the entity must also recognize the related liability. the transferred asset and related liability must be measured in a way that reflects the rights and responsibilities retained by the entity. Continuous involvement that takes on the form of a guaranty over the transferred asset must be measured at the lower of the original book value of the asset and the maximum amount of the consideration that the entity is required to return. impairment in the value of financial assets at the close of each period being reported, the entity evaluates whether or not there is objective evidence that the value of a financial asset or a group of financial assets has deteriorated. the value of a financial asset or group of financial assets is considered to have been impaired if, and only if, there is objective evidence of impairment in said value resulting from one or more events occurring after initial recognition of said assets (an “event that causes an impairment loss”), and when the impairment causing event has an effect on estimated future cash flows arising from the financial asset or group thereof and said effect can be reasonably estimated. evidence of impairment in value could include, among others, signs such as debtors or a group of debtors experiencing significant financial difficulties, default or late payment of amounts owed on the capital or interest, the probability of entities filing for bankruptcy or adopting another form of financial reorganization, or observable data indicating a measurable decrease in expected future cash flows, as well as adverse changes in the status of late pay- ments, or in economic conditions correlated to default. In the case of financial assets accounted for at amortized cost, the entity first evaluates whether or not there is objective evi- dence of impairment in their value, individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the entity determines that there is no objective evidence of impairment in the value of a financial asset evaluated individually, irrespective of its materiality, it includes said asset in a group of financial as- sets with similar credit risk features, and it evaluates them collectively to determine the existence of impairment in their value. assets that are evaluated individually to determine the existence of impairment in their value, and for which an impairment loss has been or continues to be recognized, are not included in the evaluation of impairment in value collectively. If there is objective evidence that there has been a loss due to impairment in value, the amount of the loss is measured as the difference between the book value of the asset and the present value of estimated future cash flows (not including expected future loan losses that have not yet been incurred). the present value of estimated future cash flows is discounted at the original effective interest rate of the financial assets. If a loan is subject to a variable interest rate, the discount rate used to measure impairment losses is the present effective interest rate. the book value of the asset is reduced through a provision account and the amount of the loss is recognized in income for the period. Interest earned continues to accrue on the reduced book value of the asset, using the interest rate for discounting future cash flows from the result of measuring the impairment loss in value. Interest earned is recorded as financial income in income for the year. the loans and the respective provision are canceled when there are no realistic expectations of recover- ing the amount in the future and all existing guarantees have been exercised or transferred to the entity. If in a subsequent year the estimated amount of the impairment loss increases or decreases due to an event occurring after the impairment is 87 recognized, the loss for impairment in value recognized previously is increased or reduced adjusting the reserve account. If an item attributed to the loss is recovered subsequently, the recovery is credited in the account in which the reserve was recorded under operating expenses for the period. (note 17) ii) financial liabilities Initial recognition and measurement the financial liabilities covered by Ias 39 are classified as financial liabilities at fair value with changes in income, loans and accounts payable, or as derivative instruments designated as hedging instruments in an effective hedge, as the case may be. the entity determines the classification of financial liabilities at the time of their initial recognition. all financial liabilities are initially recognized at their fair value plus, in the case of loans and accounts payable accounted for at amortized cost, the transaction costs that are directly attributable. the entity’s financial liabilities include accounts payable to suppliers, other accounts payable, and short and long-term debts, and they are accounted for as financial liabilities measured at their amortized cost. Subsequent measurement after their initial recognition, accounts payable and debts are measured at amortized cost using the effective interest method. Gains and losses are recognized in income for the period when liabilities are canceled by the amortization process, using the effective interest method. the amortized cost is calculated considering any discounts or premiums on acquisition and any commissions or costs that are an integral part of the effective interest rate. amortization of the effective interest rate is recognized in the consolidated statements of income as financial cost. Cancellation of accounts a financial liability is canceled when an obligation specified in the respective agreement has been paid or canceled, or when it is due. When an existing financial liability is replaced by another liability from the same lender under substantially different conditions, or if the conditions of an existing liability change substantially, said change is treated as a cancellation of the original liability and a new liability is recognized, and the difference in the respective book values is recognized in the consolidated statements of income. iii) financial instrument compensation financial assets and financial liabilities are compensated by reporting the net amount in the consolidated statements of financial position, only if there is a legal right of offset the amounts recognized and if there is an intention to settle the net amount or to realize said assets and cancel the liabilities simultaneously. b. Derivative financial instruments alsea uses derivative financial instruments (DfI) known as forwards or swaps, in order to a) mitigate present and future risks of adverse fluctuations in exchange and interest rates, b) avoid distracting resources from its operations and the expansion plan, and c) have certainty over its future flows, which also helps to maintain a cost of debt strategy. DfIs used are only held for economic hedge purposes, through which the entity agrees to trade cash flows at future fixed dates, at the nominal or reference value, and they are valued at fair value. 88 entity must define monthly the price levels at which the Corporate treasury must operate the different derivative financial instruments. under no circumstances should amounts above the monthly resource requirements be operated, thus ensuring that there is always a position at risk to hedge and that the derivative instruments are not held for speculation. Given the variety of derivative instruments available to cover risks, Management is empowered to define the operations for which said instruments are contracted, provided they are held for economic hedging and not for speculative purposes. operations with DfI are carried out under a master agreement on an IsDa (International swap Dealers association) form, which must be standardized and duly formalized by the legal representatives of the entity and the financial institutions. In certain cases, the entity and the financial institutions have signed an agreement enclosed to the IsDa master agreement, which stipulates conditions that require them to offer guarantees for margin calls in the event that the mark-to-market ex- ceeds certain established credit limits. the entity has the policy of monitoring the volume of operations contracted with each institution, in order to avoid margin calls as much as possible and diversify the risk for the counterparty. Derivative financial instruments are contracted in the local market under the over the counter (otC) mode. following are the financial entities that are eligible to close operations related to the entity’s risk management: BBva Bancomer s.a., Banco nacional de México, s. a., Banco santander, s. a., Barclays Bank México s. a., Deutsche Bank aG, Goldman, sachs Paris Inc. etcie., HsBC México s. a., Merril Lynch Capital services Inc., Morgan stanley Capital services Inc., and uBs aG. the entity may choose other entities, provided that they are regulated and authorized to carry out that type of operations. Valuation - DfIs are initially recorded at fair value, which is represented by the transaction cost. after their initial recognition, DfIs are valued at market value at each balance sheet date and any changes in value are recognized in the statement of income, except when said derivatives have been formally designated and they meet the requirements to be considered as hedging instru- ments associated to a hedge. In the case of cash flow hedges, the effective portion of gains or losses of the hedging instrument are recognized under other items of comprehensive gain or loss, and they are reclassified to income in the same period or periods in which the projected hedged transaction affects them. the ineffective portions and any exclusion are immediately recorded in income for the year. Identified risks are those related to variations in exchange rate and interest rate. Derivative instruments are contracted under entity policies and no risks are expected to occur that differ from the purpose for which those instruments are contracted. c. Embedded derivatives the entity reviews all signed contracts to identify the existence of embedded derivatives. Identified embedded derivatives are subject to evaluation to determine whether or not they comply with the provisions of the applicable regulations; if so, they are separated from the host contract and are valued at fair value. If an embedded derivative is classified for trade, the apprecia- tion or depreciation of fair value is recognized in income for the period. Implicit derivatives designated for hedging are recorded in changes in valuation based on the type of hedging: (1) when they relate to fair value, fluctuations in the embedded derivative and in the hedged item are valued at fair value and are recorded in income; (2) when they relate to cash flow, the effective portion of the embedded derivative is temporarily recorded under comprehensive income, and it is recycled to income when the hedged item affects them. the ineffective portion is immediately recorded in income. 89 d. inventories and cost of sales Inventories are valued at cost or at net realizable value, the lower of the two. Costs, including a portion of fixed and variable indirect costs, are assigned to inventories through the most appropriate method for the specific type of inventory. In assigning the unit cost of inventories, the entity uses the average cost method (aC). the sales cost represents the cost of inventories at the time of sale, increased, when applicable, by reductions in the net realization value of inventories during the year. the entity records the necessary estimations to recognize reductions in the value of its inventories due to impairment, obso- lescence, slow movement and other causes that indicate that utilization or realization of the items comprising the inventories will be below the recorded value. (note 8) e. Business combinations Business acquisitions are accounted using the purchase method. the consideration transferred in a business combination is measured at fair value, which is calculated as the sum of fair values of the assets transferred by the entity, less liabilities incurred by the entity with the former owners of the purchased company and the interests in capital issued by the entity in exchange for control over the acquired company at acquisition date. Costs related to an acquisition are generally recorded in the consolidated statements of income as they are incurred. at the date of acquisition, identifiable assets acquired and assumed liabilities are recognized at fair value, with the exception of: - Deferred tax assets or liabilities and assets and liabilities related to employee benefits recognized and measured in ac- cordance with Ias 12, Income Taxes, and Ias 19, employee Benefits, respectively. - Liabilities or equity securities related to payment agreements based on shares of the purchased company or payment agreements based on shares of the entity entered into to replace payment agreements based on shares of the acquired company are measured in accordance with Ifrs 2, Share Based Payments, at the date of acquisition; and - assets (or a group of assets for disposal) classified as held for sale in accordance with Ifrs 5, non-current Assets held for Sale and Discontinued operations, that are measured in accordance with that standard. Goodwill is measured as the surplus of the amount of the transferred consideration, the amount of any non-controlling inter- est of the acquired company, and the fair value of previous shareholding of the purchaser in the acquired company (if any) over the net amount of identifiable acquired assets and assumed liabilities at the date of acquisition. If after a revaluation, the net amount of identifiable acquired assets and assumed liabilities at the date of acquisition exceeds the consideration transferred, the amount of any non-controlling interest in the acquired company and the fair value of previous shareholding of the purchaser in the acquired company (if any), the surplus is recognized immediately in the consolidated statements of income as a gain on a good purchase opportunity. non-controlling interests that represent current shareholdings and that offer their holders a proportional interest in the net assets of the entity in the event of liquidation can be initially measured either at fair value or at the value of the proportional interest of the non-controlling interest in the amounts recognized for net identifiable assets of the acquired company. the measurement option is based on each transaction. other types of non-controlling interests are measured at fair value, or, when applicable, based on the provisions of another Ifrs. When the consideration transferred by the entity in a business combination includes assets or liabilities resulting from a contingent consideration agreement, the contingent consideration is measured at fair value at the date of acquisition and it is