Alsea, S.A.B. de C.V.
Annual Report 2013

Plain-text annual report

GRI 2.1, 2.2, 2.6 EXPANDING OUR HORIZONS 2013 was a record year in acquisitions, as well as organic growth. Thanks to our successful business model and diversification strategy, we were able to “Expand Our Horizons” in line with our strategic areas, which has allowed us to go beyond our clients’ expectations, drive our employees’ development, and ensure a synergy that maximizes our critical mass, while also ensuring the profitable and sustainable growth of the organization, being recognized as a socially responsible company. OUR PROFILE Alsea is the leading restaurant operator in Latin America with global leading brands in the Quick Service Coffee Shop and Casual Dining segments. ALSEA IS LIKE A It is the strength that aligns and structures the brands, endowing them with energy and direction to achieve their goals, driving them to work every day, enriching the life of its consumers creating special moments for them. 2013 ANNUAL REPORT EXPANDING OUR HORIZONS 628 UNITS 590 38 Mexico Colombia Coming soon 2014 537 UNITS 413 71 53 Mexico Argentina Chile 558 UNITS 436 72 34 16 Mexico Argentina Chile Colombia Touching people, enriching moments 39 UNITS 39 Mexico Has 1,862 units and over 32,000 employees 62 UNITS 62 Mexico 16 UNITS 13 1 1 1 Mexico Chile Argentina Colombia 3 UNITS Pei Wei Mexico 3 The primary logo lock up 19 UNITS 19 Mexico The secondary logo lock up GRI 2.2, 2.3, 2.5 2.7, 3.8 01 GRI 2.8 FINANCIAL HIGHLIGHTS(1) 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 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 2013 % 2012 % 100.0% 64.8% 5.9% 11.9% 3.0% 100.0% 9.5% 33.9% 46.1% 19.1% 21.2% 16.5% 17.8% 18.9% 100.0% 66.7% 7.1% 13.0% 4.2% 100.0% 5.4% 40.7% 34.5% 16.3% 19.7% 39.9% 26.7% 65.1% 26.4% (28.9)% 52.0% (5.5)% 15,718.5 10,490.8 1,115.1 2,038.2 663.3 12,381.7 663.3 5,043.6 4,271.4 3.1% 4.0% 11.7% 14.5% 58.2% 73.0% 0.0% (5.5)% 0.0% 40.79 0.99 0.5 6.21 687.8 12.8% 16.0% 31.0% 17.2% 1,862 32,362 13,519.5 8,764.2 797.3 1,608.6 401.8 9,797.6 932.6 3,317.2 4,520.7 8.6% 10.5% 25.78 0.57 0.5 6.57 687.8 1,421 27,619 (1) Figures in millions of pesos under IFRS, except per share data per, number of stores and employees. (2) EBITDA is defined as operating income before depreciation and amortization. (3) ROIC is defined as operating income after taxes over net operating investment (total assets - cash and cash equivalents - no-cost liabilities). (4) ROE is defined as net profit over major shareholders’ equity. (5) CAGR Compound Annual Growth Rate 2004-2013. Generating value to our Shareholders 2013 Alsea Annual Report | 02 STRATEGIC PLANNING BUSINESS MODEL 03 GRI 2.2, 2.3, 2.5, 2.6, 2.7, 2.10, 4.8 Alsea (BMV: ALSEA*) is the leading restaurant operator in Latin America with leading global brands in the Quick Service Restaurant (QSR), Coffee Shop and Casual Dining segments. The company has a multi-brand portfolio including Domino’s Pizza, Starbucks, Burger King, Chili’s, California Pizza Kitchen, P.F. Chang’s, Pei Wei, Italianni’s and The Cheesecake Factory. At the end of 2013, the company operated a total of 1,862 units in Mexico, Argentina, Chile, Colombia and shortly in Brazil. Alsea’s business model includes support for all the units through a Shared Services and Support Center that provides support in Management and Development Processes, as well as the Supply Chain. The company has more than 32,000 employees in five countries. Alsea holds the “Socially Responsible Company” distinction, and is one of the top 20 “Best Places to Work” in Mexico. 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 passion for excellence in service. • Respect and loyalty to our coworkers and the company To create a unified, respectful and unbiased work environment that is closely tied to the operations. • Personal excellence and commitment To always act honestly, austerely and fairly, without putting personal interests first. • Results oriented To always make strategic decisions that are for the good of the Company in order to improve results. STRATEGIC AREAS • Clients: Exceed our customers´ expectations through an unequalled experience in product, service and image. • People: Encourage the personal and professional development of our employees. • Synergy: Ensure synergy, maximizing critical mass in collaboration with our strategic partners. • Results: Ensure the Company’s profitable and sustainable growth. • Social Responsibility: Be recognized by our clients and employees as a Socially Responsible Company. CLIENTS BRANDS OPERATIONS MARKETING RECRUITMENT AND TRAINING SUPPORT Supply Chain Real Estate and Development Finance Human Resources Information Technology ALSEA UPPER MANAGEMENT Corporate Strategic Planning CORPORATE GOVERNANCE BOARD OF DIRECTORS Audit Committee Corporate Practices Committee 2013 Alsea Annual Report || 2013 Alsea Annual Report 04 PRESENCE IN THE FIVE MOST IMPORTANT MARKETS OF LATIN AMERICA 1,575 Units 144 Units 88 Units 55 Units 2014 Business start-up Net Sales million pesos EBITDA million pesos Net Income million pesos $15,719 $2,038 $663 $13,520 $10,669 $8,948 $1,609 $1,260 $1,003 $402 $230 $159 10 11 12 13 10 11 12 13 10 11 12 13 SALES PER BRAND 2% 3% 6% 05 GRI 2.3, 2.5, 2.7, 2.8 6% 32% 6% 17% 28% CASUAL DINING 6% 6% 3% 2% Chili’s Italianni’s P.F. Chang’s / Pei Wei California Pizza Kitchen QSR 28% 17% Burger King Domino’s Pizza COFFEE SHOPS 32% Starbucks DISTRIBUTION AND PRODUCTION 6% DIA 2013 Alsea Annual Report || 2013 Alsea Annual Report 06 MESSAGE FROM THE CHIEF EXECUTIVE OFFICER Dear shareholders It is a pleasure to share with you our results for the year 2013, a year full of achievements and a high dynamism for Alsea, in which we managed to expand our horizons, as well as our growth opportunities, through different organic growth and acquisitions initiatives. These will allow us to continue increasing the profitability of the company year after year and generate a greater value for you, our shareholders. A record year in terms of acquisitions • As part of our diversification strategy, we acquired 25% of Grupo Axo, a company that operates 16 brands in the fashion, cosmetic and household goods segments in Mexico. As a result, the company will leverage its strategic capabilities and business model maximizing synergies in its different processes. 2013 was the year when the acquisitions that we managed to close led us to expand our horizons, becoming our record year, with a total Capex investment close to 3.6 billion pesos. The following acquisitions were closed: • We achieved an agreement with Burger King to acquire 97 stores and the master franchise rights for Mexico. As a result, we consolidated Alsea’s business model, gaining control over the brand in the Mexican market since April. • We agreed to acquire the stakes of Starbucks in Mexico, Argentina and Chile, so Alsea now has a 100% stake in those markets, which positions us as Starbucks´s major business partner in the region. Additionally, we reached an agreement with Starbucks for the development and operation of the brand in Colombia, with P.F. Chang´s for the development and operation of the brand in Brazil, as well as an agreement with Walmart Mexico to acquire the VIPS restaurant business, including a total of 361 units of Vips, El Portón, Ragazzi and La Finca brands, with which Alsea will be able to reach more than 2,200 units and almost fifty thousand collaborators. Last year we were thrilled to close these transactions and agreements and now we are excited about the growth opportunities that these projects will give us in the future. We will manage to capitalize these projects thanks to our employee’s experience and the successful business model we run, expanding our horizons. Profitable Growth By the end of the year, we operated 1,862 units, representing a net growth of 441 units, out of which 1,411 are corporate units and 451 are sub-franchises. These units are profitably operated with the support and assistance of more than 32,000 employees in five countries. Thanks to their support we obtained very good results throughout the year. Facing a challenging macroeconomic environment, especially in the consumer good segment, in 2013 we achieved a growth of 8.0% in same-store sales and a net increase of 250 corporate units, which allowed us to expand our margins and have an important growth in our profitability. Financial Results At the end of 2013, net sales increased 16.3% to 15.7 billion pesos in comparison to the previous year. This increase is derived from the increase in the number of units, both due to openings and acquisitions, as well as the growth in same store sales. During the year, gross profit increased 1.7 billion pesos to 10.4 billion pesos, with a gross margin of 66.7%. Additionally, EBITDA grew 26.7% to 2.0 billion pesos at the end of 2013, which resulted in an increase of 110 basis points, ranging from 11.9% in 2012 to 13.0% during 2013. 07 GRI 1.1, 1.2, 2.8, 2.9, 3.11 Capex 3.6 billion pesos: record year in acquisitions and organic growth 15.7 BILLION PESOS IN NET SALES INCREASE 26.7% IN EBITDA VS THE PRIOR YEAR 13.0% EBITDA MARGIN 8.0% GROWTH IN SAME-STORE SALES 1,862 UNITS 2013 Alsea Annual Report || 2013 Alsea Annual Report 08 09 GRI 2.9, 2.10, 4.12, EC8, EN5 The best moments in the best company Majority net income also increased during the year, increasing 86.6% equivalent to 316 million pesos, closing at 681 million pesos. Earnings per Share, “EPS”, for the past 12 months increased to 0.99 pesos compared to the previous year, having a growth of 73%. Also, Alsea managed to have an important improvement in its profitability metrics, closing 2013 with a Return on Equity, “ROE” of 14.5%, which represents an increase of 400 basis points. A Promising Future For 2014, we estimate to invest a total of approximately 1.8 billion pesos in our organic growth and maintenance capex of our existing units. Additionally: • We will carry on with our successful development plan, which envisages the opening of 130 units of different portfolio brands for 2014. • During the next years, Alsea will consolidate the 2013 acquisitions, and in the same regard, for 2014 our brand P.F. Chang’s, will start operating in Brazil, and so the company will start expanding in this key market, expanding our potential of future growth within the Casual Dining segment. • Also, we will open our first The Cheesecake Factory unit in Mexico, a prestigious brand which has the highest volumes per unit in the world. Since we have the rights to develop the brand in Latin America, this project will represent a new growth channel in the medium term for Alsea. • In compliance with the long-term commitment with our business partners, the first Starbucks unit will start business in Colombia, helping us to consolidate our growth in South America; specifically we are strengthening our business model in a market as important as the Colombian, supporting the project with our experience with this brand in Mexico, Argentina and Chile. • Once the process of acquiring VIPS ends, we will accelerate the growth of the company with the incorporation of the 361 restaurants included in the operation, including the administrative office in charge of the standardization of products, bulk purchases, centralization of supplier delivery, as well as the manufacturing of dressings, soups and desserts. Through the Vips and El Portón formats, we will manage to supplement our portfolio offer, seeking to serve the medium-low class, which, we believe, will have important growth rates in line with the growth of the Mexican economy. SHARE - PRICE PERFORMANCE $45 $40 $35 $30 $25 $20 $15 $10 $5 Dec-11 Jan-12 Feb-12 M ar-12 Apr-12 M ay-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 M ar-13 Apr-13 M ay-13 Jun-13 Jul-13 Aug-13 Sep-13 AVERAGE VALUE TRADED IN 2013 $56 MILLION PESOS 58.2% SHARE PRICE GROWTH 3RD SHARE WITH THE HIGHEST PERFORMANCE IN 2013 Oct-13 Nov-13 Dec-13 Social Responsibility We are aware of the new challenges in environmental, financial and social aspects; therefore, we are continuously working to expand our horizons and go beyond what our stakeholders demand from us, through our Social Responsibility Committee and our Quality of Life, Responsible Consumption, Environmental and Community Support Commissions. During 2013 we achieved: • To be honored for the second consecutive year with the Socially Responsible Company distinction by CEMEFI. • For the first time we are part of the Mexican Stock Exchange Sustainability Index. • Be part –for the third consecutive year- of the United Nations Global Compact, operating in compliance with the guidelines of its Principles. • Celebrate the first anniversary of the “Va por mi cuenta” - “It’s on me” initiative, a social movement that contributes to ending child malnutrition in Mexico. We have successfully opened three children Dining Rooms in the cities of Metepec, Chalco and Ecatepec in Estado de Mexico, which serve more than 130,000 nourishing meals to children living in extreme poverty. The 4th “Our Dining Room” is currently under construction in Mexico City, to serve 330 children more. Our employees donated volunteer work equivalent to 20,000 hours. • In terms of Responsible Consumption, we made nutrition facts of the main Alsea brand products accessible to all our consumers. • Concerning the Environment, we have included 803 establishments in our energy program, saving almost 12.5 millions of kWh of electricity. • Thanks to our Quality of Life programs, Alsea was included in the Great Place to Work ranking in Mexico as one of the top 20 Best Places to Work in the category of 5,000+ employees. We are committed to improving our corporate governance practices, not only to comply as we do now with all the legal rules of the Stock Market, but also to excel them. 3RD YEAR IN THE IPC INDEX The future is full of opportunities that we will efficiently leverage by combining the support and approach of our team, the positioning and strength of our brands, as well as the flexibility and support through our business model of shared services. On behalf of the more than 32,000 employees that are part of Alsea, we appreciate your trust and support. We will continue being focused on engaging in initiatives and actions that generate value to all our shareholders, employees, consumers, strategic partners and the community in general, always expanding our horizons. Fabián Gosselin Chief Executive Officer March 2014 2013 Alsea Annual Report || 2013 Alsea Annual Report 10 GROWING BEYOND THE HORIZONS In 2013, Alsea showed a broad dynamism, achieving a net growth of 441 units, out of which 250 where corporate units, which represented greater margins and profitability for the company. For 2014, the Company estimates an organic growth plan of more than 130 units. Acquisition of 100% of the Starbucks stakes in Mexico, Chile and Argentina, to become Starbucks’s major business partner in the region. Furthermore, the Company reached an agreement with Starbucks for the development and operation of the brand in Colombia. Acquisition of 97 stores in Mexico and the master franchise rights in the country, consolidating thereby Alsea’s business model. Record year in acquisitions Capex 3.6 billion pesos 11 GRI 1.1, 1.2, 2.2, 2.9, 3.11 A PROMISING FUTURE Entrance to the Brazilian market, start of operations with P.F. Chang’s Net growth of 441 units Development of The Cheesecake Factory in Mexico Increase of 250 corporate units Opening of Starbucks in Colombia DIVERSIFICATION The diversification strategy will originate a new growth curve in the medium and long term, expanding the horizons towards other retail segments. Alsea acquired 25% of Grupo Axo, leading company in the merchandising and distribution of international brands in the fashion, cosmetics and household goods. 2013 Alsea Annual Report || 2013 Alsea Annual Report 12 13 GRI 2.8, 2.10, 4.8, LA1, LA13, HR4 UNLIMITED TALENT AND COMMITMENT In 2013, as a result of its ongoing work in favor of its employees’, quality of life and development, Alsea was recognized in Mexico as one of the top 20 “Best Places to Work”. Alsea always acts ethically and responsibly, promoting personal and labor balance in and outside the company, as well as a culture of fairness and diversity throughout the organization. The Code of Conduct guarantees equality of opportunities, respect and non- discrimination. Percentage of Men and Women 37% 8,630 Women 63% 14,405 Men *The information about the percentage of men and women, permanent employment contract and average age is only for Mexico. TOTAL EMPLOYEES 32,362 INCREASE OF VS PRIOR YEAR 17% Permanent employment contract Temporary employment contract 75% 25% 25 Years of age on average 25 Years or less 26 to 34 35 to 44 45 to 54 55 or more 57% 28% 11% 3% 1% 2013 Alsea Annual Report || 2013 Alsea Annual Report 14 EXPANDING THE HORIZONS OF PROFITABILITY SHARE PRICE $40.79 VAR 58.2% $25.78 $14.08 $12.93 DEC 10 DEC 11 DEC 12 DEC 13 Third consecutive year in the IPC Index INCREASE IN THE AVERAGE DAILY VALUE TRADED 150% VS 2012 Listed for the first time in the IPC Sustainability Index of the Mexican Stock Exchange 15 GRI 2.8, 2.9, 2.10 $2.5 BILLION PESOS LOCAL BONDS ISSUED TO 5 YEARS DEBT STRUCTURE $5.0 BILLION PESOS 58% 14% 11% 8% 9% 17 18 Sales per country 3% 4% 20% 73% 26.7% GROWTH IN EBITDA MARGIN TO 2.0 BILLION PESOS INCREASE OF 110 PBS 88.6% GROWTH IN GROSS PROFIT TO 663 MILLION PESOS ROE 14.5% ROIC 11.7% 1415162013 Alsea Annual Report || 2013 Alsea Annual Report 16 17 GRI 2.8 ADDED VALUE THAT BROADENS THE HORIZONS 6.8% INCREASE IN AVERAGE TICKET Net sales increased 16.3% to 15.7 billion pesos in 2013 compared with the previous year, as a result of customer satisfaction, which also results in a growth of 8.0% in Same-Store Sales. Starbucks Mexico and Domino’s Colombia had the highest growth in Same-Store Sales. 8.0% GROWTH IN SAME-STORE SALES SALES OF 15.7 BILLION PESOS 16.3% INCREASE MORE THAN 260 MILLION customers served 2013 Alsea Annual Report || 2013 Alsea Annual Report 18 GRI 4.1, 4.2, 4.3, 4.4, 4.5, 4.7, 4.9, 4.10, 4.11 19 MESSAGE FROM THE CHAIRMAN OF THE BOARD To the Board of Directors of Alsea S.A.B. de C.V. Dear Shareholders: Once again, Alsea, through its Board of Directors, reaffirms its commitment to be a company that fully complies with the Code of Best Practices, to guarantee the highest standards of Corporate Governance, building greater safety and trust among its shareholders, as it has been since the initial public offering of our shares in the stock market. In this manner, Alsea has managed to achieve its ambitious business plans efficiently and profitably. In 2013, the share price of Alsea had a positive performance, as the profit per share grew 73% compared to the previous year. During this period, Alsea conducted unprecedented investment decisions, all in the long term, seeking to guarantee the profitable growth of the company; to ensure that it has operating capacity to successfully accomplish these highly important projects. The Board of Directors, its governance bodies and management, have worked jointly to prepare the Strategic Plan 2020, to help the company achieve the profitability and growth expected in the market, protecting the company at all times from the implicit risks of a challenging management, both because of its size, as well as its geographic and brand diversification. Alsea has proven to be a company committed to the community, the environment and the quality of life of its employees and customers. Likewise, the company has proven to follow responsible and solid business practices, which has led it to be part of the Mexican Stock Exchange Sustainability Index as of 2013, generating thereby value to the business, its employees and shareholders. Sincerely, Alberto Torrado Martínez Chairman of the Board TRANSCENDING WITH RESPONSIBILITY AND ETHICS CORPORATE GOVERNANCE Alsea’s solid structure for Corporate Governance contributes to our development and long-term viability. CORPORATE GOVERNANCE 10 BOARD MEMBERS 5 INDEPENDENT BOARD MEMBERS CHAIRMAN: PROPRIETARY BOARD MEMBER CORPORATE PRACTICES COMMITTEE AUDIT COMMITTEE The Board of Directors is constituted by ten members, ratified or appointed by the General and Extraordinary Shareholders’ Meetings held on April 13, 2013. The Board of Directors includes five independent members and one proprietary board member as chairman. Concerned about having an impartial approach to strategic planning, Alsea has appointed Independent Members to the Board of Directors, 50% of which are Independent Members, exceeding the percentage of 25% required by the Securities Exchange Act. The company does not have Alternate Board Members, as it is considered that a Board Member is failing his/her duty to the rest of the Board Members by his/her non-attendance. The company can convene a Shareholders’ Meeting at the request of at least 25% of the Board Members. In compliance with the Securities Exchange Act and seeking to assist the Board of Directors, Alsea has created two committees acting as intermediary management bodies: The Corporate Practices Committee and the Audit Committee, which are made exclusively by Independent Board Members. The compensation framework for Alsea´s Board Members, is fixed, and calculated based on attendance to Shareholders´ meetings and committees to which each Member belongs, their participation in discussions and the effectiveness of strategic decisions made by them. For more information consult the Corporate Governance and Reports Center sections of the Alsea website. Corporate Governance Reports Center 2013 Alsea Annual Report || 2013 Alsea Annual Report 20 BOARD OF DIRECTORS 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 DIAZ RIVERA Y MANGINO, S.C. AUDIT COMMITTEE Iván Moguel Kuri CHAIRMAN Julio Gutiérrez Mercadillo MEMBER Raúl Méndez Segura MEMBER Elizabeth Garrido López SECRETARY INDEPENDENT BOARD MEMBERS 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 CHÉVEZ, RUIZ ZAMARRIPA Y CÍA., S.C. León Kraig Eskenazi DIRECTOR AND PARTNER OF IGNIA PARTNERS, LLC. CORPORATE PRACTICES COMMITTEE Julio Gutiérrez Mercadillo CHAIRMAN Marcelo A. Rivero Garza MEMBER León Kraig Eskenazi DIRECTOR AND PARTNER OF IGNIA PARTNERS, LLC. Elizabeth Garrido López SECRETARY GRI 4.1, 4.2, 4.4, 4.6, 4.8, 4.13, LA13, HR4, SO4, SO5, SO7 21 PARTICIPATION IN CHAMBERS AND ASSOCIATIONS • Consejo de la Comunicación, members of the board, with active participation in social benefits campaigns. • American Chamber of Commerce, as a guest member of the Tax Committee and the Real Estate Development Committee. • AMCO (Asociación Mexicana de Comunicaciones). Alsea, contributes 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 of each country where we are present. The Company complies with laws and regulations governing economic competence, anti-trust practices and the arm’s length principle, therefore it has never been penalized for failing to adhere to them. CODE OF ETHICS AND CONDUCT The Code provides the guidelines through which the company does its everyday activities, in line with its strategic planning. Alsea promotes a fairness and diversity culture, and any act of discrimination for reasons of age, color, disability, marital status, race, religion, gender and sexual orientation is sanctioned by the Code of Ethics and Conduct. Línea Correcta is the open line to receive reports related with the violation of the Code of Ethics and Conduct by Alsea’s employees, as well as to report complaints related to customer and supplier service. All the information received is promptly processed and responded to by the Alsea Ethics Committee. For more information consult the Code of Ethics and Conduct in Alsea´s website 2013 Alsea Annual Report || 2013 Alsea Annual Report 23 GRI 3.5, 4.14, 4.15, 4.16, 4.17 For Alsea, being socially responsible means having a positive impact, both inside and outside the company. Social Responsibility is an attitude incorporated into all aspects of planning and operation in the business units that build the Company. Quality of Life Commission Community Support Commission Responsible Consumption Commission Social Responsibility Committee Environmental Commission 22 RESPONSIBLE MANAGEMENT Alsea succeeds in its Social Responsibility management through its Social Responsibility structure. The Company has 70 representatives from areas, led by the Chairman of the Board and the Chief Executive Officer, who meet periodically to assess the relevance of internal and external matters and to respond to stakeholders’ concerns, determined by the Social Responsibility Committee. In order to comply with our programs and initiatives, the Committee has four Commissions: Community Support, Responsible Consumption, Quality of Life and Environment. This structure is already consolidated and currently has a five-year development plan for Mexico. The main challenge is to create specific plans and programs for Latin America, strengthening the Social Responsibility Strategy of Alsea. GROUPS OF INTEREST S R E D L O H E R A H S S T N E L C I S R O T A R O B A L L O C I S R E L P P U S I Y T N U M M O C DIALOGUE WITH STAKEHOLDERS Shareholders’ Meeting Relations with Investors Portfolio of Internal Means of Communication Dialogue with our Communities Electronic Media Organizational Climate Surveys Focus Groups Línea Correcta* * Phone line for complaints ANNUAL PERMANENT 2013 Alsea Annual Report || 2013 Alsea Annual Report 24 25 GRI LA1, LA2, LA3, LA7, LA10, LA13 7,667 employees internally promoted 8,222 direct employment contracts created 86 hours of training per year for collaborators who serve customers daily In order to strengthen our employees’ physical and financial health, Alsea organized: • Health City • Weight challenge • Financial Health Week • Creation of the Maximiza savings account It also strengthened quality life through: • The alignment of the Variable Compensation Plan for Managers, of all brands • The strengthening of the “Monthly weekend off for managers” QUALITY OF LIFE Alsea is an inclusive company, where minorities have access to the same opportunities and possibilities for personal, labor and financial development. As a result it expands the horizons by incorporating people with disabilities and the elderly to the operations. EMPLOYEES WITH DISABILITIES IN ALSEA 136 VS 90 IN 2012 Employees Breakdown 7% Staff Operating Staff SUCCESS STORY For Salvador Torres “Chavita”, Lobby Manager, Burger King is his second home and he is proud to have worked here for 10 years. 