included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration qualifying as adjustments for the measurement period are retrospectively adjusted along with the respective adjustments vs. goodwill. adjustments in measurement period are adjustments that arise from the additional information 90 obtained in the measurement period (which cannot exceed one year as from the acquisition date) in relation to existing facts and circumstances at acquisition date. the accounting treatment for changes in fair value of the contingent consideration that do not qualify as adjustments of the measurement period depend on the manner in which the contingent consideration is classified. the contingent consider- ation classified as capital is not remeasured at subsequent reporting dates and its subsequent liquidation is accounted for under capital. a contingent consideration classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with Ias 39 or Ias 37, Provisions, Contingent Liabilities and Contingent Assets, as appropriate, recognizing the respective gain or loss in the consolidated statements of income. When a business combination is developed in stages, the entity’s previous shareholding in the acquired company is remea- sured at fair value at acquisition date (i.e., the date on which the entity obtains control), and the resulting gain or loss, if any, is recognized in the consolidated statements of income. amounts resulting from equity in the acquired company prior to the date of acquisition, which have been previously recognized in other comprehensive income, are reclassified to the consolidated statements of income. If the initial accounting treatment of a business combination is incomplete at the end of the reporting period in which the combination takes place, the entity reports the provisional amounts of the items for which book recording is incomplete. those provisional amounts are adjusted in the measurement period (see above), or instead additional assets or liabilities are recognized to reflect new information obtained on the existing facts and circumstances at the acquisition date and which, had it been known, would have affected the amounts recognized at that date. f. Store equipment, leasehold improvements and property store equipment, leasehold improvements and property are recorded at acquisition cost. Depreciation in store equipment, leasehold improvements and property is calculated by the straight line method, based on the useful lives estimated by the entity’s Management. annual depreciation rates of the main groups of assets is as follows: store equipment transportation equipment Production equipment Buildings Leasehold improvements Computer equipment office furniture and equipment Rates 5% to 30% 25% 10% to 20% 5% 7% to 20% 30% 10% any significant components of store equipment, leasehold improvements and property that must be replaced periodically are canceled by the entity and the new component is recognized with its respective useful life and depreciation. Likewise, when major maintenance is performed, the cost is recognized as a replacement of a component to the extent that all recognition requirements are met. all other routine repair and maintenance costs are recorded as an expense in income for the period as they are incurred. 91 financing costs directly attributable to the acquisition, construction or production of an asset that necessarily requires a sub- stantial period of time to be in use condition or ready for sale are capitalized as part of the cost of the respective asset. all other financing costs are accounted for as expenses for the period in which they are incurred. financing costs include interest and other costs incurred in relation to loan agreements signed by the entity. the entity does not have the policy of selling fixed assets at the end of their useful lives, since in order to protect its image and the alsea brands, they are destructed an in some cases sold as waste. use or lease of equipment outside the provisions of franchise agreements is subject to sanctions. additionally, given the high costs of maintenance or storage required, those assets are not used as spare parts for other brand stores. for the years ended December 31, 2012 and 2011, the entity has not capitalized financing costs under the value of assets, since its lacks ratable assets or financing for purchase of construction of assets. g. intangible assets. Goodwill represents future economic benefits arising from business acquisitions that are not individually identifiable or rec- ognized separately Goodwill is subject to impairment tests at least once a year. In order to test impairment, goodwill is assigned to each of the entity’s cash generating units (or groups of cash generating units) expected to benefit from the synergies of the combination. other intangible assets represent payments made to third parties for rights to use brands through which the entity operates its establishments under the respective franchise or association agreements. amortization is calculated by the straight line method based on the use period of each brand, including renewals considered certain for the next 10 to 20 years. the terms of brand rights are as follows: Brands Domino’s Pizza starbucks Coffee Burger King Chili’s Grill & Bar California Pizza Kitchen P.f. Chang’s China Bistro Pei Wei Italianni´s Country Mexico Colombia Mexico (1) argentina Mexico, argentina, Chile and Colombia Mexico Mexico Mexico, argentina, Chile and Colombia (3) Mexico (4) Mexico (2) Year of expiration 2025 2016 2027 2027 Depending on opening dates 2015 2017 2019 2021 2021 2031 (1) (2) (3) (4) Contemplates a five-year extension to the rights for developing the brand resulting from the agreements signed in 2011. the term for each store under this brand is 20 years as of the opening date, with the right to a 10 year extension (note 1e). the term for each store under this brand is 10 years as of the opening date, with the right to an additional 10 year extension. term of 10 years with the right to an extension. 92 the entity has obligations to do and refrain from doing under the aforementioned agreements, the most important of which are carrying out capital investments and opening establishments. at December 31, 2012 and 2011, and at January 1, 2011, those obligations have been met. amortization of intangible assets is included in the depreciation and amortization accounts in the consolidated statements of income. h. Leases Determination of whether an agreement constitutes or includes a lease is based on the essence of the agreement at the date on which it is signed, if compliance of said agreement depends on the use of one or more specific assets, or if the agreement awards the right to use said assets, even when said right is not explicitly specified in the agreement. financial leases whereby substantially all risks and benefits inherent to ownership of the leased good are transferred to the entity are capitalized at the start of the lease period, either on the fair value of the leased property, or on the present value of the minimum lease payments, the lower of the two. Lease payments are distributed between the financial charges and the reduction of debt so that a constant ratio of interest over left-over debt balance can be determined. financial charges are recognized as financial costs in the consolidated statements of income. Leased assets are depreciated over their useful lives. However, if there is no reasonable certainty that the entity will obtain ownership at the end of the lease term, the asset is depreciated over its estimated useful life or over the lease term, the lower of the two. operating lease payments are recognized as operating expenses using the straight line method over the lease term, except when another systematic apportionment base is more appropriate for showing the pattern of lease benefits for the user. Contingent leases are recognized as expenses in the periods in which they are incurred. (note 13) i. Advance payments advance payments include advances for purchase of inventories, property, store equipment, leasehold improvements and services that are received in the twelve months after the date of the statement on financial position and over the course of regular operations. j. impairment in the recovery value of long-lived assets, equipment, leasehold improvements, properties, goodwill and other intangible assets at the end of the year being reported, the entity periodically evaluates the book values of its long-lived assets, store equip- ment, leasehold improvements, properties, goodwill and other intangible assets to determine whether or not those values exceed their recoverable value. the recoverable value represents the value of potential net income that is reasonably expected to be incurred as a result of using or selling said assets. If it is determined that the book values exceed the recoverable value, the entity records the necessary allowances to reduce them to their recoverable value. When assets qualify as held for sale, they are shown in the consolidated financial statements at their book value or fair value less selling expenses, the lower of the two. assets and liabilities of a group classified as held for sale are shown separately in the consolidated statements of financial position. k. Provisions Provisions are recorded when the entity has a present obligation (be it legal or assumed) as a result of a past event, and it is probable that the entity will have to settle the obligation and it is possible to prepare a reliable estimation of the total amount. 93 the amount recorded as a provision is the best estimation of the amount required to settle the present obligation at the end of the period being reported, considering the risks and uncertainties surrounding the obligation. When a provision is valued using the cash flows estimated to settle the present obligation, the book value is shown at the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered by a third party, an ac- count receivable is recorded as an asset provided that it is virtually certain that the payment will be received and the amount of the account receivable can be reliably valued. Provisions are classified as current or non-current based on the estimated period of time estimated for addressing the obliga- tions covered. l. Employee benefits Direct employee benefits are valued in proportion to the services rendered, considering current salaries, and they are recog- nized under liabilities as they accrue. this item includes mainly esPs payable, paid absences, such as vacations and vacation premium, and incentives. seniority premiums to which employees are entitled are recognized in income for each year based on actuarial calculations prepared under the projected unit credit method, considering projected balances or the projected cost of benefits. the actuarial gain or losses are recognized directly in income for the year as they are incurred. other compensation to which personnel is entitled is recognized in income for the year in which it accrues. esPs is recorded in income for the year in which it accrues and it is shown under other income and expenses in the consoli- dated statements of income. esPs is determined based on the tax profit in accordance with section I of article 10 of the Income tax Law. m. income taxes.- the expense for income taxes represents the sum of income taxes incurred and deferred income taxes. - Incurred income taxes In Mexico, income tax (It) and flat tax (Ietu) are recorded in income in the years in which they are incurred. In Chile, in april 2010, the Chilean government announced the 2010-2013 financing plan for the reconstruction of Chile after the february 2010 earthquake. said financing plan includes a temporary increase in the first Category Interest rate of the historical rate of 17% to 20% in 2011, 18.5% in 2012 and reduces it back to 17% in 2013. the change in the first Category tax was pronounced in July 2010. In Colombia, income tax is determined on the basis of tax income. the percentage for determining presumptive income is 3% of the liquid equity of the preceding year. In argentina, i.- Income taxes, the entity applies the deferred tax method to recognize the accounting effect of taxes on profits . ii.- taxes on minimum presumptive income (tMPI), the entity determines tMPI applying the current 1% rate to computable assets at each year end closing. iii.- tax on personal goods belonging to individuals or business entities resident abroad, it is determined applying the 0.5% factor to the proportional equity value at the yearend closing and its considered a lump sum payment. 94 - Deferred income taxes In recognizing deferred taxes, the entity determines whether or not, based on its financial projections, it will incur It or flat tax and it recognizes deferred tax on the tax payable in the future. Deferred income taxes are recorded based on tem- porary differences between the book value of assets and liabilities included in the consolidated financial statements and the respective tax bases used to determine the tax result, applying the respective rates to said differences and including any benefits from unamortized tax losses and tax credits. a deferred taxes on profits liability is recognized usually for all tax temporary differences . a deferred tax asset is recognized for all deductible temporary differences to the extent that it is probable that the entity will accrue future tax profits against which to apply those deductible temporary differences . those assets and liabilities are not recognized if the temporary differences arise from the goodwill or from initial recogni- tion (other than that of the business combination) of other assets and liabilities in an operation not affecting the book or tax result. a deferred tax liability is recognized for taxable temporary differences associated to investments in subsidiaries and associates, and interests in joint businesses, except when the entity is capable of controlling reversal of the temporary differences and it is probable that the timing difference will not be reversed in a foreseeable future. Deferred tax assets arising from temporary differences associated to said investments and interests are recognized only to the extent that it is probable for sufficient future tax profits to arise against which to offset those temporary differences and they are expected be reversed in the near future. the book value of a deferred tax asset must undergo a review at the end of each period being reported and it must be reduced in proportion to the likelihood of an insufficiency in taxable income with which to recover all or part of the asset. Deferred tax assets and liabilities are valued using the tax rates expected to be applied in the period in which the liability is settled or the asset is sold, based on the rates (and tax laws) approved or substantially approved at the end of the period being reported. valuation of deferred tax assets and liabilities reflects the tax consequences that would derive from the manner in which the entity expects to recover or settle the book value of its assets and liabilities at the end of the period being reported. Deferred tax assets and deferred tax liabilities are compensated when there is a legal right to offset short-term assets vs. short-term liabilities and when they relate to the same taxes on profits and the entity has the intention of liquidating its assets and liabilities on net bases. - Incurred and deferred taxes taxes incurred and deferred are recorded in income as income or expenses, except when they relate to items that are recorded in a caption other than income, either under other comprehensive income or directly under stockholders’ equity, in which case the tax is also recognized in a caption other than income; or when they arise from initial recognition of a business combination. In the case of a business combination, the tax effect is included in the recognition of the business combination. n. Revenue recognition Income generated from common operations is recorded to the extent that future economic benefits are likely to flow into the entity and income can be measured reliably, irrespective of the moment in which payment is made. Income is measured based on the fair value of the consideration received or receivable, bearing in mind the payment conditions specified in the respective agreement, without including taxes or tariffs. Sale of goods Income from the sale of goods and beverages is recognized when they are delivered to and/or consumed by customers. 95 Provision of services Income is recorded based on the percentage of completion. Percentage of completion is determined when the services have been rendered and accepted by customers. interest earned for all financial instruments measured at amortized cost, interest earned or paid is recorded using the effective interest method, which is the interest rate used to discount future payment or collection flows in cash over the expected life of the financial instrument, or a lesser period, as the case may be, with respect to the net book amount of the financial asset or liability. Interest earned is included in the interest income line in the consolidated statements of income. Dividends Income is recognized when the entity’s right to collect dividends materializes. Royalties royalty income is recorded as it is incurred, based on a fixed percentage of sub-franchise sales. o. foreign currency transactions. In order to consolidate the financial statements of foreign operations carried out independently from the entity (located in argentina, Chile and Colombia) and that comprise 25% and 23% of consolidated net income and 16% and 17% of the total consolidated assets at December 31, 2012 and 2011, respectively, companies apply the policies followed by the entity. the financial statements of consolidating foreign operations are converted to the reporting currency by initially identifying whether or not the functional and recording currency of foreign operations are different, and subsequently converting the functional currency to the reporting currency. In order to convert the financial statements of subsidiaries resident abroad from the functional currency to the reporting cur- rency at the reporting date, the following steps are carried out: - assets and liabilities, both monetary and non-monetary, are converted at the closing exchange rates in effect at the reporting date of each consolidated statement of financial position. - - Income, cost and expense items of the consolidated statements of income are converted at the average exchange rates for the period, unless those exchange rates will fluctuate significantly over the year, in which case operations are con- verted at the exchange rates prevailing at the date on which the related operations were carried out. stockholders’ equity is converted at historical exchange rates, i.e., at the rates in effect on the date on which capital contributions were made or earnings were incurred. - all conversion differences are recognized as a separate component under stockholders’ equity and form part of other comprehensive income items. 4. Critical accounting judgments and key sources for estimating uncertainties In applying the entity’s accounting policies, which are described in note 3, Management is required to make certain judgments, estimates and assumptions on the amounts of the book value of assets and liabilities included in the consolidated financial state- ments. the related estimates and assumptions are based on experience and other factors considered to be relevant. actual results could differ materially from those estimates. estimations and assumptions are reviewed on a regular basis. Changes to the accounting estimations are recognized in the period in which changes are made, or in future periods if the changes affect the current period and other subsequent periods. 96 following is an analysis of the basic assumptions regarding the future and other key sources of uncertainty contemplated in the year-end estimations for the period being reported, which involve a significant risk of giving rise to important adjustments in the book value of assets and liabilities for the following year. impairment of long-lived assets the entity annually evaluates whether or not there is indication of impairment in long-lived assets and it calculates the recoverable amount when said indication is present. Impairment occurs when the net book value of a long-lived asset exceeds its recoverable amount, which is the higher of the fair value of the asset less selling costs and the in-use book value. Calculation of the in-use value is based on the discounted cash flow model, using the entity’s projections of its operating results for the near future. the recoverable amount of long-lived assets is subject to uncertainties inherent to the preparation of projections and the discount rate used for the calculation. useful life of store equipment, leasehold improvements and properties fixed assets acquired separately are recognized at cost less accrued amortization and accrued losses for impairment. Depreciation is calculated based the straight-line method over the estimated useful life of assets. the estimated useful life and the depreciation method are reviewed at each year-end closing, and the effect of any changes in the estimation recorded is recognized prospectively. income tax valuation the entity recognizes the net future tax benefit related to deferred income tax assets depending on the likelihood of temporary differences reversing in the foreseeable future. evaluating the recoverability of deferred income tax assets requires the entity to prepare significant estimates related to the possibility of incurring future taxable income. future taxable income estimates are based on projected cash flows from the entity’s operations and the application of the existing tax laws in Mexico. the entity’s capacity to realize the net deferred tax assets recorded at reporting date could be negatively affected to the extent that future cash flows and taxable income differ significantly from the entity’s estimates. additionally, future changes in Mexico’s tax laws could limit the capacity to obtain tax deductions in future periods. intangible assets the period and amortization method of an intangible asset with a defined life is reviewed at least at the date of the consolidated statements of financial position. Changes to the expected useful life or the expected pattern of consumption of future economic benefits are made changing the period or amortization method, as the case may be, and are treated as changes in the accounting estimations. amortization expenses of an intangible asset with a defined useful life are recorded in income under the expense caption in accordance with the function of the intangible asset. Contingencies Given their nature, contingencies are only resolved when one or more future events occur or stop occurring. the evaluation of contingencies inherently includes the use of significant criteria and estimations of the result of future events. 5. non-monetary transactions In the year, the entity carried out the following financial activities and non-monetary investments that are not shown in the con- solidated statements of cash flows: as mentioned in note 24, in april 2012, alsea declared share dividends of $308,902 through the capitalization of that amount in the after-tax earnings account. 97 6. Cash and cash equivalents for the purpose of the consolidated statements of cash flows, the cash and cash equivalents caption includes cash, banks and investments in money market instruments. the cash and cash equivalents balance included in the consolidated statements of financial position and the consolidated statements of cash flows at December 31, 2012 and 2011, and at January 1, 2011 is com- prised as follows: 2012 2011 Date of transition Cash Investments payable on demand with original maturities of under three months total cash and cash equivalents $ $ 329,841 $ 316,938 $ 602,753 422,441 932,594 $ 739,379 $ 284,306 355,897 640,203 the entity keeps its cash and cash equivalents with accepted financial entities and it has historically experienced no losses due to credit risk concentration. 7. Customers the accounts receivable from customers disclosed in the consolidated statements of financial position are classified as loans and accounts receivable and therefore they are valued at their amortized cost. at December 31, 2012 and 2011, and at January 1, 2011, the customer balance is comprised as follows: franchises Credit card other Total portfolio 2012 2011 2010 164,053 101,310 100,442 365,805 116,460 48,800 63,359 228,619 106,939 20,229 83,861 211,029 the average credit term for the sale of foods, beverages, containers, packagings, royalties and other items to owners of sub-fran- chises is from eight to 14 days. no interest charges are made on accounts receivable to customers in the first 14 days after billing is issued. after that date, the entity charges the tIIe rate+5 points x2 % a year on unpaid balances. the entity has generally not recognized an estimation for doubtful accounts because customers are governed by master franchise agreements whereby they are required to follow the conditions stipulated in those agreements in relation to services and supply of production materials. following is the seniority of accounts receivable outstanding but no deemed irrecoverable: 2012 2011 Date of transition 60-90 days More than 90-120 days total $ $ 7,118 $ 18,484 $ 55,844 49,410 62,962 $ 67,894 $ average seniority (days) 93 51 43,301 42,765 86,066 67 98 the estimates shown in the consolidated statements of financial position refer to possible differences between income and accounts receivable from the general public in the regular course of operations of the different brands. estimates recorded mainly for this item total $26,324 in 2012, and $9,269 and $3,805 at December 31 and January 1, 2011, respectively. Credit risk concentration is limited because the customer base is large and independent, and the risk of customers in relation to services and supply of foods is controlled and supported by a service and/or master franchise agreement. 8. inventories at December 31, 2012 and 2011, and at January 1, 2011, inventories are as follows: foods and beverages Containers and packagings other obsolescence allowance total 9. Advance payments 2012 2011 Date of transition $ $ 455,960 $ 336,517 $ 46,265 56,251 (8,082) 39,280 36,203 (8,870) 550,394 $ 403,130 $ 230,983 98,854 30,808 (8,320) 352,325 advance payments were made for the acquisition of: 2012 2011 Date of transition Insurance and other services Inventories Lease of locales total $ $ 50,990 $ 54,044 $ 102,821 30,390 49,826 24,761 184,201 $ 128,631 $ 38,008 31,702 25,523 95,233 10. Current and non-current guarantee deposits Guarantee deposits are comprised as follows: 2012 2011 Date of transition Guarantee deposit acquisition of Italcafé $ - $ 2,262,800 $ Guarantee deposits for non-current leased properties 110,020 86,991 - 78,168 99 11. investment in shares of associated company at December 31, 2012 and 2011, and at January 1, 2011, the investment in shares of associated company is comprised of the entity’s direct equity in the capital stock, as described below: Shareholding (%) Main operations 2012 2011 Date of transition interest in stockholders’ equity starbucks Coffee Chile, s.a. 18% operator of the starbucks brand in Chile $ 40,296 $ 30,394 $ 20,783 Equity in results for the year 2012 2011 starbucks Coffee Chile, s.a. 18% operator of the starbucks brand in Chile $ 12,978 $ 8,805 the entity’s interest in assets and liabilities at December 31, 2012 and 2011, and at January 1, 2011, as well as in income and expenses related to the years ended on December 31, 2012 and 2011 is 18%. total assets, liabilities and stockholders’ equity of the associated company are as shown below: Current assets non-current assets Current liabilities non-current liabilities stockholders’ equity Income Costs 2012 2011 Date of transition $ 207,660 $ 139,152 $ 136,399 99,908 20,287 223,864 94,203 48,014 16,487 168,854 86,442 78,852 34,887 14,945 115,462 2012 2011 $ 536,655 $ 464,555 371,641 322,722 net profit for the year from continued operations 72,100 48,919 100 12. Store equipment, leasehold improvements, property and intangible assets- store equipment, leasehold improvements, property and intangible assets are as follows: Cost Buildings Store equipment Leasehold improvements Transportation equipment Computer equipment Production equipment office furniture and equipment investments Total Balance at January 1, 2011 $ 195,270 $ 1,877,882 $ 2,500,621 $ 124,599 $ 271,668 $ 212,559 $ 99,132 $ 271,164 $ 5,552,895 acquisitions Disposals 11,167 284,870 - (289,272) 467,808 (42,117) 21,362 43,492 361,707 8,289 140,002 1,338,697 (31,338) (11,470) (5,616) (36,218) - (416,031) Balance at December 31, 2011 206,437 1,873,480 2,926,312 114,623 303,690 568,650 acquisitions Business acquisition Disposals 6,956 328,707 - 164,741 (553) (91,043) adjustment for conversion 15 (43,907) 351,879 162,073 (80,501) (99,489) 15,119 2,178 74,444 15,357 (32,361) (20,306) (880) (8,436) 20,726 - (912) - 71,203 14,726 302 (1,751) (1,667) 411,166 6,475,561 108,565 - - 921,123 344,651 (227,428) (12,897) (167,261) Balance at December 31, 2012 $ 212,855 $ 2,231,978 $ 3,260,274 $ 98,679 $ 364,749 $ 588,464 $ 82,813 $ 506,834 $ 7,346,646 Amortization Balance at January 1, 2011 $ 54,639 $ 886,662 $ 1,140,413 $ 85,759 $ 179,742 $ 140,048 $ 71,509 $ - $ 2,558,772 Charge for depreciation 5,404 178,443 257,216 14,073 42,522 299,978 4,592 - 802,228 for the year Disposals Balance at December 31, 2011 Charge for depreciation for the year Business acquisition adjustment for conversion (16) (272,586) (7,291) (26,923) (9,655) (5,202) (36,186) 