93% Number of employees STAFF Mexico Latam OPERATING STAFF Mexico Latam ALSEA TOTAL 1,742 351 21,293 8,976 32, 362 2013 Alsea Annual Report || 2013 Alsea Annual Report OBJECTIVES • Activate the Mexican youth. • Promote physical activity. • Stimulate through social networks. The wellness program includes three basic pillars: Physical activity OBJECTIVES • Comply with regulatory and standard guidelines for quality. • Meet clients’ needs. • Define brand standards and processes. GRI PR2, PR3, PR4, PR5, PR6, PR7, PR8 27 ACTIONS • Starbucks Mexico Race (22,000 participants). • 444,000 activations that promote an active lifestyle through Domino’s Pizza’s social networks. • Chili’s Cup (446 people). OBJECTIVES Guidelines for communication and dissemination of programs and advertising campaigns. Product Communication ACTIONS • Publication of nutritional facts of products in websites. • Innovation and improvement of products. ACTIONS • Advertising and communication at the points of purchase. • Dissemination strategy. • Adherence to the PABI Code and marketing codes. 26 RESPONSIBLE CONSUMPTION Alsea expands its horizons by contributing to consumers’ wellbeing, promoting healthy lifestyles and a balanced nutrition that combines physical activity and a healthy diet. Likewise, and voluntarily consumers are provided with nutritional facts of Alsea’s main Food and Beverages products through the brands and Company’s websites, as a sign of our concern for our customers’ wellbeing. SATISFIED CUSTOMERS MEXICO 83.8% MEXICO 97.1% ARGENTINA 97.0% MEXICO 79.4% The primary logo lock up MEXICO 85.8% ARGENTINA 86.6% CHILE 96.8% COLOMBIA 92.4% The secondary logo lock up MEXICO 84.9% MEXICO 75.0% MEXICO 78.8% MEXICO 82.8% ARGENTINA 86.6% THE CHALLENGE FOR THE NEXT YEARS, AS OF 2014, IS TO STRENGTHEN OUR BRANDS’ POSITIONING IN TERMS OF THE THREE BASIC PILLARS ABOVE. For more information consult the living a balance life of Alsea’s website CUSTOMER SATISFACTION All the brands have a program that measures customers’ level of satisfaction, in addition to having proven customer-service and complaint-solving procedures. CLIENTS No incidents involving the failure to comply with product labeling or marketing communications regulations, including advertising, promotion, and sponsorship. No complaints related to improper use of consumers’ personal data. 2013 Alsea Annual Report || 2013 Alsea Annual Report 28 VALUE CHAIN SUPPLIERS Alsea’s Procurement Department works hard to supply the company with excellent quality products at competitive prices, as well as to develop and oversee our suppliers’ financial, social and environmental practices. 80% OF TOTAL PURCHASE IN MEXICO COMES FROM LOCAL SUPPLIERS Alsea invites its suppliers to commit to social responsibility and the chain of value, by signing the “Letter of Compliance with Laws and Regulations”, as part of its requi- rements to register procurement suppliers through which they are committed to: • Human Rights. • Workers’ Rights, Safety and Health. • Civil Protection Law. • Federal Environmental Regulations. • Anticorruption Practices. For more information consult the Procurement Policy on Alsea´s website SUCCESS STORY Campo Vivo was created in 2007, after working for many years with organic farmers. Alsea and Endeavor Mexico launched a program for the development and growth of suppliers. 1 Campo Vivo was chosen to take part in the program. 29 GRI EC6, EC9, HR1 2 The mission of Campo Vivo is to develop organic farming through a strong brand and efficient production and distribution. Alsea helped them to obtain funding and provided training and support on marketing and communication. 3 Generating value to our suppliers Launch of product MAY 2010 In May 2010, Campo Vivo products were launched. These are organic, certified products free of synthetic chemicals, the production of which has a lower impact on the environment. 5 Direct and Indirect Impact: • Global sales of juice grew more than 120%. • Positive impact on farming, by privileging local fruit producers in the area. • Creation of an important source of employment. • Empower women from Jungapeo, Michoacán. 4 “To sum up, we could say that the global impact of Alsea over a SME like Campo Vivo and its employees has been strong and beneficial. We have been able to increase our global volume, improve our product image, as well as the credibility of our other customers, increase our sales at self-service stores, have training activities, increase our production capacity and be able to develop a top HACCP control system that has allowed us to sell our products to new clients”. Mateo Dornier Owner of Campo Vivo 2013 Alsea Annual Report || 2013 Alsea Annual Report 30 ENVIRONMENT By sustainably operating its stores, Alsea expands the horizons of environmental care, assuring profitability through innovation and leadership on four lines of action of its Environmental Sustainability Plan: • Energy: Seeking to reduce energy consumption and promote the use of renewable energy. • Water: Optimizing water consumption by implementing better practices. • Waste: Minimizing the amount of waste sent to landfills, promoting recycling and correct waste segregation. • Inputs: Promoting the use of eco-friendly materials that promote an eco-friendly lifestyle among consumers, employees and suppliers. ENERGY ESTABLISHMENTS HAVE HIGH EFFICIENCY EQUIPMENT OF CONTROL AND AUTOMATION SAVING OF 762,234 L OF LP GAS PER YEAR 12,463,577 kWh ENERGY SAVING *The figures mentioned in this section only include results for Mexico. OBJECTIVES 2013 achieved per Unit Total QSR Total Coffee Shops Total Casual Dining Others 0.00% -1.00% -2.00% -3.00% -4.00% -5.00% -6.00% -7.00% -8.00% -9.00% -2.00% -2.90% -7.90% -8.30% kWh per unit T CO2 unit Note: Only considers power: 87% of information calculated based on actual consumption and 13% of estimated information based on averages by brand. Only stores operating through November 2013 are considered because of billing timing from CFE.-Comisión Federal de Electricidad-. Savings in water consumption. Urban Context Accessibility Natural ventilation, to prevent using air conditioning inside of the store. Low-water consumption toilets and faucets. Low-voltage lighting GRI 1.2, 2.10, 3.9, EN3, EN4, EN5, EN6, EN7, EN16, EN22, EN26, PR1 31 Eco-friendly materials such as painting sealers and recycled materials, were used to build the building and the furniture. SUCCESS STORY The Starbucks store located in Bosque de Chapultepec is the first Starbucks store awarded a LEED® SILVER certification in Mexico. It was designed and built in compliance with the guidelines established by the Green Building Certification Institute (GBCI). Efficient equipment to save energy and improve the quality of the environment inside of the store. LEED® STORES 1 6 Besides, the company was able to meet with specific guidelines for the certification of three more stores in 2012: • Costanera Center • Ariztia Building • Plaza San Carlos LEED®, and its related logo, is a trademark owned by the U.S. Green Building Council® and is used with permission. Alsea was recognized by the Ministry of the Environment of Mexico City for taking part in the “Ponte las Pilas con tu Ciudad” program, and collecting batteries for the first time in the offices. INPUTS WASTE AND WATER ENERGY EFFICIENCY INITIATIVES •166 heaters were replaced in our restaurants, switching to more efficient equipments. • 10 Domino’s Pizza and Burger King establishments now use natural gas instead of LP gas. • Signing of the first contract with a photovoltaic park through which 200 establishments in Mexico will be supplied with green energy. Alsea is involved with its products life cycles and strives to minimize the impact on the environment due to their consumption. Therefore, we promote the use of inputs that: • Have post-consumption or post-industrial materials. • Reduce associated emissions. • Reduce to a minimum the use of packaging and use the lower percentage of natural or non-renewable raw materials. We also promote the use of • Recyclable products. • Reused durable goods. • FSC1 certified products. • Electric equipment certified by Energy Star. • Paint and sealers with a low VOC2 content and low-mercury lamps. 1 Forest Stewardship Council. 2 Volatile Organic Compounds COLLECTION OF 462,682 L OF USED OIL PREVENTING THE POLLUTION OF 463MM L OF WATER 2018 GOALS REDUCTION OF 10% ELECTRICITY CONSUMPTION 75% COMING FROM RENEWABLE SOURCES Zero wastes TO SANITARY LANDFILL IN THE PRINCIPAL CITIES 8035832013 Alsea Annual Report || 2013 Alsea Annual Report 32 COMMUNITY SUPPORT Alsea goes beyond the horizons by supporting the growth and wellbeing of the communities where it operates through: • Community Service/ volunteering. • Financial donations. • Donations in kind. DURING 2013 THE COMPANY ACHIEVED: 20,000 VOLUNTEERED HOURS 19,828 PIECES OF FOOD DONATED 21,611 KG OF GRAINS COLLECTED THROUGH THE CAMPAIGN “SEMILLAS QUE LLENAN VIDA”, ORGANIZED BY DOMINO´S PIZZA AFTER THE NATURAL DISASTERS IN ACAPULCO, GUERRERO IN 2013, ALSEA COMMITTED TO SUPPORT THE DAMAGED COMMUNITIES, DONATING MORE THAN 1 MILLION PESOS DESTINED TO: • Housing reconstruction • Food and household goods purchase Fundación Alsea, A.C. reaffirms its commitment to ensuring food security in vulnerable communities and promoting human development through education. For more information, visit the website www.movimientovapormicuenta.org COMMUNITY DEVELOPMENT 33 GRI 4.12, EC8 Through the alliance with Fondo para la Paz, I.A.P., Fundación Alsea, A.C., combats extreme poverty in 12 communities of the State of Oaxaca, providing access to basic services, caring for and preserving the environment, as well as developing social capital, empowering women and reducing child malnutrition. Celebration of the 1st ANNIVERSARY More than $23 million pesos donated Operation of three “OUR DINING ROOMS” in Metepec, Chalco and Ecatepec 800 CHILDREN, are served meals daily, as of today, 73% of these children have overcome malnourishment More than 130,000 nutritious meals served The 4th “Our Dining Room” is now under construction, it will serve 330 MORE CHILDREN FOOD SECURITY Alsea has strengthened its relationship with Comedor Santa María, A.C. consolidating the brand “Nuestro Comedor” whose operational model assures that thousands of children in extreme poverty have access to a good daily nutrition. EDUCATION Fundación Alsea, A.C., has given a 100% scholarship for nine years, to 136 middle-school students from the Federación Mano Amiga Chalco, A.C., who thanks to this support are now about to complete their studies. Also, thanks to yearly talks by Alsea leaders who share salient life and professional stories, the company has managed to help young people and their families gain awareness of the fact that a combination of hard work, study and perseverance can help them reach their goals. 2013 Alsea Annual Report || 2013 Alsea Annual Report 34 SOCIAL RESPONSIBILITY CHALLENGES To engage Latin American leaders in Social Responsibility Management, to consolidate plans in the rest of the countries where Alsea operates, as well as to strengthen the actions in which the company is currently engaged. QUALITY OF LIFE • Consolidate the “Monthly weekend off for managers”program. • Increase the number of disabled or elderly people in our staff. • Keep promoting actions that guarantee that Alsea continues to be one of the best places to work. RESPONSIBLE CONSUMPTION • Exceed new nutrition regulations to become industry leaders in this field. • Strengthen activation of Alsea and its brands’ wellness approach in three basic aspects: - Product - Physical Activity - Communication ENVIRONMENT • Second stage of Renewable Energy Consumption. • 1st Sustainability Exhibition for employees. • Pilot test of Integrated Waste Management (Starbucks Mexico). • Strengthen the waste kitchen oil collection and recycling program. COMMUNITY SUPPORT • Build and operate the 4th “Nuestro Comedor” located in Mexico City. • Take “Nuestro Comedor” to other states of Mexico. • Promote social investment programs in the countries where the company has presence. 35 GRI 3.12 3.1 GRI INDEX Fully Partially GRI Indicator Description Level of reporting Global Compact Principles Page GRI Indicator Description Level of reporting Global Compact Principles Page Strategy and Analysis 3.4 Contact point for questions regar- ding the report or its contents. 1.1 1.2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 Statement from the most senior decision maker of the organization about the relevance of sustainability to the organization and its strategy. Description of key impacts, risks, and opportunities. Organizational Profile Name of the organization. Primary brands, products, and/ or services. Operational structure of the organization, including main divisions, operating companies, subsidiaries, and joint ventures. 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 (including geographic breakdown, sectors served, and types of customers/beneficiaries). Scale of the reporting organization (Number of employees, operations, net sales, total capitalization, etc.). Significant changes during the reporting period regarding size, structure, or ownership. 2.10 Awards received in the reporting period. Report parameters Report profile 3.1 3.2 3.3 Reporting period for information provided. Date of most recent previous report. Reporting cycle (annual, biennial, etc.). – – – – – – – – – – – – – – – 7, 11, 39 7, 11, 31, 39 Foldout Foldout, Inside front cover, 3, 11 Inside front cover, 3, 5 Inside back cover Inside front cover, 3, 5 Foldout, 3 Inside front cover, 3, 5 1, 5, 7, 13, 15, 17, 39 7, 9, 11, 15 3, 9, 13, 15, 31 Inside back cover Inside back cover Inside back cover Report scope and boundary Process for defining report content (determining materiality, prioritizing topics within the re- port; and identifying stakeholders the organization expects to use the report). 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. Data measurement techniques and the bases of calculations, including assumptions and techniques un- derlying estimations applied to the compilation of the Indicators and other information in the report. Explanation of the effect of any re-statements of information provided in earlier reports, and the reasons for such re-statement. Significant changes from previous reporting periods in the scope, boundary, or measurement me- thods applied in the report. GRI Content Index Table identifying the location of the Standard Disclosures in the report Assurance Policy and current practice with re- gard to seeking external assurance for the report. 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 – – – – – – – – – – Inside back cover 23 Inside back cover Inside back cover Inside front cover 31 Inside back cover 7, 11 35 Inside back cover Governance, commitments and engagement Governance 4.1 Governance structure of the organization. 1-10 19, 21 2013 Alsea Annual Report || 2013 Alsea Annual Report Description Level of reporting Global Compact Principles Page 1-10 19, 21 1-10 19 4.17 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-executi- ve members. Mechanisms for shareholders and employees to provide recommen- dations or direction to the highest governance body. Linkage between compensation for members of the highest gover- nance body, senior managers, and executives, and the organization’s performance. Processes in place for the highest governance body to ensure con- flicts of interest are avoided. Process for determining the composition, qualifications, and expertise of the members of the highest governance body and its committees. 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. Procedures of the highest governance body for overseeing the organization’s identification and management of economic, environmental, and social perfor- mance, including relevant risks and opportunities, and adherence or compliance with internatio- nally agreed standards, codes of conduct, and principles. Processes for evaluating the highest governance body’s own performance, particularly with res- pect to economic, environmental, and social performance. 36 GRI Indicator 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 Commitments to external initiatives Explanation of whether and how the precautionary approach or principle is addressed by the organization. Externally developed economic, environmental, and social charters, principles, or other initiatives to which the organization subscribes or endorses. 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 rou- tine membership dues; or views membership as strategic. Stakeholder Engagement 1-10 19, 21 1-10 1-10 1-10 19 21 19 1-10 3, 13, 21 1-10 19 1-10 19, 49 7 19, 47 1-10 9, 33, 39, Inside back cover GRI Indicator 4.16 EC6 EC8 EC9 EN3 EN4 EN5 EN6 EN7 EN16 EN22 EN26 Description Level of reporting Global Compact Principles Page Approaches to stakeholder engagement, including frequency of engagement by type and by stakeholder group. Key topics and concerns that have been raised through stakeholder engagement, and how the orga- nization has responded to those key topics and concerns, including through its reporting. – 8 23 23 Economic Performance Indicators Aspect: Market presence Policy, practices, and proportion of spending on locally-based suppliers at significant locations of operation. – 29 Aspect: Indirect economic impacts Development and impact of infrastructure investments and services provided primarily for public benefit through commercial, in-kind, or pro bono engagement. Understanding and describing significant indirect economic impacts, including the extent of impacts. – – Environmental Performance Indicators Aspect: Energy Direct energy consumption by primary energy source. Indirect energy consumption by primary source. Energy saved due to conservation and efficiency improvements. Initiatives to provide energy-effi- cient or renewable energy based products and services, and reduc- tions in energy requirements as a result of these initiatives. Initiatives to reduce indirect ener- gy consumption and reductions achieved. Aspect: Emissions, effluents and waste Total direct and indirect greenhou- se gas emissions by weight. Total weight of waste by type and disposal method. 8 8 Aspect: Products and services Initiatives to mitigate environ- mental impacts of products and services, and extent of impact mitigation. Aspect: Compliance 9, 33 29 31 31 31 31 31 31 8-9 9, 31 8 8 8-9 8-9 7-9 31 8 47 1-10 21 EN28 Monetary value of significant fines and total number of non-monetary sanctions for noncompliance with environmental laws and regulations. Labor practices and decent work Performance Indicators Aspect: Employment 4.14 List of stakeholder groups enga- ged by the organization. 4.15 Basis for identification and selec- tion of stakeholders with whom to engage. – – 23 23 LA1 LA2 Total workforce by employment type, employment contract, and region, broken down by gender. Total number and rate of new employee hires and employee turnover by age group, gender, and region. – 6 13, 25 25 Description Level of reporting Global Compact Principles Page GRI Indicator Description Level of reporting Global Compact Principles Page 37 Aspect: Product and service labeling Type of product and service infor- mation required by procedures, and percentage of significant products and services subject to such infor- mation requirements. Total number of incidents of non-compliance with regulations and voluntary codes concerning product and service information and labeling, by type of outcomes. Practices related to customer satisfaction, including results of surveys measuring customer satisfaction. 8 8 27 27 – 27 Aspect: Marketing communications Programs for adherence to laws, standards, and voluntary codes related to marketing commu- nications, including advertising, promotion, and sponsorship. Total number of incidents of non-compliance with regulations and voluntary codes concerning marketing communications, inclu- ding advertising, promotion, and sponsorship by type of outcomes. Aspect: Customer privacy Total number of substantiated complaints regarding breaches of customer privacy and losses of customer data. Aspect: Compliance Monetary value of significant fines for noncompliance with laws and regulations concerning the provision and use of products and services. – 27 – 27 1 27 – 47 PR3 PR4 PR5 PR6 PR7 PR8 PR9 GRI Indicator LA3 Benefits provided to full-time employees that are not provided to temporary or part-time emplo- yees, by significant locations of operation. – 25 Aspect: Occupational health and safety LA7 Rates of injury, occupational disea- ses, lost days, and absenteeism, and total number of work-related fatalities, by region and by gender. 1 25 Aspect: Training and education LA10 Average hours of training per year per employee by gender, and by employee category. – 25 Aspect: Diversity and equal opportunity LA13 Composition of governance bodies and breakdown of employees per employee category according to gender, age group, minority group membership, and other indicators of diversity. 1, 6 13, 21, 25 Human Rights Performance Indicators Aspect: Investment and procurement practices HR1 Percentage and total number of significant investment agreements and contracts that include clauses incorporating human rights concerns, or that have undergone human rights screening. 1, 6 29 Aspect: Non-discrimination HR4 Total number of incidents of discrimination and corrective actions taken. 1-2, 6 13, 21 Society Performance Indicators Aspect: Communities SO4 Actions taken in response to incidents of corruption. 10 21 Aspect: Public policy SO5 Public policy positions and participation in public policy development and lobbying. 1-10 21 Aspect: Anti-competitive behavior SO7 SO8 PR1 PR2 Total number of legal actions for anticompetitive behavior, anti-trust, and monopoly practices and their outcomes. Aspect: Compliance Monetary value of significant fines and total number of non-mone- tary sanctions for noncompliance with laws and regulations. – 21 – 47 Product Responsibility Performance Indicators Aspect: Customer health and safety Life cycle stages in which health and safety impacts of products and services are assessed for improvement, and percentage of significant products and services categories subject to such pro- cedures. 