60,027 10,038 792,519 1,390,338 72,909 212,609 434,824 227,427 212,405 15,913 39,546 19,603 - 3 53,142 (10,852) 57,350 (31,410) 1,636 (484) 7,631 (5,789) - - 39,915 9,449 1,018 (1,371) - - - - - (357,859) 3,003,141 534,381 120,777 (49,903) Disposals (325) (79,006) (54,789) (26,542) (18,496) (1,119) (5,581) - (185,858) Balance at December 31, 2012 $ 69,743 $ 983,230 $ 1,573,894 $ 63,432 $ 235,501 $ 453,308 $ 43,430 $ - $ 3,422,539 net cost Date of transition $ 140,631 $ 991,221 $ 1,360,207 $ 38,840 $ 91,926 $ 72,511 $ 27,623 $ 271,164 $ 2,994,123 Balance at December 31, 2011 $ 146,410 $ 1,080,961 $ 1,535,974 $ 41,714 $ 91,081 $ 133,826 $ 31,288 $ 411,166 $ 3,472,420 Balance at December 31, 2012 $ 143,112 $ 1,248,748 $ 1,686,380 $ 35,247 $ 129,248 $ 135,156 $ 39,383 $ 506,834 $ 3,924,108 Cost Brands Commissions for store opening franchise and use of locales rights Licenses and developments goodwill Total Balance at January 1, 2011 acquisitions Disposals Balance at December 31, 2011 acquisitions Business acquisition adjustment for conversion Disposals $ $ 671,614 $ 328,164 $ 272,000 $ 239,174 $ 206,932 $ 1,717,884 45,859 - 84,753 (2,403) 49,542 (3,114) 62,169 (15,623) - - 242,323 (21,140) 717,473 $ 410,514 $ 318,428 $ 285,720 $ 206,932 $ 1,939,067 67,839 8,330 77,133 67,239 - 220,541 803,447 - (12,725) (12,011) (9,506) (20,090) - (1,376) (6,565) - 89 (4,676) 785,816 1,589,263 - - (26,023) (40,837) Balance at December 31, 2012 $ 1,566,528 $ 386,743 $ 387,620 $ 348,372 $ 992,748 $ 3,682,011 101 Cost Brands expenses locale rights developments goodwill Total franchise other opening and use of Licenses and Amortization Balance at January 1, 2011 amortization (asset registrations) Disposals $ 255,586 $ 247,438 $ 117,669 $ 165,612 $ 16,953 $ 803,258 46,587 (191) 93,606 (1,698) 23,226 (691) 48,026 (1,751) - - 211,445 (4,331) Balance at December 31, 2011 $ 301,982 $ 339,346 $ 140,204 $ 211,887 $ 16,953 $ 1,010,372 amortization (asset registrations) Business acquisition adjustment for conversion Disposals 136,488 8,500 (2,414) (5,608) 46,321 41,928 52,180 - (11,436) (7,703) - (573) (3,144) - 22 (1,752) - - - - 276,917 8,500 (14,401) (18,207) Balance at December 31, 2012 $ 438,948 $ 366,528 $ 178,415 $ 262,337 $ 16,953 $ 1,263,181 net cost Date of transition Balance at December 31, 2011 $ $ 416,028 $ 80,726 $ 154,331 $ 73,562 $ 189,979 $ 914,626 415,491 $ 71,168 $ 178,224 $ 73,833 $ 189,979 $ 928,695 Balance at December 31, 2012 $ 1,127,580 $ 20,215 $ 209,205 $ 86,035 $ 975,795 $ 2,418,830 13. Leases the locales housing the stores of alsea are leased from third parties. In general terms, lease agreements entered into to operate the entity’s establishments are for a term of five to ten years, with fixed payments set in pesos. Lease payments are generally revised annually and they increase on the basis of inflation. as an exception, lease payments for certain establishments are agreed in us dollars, and in some cases, they may include a variable component, which is determined on the basis of net sales of the respective establishment. alsea considers that it depends on no specific lessor and there are no restrictions for the entity as a result of having signed said agreements. some of the entity’s subsidiaries have signed operating leases for utilitarian cars and sundry computer equipment. In the event of breach of any of the straight-lease agreements, the entity is required to settle in advance all its obligations, includ- ing payments and penalties for early termination, and it must immediately return all vehicles to a location specified by the lessor. amounts of lease payments derived from operating lease agreements related to the locales housing the stores of the different alsea brands are as follows: Year 2011 2012 14. Business combinations Amount $ 827,370 1,066,583 the process for the acquisition of Italianni’s concluded in february 2012. the final price was $1,765 million pesos. alsea acquired, 8,168,161 shares comprising 100% of the capital stock of Italcafé, s.a. de C.v., which owns: i.- eight Italianni’s units, as well as the exclusive rights to develop, expand and sub-franchise the Italianni’s brand throughout Mexico, and ii.- 89.7682% of the capital stock of Grupo amigos de san Ángel s.a. de C.v. (“Gasa”), a company that owns 34 Italianni’s units. the purpose of the acquisition is to consolidate the plans for expansion of the Casual Dinning segment. 102 franchise license agreements, other rights and assets assigned to third parties as a result of the transition were paid to the holders of those rights and goods. additionally, the final agreement contemplates the following, among other matters: a) the exclusive operation of the Italianni’s brand restaurants in Mexico for a maximum term of 30 years. b) alsea will pay no royalties, opening fees or commissions for the use of brand or the franchise model. c) there is no obligation to comply with an openings plan. d) the assignment of franchise agreements to existing third parties. e) the power to award new franchises to third parties. f) the rights to distribute all raw materials to the brand’s restaurants. the period for measuring the acquisition concluded in february 2013. following is an analysis of the preliminary assignment of the acquisition cost of fixed assets expressed at fair value at the date of acquisition. item Current assets: store equipment and properties, net Intangible assets, net short-term and long-term debts fair value of acquired net assets amount paid non-controlling interest Goodwill february 2012 173,961 242,241 740,619 (204,063) 952,758 1,765,000 (26,426) 785,816 $ $ as from the acquisition date, Italinanni’s has contributed $742,466 in income and $43,622 in pretax profit for the period to the entity’s earnings. If the combination had occurred at the start of 2012, the consolidated net gain for the period would have been $413,001 and the income from continuous operations would have been $13,652,912. transition costs of $3,234 were recognized in income for the period and are part of cash flows arising from operations recorded in the consolidated statements of cash flows. 103 15. Long-term debts the long-term debt at December 31, 2012 and 2011, and at January 1, 2011 is comprised of two unsecured loans, as shown below: Maturities Average annual interest rate 2012 2011 Date of transition straight loans 2013-2016 4.50% - 6.50% Less current maturities $ 2,474,480 $ 3,063,000 $ 396,647 185,333 897,524 229,524 Long-term maturities $ 2,077,833 $ 2,877,667 $ 668,000 annual long-term debt maturities at December 31, 2012 are as follows: Year 2013 2014 2015 2016 Amount $ 396,647 513,242 676,757 887,834 Bank loans include certain obligations to do and refrain from doing, such as keeping certain financial ratios. at December 31, 2012 and 2011, and at January 1, 2011, all such obligations have been met. 16. Debt instruments Based on the debt instrument program established by alsea, in May 2011, the entity concluded the placement of debt instruments for a total of $1,000 million pesos on the Mexican market (alsea11). the intermediaries that participated in placing the offer were HsBC Casa de Bolsa, s. a. de C. v., Grupo financiero HsBC, actinver Casa de Bolsa, s. a. de C. v. and Grupo financiero actinver. the debt instruments in question are for a term of three years as from their issue date, they mature in May 2014 and are subject to the 28-day tIIe (average Interbank Interest rate) rate plus 1.30 percentage points. In December 2012, the entity decided to amortize in advance the entirety of the debt instrument with ticker code alsea11. therefore, at December 31, 2012, the entity has no debt instruments. at December 2012, the balance of expenses related to said issue, such as legal fees, issue costs, and printing and placement expenses, were recognized in consolidated income statement for the year after the early amortization of the debt instrument. 17. Derivative financial instruments at December 31, 2012 and 2011, a total of 387 and 288 derivative financial instrument operations (forwards and options) were carried out, respectively, for a total of 103.4 and 86.2 million us dollars, respectively. the absolute value of the fair value of the derivative financial instruments used per quarter over the year does not comprise more than 5% of assets, liabilities or total consolidated capital, or otherwise 3% of the total consolidated sales for the last quarter. therefore, the risk for the entity of exchange rate fluctuations will have no negative effects, nor will it affect its capacity to carry out derivative financial instrument operations. 104 at December 31, 2012 and 2011, and at January 1, 2011, alsea has contracted DfIs for the purchase of dollars in 2013 of approximately 45, 6.3 and 51.5 million usD at the average exchange rate of $12.84, $12.46 and $12.14 peso to the dollar, respectively. at December 31, 2012, the entity’s debt instruments include a variable/fixed interest rate swap for a total of $400 million pesos, which amount covers payment of 28-day coupons maturing in May 2014. the entity signed two interest rate options known as “Knock out swap” and “Limited swap”, each for a notional $150 million Mexican pesos, both related to a bank loan maturing in December 2016. at January 1, 2011, the entity has acquired a variable rate/ fixed rate swap for economic interest rate hedging purposes. that strat- egy has been applied to a loan contracted by alsea (balance to date is $56.3 million pesos) of which only 20% is under a 7.98% fixed interest rate swap, plus a 10 bps spread. the loan is payable monthly and matures in June 2011. the type of derivative products and the hedged amounts are in line with the internal policy for risk management defined by the entity’s Corporate Practices Committee, which contemplates an approach to cover foreign currency needs without the possibility to carry out speculative operations. Despite the fact that the entity does not operated DfIs for speculation purposes, those instruments have not been formally des- ignated as accounting hedging instruments, and therefore the effects are recognized in income for the period under the expense accounts and interest income accounts. at December 31, 2012 and 2011, and at January 1, 2011, the entity had contracted the following financial instruments: institution Banamex Barclays Deutsche Bank HsBC santander uBs institution Deutsche Bank Banamex 2012 Thousands of dollars (notional) Average payment exchange rate Maturity 13,750 8,500 10,250 6,250 5,500 500 12.88 13.05 12.73 12.61 12.89 13.29 Thousands of dollars 2011 Average payment exchange rate Maturity 3,250 3,000 12.33 12.59 2013 2013 2013 2013 2013 2013 2012 2012 105 institution Banamex Barclays Deutsche Bank Morgan stanley santander uBs Thousands of dollars Date of transition Average payment exchange rate Maturity 6,350 1,000 27,150 2,750 6,750 7,500 12.13 12.78 12.24 11.79 11.92 11.98 2011 2011 2011 2011 2011 2011 the following interest rate financial instruments had been contracted at December 31, 2012 and 2011: institution santander Banamex HsBC Banamex Banamex institution santander Banamex HsBC 2012 instrument notional thousands of MxP Maturity Plain vanilla swap 200,000 Plain vanilla swap Plain vanilla swap Knock out swap Limited swap 100,000 100,000 150,000 150,000 2011 2014 2014 2014 2016 2016 instrument notional thousands of MxP Maturity Plain vanilla swap Plain vanilla swap Plain vanilla swap 200,000 100,000 100,000 2014 2014 2014 at January 1, 2011, the entity had not contracted financial instruments for interest rate hedging. following is a detailed list of the fair value of derivative financial instruments held in the entity’s portfolio, which receive the accounting treatment of instruments held for economic hedging or trade purposes: 106 Interest rate swap forwards and options Total fair values* 2012 2011 Date of transition $ $ $ 442 $ (569) $ (127) $ 447 (8,811) (8,365) $ $ $ 130 1,380 1,510 * fair value from the viewpoint of banks, a negative amount represents an amount in favor to alsea. at December 31, 2011, the entity had contracted DfIs to purchase us dollars in 2012 for a total $6.2 million dollars at the $12.46 exchange rate. at that same date, the fair value receivable by the entity is $8.3 million pesos. In order to quantitatively measure the credit risk of the counterparties, following is the Credit Default swap (CDs) for the interna- tional counterparty and the notional amount to be covered. Counterparty Deutsche Bank aG London CDS notional (thousands of uSD) 199 3,250 risk measurement of the local counterparty that lacks a CDs is done in relation to its counterparty risk spread for the same period, plus the 28-day tIIe reference rate. Counterparty Banamex sa Spread (thousands of uSD) 0.0% 3,000 In the preceding case, only the tIIe rate is considered to be the cost of credit risk contracted with Banco nacional de México. exposure to other counterparties is not material. the amount disclosed comprises 85% of exposure. the entity monitors the counterparty’s exposure to credit risk through a CDs, which makes it possible for hedging to exist in the event of default when a counterparty is at risk of liability exposure by the entity. at December 31, 2012 and 2011, and at January 1, 2011, the entity has had no margin calls and it has not breached the agreements signed with the different financial entities. Strategy for contracting DFIs: every month, the Corporate finance Director’s office must define the price levels at which the Corporate treasury must operate the different derivative instruments. under no circumstances should amounts above the monthly resource requirements be operated, thus ensuring that there is always a position to be hedged and that DfI are not held for specu- lation purposes. Processes and authorization levels: the Corporate treasury Manager must quantify and report to the financial Director the monthly requirements of operating resources. the Corporate financial Director may operate at his discretion up to 50% of the resource requirements being covered, and the administration and finance Director’s office may hedge up to 75% of the related exposure. under no circumstances may amounts above the limits authorized by the entity’s General Management be operated, in order to ensure that operations are always for hedging and not for speculation purposes. the foregoing is applicable to interest rates with respect to the amount of debt contracted at variable rates and the exchange rate with respect to currency requirements. If it be- comes necessary to sell positions for the purpose of making a profit and/or incurring a “stop loss”, the administration and finance Director must authorize the operation. 