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. 1 1 31 27 2013 Alsea Annual Report || 2013 Alsea Annual Report 39 GRI 1.1, 1.2, 2.8 38 THE UN GLOBAL COMPACT’S TEN PRINCIPLES AREA PRINCIPLES 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. PRINCIPLE 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining. Labour PRINCIPLE 4: The elimination of all forms of forced and compulsory labour. PRINCIPLE 5: The effective abolition of child labour. MANAGEMENT DISCUSSION & ANALYSIS CONSOLIDATED RESULTS FOR THE FULL YEAR 2013 The following table shows a condensed Income Statement in millions of Pesos (excluding EPS), the margin of net sales that each item represents, as well as the percentage change for the year ended on December 31, 2013, in comparison with the same period of 2012. The information is presented according to the International Financial Reporting Standards (IFRS) and is presented in nominal terms. NET SALES GROSS INCOME EBITDA(1) OPERATING INCOME NET INCOME EPS(2) 2013 Margin % 2012 Margin % Change % $15,718.5 10,490.8 2,038.2 1,115.1 $663.3 0.9905 100.0% $13,519.5 100.0% 66.7% 13.0% 7.1% 4.2% N.A. 8,764.2 1,608.6 797.3 $401.8 0.5726 64.8% 11.9% 5.9% 3.0% N.A. 16.3% 19.7% 26.7% 39.9% 65.1% 73.0% PRINCIPLE 6: The elimination of discrimination in respect of employment and occupation. PRINCIPLE 7: Businesses should support a precautionary approach to environmental challenges. 1 EBITDA is defined as operating income before depreciation and amortization. 2 EPS is earnings per share for the last 12 months. Sales Environment 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. Net sales increased 16.3% to 15.7 billion pesos in 2013, in comparison with 13.5 billion pesos in the previous year. This increase reflects the growth in sales of the food and beverages segments in Mexico and South America, mainly resulting from the increase in the number of units, both due to openings and acquisitions, as well as a growth of 8.0% in same-store sales. These effects were partly offset by a decrease of 15.2% in the revenues with third parties from the distribution and production segment, mainly due to the merger of Burger King in Mexico and the decrease in same-store sales of the Burger King system. 16.3% INCREASE IN NET SALES THE MILLENNIUM DEVELOPMENT GOALS With actions developed by Alsea, the Company contributes to the fulfillment of the following Millennium Goals: GOAL 1: Eradicate extreme poverty and hunger. GOAL 2: Achieve universal elementary education. GOAL 3: Promote gender equality and empower women. GOAL 7: Ensure environmental sustainability. GOAL 8: Develop a global partnership for development. Growth in brand sales was derived from the net increase of 250 corporate units in the last twelve months, as well as the growth in same-store sales from operations in Mexico and South America, mainly as a result of an increase in the average ticket of our brands thanks to different commercial and price strategies implemented, as well as a higher volume of transactions. Cost of Sales Cost of sales decreased during the 12 months of 2013 in comparison with 2012. The variation of 190 basis points vs. the previous year (2012) is mainly accountable to the sales mix, i.e. the growth of brands at a lower cost percentage, as well as the fact that the sales of DIA to Burger King in property of third parties decreased as a result of the joint venture with Burger King Worldwide. NET INCREASE OF 250 CORPORATE UNITS 2013 Alsea Annual Report || 2013 Alsea Annual Report 40 41 GROSS INCOME OF 66.7% EBITDA INCREASE 26.7% EBITDA MARGIN 13.0% CONSOLIDATED NET INCOME 658.5 million pesos Gross Profit During the full-year 2013, gross income increased 1.7 billion pesos to 10.5 billion pesos, with a gross margin of 66.7% compared to 64.8% recorded in the previous year. The increase of 1.9 percentage points in the gross margin is attributable to the effect on costs due to the appreciation of the peso against dollar in the past 12 months, the price-increase strategy and promotion of key products in some brands, as well as the business mix generated. Operating Expenses Operating Expenses (excluding depreciation and amortization) increased 0.9 percentage points as a sales percentage, ranging from 52.9% during the 12 months of 2012 to 53.8% during the same period in 2013. This increase is mainly attributed to the business mix mentioned above, where the units with the highest sales growth are the ones that have a higher expenditure as a percentage of sales, as well as to the increase in the operating cost of the stores, and to a lesser extent to the increase of pre-operating expenses related to the expansion plan. This effect was partially offset by the margin from growth in same-store sales, the operating efficiencies achieved during the year and the increase in the number of units in operation. EBITDA EBITDA increased 26.7% to 2.0 billion pesos at the end of 2013, in comparison with 1.6 billion pesos during the full-year 2012. The increase of 430 million pesos in EBITDA can be mainly attributed to the increase of 19.7% in gross income, higher same-store sales, the increase in number of units, an improvement in the cost of sales and operating expenses efficiencies. EBITDA margin increased 1.1 basis points as a percentage of sales, rising from 11.9% in 2012 to 13.0% throughout 2013. This improvement in margin is attributable to higher same-store sales, the business mix –in which the units with the highest growth also have a higher EBITDA margin as a percentage of sales–, a higher gross margin thanks to the commercial initiatives and price-strategies implemented by the brands in the portfolio, as well as to the resulting operating improvements and the rise in the exchange rate. Operating Income During the twelve months ended on December 31, 2013, the operating income increased 40% equivalent to 317.8 million pesos, closing in 1.1 billion pesos in comparison with 797.3 million pesos in the same period of 2012. Consolidated Net Profit Mayority net income for 2013 increased 311 million Pesos to reach 676 million pesos in comparison with 365 million pesos of the previous year. This increase is mainly attributable to an increase of 318 million pesos in operating income, as well as the positive variation of 26 million pesos in the results of associated companies. Such variations were partially offset by the increase of 21 million pesos in the all-in cost of financing and the increase of 66 million pesos in tax on earnings. Likewise, consolidated net profit for 2013 increased considerably in comparison with 2012, rising from 401.8 million pesos to 658.5 million pesos. Earnings per Share Earnings per Share, “EPS”, for the twelve months ended on December 31, 2013, increased to 0.99 pesos in comparison with 0.57 pesos for the twelve months ended on December 31, 2012. Results by Segment Net sales and EBITDA are shown below by business segment in millions of pesos for the full-years of 2013 and 2012. Net sales by segment 2013 % Cont. 2012 % Cont. % Var. Food and Beverages Mexico $10,371.3 66.0% $8,752.2 64.7% 18.5% Food and Beverages South America 4,219.3 26.8% 3,416.3 25.3% 23.5% Distribution and Production 4,330.0 27.5% 4,032.4 29.8% 7.4% Intercompany operations(3) (3,202.1) (20.4)% (2,681.4) (19.8)% 19.4% SALES PER SEGMENT 7% 27% 66% Food and Beverages Mexico Food and Beverages South America Distribution and Production EBITDA by segment 2013 % Cont. Margin 2012 % Cont. Margin % Var. EBITDA PER SEGMENT 9.8% 13.6% 76.6% Food and Beverages Mexico Food and Beverages South America Distribution and Production Food and Beverages Mexico $1,562.0 76.6% 15.1% $1,374.2 85.4% 15.7% 13.7% Food and Beverages South America 277.5 13.6% 6.6% 214.3 13.3% 6.3% 29.5% Distribution and Production 253.8 12.5% 5.9% 206.8 12.9% 5.1% 22.7% Others(3) (55.1) (2.7)% N.A. (186.7) (11.6)% N.A. (70.5)% Consolidated EBITDA 2,038.2 100.0% 13.0% 1,608.6 100.0% 11.9% 26.7% (3) For the purposes of presenting comparable information by segment, these operations were included in each of the relevant segments. Food and Beverages Mexico Full-year sales ending on December 31, 2013 increased 18.5% to 10.4 billion pesos, in comparison with 8.8 billion pesos for the same period of the previous year. The increase of 1.6 billion pesos is attributable mainly to the growth of same-store sales for the segment in Mexico and the opening of 175 corporate units from different brands over the last 12 months. EBITDA increased 13.7% over the past 12 months ended on December 31, 2013, to 1.6 billion pesos, in comparison with 1.4 billion pesos for the same period of the previous year. This increase is attributable to the margin generated by the increase in same-store sales and the cost improvement derived from the initiatives, commercial and price strategies implemented in different brands, and to a lesser extent, to the effect due to the above- mentioned business mix. 2013 Alsea Annual Report || 2013 Alsea Annual Report 43 CAPITAL INVESTMENTS FOR 3.6 BILLION PESOS 42 Food and Beverages South America Tax on Earnings The Food and Beverages Division of South America represented 26.8% of Alsea’s consolidated sales and at the end of the fourth quarter of 2013 was comprised of the operations of Burger King in Argentina, Chile and Colombia, as well as Domino’s Pizza Colombia, Starbucks Argentina and Chile, as well as P.F. Chang’s in Chile, Argentina and Colombia. At the end of the period there were 283 corporate units and 4 sub-franchise units. This segment had an increase of 23.5% in sales, generating 4.2 billion pesos in comparison with 3.4 billion pesos in the previous year. This increase of 803 million pesos mainly resulted from the opening of 75 corporate units and 4 sub-franchise units in that segment, as well as the increase in same-store sales of some brands in South America, and, to a lesser extent, the inclusion of operations in Starbucks Chile, as of September 2013. These variations were partially offset by the effect of the devaluation of the Argentinean peso. The Food and Beverages EBITDA for South America for the full-year 2013 increased 29.5% to 278 million pesos, in comparison with 214 million pesos in the same period of 2012. The EBITDA margin for the last 12 months ended on December 31, 2013 showed an increase of 0.3 percentage points in comparison with the same period of the previous year. This increase is attributable to a higher same-store sales margin, economies of scale resulting from the growth in the number of corporate units, operating improvements and efficiencies and, to a lesser extent, a better business mix derived from the acquisition of Starbucks Chile. The above variations were partially offset by the increase in labor expenses at store level and the effect of the devaluation of the Argentinean Peso. Distribution and Production Net sales ending on December 31, 2013 increased 7.4% to 4.3 billion pesos, in comparison with 4.0 million pesos for the same period of the previous year. This is attributable to the growth in same-store sales of the brands in Mexico and the growth in the number of units served over the past 12 months, supplying a total of 1,570 units at December 31, 2013, in comparison with 1,474 units in the same period of the previous year, which represented an increase of 6.5%. Sales to third parties decreased 15.2% to 1.1 billion pesos, mainly due to the merger of Burger King in Mexico, the decrease of same-store sales of the Burger King system, and, to a lesser extent, to the appreciation of the exchange rate. EBITDA at the end of the full-year 2013 grew 22.7%. This variation is attributable to the higher margins in the bakery business, resulting from higher volume and lower production costs, as well as operating efficiencies in logistics expenses, in combination with the effect of accessories of the credit balance retrieved related to the VAT of Distribuidora e Importadora Alsea, S.A. de C.V. These variations were partially offset by the negative effect of the appreciation of the Mexican Peso, in comparison with the previous year. Non-operating Results The tax on earnings for the full-year 2013 was 285 million pesos, which represents an increase of 66 million pesos in comparison with the previous year, mainly due to the growth of 322 million pesos in the earnings before taxes at December 31, 2013. Balance Sheet Store Equipment, Improvements to Leased Locations and Properties and Pre-Operations The increase of 2.0 billion pesos in this item resulted from the acquisition of assets, the opening of new units as part of the expansion program over the past 12 months, as well as the acquisitions closed during this period. These effects were partially offset by the amortization and depreciation of assets. During the twelve months ended on December 31, 2013, Alsea made capital investments of 3.6 billion pesos, from which 3.5 billion pesos, representing 97.4% of the total investments, were earmarked for acquisitions, unit openings, equipment refurbishing and remodeling existing stores for the different brands in the company portfolio. The remaining 94 million pesos were destined for other items, notably the lighting and automation project to reduce energy costs, logistics and improvement projects, as well as software licenses, among other items. Inventory Inventories increased 642 million pesos at December 31, 2013. This increase of 91 million pesos, equivalent to 2.7 inventory days, is mainly attributable to the operations of collection of inputs in Argentina, as well as the collection of some inputs as part of the strategy to optimize costs. Taxes Payable – Net The decrease in the account Taxes Payable – Net of Taxes Recoverable of 93 million pesos at December 31, 2013 is mainly attributable to the increase in the VAT retrievable. Suppliers Our suppliers increased from 1.1 billion pesos at December 31, 2012 to 1.4 billion pesos at December 31, 2013. This variation of millions of pesos mainly resulted from a better negotiation process, which translated into an increase of eight supplier days, which rose from 38 to 46 days over the past 12 months, and to a lesser extent, due to a larger number of units in operation. All-in Cost of Financing Bank Debt and Local Bonds The all-in cost of financing for the twelve months ended on December 31, 2013 increased to 210 million pesos, in comparison with 189 million pesos in the same period of the previous year. This increase of 21 million pesos is accountable to the negative variation of 17 million pesos due to exchange rate result, as well as the increase of 4 million pesos in net interest paid derived from a higher leverage. The company’s consolidated net debt rose 2.6 billion pesos in comparison with December 31, 2012, closing at 5.0 billion pesos at December 31, 2013, in comparison with 2.5 billion pesos in the same period of the previous year. The company’s consolidated net debt rose 2.8 billion pesos in comparison with December 31, 2012, closing at 4.4 billion pesos at December 31, 2013, in comparison with 1.5 billion pesos in the same period of the previous 2013 Alsea Annual Report || 2013 Alsea Annual Report 44 45 Stock Market Indicators Book Value per Share EPS (12 months) Outstanding shares at the close of the period (millions) Price per share at close Hedge Profile 2013 6.21 0.9905 687.8 40.79 Var % -5.5% 73.0% 0% 58.2% 2012 6.57 0.5726 687.8 25.78 The Chief Financial Officer, jointly with the Treasury Manager, manages risk seeking to: mitigate present and future risks, not to divert operating resources and expansion plans, and have certainty regarding the Company’s future cash flows, to envisage a debt cost strategy. The instruments will only be used for hedging purposes. During 2013, hedge derivatives in foreign exchange matured for $146.1 million dollars, at an average exchange rate of 12.76 pesos per dollar. This hedging resulted in an exchange rate profit of $28.1 million Mexican pesos. At December 31, 2013, Alsea has hedges to purchase US Dollars in 2014 for an approximate amount of $16.3 million US dollars, at an average exchange rate of 12.60 pesos per dollar. The foregoing is estimated at an average exchange rate of 13.00 pesos per dollar. 92.3% OF THE DEBT WAS LONG TERM ROIC INCREASED FROM 8.6% TO 11.7% year. This increase is mainly due to the debt required to face the acquisition of 100% of Starbucks Mexico, Argentina and Chile, Burger King Mexico, and 25% of Grupo Axo, and to a lesser extent, the company’s capital investment requirements. At December 31, 2013, 92.3% of the debt was long term, and to the same date 98.9% was denominated in Mexican peso, 0.9% in Argentinean Peso and 0.2% in Chilean Peso. The following table shows the structure and balance of total debt in millions of pesos at December 31, 2013. (Figures in million pesos) Balance to Dec-13 TIIE Spread Maturity Bancomer $660.00 28-day TIIE Bancomer $615.00 28-day TIIE 1.15% 1.10% 06/04/2018 10/07/2018 Santander $265.00 28-day TIIE 0.90% 07/05/2018 Santander $100.00 4.32% 0.00% 28/02/2014 Banamex Banamex $97.50 28-day TIIE $770.00 28-day TIIE Share certificates $2,488.85 28-day TIIE Argentinean debt $48.15 22% Chilean debt $8.96 0.68% TOTAL 5,043.61 Share Repurchase Program 0.95% 0.95% 0.75% N/A N/A 12/07/2018 11/07/2018 23/05/2014 17/12/2014 13/01/2014 At December 31, 2013, Alsea closed the year with a balance of zero shares in the repurchase fund. During the 12 months ended on December 31, 2013, we conducted purchase and sale operations totaling 4,044,968 shares, for an approximate amount of 140.9 million pesos. Financial Ratios ROE WAS 14.5% At December 2013, the covenants established in the Company’s credit contracts were as follows: the Net Debt to EBITDA ratio for the past 12 months was 2.1x and the twelve- month EBITDA to twelve-month interest paid ratio was 8.4x. ROIC increased from 8.6% to 11.7% over the past 12 months ended on December 31, 2013. ROE for the 12 month ended on December 31, 2013 was 14.5% in comparison with 10.5% for the same period of the previous year. 2013 Alsea Annual Report || 2013 Alsea Annual Report 46 AUDIT COMMITTEE´S ANNUAL REPORT To the Board of Directors of Alsea S.A.B de C.V. MEXICO CITY, FEBRUARY 11, 2014 In compliance with the provisions of Sections 42 and 43 of the Securities Exchange Act and the Rules of the Audit Committee, I hereby inform you about our activities during the year ending on December 31, 2013. During the performance of our work, we have taken into account the recommendations set out in the Code of Best Practices on Corporate Governance and, in accordance with a work program developed from the Committee Rules, we met at least once every quarter to perform the following activities: Risk assessment We reviewed, jointly with the Administration and External and Internal Auditors, critical risk factors that could affect the Company’s operations, and determined that they have been adequately identified and managed. Internal control We ensured that the Administration, in fulfillment of its responsibilities regarding internal control, had established adequate policies and processes. In addition, we followed up on the comments and observations in this respect made by the External and Internal Auditors in the performance of their work. External Audit We recommended that the Board of Directors hire the external auditors for the Group and subsidiaries for the fiscal year 2013. To this end, we made sure of their independence and compliance with the requirements established by law. We jointly analyze their approach and work program. We maintained ongoing and direct communication to stay informed on the progress of their work, and take note of their comments on their review and the annual financial statement. We were promptly informed of their conclusions and reports on the annual financial statement and implemented their observations and recommendations resulting from their work. We authorized the fees paid to external auditors for auditing services and other authorized services, making sure that these would not interfere with their independence from the company. Taking into account the Administration’s point of view, we evaluated its services for the previous year and stated an evaluation process for the year 2013. Internal audit In order to maintain its independence and objectivity, the Internal Audit area reports functionally to the Audit Committee. In due course, we reviewed and approved its annual program of activities. To that end, Internal Audit participated in the process of identifying risks, determining controls and verifying them. We received periodic reports regarding the progress of the approved work program, changes that might have occurred and the reasons that caused them. We followed up on the observations and suggestions made by this area and implemented them appropriately. Financial Information, Accounting Policies and Third Party Reports We reviewed together with the people responsible, the process of preparation of quarterly and annual financial statements for the Company and recommended the Board of Directors approving and authorizing their dissemination. As part of this process we took into consideration external auditors’ opinions and observations and made sure that 47 GRI 4.11, EN28, SO8, PR9 the criteria, accounting and information policies 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 Alsea’s financial situation, operating results and changes in its financial status for the year that ended on December 31, 2013. We also reviewed 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 is a comprehensive process that provides reasonable confidence as to its contents. In conclusion, we recommend that the Board authorize its publication. Our review also included reports and any other financial information required by Mexican Regulatory Bodies. We reviewed and confirmed that during the year 2013 Alsea continued using and implementing the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) to prepare its Financial Statements. Compliance with regulations, legal aspects and contingencies We confirm the existence and reliability of the controls established by the Company, to ensure compliance with any various mandatory legal provisions, making sure that they were properly disclosed in the financial information. We periodically reviewed the various tax, legal and labor contingencies faced by the company, monitoring the efficiency of the identification and follow-up procedure, as well as their proper disclosure and recording. Administrative Aspects We held regular meetings with the Administration, to keep informed about the operations of the Company, its relevant and unusual activities and events. We also met with internal and external auditors to discuss their progress of their work and any constrains they might have encountered, and to facilitate any private communications they wished to have with the Committee. Whenever we deemed it advisable, we requested independent experts to provide support and opinions. Similarly, we had no knowledge of any significant lack of compliance with the operating policies, internal control systems, and accounting records policies. We held executive meetings with the exclusive participation of Committee Members, during which we reached agreements with and made recommendations to the Administration. The Chairman of the Audit Committee reported our activities to the Board of Directors on a quarterly basis. Our work was duly documented in records and prepared for each meeting, which were appropriately reviewed and approved by Committee Members. Sincerely, C.P. Ivan Moguel Kuri Chairman of the Audit Committee 2013 Alsea Annual Report || 2013 Alsea Annual Report 48 49 GRI 4.10 CORPORATE PRACTICES COMMITTEE’S ANNUAL REPORT To the Board of Directors of Alsea S.A.B de C.V. MEXICO CITY, FEBRUARY 11, 2014 In compliance with Sections 42 and 43 of the Securities Exchange Act and in the name of the Corporate Practices Committee, I present to you our report on the activities we carried out during the year ended December 31, 2013. In the development of our work, we observed the recommendations contained in the Code of Best Practices on Corporate Governance. To analyze the relevant results of the Company, the Committee held meetings to ensure the adequate follow-up on the agreements reached during the performance of their duties, inviting any company officers deemed