107 Internal control processes: With the assistance of the Corporate treasury Manager, the Corporate finance Director must issue a report the following working day, specifying the entity’s resource requirements for the period and the percentage covered by the ad- ministration and finance Manager. every month, the Corporate treasury Manager will provide the accounting department with the necessary documentation to properly record said operations. the administration and finance Director will submit to the Corporate Practices Committee a quarterly report on the balance of positions taken. the actions to be taken in the event that the identified risks associated to exchange rate and interest rate fluctuations materialize are carried out by the Internal risk Management and Investment Committee, of which the alsea General Director and the main entity’s directors form part. Markets and counterparties Derivative financial instruments are contracted in the local market under the over the counter (otC) mode. following are the financial entities that are eligible to close operations with regard to the entity’s risk management: Banco nacional de México s.a., Banco santander s.a., Barclays Bank México s.a., Deutsche Bank México s.a., Goldman sachs Paris Inc. et Cie., HsBC México s.a., Morgan stanley Capital services InC., and uBs Bank México. the Corporate financial Director is empowered to select other participants, provided that they are regulated institutions authorized to carry out this type of operations, and that they can offer the guarantees required by the entity. Main terms and conditions of the agreements all operations with DfIs are carried out under a master agreement through an IsDa form (International swap Dealers association), which must be standardized and duly formalized by the legal representatives of the entity and the financial institutions. Polices for designating calculation and valuation agents the fair value of DfIs is revised monthly. the calculation or valuation agent used is the same counterparty or financial entity with whom the instrument is contracted, who is asked to issue the respective reports at the month-end closing dates specified by the entity. Likewise, as established in the master agreements (IsDa) that cover derivative financial operations, the respective calculations and valuations are presented in the quarterly report. the designated calculation agents are the corresponding counterparties. never- theless, the entity validates all calculations and valuations received by each counterparty. Margins, collateral and credit line policies In certain cases, the entity and the financial institutions have signed an agreement enclosed to the IsDa master agreement, which stipulates conditions that require them to offer guarantees for margin calls in the event that the mark-to-market exceeds certain established credit limits. the entity has the policy of monitoring the volume of operations contracted with each institution, in order to avoid margin calls. Valuation a) Description of valuation techniques, policies and frequency: the derivative financial instruments used by alsea (forwards and swaps) are contracted to reduce the risk of adverse fluctua- tions in exchange and interest rates. those instruments require the entity to trade cash flows at future fixed dates on the face value or reference value and are valued at fair value. 108 b) Method for measuring the effectiveness of hedges: In the case of cash flow hedges, the effective portion of gains or losses generated by the hedging instrument are recognized under comprehensive gain or loss in stockholders’ equity, and they are reclassified to income in the same period or periods in which the projected transaction affects them. the ineffective portion is immediately recorded in income for the year. the valuation of the effective and ineffective portion generated from the aforementioned instruments is recorded monthly in the entity’s consolidated financial statements. a valuation analysis was performed to determine the result of the instruments in question, that valuation meets the objective of mitigating the risk and therefore the hedge is effective. c) Liquidity in Derivative financial operations: 1. Internal sources of liquidity: every month, the Corporate finance Director’s office must define the price levels at which the Corporate treasury must operate the different hedging instruments. under no circumstances should amounts above the requirements be operated, thus ensuring that operations are always for hedging and not for speculation purposes. the resources used to address financial instrument requirements will derive from the resources generated by the issuer. 2. external sources of liquidity: no external sources of financing will be used to address requirements pertaining to deriva- tive financial instruments. 18. Provisions Provisions at December 31, 2012 and 2011, and at January 1, 2011 are as follows: Date of transition Increases charged to income Payments and cancellations December 31, 2011 Increases charged to income Payments and cancellations Compensation other personnel payments Supplies and others Total $ 76,580 $ 288,012 $ 398,165 (371,114) 103,631 434,582 (400,509) 577,051 (396,964) 468,099 728,559 (672,627) 364,592 975,216 (768,078) 571,730 1,163,141 (1,073,136) December 31, 2012 $ 137,704 $ 524,031 $ 661,735 109 19. Depreciation and amortization included in the consolidated statements of income Included in the cost of sales: Depreciation amortization subtotal Included in operating expenses: Depreciation amortization subtotal total 20. Expenses for employee benefits 2012 2011 $ $ $ 12,019 4,412 16,431 522,362 272,505 794,867 811,298 $ 6,946 1,274 8,220 446,134 215,646 661,780 670,000 following are the expenses for employee benefits included under operating costs and expenses in the consolidated statements of income. Wages and salaries social security costs retirement benefits total 21. other (expenses) income In 2012 and 2011, this caption is comprised as follows: Legal expenses Loss on fixed assets disposals, net esPs on tax base restatement and interest on tax refund other income (expenses), net total 22. Employee retirement benefits 2012 2011 2,552,834 $ 309,891 21,923 2,884,648 $ 2012 2011 (1,425) $ (5,346) (4,782) 2,220 19,137 9,804 $ 2,032,522 277,740 4,050 2,314,312 (41,123) (33,855) (5,038) 929 (13,067) (92,154) $ $ $ $ at December 31, 2012 and 2011, and at January 1, 2011, the two seniority premiums and indemnities at the end of the labor relation- ship for causes other than restructuring to which employees are entitled by law are recognized in income for each year in which the services are rendered based on actuarial calculations. 110 the entity has not established a trust to cover those benefits. following is a summary of the actuarial calculations. 2012 Benefits 2011 Date of transition Seniority premium Retirement Seniority premium Retirement Seniority premium Retirement obligation for defined benefits $ 11,754 $ 48,335 $ 8,224 $ 34,331 $ 6,209 $ unamortized items - (8,879) - (10,805) - 28,391 (12,102) Current net liability $ 11,754 $ 39,456 $ 8,224 $ 23,526 $ 6,209 $ 16,289 the net cost for the period included in operating expenses is comprised as shown below: Benefits 2012 2011 Seniority premium Retirement Seniority premium Retirement $ $ 1,804 $ 5,716 $ 1,264 $ 689 1,166 2,660 5,067 457 2,178 4,634 2,115 2,523 3,659 $ 13,443 $ 3,899 $ 9,272 Labor cost financial cost amortization of pending items net cost for the period: following is the reconciliation of the main components of obligation for defined benefits (oDB) at December 31, 2012 and 2011, and at January 1, 2011: Benefits 2012 2011 Seniority premium Retirement Seniority premium Retirement $ 8,224 $ 34,331 $ 6,209 $ 28,391 2,215 724 1,489 (898) 5,792 2,687 5,534 (9) 1,299 472 383 (139) 4,651 2,123 (834) - Initial balance of oDB Labor cost of current services financial cost actuarial gains and losses for the period employee benefits payments ending balance of oDB $ 11,754 $ 48,335 $ 8,224 $ 34,331 the most significant assumptions used in determining the net cost for the period of the plans are as follows: the interest rates and assumptions used to show the present value of obligations and the expected asset yields are in line with the economic environment in which the entity operates. reference for establishing the parameters used to determine interest rates are taken from long-term, low risk financial instruments that are representative of the market, using a long-term interest curve and considering the bond rate issued by the federal government. 111 2012 7% 5.8% 5.3 Benefits 2011 Date of transition 7% 5.7% 5.3 8% 5.9% 5.3 Discount rate salary increase rate average expected labor life (years) * Includes the expected career salary increase assumption 23. income taxes the entity is subject to income tax and flat tax. income taxes (iT) - the rate is 30% for 2013, 2012 and 2011, and will be 29% for 2014 and 28% subsequent years. the entity consolidates with its subsidiaries for It purposes. the amendments to the Income tax Law applicable as from 2010 were published on December 7, 2009, and establish that: It pay- ment pertaining to the tax consolidation benefits arising from 1999 to 2004 must be made in installments from 2010 to 2014 and b) It payment pertaining to the tax consolidation benefits arising in 2005 and subsequent years must be paid from the sixth to the 10th year following that in which the benefit arises. tax payment on tax consolidation benefits arising from 1982 (year of tax consolidation startup) to 1998 may be demanded in certain cases specified in the tax provisions. flat tax (iETu) - Income, deductions and certain tax debts are determined on the basis of cash flows for each period. the rate is 17.5% as from 2010. the asset tax Law was annulled when the flat tax Law came into effect, which allows, under certain circum- stances, recovery of that tax paid in the 10 years immediately preceding that in which It is first paid, in the terms of the tax provi- sions. furthermore, unlike It, Ietu is incurred individually by the controlling company and its subsidiaries. the tax on profits is the higher of It and Ietu. on the basis of financial projections, the entity has determined that it will essentially be paying It; therefore, the entity recognizes deferred It. a. income taxes It (tax basis) Deferred It 2012 2011 $ $ 326,795 $ (107,648) 219,147 $ 275,064 (168,047) 107,017 112 the tax expense attributable to income before It was different from that arrived at by applying the 30% rate in 2012 and 2011, as a result of the following items: expected It rate nondeductible expenses, effects of inflation and others Change in the reserve for valuation of tax losses effective consolidated It rate b. Deferred taxes – balance sheet 2012 30% 10% (5%) 35% 2011 30% 4% (3%) 31% following is an analysis of deferred tax (assets) liabilities shown in the consolidated statements of financial position: 2012 2011 Transition Date Deferred (assets) liabilities: estimation for doubtful accounts and inventory obsolescence $ Liability provisions advances from customers unamortized tax losses, net of the valuation reserve recoverable asset tax store equipment, leasehold improvements and property other assets advance payments (5,997) (220,682) (30,072) (201,465) (12,269) (380,473) 807 21,186 (5,351) $ (151,786) (29,756) (170,115) (22,802) (327,214) (41) 14,645 Temporary differences Beginning balance recognized in income Procurement recognized directly in capital $ $ (828,965) (692,420) $ 2012 2011 (692,420) $ (107,648) (24,628) (4,269) (544,474) (168,047) - 20,101 $ (828,965) $ (692,420) (2,164) (93,795) (10,945) (172,426) (22,802) (255,020) (1,277) 13,955 (544,474) Deferred assets not recognized at December 31, 2012 and 2011 and at January 1, 2011 totaled $159,594, $190,220 and $200,245, respectively. the net change in deferred assets not recognized at December 31, 2012 and 2011 and at January 1, 2011 was a decrease of $30,626 and $10,025 and an increase of $21,603, respectively, arising mainly from accrued tax losses. 113 at December 31, 2012, unamortized tax losses expire as shown below Year of maturity Amortizable losses 2014 2016 2017 2018 2019 2020 2021 2022 $ 29,187 62,843 44,825 169,980 102,740 68,368 41,962 43,615 the entity has recognized no liability for deferred taxes on the undistributed earnings of its subsidiaries arising in 2012 and pre- ceding years, as it currently does not expect those undistributed profits to be reversed or become taxable in the near future. that deferred liability will be recognized when the entity expects to receive those undistributed profits and they become taxable, such as in the case of sales or the disposal of investments in shares. at December 31, 2012 and 2011 and at January 1, 2011, It balances related to the entity’s consolidated tax regime before and after the 2009 tax amendments came into effect correspond to unamortized tax losses arising under consolidation at the controlling and the controlled companies amounting to $193,454, $169,813 and $130,326 respectively. following is the yearly schedule of payments contemplated by the entity to cover income tax liabilities arising under tax consolida- tion resulting from the 2009 tax amendments: Year of maturity 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 114 Payment $ 6,885 11,407 22,976 27,912 32,926 33,501 27,132 16,194 9,965 4,556 $ 193,454 24. Stockholders’ equity following is a description of the principal features of the stockholders’ equity accounts: a. Capital stock structure following are the movements in the capital stock and the premium on the issuance of shares: Thousands of pesos Capital stock number of shares 605,240,724 $ 362,080 $ 761,200 - 606,001,924 11,802,800 16,465,957 - - 53,488,373 687,759,054 381 - 362,461 5,901 8,233 - - 26,744 403,339 Premium on the issuance of shares 1,086,415 - 5,632 1,092,047 - 300,669 1,090 (15,262) 1,088,278 2,466,822 figures at January 1, 2011 repurchased shares Premium on share subscription figures at December 31, 2011 repurchased shares Dividends declared in shares repurchased shares, net Purchase of the non-controlling portion Placement of shares figures at December 31, 2012 In December 2012, alsea issued 46,511,628 shares with an overallotment of 6,976,745 shares, which was exercised at an offering price of 21.50 (twenty one pesos and fifty centavos) per share. the issue was recorded net of placement expenses. (note 1d) In april 2012, alsea declared dividends of $308,902 by capitalizing that amount from the after-tax earnings account in order to cover the subscription value of 16,465,957 shares issued and used as payment of the declared dividend at a rate of $37.52 pesos per share. authorization was issued for the factor used in determining the number of shares necessary to cover the dividend declared to be the closing quotation price for the date of the stockholders’ meeting, that is to say, $18.76 (eighteen pesos and 76 centavos), of which $0.50 (zero pesos fifty centavos) corresponds to the theoretical value, and the remainder to a premium on share subscription. In april 2011, cash dividends were declared in the amount of $122,648. the fixed minimum capital with no withdrawal rights is represented by Class I shares, while the variable portion is represented by Class II shares, and must in no case exceed 10 times the value of the minimum capital with no withdrawal rights. at December 31, 2012 and 2011, and at January 1, 2011, the fixed and variable subscribed capital stock is represented by 687,759,054, 606,001,924 and 605,240,724 common nominative shares, respectively, with no par value, as shown below: 115 Description number of shares Amount fixed portion of the capital stock at December 31, 2012 fixed capital stock variable capital stock repurchased shares (par value) Capital stock at December 31, 2011 fixed capital stock variable capital stock repurchased shares (par value) Capital stock at January 1, 2011 $ $ $ $ 687,759,054 489,157,480 128,647,244 (11,802,800) 606,001,924 489,157,480 128,647,244 (12,564,000) 605,240,724 $ 403,339 304,038 64,324 (5,901) 362,461 304,038 64,324 (6,282) 362,080 the national Banking and securities Commission has established a procedure that allows the entity to acquire its own shares on the market, for which purpose, a reserve for repurchase of own shares must be created and charged to retained earnings. alsea has applied that procedure at December 31, 2012. total repurchased shares must not exceed 5% of total released shares; they must be re-placed in no more than one year, and are not considered in the payment of dividends. the premium on the issuance of shares is the difference between the payment for subscribed shares and the par value of those same shares, or their theoretical value (paid-in capital stock divided by the number of outstanding shares) in the case of shares with no par value, plus restatement at December 31, 2012. repurchased own shares available are reclassified to contributed capital. In January 2012, Café sirena, s. de r.L. de C.v. declared a cash dividend of $150,000, calculated on the value of each of the equity units into which the company’s capital stock is divided. the amount corresponding to the uncontrolled portion was $27,000. In august 2012, it was agreed to convert the variable capital stock to fixed minimum capital stock, with the resulting reduction in the variable portion of the capital stock and an increase in the minimum fixed portion, which was effected by converting 145,113,201 Class II shares currently representing the variable portion of the capital stock for the same number of shares, while Class I shares remained unchanged, representing the minimum fixed portion, after which, the shareholders continue to hold the same number of shares. (a) Executives stock option plan alsea has established a stock option plan for its executives. the plan was set up in 2005 and concluded on December 31, 2009. It consisted of providing the executives the right to receive the surplus (difference) on certain shares determined be- tween the price of the shares at the outset of the plan and the exercise price of the option (market value) payable in cash. the assignment of 5,886,524 shares for this plan was approved at a stockholders’ meeting and those shares were adminis- tered by a trust. at the close of the 2006 period, the executives exercised 20% of the rights acquired so far, and the remaining 80% was exercised in the 2009 period, for which a payment of a $14,306 premium on share subscription was recognized. at December 31, 2011, institution administering the trust authorized its total termination. 116 (b) Stockholders’ equity restrictions i. five percent of net earnings for the period must be set aside for the legal reserve until it reaches 20 percent of the capital stock. at December 31, 2012, the legal reserve amounted to $100,735, which has not yet reached the required 20%. ii. Dividends paid from retained earnings are not subject to It if paid from the after-tax earnings account (CufIn), and 30% must be paid on the excess, i.e., the result arrived at by multiplying the dividend paid by a factor of 1.4286. the tax on the dividend payment not arising from the CufIn must be paid by the entity and may be credited against corporate It in the following years. 25. Profit per share the basic profit per share is calculated by dividing the net profit for the period attributable to the holders of the ordinary capital of the controlling company by the average weighted number of ordinary shares outstanding during the period. the amount of diluted profits per share is calculated by dividing the net profit attributable to the holders of the ordinary capital of the controlling company (after adjusting for interest on the convertible preferential shares) by average weighted ordinary shares outstanding during the period plus average weighted ordinary shares issued when converting all potential ordinary diluted shares to ordinary shares. at December 31, 2012 and 2011, the entity has no diluted profits per share. the following table shows information on income and shares used in calculating basic and diluted profits per share. net profit (in thousands of pesos) attributable to the stockholders shares (in thousands of shares): average weighted outstanding shares Basic profit per share 26. Related party balances and transactions other compensation and benefits 2012 2011 $ $ 364,918 $ 209,643 637,329 0.57 $ 609,342 0.34 total compensation paid by the entity to directors and the principal officers for the period ended on December 31, 2012 and 2011 was approximately $109 and $108 million pesos, respectively. that includes compensation determined at a stockholders’ meeting for discharging their duties in that period, as well as salaries and wages. the entity constantly reviews salaries, bonuses and other compensation plans so as to offer its personnel competitive remu- neration conditions. 117 Compensation plans for retaining executive talent Deferred compensation programs were implemented in 2003 in order to bring the interests of the Issuing entity’s executives in line with those of the stockholders and make it more likely that they will remain with the entity. Bond plans were implemented in 2003 and 2004, which have now been settled. subsequently, a stock option plan was established in 2005, which concluded on December 31, 2009. It consisted of providing the executives the right to receive the surplus (difference) on certain shares determined between the price of the shares at the outset of the plan and the exercise price of the option (market value) payable in cash (note 24 a). 27. Commitments and contingent liabilities Commitments: a) the entity rents certain equipment and the facilities housing its stores and distribution centers under leasing agreements for specific periods (see note 13). the estimation for future minimum operating lease payments for the facilities housing the different alsea trademarks is shown below: Year 2013 2014 2015 2016 2017 Amount 1,049,809 983,604 921,575 863,458 809,006 $ $ b. the entity has a number of commitments pertaining to the agreements established in the contracts for trademarks acquired. c. During the normal course of operations, the entity acquires commitments under production material supply contracts which in certain cases establish conventional penalties in the event of noncompliance. Contingent liabilities: at the date of the financial statement, alsea is involved in no judicial, administrative or arbitration procedures that could affect the entity or its subsidiaries. 28. financial information per segment the entity is divided into three large operating divisions, i.e., food and beverages in Mexico, food and beverages in LataM and dis- tribution services, all run by the same management. The Food and Beverage segments in which we participate in Mexico and Latin America (LATAM) are defined as follows: fast food: the features of this segment are as follows: i) fixed and restricted menu, ii) food for immediate consumption, iii) strict control of individual portions for each ingredient and finished product, iv) individual wrapping, among others. this type of segment has easy access and can therefore penetrate any location. 118 Coffee shops: specialized outlets principally selling coffee. the principal difference is the quality service together with a competitive price; the image/environment is focused on attracting all types of customers. Casual dining: this is a segment of service restaurants at which an order is taken, aside from take-out service and home delivery service, offering quality service together with a competitive price; the image/environment is focused on attracting all types of customers. this segment includes fast food establishments and gourmet restaurants. the principal features of casual dining res- taurants are i) easy access, ii) informal dress code, iii) casual environment, iv) modernity, v) simple décor, vi) high-quality service and vii) accessible prices. alcoholic beverages are generally sold at those establishments. fast casual dining: this is a combination of the fast food and casual dining segments: The distribution and production segment is defined as follows: Distribuidora e Importadora alsea, s.a. de C.v (DIa). specializes in the purchase, importation, transportation, storage and distribution throughout Mexico of frozen, refrigerated and try food products to supply all Domino’s Pizza, Burger King, starbucks, Chilis Grill & Bar and P.f. Chang’s China Bistro, Pei Wei e Italianni´s establishments in Mexico. additionally, DIa handles the preparation and distribution of pizza dough for the entire Domino’s Pizza system in Mexico. Panadería y alimentos para food service, s.a. de C.v. produces sandwiches and bread to supply starbucks and other alsea trade- marks. the business model contemplates the central plant located in Lerma, where pastries, bread and sandwiches are prepared. the definition of the operating segments is based on the financial information provided to the General Management, and is reported on the same basis used internally by each operating segment. Performance at the different operating segments is evaluated on the same basis. the information pertaining to segments for the year ended on December 31, 2012 and 2011 is as follows: (figures in millions of pesos) 119 figures in millions of pesos at December 31, 2012 food and Beverage Division LATAM Division Distribution and Production Division Eliminations Consolidated 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Income from third parties $ 8,752 $ 7,084 $ 3,416 $ 2,402 $ 1,332 $ 1,166 $ 19 $ 18 $ 13,519 $ 10,669 Intersegment - - - - 2,701 2,230 (2,701) (2,230) - - Income Costs 8,752 7,084 3,416 2,402 4,033 3,396 (2,682) (2,212) 13,519 10,669 2,957 2,372 1,129 809 3,383 2,824 (2,697) (2,217) 4,772 3,788 operating costs and expenses 4,488 3,872 2,074 1,394 588 541 (40) 7,157 5,766 168 130 Depreciation and amortization Interest paid Interest earned other financial expenses equity in associates Income taxes segment income 558 122 (76) 13 59 - 182 508 478 72 (49) (19) 4 - 79 279 28 (6) 2 24 13 49 (15) 22 12 (1) 26 37 - (9) (19) 35 9 - 34 43 - (8) (8) - 17 (3) - 14 9 31 33 - other components of income - - - - - - 7 33 85 36 31 51 33 (58) (20) 63 - (4) 64 - 6 (84) (56) 794 244 (46) (9) 189 13 219 - 37 661 152 (20) (13) 119 9 107 - 27 Majority net profit $ 364 210 assets: $ 8,496 $ 7,332 $ 1,274 $ 1,148 $ 1,533 $ 1,347 $ (2,538) $ (1,679) $ 8,765 $ 8,148 Investment in productive assets (Investment in associates) - - (Investment in fixed and 608 568 intangible assets) 40 277 30 428 - 34 - 203 - 47 - (3) 40 30 966 1,196 total assets $ 9,104 $ 7,900 $ 1,591 $ 1,606 $ 1,567 $ 1,550 $ (2,491) $ (1,682) $ 9,771 $ 9,374 total liabilities $ 5,070 $ 3,481 $ 1,137 $ 1,138 $ 960 $ 891 $ (2,198) $ 571 $ 4,969 $ 6,081 120 29. foreign currency position following are monetary assets and liabilities denominated in us dollars (dollars) shown in the reporting currency at December 31, 2012 and 2011 and January 1, 2011: assets Liabilities asset (liability) position, net Thousands of pesos 2012 2011 Transition date 484,233 (390,432) 93,802 582,388 (514,458) 67,930 266,257 (320,540) (54,283) the dollar exchange rate at December 31, 2012 and 2011 and January 1, 2011 was $13.01, $13.98 and $12.38, respectively. at March 29, 2013, date of issuance of the consolidated financial statements, the rate of exchange was $12.3438 per us dollar. following are the exchange rates used in the different conversion processes in relation to the reporting currency at December 31, 2012 and 2011 and January 1, 2011, and at the date of issuance of the consolidated financial statements: Country of origin Currency Closing Exchange-rate issuance March 29, 2013 2012 argentina Chile Colombia argentinian Peso (arP) Chilean Peso (CLP) Colombian Peso (CoP) 2.6486 0.0271 0.0074 2.4088 0.0261 0.0067 Country of origin Currency Closing Exchange-rate issuance March 29, 2013 2011 argentina Chile Colombia argentinian Peso (arP) Chilean Peso (CLP) Colombian Peso (CoP) 3.2485 0.0269 0.0072 2.4088 0.0261 0.0067 Country of origin Currency Closing Exchange-rate issuance Transition date January 1, 2011 argentina Chile Colombia argentinian Peso (arP) Chilean Peso (CLP) Colombian Peso (CoP) 3.1142 0.0264 0.0064 2.4088 0.0261 0.0067 121 the following currencies were used for conversion purposes: foreign operations fast food sudamericana, s. a. starbucks Coffee argentina, s. r. L. asian Bistro argentina, s.r.L. fast food Chile, s. a. asian food Ltda, Dominalco, s. a. operadora alsea en Colombia, s. a. asian Bistro Colombia, s.a.s Country of origin argentina argentina argentina Chile Chile Colombia Colombia Colombia Currency of Recording functional Reporting arP arP arP CLP CLP CoP CoP CoP arP arP arP CLP CLP CoP CoP CoP MXP MXP MXP MXP MXP MXP MXP MXP 30. fair value of financial assets and liabilities • Fair value of financial instruments recorded at amortized cost the entity’s principal financial instruments are valued at amortized cost, as they generally consist of accounts receivable and liabilities at amortized cost. With the exception of debt and debt instruments, the entity’s management considers that the book value of said financial assets and liabilities approximates their fair value, given their nature and the fact that they are short term. the fair value of the debt at December 31, 2012 is estimated to be approximately $2,753 million pesos. the fair value of the debt and debt instruments at December 31, 2011 is estimated to be approximately $3,591 and $1,147 million pesos, respectively. • valuation techniques and assumptions applied in determining fair value the fair value of financial assets and liabilities is determined as follows: • the fair value of financial assets and liabilities with standard terms and conditions and negotiated in liquid asset markets is determined on the basis of prices quoted in the market. • the fair value of other assets and liabilities is determined as per models