advisable. To comply with the responsibilities of this committee, we carried out the following activities: • During this period we did not receive any request for dispensation according to Section 28, subsection III, paragraph f) of the Securities Exchange Act; hence, it was not necessary to make any recommendation in this regard. • This committee presented and approved the Strategic Plan of Domino’s Pizza Mexico, which we recommended to be presented to the Board of Directors for its ratification. • This committee presented and approved the Business Plan of Starbucks Colombia, which we recommended to be presented to the Board of Directors for its ratification. • This committee presented and approved the proposal to issue stock certificates, which we recommended to be presented to the Board of Directors for its ratification. • This committee presented and approved the Investment Plan to acquire 25% of Grupo Axo, S.A.P.I. de C.V.’s equity, which we recommended to be presented to the Board of Directors for its ratification. • This committee presented and approved the Investment Plan to acquire 100% of Starbucks Argentina and Chile, which we recommended presenting to the Board of Directors for its approval. • This committee presented and approved the project to acquire Vips, which we recommended to be presented to the Board of Directors for its approval. • We presented quarterly and accrued results of the Stock Exchange Plan for the year 2013. • We were presented with the update of the shareholder cost applicable at the end of each quarter of 2013, according to methodology authorized by the Board of Directors. • We were presented on a quarterly basis with a summary of the risk management operations through “forwards of the exchange rate” (Peso-Dollar) conducted over the year. These operations were executed as authorized; that is, in compliance with the objective of covering the exchange rate risk of the operation based on the authorized budget. • We were presented with the Strategic Plan 2013-2018, which we recommended to be presented to the Board of Directors for its approval. • We were presented the 2014 Budget, which we recommended to be presented to the Board of Directors for its approval. • We were presented with the Compensation Plan for the CEO’s Reporting Line, which we recommended to be presented to the Board of Directors for its approval. • We were presented with the Succession and Talent Development Plans, which we reviewed. • We were presented with the results of the evaluation of relevant executives in 2013. • The Corporate Division of Human Resources presented the Compensation Strategy for relevant executives for the year 2014. This Committee recommended the approval of the strategy. • We were presented with the organizational structure of Alsea 2014, which we recommended to be presented to the Board of Directors for its approval. • In each and every meeting of the Board of Directors, we presented a report of the activities of the Corporate Practices Committee for its consideration and recommended its ratification and/or approval. Finally, I would like to mention that as part of our activities, including the preparation of this report, we have always listened to and taken into account the viewpoint of relevant executives, without identifying any notable difference of opinion. Sincerely, Corporate Practices Committee Julio Gutiérrez Mercadillo Chairman 2013 Alsea Annual Report || 2013 Alsea Annual Report FINANCIAL STATEMENTS ALSEA, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated financial statements for the years ended December 31, 2013 and 2012, and Independent Auditors’ Report dated February 21, 2014 Contents 51 Independent auditors’ report 52 Consolidated statements of financial position Consolidated statements of income 54 Consolidated statements of income and other comprehensive income 55 56 Consolidated statements of changes in stockholders’ equity 58 Consolidated statements of cash flows 60 Notes to the consolidated financial statements Independent auditors’ report To the Board of Directors and Shareholders of Alsea, S.A.B. de C.V. 51 We have audited the accompanying consolidated financial statements of Alsea, S.A.B. de C.V. and Subsidiaries (the Entity), which comprise the consolidated statements of financial position at December 31, 2013 and 2012, and the consolidated statements of income, of income and other comprehensive income, of changes in stockholders’ equity and of cash flows for the years then ended, as well as a summary of the significant accounting policies and other explanatory information. Management’s responsibility for the financial statements The Entity’s Management is responsible for the preparation and fair presentation of the accompanying consolidated financial statements in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board and for such internal control as management determines is necessary to enable the preparation of 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 audits. We conducted our audits in accordance with International Standards on Auditing. 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s 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, 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 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 financial position of Alsea, S. A.B. de C. V. and its subsidiaries as of December 31, 2013 and 2012, and its financial performance and its cash flows for the years then ended, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Galaz, Yamazaki, Ruiz Urquiza, S. C. A member of Deloitte Touche Tohmatsu Limited C. P. C. Francisco Torres Uruchurtu February 21, 2014 Annual Report Alsea 2013 |52 Alsea, S.A.B. de C.V. and Subsidiaries Consolidated statements of financial position At December 31, 2013 and 2012 (Figures in thousands of Mexican pesos) ASSETS Current assets Cash and cash equivalents Customers, net Value–added tax and other recoverable taxes Other accounts receivable Inventories, net Advance payments Total current assets Long–term assets Guarantee deposits Investment in shares of associated companies Store equipment, leasehold improvements and property, net Notes 2013 2012 Notes 2013 2012 53 6 7 8 9 10 15 11 $ 663,270 $ 360,104 369,350 268,714 641,880 304,323 932,594 339,481 272,254 196,450 550,394 184,201 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Current maturities of long–term debt Suppliers Accounts payable and accrued liabilities Provisions Income taxes Taxes arising from tax consolidation 2,607,641 2,475,374 Total current liabilities 128,108 110,020 788,665 40,296 4,610,942 3,924,108 Long–term liabilities Long–term debt, 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 18 $ 388,486 $ 1,408,565 170,862 730,727 360,947 10,111 396,647 1,129,612 209,669 661,735 189,749 6,885 3,069,698 2,594,297 2,166,281 2,488,850 64,721 15,923 72,884 2,077,833 – 58,787 186,569 51,210 4,808,659 2,374,399 7,878,357 4,968,696 403,339 2,037,390 1,512,464 569,271 (251,037) 4,271,427 231,875 4,503,302 403,339 2,466,822 1,173,693 564,201 (87,347) 4,520,708 308,189 4,828,897 21 20 18 19 20 24 25 Intangible assets, net Deferred income taxes 12 and 17 3,263,896 2,418,830 20 982,407 828,965 Total long–term assets 9,774,018 7,322,219 Stockholders’ equity attributable to the controlling interest Non–controlling interest Total stockholders’ equity Total assets $ 12,381,659 $ 9,797,593 Total liabilities and stockholders’ equity $ 12,381,659 $ 9,797,593 See accompanying notes to the consolidated financial statements. Mr. Fabián Gosselin Castro Mr. Diego Gaxiola Cuevas Mr. Alejandro Villarruel Morales General Director Administration and Financial Director Corporate Controller Annual Report Alsea 2013 || Annual Report Alsea 2013 54 Alsea, S.A.B. de C.V. and Subsidiaries Consolidated statements of income For the years ended December 31, 2013 and 2012 (Figures in thousands of Mexican pesos) Net sales Cost of sales Leases Depreciation and amortization Other operating costs and expenses Other income, net Interest income Exchange loss (gain), net Interest expenses Alsea, S.A.B. de C.V. and Subsidiaries Consolidated statements of income and other comprehensive income For the years ended December 31, 2013 and 2012 (Figures in thousands of Mexican pesos) 55 Note 2013 2012 2013 2012 27 $ 15,718,543 $ 13,519,506 Consolidated net income $ 663,320 $ 401,798 29 5,227,739 1,262,533 923,121 7,212,874 (22,799) (39,044) 8,125 241,389 904,605 4,755,290 1,066,583 811,298 6,098,830 (9,804) (47,043) (8,719) 245,104 607,967 Items that may be reclassified subsequently to income: Valuation of financial instruments, net of income taxes – (9,963) Exchange differences on translating foreign operations (164,487) (114,134) Total comprehensive income for the period, net of income taxes $ 498,833 $ 277,701 (164,487) (124,097) Equity in results of associated companies 15 43,582 12,978 Comprehensive income (loss) for the year attributable to: Income before income taxes 948,187 620,945 Controlling interest Income taxes 20 284,867 219,147 Non–controlling interest $ $ 516,527 $ 240,821 (17,694) $ 36,880 Consolidated net income $ 663,320 $ 401,798 Net income (loss) for the year attributable to: Controlling interest Non–controlling interest Basic and diluted net earnings per share (cents per share) 26 $ $ $ 681,014 $ 364,918 (17,694) $ 36,880 0.99 $ 0.57 See accompanying notes to the consolidated financial statements. See accompanying notes to the consolidated financial statements. Mr. Fabián Gosselin Castro Mr. Diego Gaxiola Cuevas Mr. Alejandro Villarruel Morales Mr. Fabián Gosselin Castro Mr. Diego Gaxiola Cuevas Mr. Alejandro Villarruel Morales General Director Administration and Financial Director Corporate Controller General Director Administration and Financial Director Corporate Controller Annual Report Alsea 2013 || Annual Report Alsea 2013 56 57 Alsea, S.A.B. de C.V. and Subsidiaries Consolidated statements of changes in stockholders’ equity For the years ended December 31, 2013 and 2012 (Figures in thousands of Mexican pesos) Contributed capital Retained earnings Other comprehensive income items Capital stock Premium on issuance of share Repurchased shares Reserve for repurchase of shares Legal reserve Retained earnings Valuation financial instruments Effect of conversion of foreign operations Total controlling interest Non–controlling interest Total stockholders’ equity Balances at January 1, 2012 $ 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 Repurchase of shares (Note 24) Sales of shares (Note 24) Transfer of legal reserve (Note 24) Purchase of non–controlling interest (Note 1j, 16 and 25) Stock dividends declared (Note 24) Dividends declared in cash by a subsidiary (Note 24) Placement of shares (notes 3h and 24) Comprehensive income Balances at December 31, 2012 Repurchase of shares (Note 24) Sales of shares (Note 24) Purchase of non–controlling interest (Note 25) Dividends declared in cash (Note 24) Other movements Comprehensive income 1,090 (291) – – – – – – (15,262) 8,233 300,669 – – 26,744 1,088,278 – – 403,339 2,466,822 – – – – – – – – (429,262) – (170) – 6,192 – – – – – – – (1,011) 1,011 – – – – – (12,860) 193,158 – – (1,090) – 7,125 (7,125) – – – – – – – (308,902) – – – – – – – – – – – – – – – – – – – – – (13,151) 199,350 – – – – (13,151) 199,350 – (15,262) (494) (15,756) – – – – (27,000) (27,000) 1,115,022 – 1,115,022 364,918 (9,963) (114,134) 240,821 36,880 277,701 564,201 100,736 1,072,957 (797) (86,550) 4,520,708 308,189 4,828,897 (67,927) 72,997 – – – – – – – – – – – – – (343,880) 1,637 681,014 – – – – 797 – – – – – – (68,938) 74,008 – – (68,938) 74,008 (429,262) (28,020) (457,282) (343,880) (30,600) (374,480) 2,264 – 2,264 (164,487) 516,527 (17,694) 498,833 $ 569,271 $ 100,736 $ 1,411,728 $ – $ (251,037) $ 4,271,427 $ 231,875 $ 4,503,302 Mr. Fabián Gosselin Castro Mr. Diego Gaxiola Cuevas Mr. Alejandro Villarruel Morales General Director Administration and Financial Director Corporate Controller Balances at December 31, 2013 $ 403,339 $ 2,037,390 $ See accompanying notes to the consolidated financial statements. Annual Report Alsea 2013 || Annual Report Alsea 2013 58 Alsea, S.A.B. de C.V. and Subsidiaries Consolidated statements of cash flows For the years ended December 31, 2013 and 2012 (Figures in thousands of Mexican pesos) Operating activities: Consolidated net income Adjustment for: Income taxes Equity in results of associated companies Interest expense Interest income Loss on disposal of store equipment and property Provisions 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 paid Other liabilities Labor obligations Note 2013 2012 Note 2013 2012 59 $ 663,320 $ 401,798 Bank loans Cash flows from financing activities: 284,867 (43,582) 241,389 (39,044) 24,386 68,993 923,121 – – 219,147 (12,978) 245,104 (47,043) 64,200 90,005 811,298 (11,748) (9,963) 2,123,450 1,749,820 (15,629) – (84,317) (82,506) (102,645) (18,088) 264,222 (456,397) (41,453) 21,674 (79,917) (758) (23,263) (100,418) (38,332) (23,029) 80,640 (220,337) 85,066 19,460 Repayments of loans Issuance of debt instruments Repayments of debt instrument Increase in capital stock Interest paid Dividends paid Other items Acquisition of non–controlling interest Repurchase of shares Sales of shares 18 1 and 19 24 2,538,686 (2,449,815) 2,488,850 – – (241,389) (343,880) – (683,441) (67,927) 72,997 75,092 (750,168) – (1,000,000) 1,115,022 (245,104) – (27,000) (15,262) (13,151) 199,350 Net cash flows provided by (used in) by financing activities 1,314,081 (661,221) Net (decrease) increase in cash and cash equivalents (270,048) 190,889 Exchange effects on value of cash Cash and cash equivalents: At the beginning of the year At end of year 724 2,326 932,594 739,379 $ 663,270 $ 932,594 Net cash flows provided by operating activities 1,608,311 1,448,932 See accompanying notes to the consolidated financial statements. Cash flows from investing activities: Interest collected Store equipment, leasehold improvements and property Intangible assets Reimbursement of guarantee deposit Acquisitions of business, net of cash acquired 39,044 (1,127,548) (339,428) 47,043 (921,123) (220,542) – 2,262,800 1 and 16 (1,764,508) (1,765,000) Net cash flows used in investing activities (3,192,440) (596,822) Mr. Fabián Gosselin Castro Mr. Diego Gaxiola Cuevas Mr. Alejandro Villarruel Morales General Director Administration and Financial Director Corporate Controller Annual Report Alsea 2013 || Annual Report Alsea 2013 60 Alsea, S.A.B. de C.V. and Subsidiaries Notes to the consolidated financial statements For the years ended December 31, 2013 and 2012 (Figures in thousands of Mexican pesos) 1. Activity, main operations and significant events 61 c. Placement of debt instruments in the amount of $2,500,000.– In June 2013, Alsea concluded the placement of debt instruments worth $2,500,000. Those debt instruments are for a five–year term, maturing in June 2018, and bear interest at the 28–day TIIE rate (Mexican 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 Interbank Offering rate) plus 0.75 percentage points. Entity’s domicile is Paseo de la Reforma No. 222, tercer piso, Col. Juárez, Delegación Cuauhtémoc C.P. 06600, México, D.F. The Entity was incorporated for a period of 99 years, starting as from the date on which the respective deed was signed, which was April 7, 1997. $3,500 million. This is the first issue under the debt instrument program, which was approved on April 25, 2013 by the Board of Directors for issuances up to For disclosure purposes in the notes to the consolidated financial statements, reference made to pesos, “$” or MXP is for thousands of Mexican d. Acquisition of the master franchise of Burger King in Mexico.– In April 2013, Alsea acquired the master franchise rights to the Burger King pesos, and reference made to dollars is for US dollars. Operations restaurants in México, S.A. de C.V. (“BKM”), pursuant to a strategic association agreement signed between Alsea and Burger King Worldwide Inc. (“BKW”). BKM, a subsidiary of BKW in Mexico was merged with Operadora de Franquicias Alsea S.A. de C.V. (“OFA”), a subsidiary of Alsea, a result of which Alsea holds an 80% stake in OFS with the remaining 20% held by BKW. The Entity’s management has assessed the terms of the above agreement and strategic partnership concluding that it continues to exercise control over OFA, both before and after the transaction, such that Alsea is mainly engaged in operating fast food restaurants or “QSR” and cafeteria and casual dining units or “Casual Dining”. The brands operated the financial information of BKM has been consolidated in the accompanying consolidated financial statements, as from the closing date of in Mexico by the Entity are Domino’s Pizza, Starbucks, Burger King, Chili’s Grill & Bar, California Pizza Kitchen, P.F Chang’s and Pei Wei Asian Diner, transaction. and it has operated the Italianni’s brand beginning 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 Additionally, as part of the master plan for development of the franchise, Alsea committed to a plan for new openings that contemplates opening services, as well as administrative services (financial, human resources and technology). The Entity operates the Burger King and Starbucks. 175 units the next five years. The parties agreed to review the continuity of a contractual expansion plan after that period has elapsed (see brands in Chile and Argentina. In Colombia, it has operated the Domino’s Pizza and Burger King brands since 2008. In May 2011, Alsea entered accounting effects in Note 16). into 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. Significant events a. Acquisition of Starbucks operations in Mexico, Chile and Argentina.– As part of its expansion plan, in July 2013 Alsea entered into an agreement e. Acquisition of VIPS.– In September 2013, Alsea reached an agreement with Wal–Mart de México, S.A.B. de C.V. (Grupo Wal–Mart) to acquire 100% of VIPS, the Grupo Wal–Mart restaurant division, for a total of $8,200,000, which will be financed with debt. VIPS operations include a total of 362 restaurants, of which 263 are of the “Vips” brand, 90 are “El Portón” brand, 7 are “Ragazzi” brand and two are “La Finca” brand. Those operations also include: I) the rights to intellectual property over the four brands, the menus, development of to acquire 100% of the operations of the Starbucks coffee chain in Chile and Argentina. Such acquisition comprises the remaining 82% of the product, the operating processes and other items; II) the acquisition of 18 real property assets; III) the buildings of 214 units; and IV) an Starbucks Coffee Chile and the remaining 18% of Starbucks Coffee Argentina. With such acquisition, Alsea will control the 66 Starbucks stores in administrative office dedicated to the standardization of products, bulk purchases, the centralization of deliveries by suppliers and the production Argentina and the 44 stores in Chile (see Note 16 and 25). In September 2013, Alsea finalized the acquisition of the remaining shares of Starbucks of desserts, sauces and food dressings. The transaction included the acquisition of Operadora VIPS, S. de R.L. de C.V. (OVI) and Arrendadora de Coffee Chile, S.A. de C.V., as from which date it has consolidated the financial information. Restaurantes, S. de R.L. de C.V. (ARE), as well as the transfer of personnel who provide services to VIPS and that at the date of the transaction worked in different Grupo Wal–Mart service companies; the transfer became effective as of August 2013 and the personnel were transferred Additionally, in April 2013, Alsea acquired from Starbucks Coffee International (“SCI”, an affiliate of the Starbucks Coffee Company) the remaining to Servicios Ejecutivos de Restaurantes, S. de R.L. de C.V. (SER) and Holding de Restaurantes, S. de R.L. de C.V. (HRE), which are newly created 18% of Café Sirena, S.A. de C.V. (Café Sirena), a subsidiary created by both entities in Mexico. As a result of that acquisition, Alsea will control companies. On October 28, 2013, the Alsea shareholders approved the acquisition of VIPS and the close of such transaction is subject to receiving 100% of operations in Mexico (see Note 25). Additionally, Alsea committed to a new openings plan that contemplates approximately 50 units the respective regulatory authorizations and to meeting certain closing conditions. At December 31, 2013 no accounting effects have arisen in per year over the next five years. The parties agreed to review continuity of a contractual expansion plan after that period has elapsed. relation to that transaction. In June 2013, SCI signed an agreement to develop the brand in the Colombian market through an association between Alsea (70%) and Nutressa f. Acquisition of the exclusive rights to develop the P.F. Chang’s China Bistro in Brazil – In January 2013, the Entity signed a Development and (a Colombian company – 30%), whereby a commitment is made to open 51 stores in the following 5 years. b. Acquisition of 25% of Grupo Axo, S.A.P.I de C.V.– In June 2013, the Entity formalized the acquisition of 25% of the shares of Grupo Axo, S.A.P.I. de C.V. (Grupo Axo), a leader in sales of international brands of clothes, cosmetics and household appliances. Operation agreement for the exclusive rights to develop 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 enter the Brazilian market with the P.F. Chang’s China Bistro brand, a development and expansion strategy has been 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 Grupo Axo has more than 2,200 points of sale inside a number of department stores in Mexico. It has 116 of its own stores and it carries the Casual and Fast–food operator in Latin America. With Brazil operations as the new path for growth, the Entity will work towards generating following brands: Tommy Hilfiger, Coach, Guess, Rapsodia, Thomas Pink, Brooks Brothers, Marc Jacobs, Etro, Emporio Armani, Brunello Cucinelli, greater diversification and profitability of its portfolio. Theory, Kate Spade Express, Crate & Barrel and VSBA (Victoria’s Secret Bath Accessories (see Note 15)). Annual Report Alsea 2013 || Annual Report Alsea 2013 62 63 g. Signing of the exclusive rights to develop and operate the Cheesecake Factory® restaurants in Mexico – Alsea signed an agreement to the 2. Bases for presentation exclusive rights to develop and operate the 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. a. New and revised IFRSs affecting amounts reported and/or disclosures in the financial statements The agreement initially contemplates 12 openings between Mexico and Chile in the following eight years with 10–year agreements per restaurant, In the current year, the Entity has applied a number of new and revised International Financial Reporting Standards (IFRS) issued by the and the right to extend that period for an additional 10 years. International Accounting Standards Board (IASB), that are mandatorily effective beginning on January 1, 2013. The Cheesecake Factory® chain is considered the best seller per unit in its category. The brand focuses on providing customers with top quality New and revised Standards on consolidation, joint arrangements, associates and disclosures. products and services. Its operations include 162 restaurants under the The Cheesecake Factory® brand in over 35 states of the US operating under a franchise license. h. Capital issue.– In December 2012, Alsea issued stock worth $1,150 million pesos, which included the over–allotment option. The issue was carried In May 2011, a package of five standards on consolidation, joint arrangements, associates and disclosures was issued comprising IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 (as revised in 2011) Separate Financial Statements and IAS 28 (as revised in 2011) Investments in Associates and Joint Ventures. Subsequent to the issue out in the Mexican market through the Mexican Stock Exchange (MSE) and in foreign markets through a private offer made in accordance with of these standards, amendments to IFRS 10, IFRS 11 and IFRS 12 were issued to clarify certain transitional guidance on the first–time Regulation “S” of the US Securities Act of 1933. The final placement price according to the book closing was 21.50 pesos per share, which resulted application of the standards. 