for the determination of generally accepted prices, which are based on the analysis of discounted cash flow. Fair value hierarchy: the entity classifies valuations at fair value recognized in the consolidated statements of financial position on three levels of hierarchy, in accordance with the data used for the valuation. When a valuation uses data from different levels, the overall valu- ation is classified on the lowest level for classification of any relevant figure. • Level I fair value valuations are those derived from prices quoted (unadjusted) in active markets for identical assets or li- abilities. • Level 2 fair value valuations are those derived from indicators other than quoted prices included in Level 1, which are ob- servable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and 122 • Level 3 fair value valuations are those derived from valuation techniques that include indicators for assets and liabilities not based on observable market information (non-observable indicators). the following analysis shows fair value measured as per a valuation methodology considered to qualify as Level 2:: December 31, 2012 forwards and options swaps total December 31, 2011 forwards and options swaps total January 1, 2011 forwards and options swaps total Level 2 Level 2 (569) 442 (127) (8,811) 447 (8,364) Level 2 1,380 130 1,510 $ $ $ $ $ $ 123 31. financial risk policies and management- Significant accounting policies the details of significant accounting policies and methods adopted (including recognition criteria, bases for valuation and bases for recognition of income and disbursements) for each type of financial asset, financial liability and capital instrument are disclosed in note 3. Categories of financial instruments the principal categories of financial instruments are: financial assets Cash and cash equivalents Accounts and other receivables: Customers – less estimation for doubtful accounts value added tax and other recoverable taxes other accounts receivable short-term guarantee deposits Long-term guarantee deposits financial liabilities at amortized cost: Long-term debt Debt instruments accounts payable to suppliers other accounts payable for negotiation Derivative financial instruments 2012 2011 Transition date $ 932,594 $ 739,379 $ 640,203 339,481 272,254 196,450 219,350 243,736 166,228 - 2,262,800 110,020 86,991 207,224 218,037 39,482 - 78,168 2012 2011 Transition date 2,474,480 3,063,000 - 1,129,612 175,637 993,531 1,021,424 67,068 897,524 694,834 710,548 25,042 - 8,365 (3,391) The objectives of financial risk management alsea is principally exposed to the following financial risks: (i) market (foreign currency and interest rate), (ii) credit and (iii) liquidity. the entity seeks to minimize the potential negative effects of the aforementioned risks on its financial performance by applying different strategies. the first involves securing risk coverage through derivative financial instruments. Derivative financial instruments are negotiated only with entities with recognized solvency, and limits have been established for each entity. It is the policy of the entity not to conduct operations with derivative financial instruments for speculative purposes. 124 Market risk the entity is exposed to market risks arising from variations in exchange and interest rates. variations in exchange and interest rates may arise as a result of changes in domestic and international economic conditions, tax and monetary policies, market liquid- ity, political events and natural catastrophes and disasters, among others. exchange fluctuations and the devaluation or depreciation of local currency in the countries in which alsea participates could limit the entity’s capacity to convert local currency to dollars or other foreign currency, thus affecting its operations, operating results and financial position. the entity currently has a risk management policy aimed at mitigating present and future risks involving those variables, which arise mainly from the purchase of inventories, payments in foreign currency and the bank and stock exchange debt contracted at a floating rate. the contracting of derivative financial instruments is intended to cover or mitigate a primary position represent- ing some type of identified or associated risk for the entity. Instruments used are merely for economic coverage purposes, not for speculation or negotiation. the types of derivative financial instruments approved by the entity for the purpose of mitigating exchange fluctuation and interest rate risks are as follows: - - - - usD/MXn exchange-rate forwards contracts usD/MXn exchange-rate options Interest rate swaps Cross-Currency swaps Given the variety of possible derivative financial instruments for covering the risks identified by the entity, the Director of Corporate finance is authorized to select said instruments and determine how they are to be operated. Exchange risk management usD coverage and the respective requirements are determined on the basis of cash flow budgeted by the entity, and are in line with the current risk management policy approved by the Business Practices Committee, General Management and the Director of administration and finance. the policy is monitored by the Director of Internal audit. the exchange risk denominated in foreign currency (usD) is monitored internally on a weekly basis based on unexpired positions or coverage at the market exchange rate. In all cases, the table for calculation or valuation of derivative financial instruments is the table specified in the master contract. the internal review is intended to spot significant variations in exchange rates that could give rise to a risk or result in some type of noncompliance by the entity. In the event that a significant and representative risk position is encountered, it is reported to the Director of Corporate finances by the Corporate treasury Manager. the following table contains quantitative details of the exchange risk exposure based on usD/MXn foreign currency forwards and options contracts entered into by the entity and in effect at December 31, 2012. 125 Type of derivative, security or contract Purpose of the coverage Position forwards Long economic options Long economic Value of the underlying asset/reference variable notional amount/ nominal amount (uSD) fair value (uSD) Current quarter Previous quarter Current quarter Previous quarter Current quarter Previous quarter Maturities (uSD) 13.1 usD/MXn 12.85 usD/MXn 13.1 usD/MXn 12.85 usD/MXn 18,250 18,500 $ 19 $ 251 $ 18,250 26,500 43,500 $ (63) $ 332 $ 26,500 note 29 shows foreign currency positions at December 31, 2012 and 2011 and January 1, 2011. It also shows the exchange rates in effect on those dates and transactions for the year ended on December 31, 2011. as concerns the sensitivity analysis, because the fair value of the derivative financial instrument (DfI) position at December 31, 2012 and 2011 is not material, any change in the risk factors pertaining to the interest rate or the peso/dollar exchange rate would not significantly impact their fair value. on that basis, entity management concluded that the payment capacity and liquidity for handling obligations contracted are not affected and show no significant impact. Likewise, as mentioned, DfIs used by the entity are intended to mitigate usD interest rate and exchange rate risks. any devaluation/revaluation of the peso against the dollar, which represents management’s evaluation of a possible reasonable change in the parity of those currencies, would result in an increase/decrease in income and stockholders’ equity of approximately $55 and $25 million pesos for the years ended on December 31, 2012 and 2011, considering that not all foreign currency financial instruments are covered by derivative financial instruments. the sensitivity analysis is determined on the basis of the us dollar financial instrument position at December 31, 2012 and 2011 and may not be representative of the exchange risk during the period due to variations in the net position in that currency. interest rate risk management the entity faces certain exposure to the volatility of interest rates as a result of contracting bank and stock exchange debt at fixed and variable interest rates. the respective risks are monitored and evaluated monthly on the basis of: - Cash flow requirements - a budget review - observation of the market and interest rate trends in the local market and in the countries in which alsea operates (Mexico, argentina, Chile and Colombia). - Differences between negative and positive market rates the aforementioned evaluation is intended to mitigate the entity’s risk concerning debt subject to floating rates or indicators, to streamline the respective price and to determine the most advisable mix of fixed and variable rates. at the date of the consolidated financial statements, the entity has an interest rate swap at variable and fixed interest rates amounting to a total of $400 million pesos, maturing in May 2014. In addition to the plain vanilla It, two interest rate options have been contracted, known as a knockout swap and a limited swap, each for a notional amount of $150 million pesos, both applied to a bank loan expiring in 2016. 126 according to the swap contract, the entity agrees to exchange the difference between the fixed and floating interest rates calculated on the agreed notional amounts of capital, which makes it possible to reduce, mitigate and control the exchange risk on interest rates on the fair value of debt issued at a fixed interest rate and exposures to the risk of cash flow on debt issued at a variable interest rate. the following table contains quantitative details of the exchange risk exposure based on forwards and options contracts entered into by the entity and in effect at December 31, 2012. Type of derivative, security or contract Purpose of the coverage Position Value of the underlying asset reference variable notional amount nominal amount (uSD) fair value (uSD) Current quarter Previous quarter Current quarter TPrevious quarter Current quarter TPrevious quarter Maturities (uSD) Interest rate swap Knock out swap Limited swap Long economic Long economic Long economic 4.84 - tIIe 28 d 4.84 - tIIe 28 d 4.84 - tIIe 28 d 4.81 - tIIe d 4.81 - tIIe d 4.81 - tIIe d 30,888 31,008 $ 151 $ 167 30,888 11,583 11,628 $ (48) $ (173) 11,583 11,583 11,628 $ (70) $ 150 11,583 the Corporate treasury Manager is responsible for monitoring and reporting to the Director of administration and finance any significant event or contingency that could affect the coverage, liquidity, maturities, etc. of the DfIs. the Director of administration and finance reports any such situation to the alsea General Director if the identified risks could materialize. note 15 and 16 contain details of loans from financial institutions and the issuance of debt instruments, respectively, at December 31, 2012 and 2011 and January 1, 2011. Credit risk management In order to minimize the credit risk associated with the counterparty, entity contracts its financial instruments with institutions both in Mexico and abroad authorized to engage in that type of operation. as concerns derivative financial instruments, a standard contract approved by the International swaps and Derivatives association Inc. is signed, as well as standard confirmation forms for each operation. Bilateral guarantee contracts are also signed with the counterparty, which specify policies on margins, collateral and the credit lines to be granted. those contracts, usually known as Credit support annexes, establish the credit limits granted to the entity by financial institutions, which apply in the event of negative scenarios or fluctuations that affect the fair value of the open positions in deriva- tive financial instruments. those contracts establish margin calls in the event that credit line limits are exceeded. In addition to the Credit support annexes (Csa) attached to the master contract, the entity monitors the positive or negative fair value on a monthly basis. If a significant positive result arises, a credit default swap (CDs) can be contracted to lower the risk of noncompliance by any of the counterparties. It is the policy of the entity to monitor the volume of operations contracted with each of those institutions in order to avoid margin calls and mitigate the credit risk with counterparties. 127 the entity’s maximum credit risk arises from the book value of financial assets, which amount to $1,845,897 at December 31, 2012. Liquidity risk the entity’s principal source of liquidity is cash generated by operations. the Director of finance holds final responsibility for liquidity management, for which purpose, policies have been established for control of and follow-up on working capital, which makes it possible to manage short, medium and long-term financing require- ments. Periodic cash flow projections are prepared in order to manage the risk and ensure adequate reserves, credit lines are contracted and investments are planned. notes 15, 16 and 17 provide the details of the financing contracted by the entity and the respective maturities. the following table shows contractual maturities of the entity’s financial liabilities. the table is based on undiscounted flows based on the first date on which payment can be demanded of the entity, and includes payments of principal and interest. December 31, 2012 Less than a year over 1 year and less than 3 over 3 years and less than 5 Total Loans from financial institutions $ 496,553 $ 1,395,753 $ 860,763 $ 2,753,069 accounts payable to suppliers other accounts payable 1,129,612 175,637 - - - - 1,129,612 175,637 total $ 1,801,802 $ 1,395,753 $ 860,763 $ 4,058,318 December 31, 2012 Less than a year over 1 year and less than 3 over 3 years and less than 5 Total Loans from financial institutions $ 510,113 $ 1,346,175 $ 1,735,168 $ 3,591,456 Debt instruments accounts payable to suppliers other accounts payable 61,592 1,085,400 1,021,424 67,068 - - - - - 1,146,992 1,021,424 67,068 total $ 1,660,197 $ 2,431,575 $ 1,735,168 $ 5,826,940 January 1, 2011 Less than a year over 1 year and less than 3 over 3 years and less than 5 Total Loans from financial institutions $ 284,993 $ 336,243 $ 442,993 $ 1,064,229 Debt instruments accounts payable to suppliers other accounts payable 50,535 710,548 25,042 757,199 - - - - - - 807,734 710,548 25,042 total $ 1,071,118 $ 1,093,442 $ 442,993 $ 2,607,553 128 Management of capital the main purpose of managing capital is to ensure that the entity maintains strong credit ratings and healthy capital ratios in sup- port of its business and to ensure maximum value for the stockholders. the entity manages is capital structure and makes any necessary adjustments required by changes in economic conditions. With a view to maintaining and adjusting its capital structure, the entity may modify dividend payments, reimburse capital or issue new shares. In the periods ended on December 31, 2012 and 2011, there were no modifications to the objectives, policies or processes pertaining to capital management. the following ratio is used by the entity and by different rating agencies and banks to measure credit risk. - net debt to eBItDa = net debt/eBItDa Itm at December 31, 2012 and 2011, and at January 1, 2011, the financial restrictions established in the entity’s loan agreements are as follows: the net debt to eBItDa ratio for the last twelve months was slightly under 1.0 times, 2.6 times and 0.96 times. 