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 was comprised of 687,759,054 (six hundred and eighty seven million, seven hundred and fifty nine thousand, fifty four) Class I, Those standards had no significant effects at December 31, 2013, except the requirement to make additional disclosures, which are included in single series, common shares, with no par value. The Entity used the resources derived from this issue to prepay the debt instrument with ticker the accompanying consolidated financial statements. However, the standards that are applicable to the Entity are as follows: code ALSEA’11, which matures in 2014, as a result of which the Entity’s leverage decreased (Net Debt to EBITDA) from 1.9x to 1.2x based on figures at September 2012 (see Note 24). IFRS 10 Consolidated financial statements i. Early full amortization of the “ALSEA 11” debt instrument.– In May 2011, Alsea placed debt instruments for a total of $1,000 million in the Mexican IFRS 10 replaces the parts of IAS 27 Consolidated and Separate Financial Statements that deal with consolidated financial statements and SIC–12 market (the “ALSEA 11” debt instrument). The resources obtained from that issue were used mainly to prepay the debt instruments issued in Consolidation – Special Purpose Entities. IFRS 10 changes the definition of control such that an investor has control over an investee when a) December 2009 and March 2010 for $300 million and $400 million, respectively. it has power over the investee, b) it is exposed, or has rights, to variable returns from its involvement with the investee and c) has the ability to use its power to affect its returns. All three of these criteria must be met for an investor to have control over an investee. Previously, control was In December 2012, the Entity prepaid the total amount the ALSEA 11 debt instrument. The payment was for approximately $1,004.7 million, which defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Additional guidance included accrued interest. Payment was made using part of the resources obtained from a capital issuance carried out by the Entity, which helped has been included in IFRS 10 to explain when an investor has control over an investee. Some guidance included in IFRS 10 that deals with whether to improve the cost of the debt and the maturity profile (see Note 19). or not an investor that owns less than 50% of the voting rights in an investee has control over the investee is relevant to the entity. j. Acquisition of 35% of Grupo Calpik, S.A.P.I. de C.V. and of 10.64% of Panadería y Alimentos para Food Service, S.A de C.V..– On June 2012, the At December 31, 2013, the transition provisions set forth in IFRS 10 gave rise to no significant changes in the Entity. Entity formalized the acquisition of the remaining 35% of shares of Grupo Calpik, a company that holds the exclusive rights to develop and operate California Pizza Kitchen restaurants in Mexico. The transaction gave rise to a charge to stockholders’ equity of $15,262. Additionally, in IFRS 12 Disclosure of Interests in Other Entities October 2012, Alsea acquired the remaining 10.64% of the 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 transaction gave rise to a decrease in the Entity’s non– IFRS 12 is a new disclosure standard and is applicable to entities that have interests in subsidiaries, joint arrangements, associates and/ controlling interest of $15,172 and $11,748, respectively (see Note 25). or unconsolidated structured entities. In general, the application of IFRS 12 has resulted in more extensive disclosures in the consolidated k. Agreement to acquire Italianni’s restaurants and the exclusive rights to develop and operate that brand of restaurants in Mexico.– The Italianni’s acquisition concluded in February 2012 at a final price of $1,765 million. financial statements. IFRS 13 Fair Value Measurement Italianni’s is the leading Italian food chain in Mexico with more than 52 units in over 20 states. The brand is known for offering top quality IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The scope of IFRS 13 products and services thanks to its experienced operating team and a philosophy based on high service values (see Note 16). is broad; the fair value measurement requirements of IFRS 13 apply to both financial instrument items and non–financial instrument items for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements, except for share–based payment transactions that are within the scope of IFRS 2 Share–based Payment, leasing transactions that are within the scope of IAS 17 Leases, and measurements that have some similarities to fair value but are not fair value (e.g. net realizable value for the purposes of measuring inventories or value in use for impairment assessment purposes). Annual Report Alsea 2013 || Annual Report Alsea 2013 64 65 IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under IFRS 13 is an exit price regardless of whether that price is directly observable or estimated using another valuation technique. Also, IFRS 13 includes extensive 1 Effective for annual periods beginning on or after January 1, 2014, with earlier application permitted. 2 Effective for annual periods beginning on or after January 1, 2015, with earlier application permitted. 3 Effective for annual periods beginning on or after January 1, 2016, with earlier application permitted. disclosure requirements. The Entity’s management estimates that application of those new and revised standards will have no effects on the consolidated financial IFRS 13 requires prospective application from January 1, 2013. In addition, specific transitional provisions were given to entities such that they statements. need not apply the disclosure requirements set out in the Standard in comparative information provided for periods before the initial application of the Standard. In accordance with these transitional provisions, the Entity has not made any new disclosures required by IFRS 13 for the 2012 comparative period. 3. Significant accounting policies Amendments to IAS 1 Presentation of Items of Other Comprehensive Income a. Statement of compliance The amendments to IAS 1 Presentation of Items of Other Comprehensive Income introduce new terminology, whose use is not mandatory, for The Entity’s consolidated financial statements have been prepared in accordance with the IFRS issued by the IASB. the statement of comprehensive income and income statement. Under the amendments to IAS 1, the ‘statement of comprehensive income’ is renamed as the ‘statement of profit or loss and other comprehensive income’. The amendments to IAS 1 retain the option to present profit or loss b. Basis of measurement and other comprehensive income in either a single statement or in two separate but consecutive statements. However, the amendments to IAS 1 require items of other comprehensive income to be grouped into two categories in the other comprehensive income section: (a) items that will The Entity’s consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments that are not be reclassified subsequently to profit or loss and (b) items that may be reclassified subsequently to profit or loss when specific conditions valued at fair value, as explained in further detail within the significant accounting policies. are met. Income tax on items of other comprehensive income is required to be allocated on the same basis – the amendments do not change the option to present items of other comprehensive income either before tax or net of tax. The amendments have been applied retrospectively, i. Historical cost and hence the presentation of items of other comprehensive income has been modified to reflect the changes. Other than the above mentioned The historical cost is generally based on the fair value of the consideration paid in exchange for goods or services. presentation changes, the application of the amendments to IAS 1 does not result in any impact on profit or loss, other comprehensive income and total comprehensive income. IAS 19 Employee benefits – (revised in 2011) ii. Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Entity takes into account the characteristics of the asset or liability if In the current year, the Entity applied IAS 19, Employee Benefits – (revised in 2011) and the related amendments for the first time. market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share–based IAS 19 (as revised in 2011) changes the accounting for defined benefit plans and termination benefits. The most significant change relates to the payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that accounting for changes in defined benefit obligations and plan assets. have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 or value in use in IAS 36. The amendments require the recognition of changes in defined benefit obligations and in the fair value of plan assets when they occur, and hence In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the eliminate the ‘corridor approach’ permitted under the previous version of IAS 19 and accelerate the recognition of past service costs. All actuarial inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which gains and losses are recognized immediately through other comprehensive income in order for the net pension asset or liability recognized in are described as follows: the consolidated statement of financial position to reflect the full value of the plan deficit or surplus. Furthermore, the interest cost and expected return on plan assets used in the previous version of IAS 19 are replaced with a ‘net interest’ amount under IAS 19, which is calculated by applying • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the the discount rate to the net defined benefit liability or asset. Those changes have not given rise to significant effects. measurement date; b. New and revised IFRS in issue but not yet effective The Entity has not applied the following new and revised IFRSs that have been issued but are not yet effective: IFRS 9, Financial Instruments 3 Amendments to IFRS 9 and IFRS 7, Mandatory effective date of IFRS 9 and Transition Disclosures 2 Amendments to IFRS 10 and IFRS 12 and IAS 27, Investment Entities 1 Amendments to IAS 32, – Offsetting Financial Assets and Financial Liabilities 1 • Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and • Level 3 inputs are unobservable inputs for the asset or liability. Annual Report Alsea 2013 || Annual Report Alsea 2013 66 67 c. Basis of consolidation At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value, except that: The consolidated financial statements include those of the Entity and the subsidiaries over which it holds control. Control is obtained when – Deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in the Entity: • Has power over the investment accordance with IAS 12 Income Taxes and IAS 19 respectively; – Liabilities or equity instruments related to share–based payment arrangements of the acquiree or share–based payment arrangements • Is exposed, or has rights, to variable returns from its involvement with the investee; and of the Entity entered into to replace share–based payment arrangements of the acquireeare measured in accordance with IFRS 2 at the • Has the ability to use its power to affect its returns. acquisition date; and The Entity reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the – Assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non–current Assets Held for Sale and Discontinued three elements of control listed above. Operations are measured in accordance with that standard. Consolidation of a subsidiary begins when the Entity obtains control over the subsidiary and ceases when the Entity loses control of the Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non–controlling interests in the acquiree, subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement and the fair value of the acquirer’s previously held equity interest in the acquire (if any) over the net of the acquisition–date amounts of the of profit or loss and other comprehensive income from the date the Entity gains control until the date when the Entity ceases to control the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition–date amounts of the identifiable subsidiary. assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non–controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognized immediately in profit or Net income (loss) and each component of other comprehensive income are attributed to the owners of the Entity and to the non–controlling loss as a bargain purchase gain. interests. Total comprehensive income of subsidiaries is attributed to the owners of the Entity and to the non–controlling interests even if this results in the non–controlling interests having a deficit balance. Non–controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non–controlling interests’ proportionate share of the recognized When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Entity’s amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction–by–transaction basis. Other types accounting policies. of non–controlling interests are measured at fair value or, when applicable, on the basis specified in another IFRS. All intercompany balances and operations have been eliminated in the consolidation. Changes in the Entity’s ownership interest in existing subsidiaries When the consideration transferred by the Entity in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition–date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional Changes in the Entity’s ownership interests in subsidiaries that do not result in the Entity losing control over the subsidiaries are accounted for information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances as equity transactions. The carrying amounts of the Entity’s interests and the non–controlling interests are adjusted to reflect the changes in that existed at the acquisition date. their relative interests in the subsidiaries. Any difference between the amount by which the non–controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of Entity. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments When the Entity loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between (i) the reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of is remeasured at subsequent reporting dates in accordance with IAS 39, or IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as the assets (including goodwill), and liabilities of the subsidiary and any non–controlling interests. All amounts previously recognized in other appropriate, with the corresponding gain or loss being recognized in profit or loss. comprehensive income in relation to that subsidiary are accounted for as if the Entity had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable IFRSs). The fair When a business combination is achieved in stages, the Entity’s previously held equity interest in the acquiree is remeasured to its acquisition– value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for date fair value and the resulting gain or loss, if any, is recognized in profit or loss. Amounts arising from interests in the acquiree prior to the subsequent accounting under IAS 39, when applicable, the cost on initial recognition of an investment in an associate or a joint venture. acquisition date that have previously been recognized in other comprehensive income are reclassified to profit or loss where such treatment depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent would be appropriate if that interest were disposed of. d. Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement at fair value, which is calculated as the sum of the acquisition–date fair values of the assets transferred by the Entity, liabilities incurred by the period (see above), or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that Entity to the former owners of the acquiree and the equity interests issued by the Entity in exchange for control of the acquiree. Acquisition– existed at the acquisition date that, if known, would have affected the amounts recognized at that date. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Entity related costs are generally recognized in profit or loss as incurred. Annual Report Alsea 2013 || Annual Report Alsea 2013 68 e. Goodwill 69 The Entity discontinues the use of the equity method from the date when the investment ceases to be an associate or a joint venture, or when the investment is classified as held for sale. When the Entity retains an interest in the former associate or joint venture and the retained Goodwill arising from on a acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated interest is a financial asset, the Entity measures the retained interest at fair value at that date and the fair value is regarded as its fair value impairment losses, if any. on initial recognition in accordance with IAS 39. The difference between the carrying amount of the associate or joint venture at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the For the purposes of impairment testing, goodwill is allocated to each of the Entity’s cash–generating units that is expected to benefit from the associate or joint venture is included in the determination of the gain or loss on disposal of the associate or joint venture. In addition, the synergies of the combination. Entity accounts for all amounts previously recognized in other comprehensive income in relation to that associate or joint venture on the same basis as would be required if that associate or joint venture had directly disposed of the related assets or liabilities. Therefore, if a gain A cash–generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication or loss previously recognized in other comprehensive income by that associate or joint venture would be reclassified to profit or loss on the that the unit may be impaired. If the recoverable amount of the cash–generating unit is less than its carrying amount, the impairment loss is disposal of the related assets or liabilities, the Entity reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the when the equity method is discontinued. carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods. On disposal of the relevant cash–generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. f. Investment in associates and joint businesses The Entity continues to use the equity method when an investment in an associate becomes an investment in a joint venture or an investment in a joint venture becomes an investment in an associate. There is no remeasurement to fair value upon such changes in ownership interests. When the Entity reduces its ownership interest in an associate or a joint venture but the Entity continues to use the equity method, the Entity reclassifies to profit or loss the proportion of the gain or loss that had previously been recognized in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities. An associate is an entity over which the Entity has significant influence. Significant influence is the power to participate in the financial and When a group entity transacts with an associate or a joint venture of the Entity, profits and losses resulting from the transactions with the operating policies decisions of the investee, but is not control or joint control over those policies. associate or joint venture are recognized in the Entity’s consolidated financial statements only to the extent of interests in the associate or joint A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant g. Revenue recognition activities require unanimous consent of the parties sharing control. venture that are not related to the Entity. The results and assets and liabilities of associates or joint ventures are incorporated in these consolidated financial statements using the can be measured reliably, irrespective of the moment in which payment is made. Income is measured based on the fair value of the consideration equity method of accounting, except when the investment, or a portion thereof, is classified as held for sale, in which case it is accounted for received or receivable, bearing in mind the payment conditions specified in the respective agreement, without including taxes or tariffs. Income generated from ordinary operations is recorded to the extent that future economic benefits are likely to flow into the Entity and income in accordance with IFRS 5. Under the equity method, an investment in an associate or a joint venture is initially recognized in the consolidated statement of financial position at cost and adjusted thereafter to recognize the Entity’s share of the profit or loss and other comprehensive Sale of goods income of the associate or joint venture. When the Entity’s share of losses of an associate or a joint venture exceeds the Entity’s interest in that associate or joint venture (which includes any long–term interests that, in substance, form part of the Entity’s net investment in the associate or joint venture), the Entity discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Entity has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. Revenues from the sale of food and beverages is recognized when they are delivered to and/or consumed by customers. Provision of services Revenues from services are recognized by reference to the stage of completion, which is generally when the services have been rendered and An investment in an associate or a joint venture is accounted for using the equity method from the date on which the investee becomes an associate or a joint venture. On acquisition of the investment in an associate or a joint venture, any excess of the cost of the investment over the Entity’s share of the net fair value of the identifiable assets and liabilities of the investee is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Entity’s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognized immediately in profit or loss in the period in which the investment is acquired. The requirements of IAS 39 are applied to determine whether it is necessary to recognize any impairment loss with respect to the Entity’s investment in an associate or a joint venture. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases. accepted by customers. Dividends Dividend income is recognized when the Entity’s right to collect dividends has been established. Royalties Royalty income is recorded as it is earned, based on a fixed percentage of sub–franchise sales. Annual Report Alsea 2013 || Annual Report Alsea 2013 70 71 h. Foreign currency transactions – Deferred income tax In order to consolidate the financial statements of foreign operations carried out independently from the Entity (located in Argentina, Chile and Until December 31, 2013, in recognizing deferred taxes, the Entity determines whether or not, based on its financial projections, it will incur Colombia) and that comprise 27% and 25% of consolidated net income and 21% and 16% of the total consolidated assets at December 31, 2013 ISR or IETU and it recognizes deferred taxes on that basis (see Note 20). Deferred tax is recognized on temporary differences between the and 2012, respectively, companies apply the policies followed by the Entity. The financial statements of consolidating foreign operations are carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation converted to the reporting currency by initially identifying whether or not the functional and recording currency of foreign operations is different, of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally and subsequently converting the functional currency to the reporting currency. recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference In order to convert the financial statements of subsidiaries resident abroad from the functional currency to the reporting currency at the arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the reporting date, the following steps are carried out: taxable profit nor the accounting profit. – Assets and liabilities, both monetary and non–monetary, are converted at the closing exchange rates in effect at the reporting date of each Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, and statement of financial position. interests in joint ventures, except where the Entity is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated – Income, cost and expense items of the statement of income are converted at the average exchange rates for the period, unless those with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against exchange rates will fluctuate significantly over the year, in which case operations are converted at the exchange rates prevailing at the date which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. 