32. Explanation of the transition to ifRS In January 2009, the national Banking and securities Commission (nBsC) amended the respective regulations to require certain entities disclosing financial information to the public through the Mexican stock exchange (BMv) (including the entity) to prepare and disclose their financial information on the basis of the Ifrs issued by the International accounting standards Board (IasB). on that basis, on January 1, 2012, the entity adopted the accounting framework established in the Ifrs for preparing its consolidated financial statements in order to comply with the provisions of the nBsC. following is a description of the principal changes in ac- counting policies resulting from the initial adoption of the Ifrs. the entity’s consolidated financial statements at December 31, 2012 and for the year ended on that date will be the first annual consolidated financial statements that comply with Ifrs. the period ended on December 31, 2011 is the comparative period, and the transition date was January 1, 2011. the entity applied the significant obligatory exemptions and certain optional exemptions for retrospective application of the Ifrs. the following reconciliations show quantification of the effects of transition and the impact on stockholders’ equity at the transition date (January 1, 2011) and at December 31, 2011 and on the comprehensive net profit for the transition period (January 1, 2011) and at December 31, 2011: 129 i) Equity a) Reconciliation of stockholders’ equity at January 1, 2011 (date of transition to the IFRS) Equity nota figures under MfRS at January 1, 2011 Adjustments and reclassifications figures per ifRS Capital stock $ 527,657 $ (165,577) $ Premium on share subscription Legal reserve retained earnings effects of conversion reserve for repurchase of shares total capital attributable to the owners of the controlling company i i ii, iii v i 1,241,208 92,108 636,262 (23,340) 391,433 (154,793) (6,057) 309,459 23,340 (27,600) 362,080 1,086,415 86,051 945,721 - 363,833 2,865,328 (21,228) 2,844,100 non-controlling interest 245,641 (471) 245,170 total stockholders’ equity $ 3,110,969 $ (21,699) $ 3,089,270 reconciliation of stockholders’ equity at December 31, 2011 Equity figures under MfRS at January 1, 2011 Adjustments and reclassifications (note 32(iii)) figures per ifRS Capital stock $ 528,038 $ (165,577) $ Premium on share subscription Legal reserve financial instrument valuation retained earnings effects of conversion reserve for repurchase of shares total capital attributable to the owners of the controlling company 1,246,840 99,667 9,166 712,460 4,244 411,503 3,011,918 (154,793) (6,056) - 312,696 23,340 (27,600) (17,990) 362,461 1,092,047 93,611 9,166 1,025,156 27,584 383,903 2,993,928 non-controlling interest 299,274 (471) 298,803 total stockholders’ equity $ 3,311,192 $ (18,461) $ 3,292,731 130 ii) Comprehensive income reconciliation of net income for the year ended December 31, 2011 net consolidated income per Mfrs financial instrument valuation Conversion of foreign operations Comprehensive consolidated income per Mfrs Cancellation of the liability at the end of the period Comprehensive income under Ifrs at December 31, 2011 $ $ 233,523 9,166 27,584 270,273 3,238 273,511 iii The different items included in the aforementioned reconciliations are explained below: i) Capital stock under Mfrs, capital stock accounts, the premium on share subscription, the legal reserve, the reserve for the repurchase of shares and retained earnings were restated up to December 31, 2007 on the basis of national Consumer Price Index (nCPI) factors. under the Ifrs, the effects of inflation are recognized only in hyperinflationary economies, that is to say, when the infla- tion rate accrued over a three-year period approximate or exceeds 100%. the most recent three-year period in which Mexico showed those figures was from 1996 to 1998. therefore, the effects of inflation recognized after that date under capital stock, the capital reserve, the reserve for the repurchase of own shares and retained earnings were eliminated; the net effect was $533,768. ii) Deferred taxes the adjustment corresponds to the recalculation of deferred taxes, principally the adjustments resulting from adoption of Ifrs, which affected the book value of assets and liabilities. the overall net effect on deferred taxes was $9,299 and $6,436 at the transition date and at December 31, 2011, respec- tively. iii) employee benefits the differences in labor obligations between Mfrs and the Ifrs arise principally as concerns the valuation for adjust- ments in actuarial assumptions. under Ifrs, the benefits from termination of employment are recognized only if the company can demonstrate its commitment to terminate employment by means of a detailed dismissal plan as per nIC 19 employee Benefits. therefore, the termination liability recognized on the basis of Mfrs was eliminated for Ifrs purposes at the transition date. the amount eliminated was $9,686. iv) Reclassification of debt instrument issuance expenses the cost of issuing debt instruments was reclassified to the respective long-term debt. adjustments at the transition date and at December 31, 2011 totaled $9,685 and $14,311, respectively. v) effects of conversion under Ifrs, an entity adopting Ifrs for the first time is not required to comply with the requirements concerning ac- crued conversion differences existing at the transition date. However, when applying that exemption, the entity must not consider the accumulated conversion differences recognized under Mfrs and may not consider those differences when 131 determining the gain or loss on the subsequent disposal of any business abroad. at the transition date, the accumulated result of converting foreign currency was ($24,757), which was canceled against retained earnings. the entity considers that it has no material adjustments in the consolidated statements of cash flows, which is why no such reconciliation is presented. Exceptions and exemptions in adopting ifRS Ifrs 1 now in force, provides certain exceptions and exemptions from the general requirement to apply Ifrs retrospectively to the transition date. Ifrs 1 establishes four obligatory exceptions and fourteen optional exemptions for not applying Ifrs retrospectively in the consolidated statements of financial position at the transition date. alsea is applying the obligatory exceptions pertaining to 1) determination of estimations at the transition date, 2) prospective application, as from that date, of the regulatory requirements of International accounting standards (Ias) 27, Consolidated and Individual Financial Statements, applicable to the non-controlling interest, 3) an entity need not provide a list of coverages of a type that does not comply with the coverage conditions specified in Ias 39 and 4) prospective application of the disposal in books of financial assets and liabilities. optional exemptions applicable to Alsea are: fair value or revaluation- under Ifrs 1, on the transition date, the entity may opt to measure property, plant and equipment at fair value, and use that fair value as the attributed cost at that date. an entity adopting Ifrs for the first time may opt to use the revaluation method as per its previous accounting principles for store equipment, leasehold improvements, real property and intangibles, either at the transition date or some previous date, as the at- tributed cost at the revaluation date, if it was substantially comparable at that date. • at fair value, or • at cost or at depreciated cost as per Ifrs, adjusted to reflect, for example, changes in the general or specific price index. alsea has decided that its attributed cost at the date of transition is to be the revalued depreciated cost of its store equipment, leasehold improvements and real property, determined as per Mfrs at December 31, 2010 (which includes the effects of inflation up to December 31, 2007 and current pesos for movements as from that date). Business combinations- an entity adopting Ifrs for the first time may opt not to apply Ifrs 3, Business Combinations, retroactively to business combina- tions carried out in the past (prior to the transition date to Ifrs). alsea has decided that their consolidated financial statements will show business combinations up to the transition date as they were recognized under Mfrs, i.e., by the purchase method, including acquisitions in stages. all acquisitions made as from the transition date, which is January 1, 2011, are recognized in accordance with Ifrs 3, which among other things, makes it necessary to: • • • • • • specify that the item acquired qualifies as a business specify the acquiring party Determine the acquisition date recognize identifiable assets acquired, liabilities assumed and the non-controlled interest in the wired entity. value the price recognize goodwill acquired or a profit on the purchase, after certain considerations. 132 Accumulated conversion effects of foreign entities - Ias 21, effects of variations in Foreign Currency exchange Rates, requires the entity to: • • recognize certain differences of the effects of conversion in comprehensive income and include them in a separate stockhol ders’ equity component and reclassify the accumulated conversion difference arising from the disposal of a business abroad (including, if applicable, the results of the respective coverage) from stockholders’ equity to income as part of the profit or loss arising from the disposal. However, an entity adopting Ifrs for the first time need not comply with this requirement as concerns accumulated conversion dif- ferences existing at the transition date. If an entity adopting Ifrs for the first time makes use of this exemption: • • accumulated conversion differences for all businesses located abroad are considered to be nil on the transition date and the profit or loss on the subsequent disposal of any business abroad must exclude any conversion differences arising prior to the transition to Ifrs and must include conversion differences arising subsequent to that date. alsea applied that exemption in their consolidated financial statements at the transition date, and therefore reclassified the ac- cumulated effect of conversion of foreign entities as per Mfrs to retained earnings. as from January 1, 2011, alsea determined the effects of conversion in accordance with Ias 21. 33. new accounting standards the entity has not applied the following new and revised Ifrs, which have been analyzed but not yet implemented: IFRS 9, financial Instruments3 IFRS 10, Consolidated Financial Statements 1 IFRS 11, Joint Agreements 1 IFRS 12, Information to be disclosed concerning equity in other entities 1 IFRS 13, Measurement of Fair value 1 Modifications to IFRS 7, Disclosures– Compensation for financial assets and liabilities 1 Modifications to IFRS 9 and IFRS 7, effective date for Ifrs 9 and transition Disclosures3 Modifications to IFRS 10, IFRS 11 and IFRS 12, Consolidated financial statements, Joint Agreements and Disclosures Concerning equity in other entities: Transition guidelines IAS 19 (revised in 2011), employee benefits 1 IAS 27 (revised in 2011), Individual Financial Statements 1 IAS 28 (revised in 2011), Investments in Associates and Joint Agreements 1 Modifications to IAS 32, Disclosures - Compensation for Financial Assets and Liabilities 2 Modifications to IFRS, Annual improvements to IFRS 2009-2011 cycle, except for modifications to IAS 1 1 effective for annual periods beginning as from January 1, 2013. 2 effective for annual periods beginning as from January 1, 2014. 3 effective for annual periods beginning as from January 1, 2015. 34. Authorization of the consolidated financial statements the accompanying consolidated financial statements were authorized for issuance on March 29, 2013 by Diego Gaxiola Cuevas, Chief executive offcer, and therefore do not reflect events occurred subsequent to that date; they are subject to approval by the stockholders and audit committee, who may modify them as provided in the Corporations Law. fabián gosselin Castro Chief executive officer Diego gaxiola Cuevas Chief financial officer Alejandro Villarruel Morales Corporate Controller 133 The best is yet to come... 134 INVESTOR INFORMATION INVESTOR RELATIONS 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 2012 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. ABOuT ThIS REpORT Alsea presents its first 2012 comprehensive report, which reflects both the financial results as well as the actions taken during 2012 with respect to sustainability issues. For the second consecutive year we are presenting this report based on guidelines provided by the Global Reporting Initiative (GRI) methodology. It is a self-declared level B report, without external verification. Also, we are committed to ensuring that our operations and strategies are aligned with the United Nations’ Millennium Development Goals and the Principles of the Global Contract. This is why we are also presenting initiatives for supporting its 10 principles in this report. Enrique González Casillas Investor Relations ri@alsea.com.mx Phone: +52 (55) 5241-7035 Diego Gaxiola Cuevas CFO ri@alsea.com.mx Phone: +52 (55) 5241-7151 HEADQUARTERS Alsea S.A.B. de C.V. Av. Paseo de la Reforma #222, 3th. Floor Tower 1 Corporate Building Col. Juárez, Del. Cuauhtémoc ZIP Code 06600, México D.F Phone: +52 (55) 5241-7100 INDEPENDENT AUDITORS DELOITTE Galaz, Yamazaki, Ruiz Urquiza, S.C. Av. Paseo de la Reforma #489, 6th. Floor Col. Cuauhtémoc, Del. Cuauhtémoc ZIP Code 06500, México D.F. Phone: +52 (55) 5080-6000 SOCIAL RESPONSIBILITY: Ivonne Madrid Canudas responsabilidad-social@alsea.com.mx Phone: 52 41 71 00 ext. 7335 This Report is available in: www.alsea2012.com or in our App “Alsea 2012” (Downloadable in Itunes’s App Store). Our previous reports can be consulted in: www.alsea.com.mx FSC n o i t a c i n u m m o C e t a r o p r o C d n a l a n o i t a z i n a g r O f o n o i t a r o b a l l o c e h t h t i W n o t s u o H r o o C h t r a E l : t n i r P l i G o c i r e d e F : y h p a r g o t o h P . C S . s e r o d a ñ e s i D t t n i r P : n g i s e D 2 1 0 2 t r o p e R l a u n n A a e s l A In augmentation Annual Report 2012 www.alsea.com.mxGrowthStrengtheningResultsSustainability

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