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 probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer made or earnings were incurred. – All conversion differences are recognized as a separate component under stockholders’ equity and form part of other comprehensive the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the period in which the liability is settled or income items. i. Employee benefits The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities Direct employee benefits are valued in proportion to the services rendered, considering current salaries, and they are recognized under liabilities Deferred tax assets and liabilities are offset when there is a legal right to offset short–term assets vs. short–term liabilities and when as they accrue. This item includes mainly employees statutory profit sharing (PTU) payable, paid absences, such as vacations and vacation they relate to income taxes payable to the same tax authorities and the Entity has the intention of liquidating its assets and liabilities premiums, and incentives. on net bases. Other compensation to which personnel is entitled is recognized in income in the year in which it accrues. – Current and deferred tax for the year Statutory employee profit sharing is recorded in income in the year in which it accrues and it is shown under operating expenses in the statement Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive of income. income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included Statutory employee profit sharing is determined based on the tax profit in accordance with Section I of article 10 of the Mexican Income Tax Law. in the accounting for the business combination. j. Income taxes The income tax expense represents the sum of tax currently payable and deferred tax. – Current tax Current income taxes, calculated as the higher of the regular Mexican income tax (“ISR”) and, through December 31, 2013, the Business Flat Tax (“IETU”), are recorded in the results of the year in which they are incurred. Annual Report Alsea 2013 || Annual Report Alsea 2013 72 73 k. Store equipment, leasehold improvements and property 2. Intangible assets acquired separately Store equipment, leasehold improvements and property are recorded at acquisition cost. Other intangible assets represent payments made to third parties for the rights to use the brands with which the Entity operates its establishments under the respective franchise or association agreements. Amortization is calculated by the straight line method based on Depreciation of store equipment, leasehold improvements and property is calculated by the straight line method, based on the useful lives the use period of each brand, including renewals considered to be certain, which are generally for 10 to 20 years. The terms of brand rights estimated by the Entity’s Management. Annual depreciation rates of the main groups of assets are 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 depreciated as separate components of the asset and to the extent they are not fully depreciated at the time of their replacement, are written off by the Entity are as follows: Brands Domino’s Pizza Starbucks Coffee Burger King Chili’s Grill & Bar California Pizza Kitchen P.F. Chang’s and replaced by the new component, considering its respective useful life and depreciation. Likewise, when major maintenance is performed, the cost is recognized as a replacement of a component provided that all recognition requirements are met. All other routine repair and maintenance Pei Wei Italianni’s costs are recorded as an expense in the period as they are incurred. Country Mexico Colombia Mexico Argentina Colombia Chile Year of expiration 2025 2016 2037 2027 2033 2027 Mexico, Argentina, Chile and Colombia Depending on opening dates Mexico Mexico Mexico Argentina, Chile and Colombia (2) Mexico (3) Mexico (1) 2015 2022 2019 2021 2021 2031 Financing costs directly attributable to the acquisition, construction or production of an asset that necessarily requires a substantial period of time to get it ready for its intended use or 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 (1) The term for each store under this brand is 20 years as of the opening date, with the right to a 10 year extension. (2) 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. (3) Term of 10 years with the right to an extension. signed by the Entity. In the years ended December 31, 2013 and 2012, the Entity has not capitalized financing costs under the value of assets, The Entity has affirmative and negative covenants under the aforementioned agreements, the most important of which are carrying out capital since did not have any qualifying assets or financing for purchase or construction of assets. investments and opening establishments. At December 31, 2013 and 2012, the Entity has fully complied with those obligations. The Entity does not maintain a policy of selling fixed assets at the end of their useful lives. Instead, in order to protect its image and the Amortization of intangible assets is included in the depreciation and amortization accounts in the statement of income. Alsea brands, those assets are destroyed or in some cases sold as scrap. The use or lease of equipment outside the provisions of the franchise agreements is subject to sanctions. Additionally, given the high costs of maintenance or storage required, those assets are not used as spare An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising parts for other brand stores. l. Intangible assets 1. Intangible assets acquired in a business combination from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in profit or loss when the asset is derecognized. m. Impairment in the y value of long–lived assets, equipment, leasehold improvements, properties, and other intangible assets At the end of each reporting period, the Entity reviews the carrying amounts of its tangible and intangible assets to determine whether there is Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated the acquisition date (which is regarded as their cost). in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Entity estimates the recoverable amount of the cash–generating unit to which the asset belongs. When a reasonable and consistent Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortization basis of allocation can be identified, corporate assets are also allocated to individual cash–generating units, or otherwise they are allocated to and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. the smallest group of cash–generating units for which a reasonable and consistent allocation basis can be identified. Annual Report Alsea 2013 || Annual Report Alsea 2013 74 75 Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are 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 discounted to their present value using a pre–tax discount rate that reflects current market assessments of the time value of money and the reported, considering the risks and uncertainties surrounding the obligation. When a provision is valued using the cash flows estimated to settle risks specific to the asset for which the estimates of future cash flows have not been adjusted. the present obligation, the carrying value is shown at the present value of those cash flows. If it is estimated that the recoverable amount of an asset (or cash generating unit) is lower than its carrying value, the carrying value of the asset When some or all of the economic benefits required to settle a provision are expected to be recovered by a third party, an account receivable (or cash generating unit) is reduced to its recoverable amount. Impairment losses are immediately recognized in income. The Entity performs 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 annual impairment tests to identify indications of impairment. reliably measured. n. Inventories and cost of sales Provisions are classified as current or non–current based on the estimated period of time estimated for settling the related obligations. Inventories are valued at the lower of cost or net realizable value. 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 Contingent liabilities acquired as part of a business combination average cost method (AC). Cost of sales represents the cost of inventories at the time of sale, increased, when applicable, by reductions in the value of inventory during the year to its net realizable value. The Entity records the necessary estimations to recognize reductions in the value of its inventories due to impairment, obsolescence, slow movement and other causes that indicate that utilization or realization of the items comprising the inventories will be below the recorded value. o. Leases Determination of whether an agreement constitutes or includes a lease is based on the substance of the agreement at the date on which it is signed, if compliance with such agreement depends on the use of one or more specific assets, or if the agreement awards the right to use such assets, even when such 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, at the lower of the fair value of the leased property or the present value of the minimum lease payments. Lease payments are distributed between the financial charges and the reduction of the lease obligation so that a constant ratio of interest is incurred on the balance of the lease obligation. Financial charges are recognized as interest expense in the statement 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 the lower of its estimated useful life or the lease term. 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 lease payments are recognized as expenses in the periods in which they are incurred. p. Advance payments Contingent liabilities acquired in a business combination are initially measured at fair value at the acquisition date. At the end of subsequent reporting periods, such contingent liabilities are measured at the higher of the amount that would be recognized in accordance with IAS 37 and the amount initially recognized less cumulative amortization recognized in accordance with IAS 18 Revenue. r. Financial instruments Financial assets and financial liabilities are recognized when the Entity becomes a party to the contractual provisions of the instruments. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of financial assets and financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets and financial liabilities at fair value through profit or loss are recognize immediately in profit or loss. s. Financial assets Financial assets are classified into the following specific categories: financial assets “at fair value through profit or loss” (FVTPL), “held–to– maturity” investments, “available–for–sale” (AFS) and financial assets and “loans and receivables”. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognized and derecognized on the trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. 1. Effective interest method The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. 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 of financial position and are incurred in course of regular operations. Income is recognized on an effective interest basis for debt instruments other than those financial assets classified as of FVTPL. q. Provisions 2. Financial assets at FVTPL 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 Financial assets are classified as of FVTPL when the financial asset is either held for trading or it is designated as of FVTPL. Entity will have to settle the obligation and it is possible to prepare a reliable estimation of the total amount. Annual Report Alsea 2013 || Annual Report Alsea 2013 76 77 A financial asset is classified as held for trading if : 5. Derecognition of financial assets • • It has been acquired principally for the purpose of selling it in the near term; or The Entity stops recognizing a financial asset only when the contractual rights over the cash flows of the financial asset expire and the risks On initial recognition it is part of a portfolio of identified financial instruments that the Entity manages together and has a recent actual and rewards of ownership of the financial asset are transferred. pattern of short–term profit–taking; or • It is a derivative that is not designated and effective as a hedging instrument A financial asset other that a financial asset held for trading may be designated as of FVTPL upon initial recognition, if: • • Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or The financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Entity’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or • It forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract to be designated as of FVTPL. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss. t. Financial liabilities and equity instruments 1. Classification as debt or equity Debt and equity instruments issued by a group entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the “other 2. Equity instruments income and expenses” in the statement of income. 3. Loans and receivables Loans and receivables are non–derivative financial assets with fixed or determinable payments that are not traded on an active market are classified as loans and receivables. Loans and receivables are valued at amortized cost using the effective interest method, less impairment identified. Interest income is recognized by applying the effective interest rate, except for short term receivables when the effect of discounting is inmmaterial. 4. Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. For financial assets that are carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss. For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by a group entity are recognized at the proceeds received, net of direct issue costs. Repurchase of the Entity’s own equity instruments is recognized and deducted directly in equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Entity’s own equity instruments. 3. Financial liabilities Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’. 4. Other financial liabilities Other financial liabilities (including borrowings and trade and other payables) are subsequently measured at amortized cost using the effective interest method. 5. Derecognition of financial liabilities The Entity derecognizes financial liabilities when, and only when, the Entity’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss. u. 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 cash flows, which also helps to maintain a cost of debt strategy. DFI’s used are only held for economic hedge purposes, through which the Entity agrees to the trade cash flows at future fixed dates, at the nominal or reference value, and they are valued at fair value. Annual Report Alsea 2013 || Annual Report Alsea 2013 78 79 Embedded derivatives: The Entity reviews all signed contracts to identify the existence of embedded derivatives. Identified embedded Markets and counterparties: Derivative financial instruments are contracted in the local market under the over the counter (OTC) mode. derivatives are subject to evaluation to determine whether or not they comply with the provisions of the applicable regulations; if so, they Following are the financial entities that are eligible to close operations in relation to the Entity’s risk management: BBVA Bancomer S.A., are separated from the host contract and are valued at fair value. If an embedded derivative is classified as trading instruments, changes in Banco Nacional de México, S. A., Banco Santander, S. A., Barclays Bank México S. A., Deutsche Bank AG, Goldman, Sachs Paris Inc. Etcie., HSBC their fair value are recognized in income for the period. México S. A., Merril Lynch Capital Services Inc., Morgan Stanley Capital Services Inc., and UBS AG. Changes in the fair value of embedded derivatives designated for hedging recognize in based on the type of hedging: (1) when they relate to fair The Corporate Financial Director is empowered to select other participants, provided that they are regulated institutions authorized to carry value hedges, fluctuations in the embedded derivative and in the hedged item they are valued at fair value and are recorded in income; (2) when out this type of operations, and that they can offer the guarantees required by the Entity. they relate to cash flows hedges, the effective portion of the embedded derivative is temporarily recorded under other comprehensive income, and it is recycled to income when the hedged item affects results. The ineffective portion is immediately recorded in income. Accounting of hedging: DFI’s are initially recorded at their fair value, which is represented by the transaction cost. After initial recognition, DFI’s are valued at each reporting period at their fair value and changes in such value are recognized in the statement of income, except Strategy for contracting DFI’s: Every month, the Corporate Finance Director’s office must define the price levels at which the Corporate if those derivative instruments have been formally designated as and they meet the requirements to be considered hedge instruments Treasury must operate the different hedging instruments. Under no circumstances should amounts above the monthly resource requirements associated to a hedge relation. be operated, thus ensuring that operations are always carried out for hedging and not for speculation purposes. Given the variety of derivative instruments available to hedge risks, Management is empowered to define the operations for which such instruments are to be Polices for designating calculation and valuation agents contracted, provided they are held for hedging and not for speculative purposes. Processes and authorization levels: The Corporate Treasury Manager must quantify and report to the Financial Director the monthly the instrument is contracted, who is asked to issue the respective reports at the month–end closing dates specified by the Entity. requirements of operating resources. The Corporate Financial Director may operate at his discretion up to 50% of the needs for the resources being hedged, and the Administration and Financial Management may cover up to 75% of the exposure risk. Under no circumstances may Likewise, as established in the master agreements (ISDA) that cover derivative financial operations, the respective calculations and amounts above the limits authorized by the Entity’s General Management be operated, in order to ensure that operations are always for valuations are presented in the quarterly report. The designated calculation agents are the corresponding counterparties. Nevertheless, the hedging and not for speculation purposes. The foregoing is applicable to interest rates with respect to the amount of debt contracted at Entity validates all calculations and valuations received by each counterparty. The fair value of DFIs is reviewed monthly. The calculation or valuation agent used is the same counterparty or financial entity with whom variable rates and the exchange rate with respect to currency requirements. If it becomes necessary to sell positions for the purpose of making a profit and/or incurring a “stop loss”, the Administration and Finance Director must first authorize the operation. Internal control processes: With the assistance of the Corporate Treasury Manager, the Corporate Financial Director must issue a report the 4. Critical accounting judgments and key sources for estimating uncertainties following working day, specifying the Entity’s resource requirements for the period and the percentage covered by the Administration and In applying the Entity’s accounting policies, which are described in Note 3, Management is required to make certain judgments, estimates and Financial Manager. Every month, the Corporate Treasury Manager will provide the Accounting department with the necessary documentation assumptions on the amounts of the carrying value of assets and liabilities included in the financial statements. The related estimates and to properly record such operations. The Administration and Finance Director will submit to the Corporate Practices Committee a quarterly assumptions are based on experience and other factors considered to be relevant. Actual results could differ materially from those estimates. report on the balance of positions taken. Estimations and assumptions are reviewed on a regular basis. Changes to the accounting estimations are recognized in the period in which The actions to be taken in the event that the identified risks associated with exchange rate and interest rate fluctuations materialize, are changes are made, or in future periods if the changes affect the current period and other subsequent periods. to be carried out by the Internal Risk Management and Investment Committee, of which the Alsea General Director and the main Entity’s directors form part. a. Critical judgments for applying the accounting policies Main terms and conditions of the agreements: Operations with DFI’s are carried out under a master agreement on an ISDA (International The following are the critical judgments, apart from those involving estimations, that the Entity’s management has made in the process of Swap Dealers Association) form, which must be standardized and duly formalized by the legal representatives of the Entity and the financial applying the Entity’s accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial institutions. statements. Margins, collateral and credit line policies: In certain cases, the Entity and the financial institutions have signed an agreement enclosed to Control over Operadora de Franquicias Alsea, S.A. de C.V. (OFA) the ISDA master agreement, which stipulates conditions that require them to offer guarantees for margin calls in the event that the mark– to–market value exceeds certain established credit limits. The Entity has the policy of monitoring the volume of operations contracted with each institution, in order to avoid as much as possible Note 16 indicates that OFA is one of the Entity’s subsidiaries. Based on the contractual agreements signed by the Entity and other investors, the Entity is empowered to appoint and remove most of the members of the board of directors of OFA, which has the power to control the relevant operations of OFA. Therefore, the Entity’s management concluded that the Entity has the capacity to unilaterally control the relevant activities of margin calls and diversify its counterparty risks. OFA and therefore it has control over OFA. Identified risks are those related to variations in exchange rate and interest rate. Derivative instruments are contracted under the Entity’s policies and no risks are expected to occur that differ from the purpose for which those instruments are contracted. Annual Report Alsea 2013 || Annual Report Alsea 2013 80 81 b. Key sources of estimation uncertainty In estimating the fair value of an asset or liability, the Entity uses market–observable data to the extent it is available. When level 1 inputs are not available, the Entity engages third party qualified appraisers to perform the valuation. The valuation committee works closely with The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, the qualified external appraiser to establish the appropriate valuation techniques and inputs to the model. Every three months, the Financial that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Director reports the findings of the valuation committee to the Entity’s board of directors to explain the causes of fluctuations in the fair 1. Impairment of long–lived assets value of assets and liabilities. Information about the valuation techniques and inputs used in the determining the fair value of various assets and liabilities are disclosed The Entity annually evaluates whether or not there is indication of impairment in long–lived assets and calculates the recoverable amount Note 23 i. when indicators are present. Impairment occurs when the net carrying value of a long–lived asset exceeds its recoverable amount, which is the higher of the fair value of the asset less costs to sell and the value in–use of the asset. Calculation of the value in–use is based on the 6. Contingencies 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. Given their nature, contingencies are only resolved when one or more future events occur or cease to occur. The evaluation of contingencies inherently includes the use of significant judgment and estimations of the outcomes of future events. 2. Useful life of store equipment, leasehold improvements and properties Fixed assets acquired separately are recognized at cost less accumulated depreciation and amortization and accrued losses for impairment. 5. Non–monetary transactions 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 the end of each reporting period, and the effect of any changes in the estimation recorded is recognized In the year, the Entity carried out the following activities which did not generate or utilize cash, for which reason, they are not shown in the prospectively. 3. Income tax valuation consolidated statements of cash flows: As mentioned in Note 24, in April 2012, Alsea declared a dividend payment of $308,902 in shares by capitalizing the corresponding amount of the after–tax earnings account. The Entity recognizes net future tax benefits associated with deferred income tax assets based on the probability that future taxable income will be generated against which the deferred income tax assets can be utilized. Evaluating the recoverability of deferred income tax assets The Entity acquired 82% of Starbucks Coffee Chile, S.A. (Starbucks Chile) and formalized the merger of OFA and Burger King Mexicana, S.A de C.V. requires the Entity to prepare significant estimates related to the possibility of generating future taxable income. Future taxable income (“BKM”), whereby the Entity also acquired 28.1% of the shares of OFA held by BKW, with which Alsea’s final shareholding in OFA is 80% and in 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 BKW is 20%. The breakdown of those acquisitions and the consideration paid in shares and assumed liabilities are shown in Note 16. capacity to realize the net deferred tax assets recorded at any 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. 6. Cash and cash equivalents 4. Intangible assets 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 statement of financial position and the statement of cash flows at December 31, 2013 and 2012 is comprised as follows: The period and amortization method of an intangible asset with a defined life is reviewed at a minimum at each reporting date. 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 definite useful life are recorded in income under the expense caption in accordance with the function of the intangible asset. Cash Investments with original maturities of under three months 2013 2012 $ 545,708 $ 117,562 329,841 602,753 5. Fair value measurements and valuation processes Some of the Entity’s assets and liabilities are measured at fair value for financial reporting purposes. The Entity’s Board of Directors has set up a valuation committee, which is headed up by the Entity’s Financial Director, to determine the appropriate valuation techniques and The Entity maintains its cash and cash equivalents with accepted financial entities and it has not historically experienced losses due to credit inputs for fair value measurements. risk concentration. Total cash and cash equivalents $ 663,270 $ 932,594 Annual Report Alsea 2013 || Annual Report Alsea 2013 82 83 7. Accounts receivable from customers 8. Inventories The accounts receivable from customers disclosed in the consolidated statements of financial position are classified as loans and accounts At December 31, 2013 and 2012, inventories are as follows: receivable and therefore they are valued at their amortized cost. At December 31, 2013 and 2012, the customer balance is comprised as follows: Franchises Credit card Other Allowance for doubtful accounts 2013 2012 $ 213,231 $ 110,442 90,505 414,178 (54,074) 164,053 101,310 100,442 365,805 (26,324) $ 360,104 $ 339,481 Food and beverages Containers and packaging Other Obsolescence allowance Total 2013 2012 $ 491,256 $ 455,960 57,682 99,403 (6,461) 46,265 56,251 (8,082) $ 641,880 $ 550,394 Inventories recognized under cost of sales for inventory consumption in the period related to continuous operations totaled $5,227,739 and $4,755,290 for the years ended December 31, 2013 and 2012, respectively. The average credit term for the sale of food, beverages, containers, packaging, royalties and other items to owners of sub–franchises 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, 9. Advance payments late–payment interest is calculated at the the Mexican Interbank Equilibrium Rate (TIIE) plus 5 points x 2% per year on the unpaid balance at Advance payments were made for the acquisition of: the date of settlement. Following is the aging of past due but unimpaired accounts receivable: 15–60 days 60–90 days More than 90 days Total $ 2013 37,376 12,327 73,615 $ 2012 36,540 7,118 55,844 $ 123,318 $ 99,502 Insurance and other services Inventories Lease of locales Total 10. Non–current guarantee deposits Guarantee deposits are comprised as follows: Average time overdue (days) 77 93 2013 2012 $ $ 136,796 134,459 33,068 50,990 102,821 30,390 $ 304,323 $ 184,201 2013 2012 The allowance for doubtful account balances relates to amounts owed by franchisees. Amounts recognized primarily for this item amount to $54,074 and $26,324 in 2013 and 2012, respectively. Non–current guarantee deposits for leased properties $ 128,108 $ 110,020 Credit risk concentration is limited because the customer base is large and dispersed, and the risk of default by customers in relation to services and supply of food is controlled and supported by a service and/or master franchise agreement. Annual Report Alsea 2013 || Annual Report Alsea 2013 84 85 11. Store equipment, leasehold improvements and property 12. Intangible assets a. Store equipment, leasehold improvements and properties are as follows: a. Intangible assets are comprised as follows: Buildings Store equipment Leasehold improvements Transportation equipment Computer equipment Production equipment furniture and Construction equipment in process Total Office Brand rights Commissions for store opening Franchise and use of locale rights Licenses and developments Goodwill Total Cost Cost Balance as of January 1, 2012 $ 206,437 $ 1,873,480 $ 2,926,312 $ 114,623 $ 303,690 $ 568,650 $ 71,203 $ 411,166 $ 6,475,561 Balance as of January 1, 2012 $ 717,473 $ 410,514 $ 318,428 $ 285,720 $ 206,932 $ 1,939,067 Acquisitions Business acquisition Disposals 6,956 328,707 – 164,741 351,879 162,073 15,119 2,178 74,444 15,357 20,726 14,726 108,565 – 302 (553) (91,043) (80,501) (32,361) (20,306) (912) (1,751) 921,122 344,651 (227,427) Acquisitions Business acquisition Adjustment for currency conversion – – Adjustment for currency conversion 15 (43,907) (99,489) (880) (8,436) – (1,667) (12,897) (167,261) Disposals 67,839 803,447 8,330 77,133 67,239 – 220,541 – – – 785,816 1,589,263 (12,725) (12,011) (1,376) 89 – (9,506) (20,090) (6,565) (4,676) – (26,023) (40,837) Balance as of December 31, 2012 212,855 2,231,978 3,260,274 Acquisitions Business acquisition Disposals 93,449 263,512 375,472 91,529 264,705 – – 98,679 27,091 180 364,749 588,464 94,508 194,299 4,690 – 82,813 10,533 1,408 506,834 7,346,646 68,684 31,860 1,127,548 394,372 Balance as of December 31, 2012 Acquisitions Business acquisition 1,566,528 386,743 387,620 9,789 11,489 17,985 – 212,177 18,366 348,372 105,973 – 113 789,877 992,748 3,682,011 Adjustment for currency conversion (7,139) (60,775) (116,515) (2,100) (13,206) – (4,269) (18,560) (222,564) Disposals (70,620) (25,561) (10,519) (10,750) (2,096) (176) – (119,722) Adjustment for currency conversion (24,015) (14,239) (3,441) (838) – (649) (2,860) (110) (66) – 339,428 826,341 (42,533) (3,685) Balance as of December 31, 2013 $ 299,165 $ 2,455,624 $ 3,758,375 $ 113,331 $ 439,991 $ 780,667 $ 90,309 $ 588,818 $ 8,526,280 Balance as of December 31, 2013 $ 1,569,638 $ 381,133 $ 614,612 $ 453,554 $ 1,782,625 $ 4,801,562 Depreciation Amortization Balance as of January 1, 2012 $ 60,027 $ 792,519 $ 1,390,338 $ 72,909 $ 212,609 $ 434,824 $ 39,915 $ – $ 3,003,141 Balance as of January 1, 2012 $ 301,982 $ 339,346 $ 140,204 $ 211,887 $ 16,953 $ 1,010,372 Charge for depreciation for the year 10,038 227,427 212,405 39,546 19,603 Business acquisition Adjustment for currency conversion – 3 53,142 57,350 7,631 (10,852) (31,410) (484) (5,789) – – 15,913 1,636 9,449 1,018 (1,371) Disposals (325) (79,006) (54,789) (26,542) (18,496) (1,119) (5,581) Balance as of December 31, 2012 69,743 983,230 1,573,894 Charge for depreciation for the year 7,296 240,616 270,246 63,432 16,271 235,501 453,308 57,799 28,014 43,430 4,748 Adjustment for currency conversion Disposals (16) – (21,057) – (879) (10,602) – (1,989) (65,424) (13,323) (7,628) (9,498) (1,622) (152) – – – – – – – – 534,381 120,777 (49,903) (185,858) 3,422,538 624,990 (34,543) (97,647) Amortization Business acquisition Adjustment for currency conversion Disposals Balance as of December 31, 2012 Amortization Adjustment for currency conversion Disposals 136,488 46,321 41,928 52,180 – 8,500 – – – – (2,414) (11,436) (573) 22 – (5,608) (7,703) (3,144) (1,752) – 276,917 8,500 (14,401) (18,207) 438,948 166,703 366,528 178,415 262,337 16,953 1,263,181 17,916 41,756 71,756 – (6,182) (13,946) (252) (652) (1,414) (951) (207) – (42) – 298,131 (21,749) (1,897) Balance as of December 31, 2013 $ 77,023 $ 1,137,365 $ 1,830,817 $ 71,196 $ 273,200 $ 479,700 $ 46,037 $ – $ 3,915,338 Balance as of December 31, 2013 $ 599,217 $ 369,846 $ 217,806 $ 333,844 $ 16,953 $ 1,537,667 Net cost Net cost Balance as of December 31, 2012 $ 143,112 $ 1,248,748 $ 1,686,380 $ 35,247 $ 129,248 $ 135,156 $ 39,383 $ 506,834 $ 3,924,108 Balance as of December 31, 2012 $ 1,127,580 $ 20,215 $ 209,205 $ 86,035 $ 975,795 $ 2,418,830 Balance as of December 31, 2013 $ 222,142 $ 1,318,259 $ 1,927,558 $ 42,135 $ 166,791 $ 300,967 $ 44,272 $ 588,818 $ 4,610,942 Balance as of December 31, 2013 $ 970,421 $ 11,287 $ 396,806 $ 119,710 $ 1,765,672 $ 3,263,896 Annual Report Alsea 2013 || Annual Report Alsea 2013 86 87 13. Operating lease agreements Subsidiary and/or associate Operations 2013 2012 The locales housing the stores of Alsea are leased from third parties. In general terms, lease agreements signed for the operations of the Entity’s Grupo Calpik, S.A.P.I. de C.V. Operator of the California Pizza Kitchen establishments are for a term of between five and ten years, with fixed rates set in pesos. Lease payments are generally revised annually and brand in Mexico 99.99% 99.99% they increase on the basis of inflation. As an exception, lease payments for certain establishments are agreed in US dollars, and in some cases, Especialista en Restaurantes Operator of the P.F. Chang’s Chang’s y they may include a variable component, which is determined on the basis of net sales of the respective establishment. Alsea considers that it de Comida Estilo Asiática, S.A. de C.V. Pei Wei en México 99.99% 99.99% depends on no specific lessor and there are no restrictions for the entity as a result of having signed such agreements. Some of the Entity’s subsidiaries have signed operating leases for company vehicles and computer equipment. In the event of breach of any of the lease agreements, the Entity is required to settle in advance all its obligations, including payments and penalties for early termination, and it must immediately return all vehicles to a location specified by the lessor. Rental expense derived from operating lease agreements related to the locales housing the stores of the different Alsea brands are as follows: Distribuidora e Importadora Distributor of foods and production materials Alsea, S.A. de C.V. Italcafe, S.A. de C.V. 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. Starbucks Coffee Chile, S.A. (1) Operator of Italianni’s brand Operator of the Starbucks brand in Chile 99.99% 100.00% 89.77% 93.86% 94.88% 100.00% 99.99% 100.00% 89.77% 93.86% 94.88% 18.00% 2013 2012 the financial information. Before that date, the Entity recognized the equity method (see Note 1a and 16). (1) In September 2013, Alsea acquired the entirety of the shares of Starbucks Coffee Chile, S.A. de C.V., as from which date it has consolidated Rental expense $ 1,262,533 $ 1,066,583 14. Investment in subsidiaries a. The Entity’s shareholding in the capital stock of its main subsidiaries is as follows: Subsidiary and/or associate Operations 2013 2012 Panadería y Alimentos para Food Service Distribution of Alsea brand foods Café Sirena, S. de R.L de C.V. Operator of the Starbucks brand in Chile Operadora de Franquicias Alsea, S.A. de C.V. Operator of the Burger King brand in Mexico Operadora y Procesadora de Productos Operator of the Domino’s Pizza brand in Mexico de Panificación S.A. de C.V. Gastrosur, S.A. de C.V. Operator of the Chili’s Grill & Bar brand in Mexico Fast Food Sudamericana, S.A. Operator of the Burger King brand in Argentina Fast Food Chile, S.A. Operator of the Burger King brand in Chile Starbucks Coffee Argentina, S.R.L Operator of the Starbucks brand in Argentina Dominalco, S.A. Operator of the Domino’s Pizza brand in Colombia Servicios Múltiples Empresariales Operator of Factoring and Financial Leasing ACD S.A. de C.V. SOFOM E.N.R in Mexico Asian Bistro Colombia, S.A.S Asian Bistro Argentina S.R.L. Operator of the P.F. Chang’s brand in Colombia Operator of the P.F. Chang’s brand in Argentina Operadora Alsea en Colombia, S.A. Operator of the Burger King brand in Colombia Asian Food Ltda. Operator of the P.F. Chang’s brand in Chile 100.00% 100.00% 80.00% 99.99% 99.99% 99.99% 99.99% 100.00% 95.00% 99.99% 100.00% 100.00% 95.00% 100.00% 100.00% 82.00% 99.99% 99.99% 99.99% 99.99% 99.99% 82.00% 95.00% 99.99% 100.00% 100.00% 95.00% 100.00% 15. Investment in associated companies Acquisition of the non–controlling interest of Grupo Axo In June 2013, Alsea reached an agreement to acquire 25% of the capital stock of Grupo Axo. The respective carrying entry was made in the consolidated statement of financial position as investments in shares of associated companies, and that operation gave rise goodwill of $559,887, which is included in the balance of the investment. Goodwill arising from the acquisition of Grupo Axo resulted from the consideration paid, which included the amounts of the benefits of new businesses, mainly the sale of international brands of clothes and cosmetics, from which growth is expected through a development plan. Those benefits are recognized separately in goodwill because they fail to meet the recognition criteria for identifiable intangible assets. At December 31, 2013 and 2012, the investment in shares of associated companies is comprised of the Entity’s direct interest in the capital stock of the companies listed below: Starbucks Coffee Chile, S.A. Grupo Axo, 2013 – 25% (%) 2012 Main operations Interest in associated company 12/31/2013 12/31/2012 18% Operator of the Starbucks $ – $ 40,296 brand in Chile – Sales of prestigious brands 788,665 – of clothes and accessories Total $ 788,665 $ 40,296 Annual Report Alsea 2013 || Annual Report Alsea 2013 88 89 Starbucks Coffee Chile, S.A. Grupo Axo, 2013 – 25% (%) Equity in results 2012 Main operations 12/31/2013 12/31/2012 18% Operator of the Starbucks $ – $ 12,978 brand in Chile – Company engaged in sales 43,582 – of prestigious brands of clothes and accessories Total $ 43,582 $ 12,978 Starbucks Coffee Chile, S.A. The Entity’s interest in equity as of December 31, 2012, as well as in the income and expenses for the year ended December 31, 2012 was 18%. The associated company’s total assets, liabilities and equity and its results are as follows: Current assets Non–current assets Current liabilities Non–current liabilities Equity Income Costs Net profit for the period Grupo Axo, S.A.P.I. de C.V. 12/31/2012 207,660 136,399 99,908 20,287 223,864 12/31/2012 536,655 464,555 72,100 $ $ $ $ $ $ $ $ Revenues Costs Profit for the period 01/08/2013 to 31/12/2013 $ $ $ 1,207,860 1,033,532 174,328 The reconciliation of the financial information summarized above regarding the carrying value of the interest in Grupo Axo is as follows: Net assets of the associated company Entity’s interest in Grupo Axo (25%) Plus: goodwill 2013 915,114 228,778 559,887 $ $ Carrying value of the Entity’s interest in Grupo Axo $ 788,665 16. Business combination Acquisition of the controlling interest of Starbucks Coffee Chile In September 2013, Alsea acquired 82% of Starbucks Coffee Chile, S.A. (Starbucks Chile), which operates the Starbucks stores in Chile, as a result of which Alsea’s shareholding in that entity increased from 18% to 100%, thus constituting a business combination that is currently undergoing valuation by the purchase method in accordance with the IFRS. The following steps are required in acquisition accounting: • • Recognize and measure the respective assets acquired and liabilities assumed. In a business combination performed in phases, the purchaser reassesses its previous interest in the acquired entity at date of acquisition using the fair value and recognize the resulting gain or loss, if any, in income. • Determine the respective franchise right or goodwill, if any. Following is an analysis of the preliminary assignment of acquisition cost to the fair values of acquired net assets. Given that the accounting for the acquisition is in the measurement period, which is expected to conclude in September 2014, the following preliminary figures are subject to change: The Entity’s interest in assets and liabilities as of December 31, 2013, and in the income and expenses for the period from the date of acquisition to December 31, 2013 is 25%. The associated company’s total assets, liabilities and equity and its results are as follows: Current assets Non–current assets Current liabilities Non–current liabilities Equity Non–controlling equity 12/31/2013 $ $ $ $ $ $ 1,435,557 911,862 997,003 416,473 915,114 18,829 Item Current assets Equipment and intangible assets Current and long–term liabilities Fair value of net assets Fair value of prior interest Price paid in cash Total value of consideration paid Goodwill August 2013 $ 218,083 148,125 (101,807) 264,401 47,593 860,014 907,607 $ 643,206 Annual Report Alsea 2013 || Annual Report Alsea 2013 90 91 Goodwill arising from the acquisition of Starbucks Coffee Chile derives from the price paid, which included amounts in relation to the benefits The consideration paid in OFA shares, which is in the measurement phase, totals $217,534 and comprises 20% of its stockholders’ equity. of operating 44 stores for which market growth is expected based on a development plan over the next five years in Chile, as well the adjacent benefits, mainly the growth in income, operating synergies and the purchase of supplies. Those benefits are recognized separately in goodwill Goodwill arising from the acquisition of Burger King Mexicana derives from the price paid, which included amounts related to the benefits of because they fail to meet the recognition criteria for identifiable intangible assets. operating 204 stores (97 acquired and 107 own stores), for which market growth is expected based on a development plan over the next five years, as well the adjacent benefits, mainly the growth in income, operating synergies and the purchase of supplies resulting from the merger As from the acquisition date, Starbucks Chile has contributed $231,131 to consolidated revenues and $32,772 to the profit before income taxes of the Burger King brand in Mexico. Those benefits are recognized separately in goodwill because they fail to meet the recognition criteria for for the period. If the acquisition had occurred on January 1, 2013, Alsea’s consolidated net profit for the period would have been $694,362 and identifiable intangible assets. revenues would have been $16,087,950. The acquisition price did not include any a contingent consideration. Acquisition expenses related to this transaction amounted to $1,028, which is shown under other expenses. As from the acquisition date, Burger King Mexicana has contributed $564,376 to revenues and $3,756 to the profit before income taxes for the period. If the acquisition had occurred on January 1, 2013, Alsea’s consolidated net profit for the period would have been $647,842 and revenues Net cash flows related to the acquisition of the subsidiary total $731,358, corresponding to the consideration paid in cash of $860,014, less cash would have been $15,893,611. Acquisition expenses related to this transaction amounted to $1,101, which is shown under other expenses. and cash and cash equivalent balances acquired in the amount of $128,656. Net cash flows related to the acquisition of the subsidiary total $288,067, corresponding to the consideration paid in cash of $333,895, less cash Acquisition of Burger King Mexicana and cash and cash equivalents balances acquired totaling $47,828. In April 2013, the acquisition of the BURGER KING® master franchise in Mexico concluded. According to the strategic association egreement Acquisition of Italianni’s signed by Alsea and Burger King Worldwide Inc. (BKW), the BKW subsidiary in Mexico, Burger King Mexicana, S.A. de C.V. (BKM) was merged with OFA, a subsidiary of Alsea, with the latter as the surviving company and operator of 204 BURGER KING® restaurants in Mexico. After the merger The acquisition of Italianni’s concluded in February 2012. The final price was $1,765 million. concluded, Alsea also acquired 28.1% of the shares of OFA held by BKW, after which Alsea’s final shareholding in OFA is 80% and BKW’s final shareholding in OFA is 20%. Alsea acquired 8,168,161 shares comprising 100% of the shares of Italcafé, SA. de C.V., which owns: i.– Eight Italianni’s units and the exclusive rights to develop, expand and sell subfranchises of the Italianni’s brand throughout Mexico, and ii.– 89.7682% of the capital stock of Grupo Given that the operation was considered the acquisition of is business, the related acquisition accounting was applied as of the acquisition date. 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 The acquisition price did not include any contingent consideration. expansion plans of the Casual Dinning segment. The following steps are required in acquisition accounting: i.– Recognize and measure the respective assets acquired and liabilities assumed ii.– Determine the respective franchise right or goodwill, if any. Franchise license agreements, other rights and assets assigned to third parties were paid to the holders of those rights and goods as part of the transaction. Following is an analysis of the preliminary assignment of acquisition cost to the fair values of acquired net assets. Given that the accounting for the acquisition is in the measurement period, which is expected to conclude in April 2014, the following preliminary figures are subject to change: a) The exclusive operation of the Italianni’s brand restaurants in Mexico for a maximum term of 30 years. Additionally, the final agreement contemplates the following, among other matters: Item March 2013 b) Alsea will pay no royalties, opening fees or commissions for the use of the brand or the franchise model. Current assets Equipment and intangible assets Deferred taxes Current and long–term liabilities Fair value of net assets Consideration paid in shares Price paid in cash Total value of price paid Goodwill $ 106,128 309,374 62,803 (73,547) 404,758 217,534 333,895 551,429 $ 146,671 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. Annual Report Alsea 2013 || Annual Report Alsea 2013 92 93 The measurement period concluded in February 2013. Following is an analysis of fair value to the net assets acquired as of the date of acquisition. Assignment of goodwill to cash generating units No changes arose to the preliminary recognition of the acquisition. In order to carry out impairment tests, goodwill was assigned to the following cash generating units: Item Current assets Store equipment and properties, net Intangible assets, net Short–term and long–term debts Fair value net assets Price paid in cash Non–controlling interest Total value of price paid Goodwill February 2012 $ 173,961 242,241 740,619 (204,063) 952,758 1,765,000 (26,426) 1,738,574 $ 785,816 Burger King Mexicana Domino’s Pizza Chili’s Italianni’s Starbucks Coffee Chile 2013 2012 $ 239,756 $ 93,085 70,280 26,614 785,816 643,206 70,280 26,614 785,816 – $ 1,765,672 $ 975,795 At December 31, 2013 and 2012, studies performed on impairment testing concluded that goodwill shows no signs of impairment. The non–controlling interest recognized at the acquisition date was valued based in proportion to identifiable net assets. 18. Long–term debt Goodwill arising from the acquisition of Italianni’s derives from the consideration paid, which included amounts related to the benefits of operating the Italian food brand, for which market growth is expected based on a development plan over the next five years, as well the adjacent benefits, mainly the growth in income and the expected operating synergies. Those benefits are recognized separately in goodwill because they fail to meet the recognition criteria for identifiable intangible assets. As from the acquisition date and until December 31, 2012, Italinanni’s has contributed $742,466 to revenues and $43,622 to the profit before income taxes for the period. If the acquisition had occurred on January 1, 2013, Alsea’s consolidated net profit for the period would have been $413,001 and revenues would have been $13,652,912. Acquisition expenses related to this transaction amounted to $3,234, which is shown under other expenses. Long–term debt at December 31, 2013 and 2012 is comprised of unsecured loans, as shown below: Maturities Average annual interest rate 2013 2012 2014–2018 4.50% 8.00% Single loans Less current maturities Long–term maturities $ 2,554,767 $ 2,474,480 388,486 396,647 $ 2,166,281 $ 2,077,833 Net cash flows related to the acquisition of the subsidiary total $1,758,181, corresponding to the consideration paid in cash of $1,765,000, less the acquired cash and cash and cash equivalents balances acquired for a total of $6,819. Annual long–term debt maturities at December 31, 2013 are as follows: 17. Goodwill Goodwill is comprised as follows: Item Balance as of January 01, 2012 Italianni’s Balance as of December 31, 2012 Burger King Mexicana Starbucks Coffee Chile Balance as of December 31, 2013 $ Amount 189,979 785,816 975,795 146,671 643,206 $ 1,765,672 Year 2014 2015 2016 2017 2018 $ Amount 388,486 472,598 549,098 702,098 442,487 $ 2,554,767 Bank loans include certain affirmative and negative covenants, such as maintaining certain financial ratios. At December 31, 2013 and 2012, all such obligations have been duly met. Annual Report Alsea 2013 || Annual Report Alsea 2013 94 95 19. Debt instruments a. In June 2013, the Entity decided to issue debt instruments for a total of $2,500,000 over 5 years as from the issue date, maturing in June 2018. Those instruments will accrue interest at the 28–day TIIE rate plus 0.75 percentage points. The balance at December 31, 2013 is $2,488,850. b. Based on the debt instrument program established by Alsea, in May 2011, the Entity concluded the placement of debt instruments for a total of In Colombia, i– Income tax is determined on the basis of taxable income. The tax rate is 32%, ii.– The percentage for determining presumptive income is 3% of the liquid equity of the preceding year. In Argentina i.– Tax on income The Entity applies the deferred tax method to recognize the accounting effects of taxes on earnings at the 30% rate. ii.– Tax on presumptive minimum earnings (IGMP for its acronym in Spanish), the Entity determines IGMP applying the current 1% rate to assets computable at each year–end closing, iii.– Tax on personal goods of individuals or business entities residing abroad, the tax is determined $1,000 million on the Mexican market (ALSEA11). The intermediaries that participated in placing the offer were HSBC Casa de Bolsa, S. A. de C. V., applying the 0.5% to the proportional value of equity at the year–end closing and it is considered a single and final payment. Grupo Financiero HSBC, Actinver Casa de Bolsa, S. A. de C. V. and Grupo Financiero Actinver. a. Income taxes recognized in income 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 rate plus 1.30 percentage points. In December 2012, the Entity decided to prepay the entirety of the debt instrument. Therefore, at December 31, 2012, no amounts are outstanding under ALSEA 11. At December 2012, the balance of expenses related to such issue, such as legal fees, issue costs, and printing and placement Income tax (tax basis) Deferred income tax expenses, were recognized in the consolidated statement of income for the year subsequent to the prepayment. 2013 2012 $ 422,573 $ (137,706) 326,795 (107,648) $ 284,867 $ 219,147 20. Income taxes The Entity is subject to income tax and through December 31, 2013, to flat tax. Income tax – The rate was 30% in 2013 and 2012 and as a result of the new 2014 income tax law (2012 tax law), the rate will continue at 30% in 2014 and thereafter. The Entity incurred income tax on a consolidated basis up to 2013 with its Mexican subsidiaries. As a result of the 2014 tax reform, the tax consolidation regime was eliminated, and the Entity and its subsidiaries have the obligation to pay the deferred income tax determined as of that date during the subsequent five years beginning in 2014, as illustrated below. Pursuant to Transitory Article 9, section XV, subsection d) of the 2014 Law, given that as of December 31, 2013 the Entity was considered to be a holding company and was subject to the payment scheme contained in Article 4, Section VI of the transitory provisions of the income tax law published in the Federal Official Gazette on December 7, 2009, or article 70–A of the income tax law of 2013 which was repealed, it must continue to pay the tax that it deferred under the tax consolidation scheme in 2007 and previous years based on the aforementioned provisions, until such payment is concluded. Flat tax – Flat tax was eliminated as of 2014; therefore, up to December 31, 2013, this tax was incurred both on revenues and deductions and certain tax credits based on cash flows from each year. The respective rate was 17.5%. As of 2008, the Asset Tax Law (LIMPAC) was eliminated, but under certain provisions of the income tax law, the amount of this tax paid in the 10 years immediately prior to that in which income tax is first paid may be recovered in accordance with applicable tax provisions. The current income tax is the grater of ISR and IETU up to 2013. In Chile, in April 2010, the Chilean government announced the 2010–2013 financing plan for the reconstruction of Chile after the February 2010 earthquake. Such 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. The tax expense attributable to income before income tax differs from that arrived at by applying the 30% statutory rate in 2013 and 2012 due to the following items: Statutory income tax rate Non–deductible expenses, effects of inflation and others Change in unrecognized tax benefits 2013 30% 3% (3%) 2012 30% 10% (5%) Effective consolidated income tax rate 30% 35% b. Deferred taxes – balance sheet Following is an analysis of deferred tax assets shown in the consolidated statement of financial position: Deferred (assets) liabilities: Estimation for doubtful accounts and inventory obsolescence $ (10,863) $ (5,997) 2013 2012 Liability provisions Advances from customers Unamortized tax losses Recoverable asset tax Store equipment, leasehold improvements and property Other assets Advance payments (368,176) (18,565) (166,337) (12,269) (471,470) 12,224 53,049 (220,682) (30,072) (201,465) (12,269) (380,473) 807 21,186 $ (982,407) $ (828,965) Annual Report Alsea 2013 || Annual Report Alsea 2013 96 97 Timing differences Beginning balance Recognized in income Acquisition Recognized directly in capital 2013 2012 21. Provisions $ (828,965) $ (692,420) Provisions at December 31, 2013 and 2012 are comprised as follows: (137,706) (11,024) (4,712) (107,648) (24,628) (4,269) $ (982,407) $ (828,965) Compensation and other personnel Supplies payments and others Total Deferred assets not recognized at December 31, 2013 and 2012 totaled $28,384 and $159,594, respectively. The net change in deferred assets not recognized at December 31, 2013 and 2012 resulted in a decrease of $28,446 and $30,626, respectively, arising mainly from accumulated tax losses. January 1, 2012 $ 103,631 $ 468,099 $ 571,730 Increases charged to income Payments and cancellations 434,582 (400,509) 728,559 (672,627) 1,163,141 (1,073,136) At December 31, 2013, unamortized tax losses expire as shown below: December 31, 2012 $ 137,704 $ 524,031 $ 661,735 Year of maturity 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Amortizable losses $ 266,624 14,315 26,664 39,028 30,346 1,581 28,877 22,692 51,342 72,987 At December 31, 2013 and 2012, income tax payable balances related to the Entity’s consolidated tax regime before and after the enactment of the 2011 tax amendments correspond to unamortized tax losses arising under consolidation at the controlling and the controlled companies amounting to $26,034 and $193,454, respectively. Following is the yearly schedule of payments contemplated by the Entity to cover income tax liabilities arising under tax consolidation resulting from the 2014 tax amendments: Year of maturity 2014 2015 2016 2017 $ Payment 10,111 7,229 5,801 2,893 $ 26,034 Increases charged to income Payments and cancellations 545,424 (532,121) 426,466 (370,777) 971,890 902,898 December 31, 2013 $ 151,007 $ 579,720 $ 730,727 22. Employee retirement benefits The net cost for the period related to obligations derived from the pension plan and those related to seniority premiums and termination benefits totals $21,674 and $17,102 in 2013 and 2012. Other disclosures required by the accounting provisions are not considered significant. 23. Financial instruments a. Capital risk management The Entity manages its capital to ensure that the companies that it controls are able to continue operating as a going concern while they maximize the yield for their shareholders by streamlining the debt and equity balances. The Entity’s general strategy has not changed in relation to 2012. The Entity’s capital structure consists of the net debt (the loans described in Note 18, compensated by cash balances and banks) and the Entity’s capital (made up of issued capital stock, reserves and retained earnings, as shown in Note 24). The Entity is not subject to external requirements to manage its capital. The main purpose for managing the Entity’s capital risk is to ensure that it maintains a solid credit rating and sound equity ratios to support its business and maximize value to its shareholders. Annual Report Alsea 2013 || Annual Report Alsea 2013 98 99 The Entity manages its capital structure and makes any necessary adjustments based on changes in economic conditions. In order to maintain Exchange fluctuations and devaluation or depreciation of the local currency in the countries in which Alsea participates could limit the and adjust its capital structure, the Entity can modify the dividend payments to the shareholders, reimburse capital to them or issue new shares. Entity’s capacity to convert local currency to US dollars or to other foreign currency, thus affecting their operations, results of operations and In the years ended December 31, 2013 and 2012, there were no modifications to the objectives, policies or processes pertaining to capital management. financial position. The Entity currently has a risk management policy aimed at mitigating present and future risks involving those variables, which arise mainly from purchases of inventories, payments in foreign currencies and public debt contracted at a floating rate. The contracting of derivative financial The following ratio is used by the Entity and by different rating agencies and banks to measure credit risk. instruments is intended to cover or mitigate a primary position representing some type of identified or associated risk for the Entity. Instruments – Net Debt to EBITDA = Net Debt / EBITDA ltm used are merely for economic hedging purposes, not for speculation or negotiation. The types of derivative financial instruments approved by the Entity for the purpose of mitigating exchange fluctuation and intereset rate risk At December 31, 2013 and 2012, the financial restriction established in the Entity’s loan agreements relates to the Net Debt to EBITDA ratio for are as follows: the last twelve months. The Entity complied with the established ratio, which was slightly below 1.0 and 2.6, respectively. b. Financial instrument categories Financial assets Cash and cash equivalents Loans and accounts receivable at amortized cost Financial liabilities at amortized cost Bank loans Long–term bank loans Debt securities Other accounts payable and others c. Objectives of managing financial risks 2013 2012 $ 663,270 628,818 $ 932,594 535,931 388,486 2,166,281 2,488,850 901,589 396,647 2,077,533 – 871,404 Alsea is mainly exposed to the following financial risks: (i) market (foreign currency and interest rate), (ii) credit and (iii) liquidity. – USD/MXN exchange–rate forwards contracts – USD/MXN exchange–rate options – – Interest Rate Swaps and Swaptions Cross Currency Swaps Given the variety of possible derivative financial instruments for hedging the risks identified by the Entity, the Director of Corporate Finance is authorized to select such instruments and determine how they are to be operated. Exposure to market risk is valued by the value at risk (VaR), which is supplemented with a sensitivity analysis. There have been no changes in the Entity’s exposure to market risks or in the way in which those risks are managed and valued. e. Currency exchange risk management The Entity carries out transactions in foreign currency and therefore it is exposed to exchange rate fluctuations. Exposure to exchange rate fluctuations is managed within the parameters of approved policies, using foreign currency forwards contracts. Note 32 shows foreign currency positions at December 31, 2013 and 2012. It also shows the exchange rates in effect at those dates. USD hedging and its requirements are determined based on the cash flow budgeted by the Entity, and it is aligned to the current Risk Management The Entity seeks to minimize the potential negative effects of the aforementioned risks on its financial performance by applying different Policy approved by the Corporate Practices Committee, the General Director’s office and the Administration and Financial Director’s office. The strategies. The first involves securing risk coverage through derivative financial instruments. policy is overseen by the Internal Audit Department. Derivative instruments are only traded with well–established institutions and limits have been set for each financial institution. The Entity has The exchange rate risk expressed in a foreign currency (USD) is internally monitored on a weekly basis with the positions or hedges approximating the policy of not carrying out operations with derivative financial instruments for speculative purposes. maturity at market exchange rates. The agent calculating or valuing the derivative financial instruments is in all cases the counterparty designated d. Market risk The Entity is exposed to market risks resulting from changes 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 liquidity, political events and natural catastrophes or disasters, among others. under the master agreement. The purpose of the internal review is to identify any significant changes in exchange rates that could pose a risk or cause the Entity to incur in non–compliance with its obligations. If a significant risk position is identified, the Corporate Treasury Manager informs the Corporate Financial Director’s office. Annual Report Alsea 2013 || Annual Report Alsea 2013 100 101 The following table shows a quantitative description of exposure to exchange risk based on foreign currency forwards and options agreements At December 31, 2012 and 2011, the Entity had contracted the following financial instruments: contracted by the Entity in USD/MXN, in effect as of December 31, 2013. Figures in thousands of US dollars at 2013 Underlying / reference variable Notional amount/ face value (thousands of USD) Fair value (thousands of USD) Type of derivative, security or contract Position Objective of the hedging Current quarter Previous quarter Current quarter Previous quarter Current quarter Previous quarter Amounts of maturities (thousands of USD) Underlying / reference variable Notional amount / face value (USD) Fair value (USD) Type of derivative, security or contract Position Objective of the hedging Current Quarter Prior Quarter Current Quarter Prior Quarter Current Quarter Prior Quarter Amounts of maturities (USD) Forwards Long Economic USD/MXN USD/MXN 2,500 1,500 $ (16) $ (8) 2,500 Forwards Long Economic USD/MXN USD/MXN 2,500 1,500 $ (16) $ (8) 2,500 13.06 13.01 13.06 13.01 Options Long Economic USD/MXN USD/MXN 13,750 4,500 $ (9) $ (76) 13,750 Options Long Economic USD/MXN USD/MXN 13,750 4,500 $ (9) $ (76) 13,750 13.06 13.01 13.06 13.01 1. Foreign currency sensitivity analysis Figures in thousands of US dollars at 2012 At December 31, 2013, the Entity has contracted hedging in order to purchase US dollars for the next 12 months at the average exchange rate of 12.60 for a total of $16.3 million dollars. The fair value of currency derivative financial instruments is $0.3 million pesos. Considering the USD/MXN exchange rate at 13.06 for the 2013 closing, the Entity’s current portfolio and the net long position between forwards and options, Management assumes that a stress scenario affecting its income for the year ended December 31, 2013 would have resulted in appreciation of 1.00 to the US dollar, which would result in the purchase of forwards agreements above the market price and the activation of options with a barrier, thus increasing the notional amount covered and the fair value thereof. The effect on the derivative financial instrument portfolio at the exchange rate with appreciation of 8% would result in an increase in financing costs of approximately $15.6 million pesos. The net position of assets vs. financial liabilities expressed in US dollars is not being considered because it is not representative or material to the Entity. The analysis shows only the effect on hedging for purchases of US dollars contracted and in effect at the December 31, 2013 closing. Management considers that in the event of a stress scenario as the one described above, the Entity’s liquidity capacity would not be affected, there would be no negative effects on its operations, nor would compliance with the commitments assumed in relation to contracted derivative financial instruments be at risk. 2. Foreign currency forwards and options contracts At December 31, 2013 and 2012, a total of 309 and 387 derivative financial instrument operations (forwards and options) were carried out, respectively, for a total of 146.1 and 103.3 million US dollars, respectively. The absolute value of the fair value of the derivative financial instruments entered into 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. At December 31, 2013 and 2012, Alsea has contracted DFI’s to purchase US dollars in the next twelve months for a total of approximately $16.3 and $45 million USD, at the average exchange rate of $12.6 and $12.84 pesos to the dollar, respectively. Underlying / reference variable Notional amount / face value (USD) Fair value (USD) Type of derivative, security or contract Position Objective of the hedging Current Quarter Prior Quarter Current Quarter Prior Quarter Current Quarter Prior Quarter Amounts of maturities (USD) Forwards Long Economic USD/MXN USD/MXN 18,250 18,500 $ 19 $ 251 18,250 13.01 12.85 Options Long Economic USD/MXN USD/MXN 26,500 43,500 $ (63) $ 332 26,500 13.01 12.85 f. Interest Rate Risk Management The Entity faces certain exposure to the volatility of interest rates as a result of contracting bank and public stock exchange debt at fixed and variable interest rates. The respective risks are monitored and evaluated monthly on the basis of: – Cash flow requirements – Budget reviews – 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 prices and to determine the most advisable mix of fixed and variable rates. Annual Report Alsea 2013 || Annual Report Alsea 2013 102 103 The Corporate Treasury Manager is responsible for monitoring and reporting to the Administration and Financial Director any events or Figures in thousands of US dollars at 2012 contingencies of importance that could affect the hedging, liquidity, maturities, etc. of DFI’s. He in turn informs Alsea’s General Management of any identified risks that might materialize. The type of derivative products utilized and the hedged amounts are in line with the internal risk management policy 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. Interest rate swap contracts According to the interest rate contracts in place, the Entity agrees to exchange the difference between the amounts of the fixed and variable rates calculated on the agreed notional amount. Such contracts allow the Entity to mitigate interest rate change risks on the fair value of the debt issued at a fixed interest rate and the exposure to cash flows on the debt issued at a variable interest rate. The fair value of interest rate swaps at the end of the period being reported is determined by discounting future cash flows using the curves at the end of the period being reported and the credit risk inherent to the contract, as described further on in these consolidated financial statements. The average interest rate is based on current balances at the end of the period being reported. Type of derivative, security or contract Interest Underlying / reference variable Notional amount / face value (USD) Fair value (USD) Position Objective of the hedging Current Quarter Prior Quarter Current Quarter Prior Quarter Current Quarter Prior Quarter Amounts of Expiration (USD) rate swap Long Economic Knock Out swap Long Economic Limited swap 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 following table shows a quantitative description of exposure to interest rate risk based on interest rate forwards and options agreements contracted by the Entity, in effect as of December 31, 2013. 1. Analysis of interest rate sensitivity Underlying / reference variable Notional amount / face value (USD) Fair value (USD) Position Objective of the hedging Current Quarter Prior Quarter Current Quarter Prior Quarter Current Quarter Prior Quarter Amounts of Expiration (USD) The following sensitivity analysis has been determined on the basis of the exposure to interest rates of derivative instruments and of non– derivative instruments at the end of the period being reported. In the case of variable rate liabilities, an analysis is prepared assuming that the amount of the liability held at the end of the period being reported has been the amount of the liability throughout the year. • The first stress scenario considered by Management is a 200 bps increase in the 28–day TIIE reference rate while the rest of the variables remain constant. With the mix in the hedging portfolio of plain vanilla interest rate swaps and the swaptions contracted at the December 31, 2013 close, the increase in financial costs is of approximately $43,000. The above effect arises because the barriers protecting the increase in the interest rates are exceeded, which leaves the Entity exposed to market rates. 3.79% – TIIE 28 d 3.79% – TIIE 28 d 3.79% – TIIE 28 d 3.79% – TIIE 28 d 4.03 – TIIE d 4.03 – TIIE d 4.03 – TIIE d 4.03 – TIIE d 38,270 38,426 $ 315 $ 424 38,270 the Entity’s liquidity nor gives rise to a negative effect on the business’s operations or in assuming commitments for contracting interest • A 150 bps increase in the 28–day TIIE rate represents an increase in the financial cost of approximately $15,000, which poses no risk to rate derivative financial instruments. 11,481 11,528 $ 56 $ 63 11,481 • Lastly, the scenario with a 100 bps increase in the 28–day TIIE reference rate would have a positive effect on the financial cost of approximately $1,500. The foregoing is due to the fact that plain vanilla swaps and swaptions hedging would be active, thus improving the level of exchange from a variable to a fixed rate. 11,481 11,528 $ 64 $ 74 11,481 7,654 7,685 $ 47 $ 50 7,654 Figures in thousands of US dollars at 2013 Type of derivative, security or contract IRS Plain Vanilla Knock Out Long Economic IRS Long Economic Limited IRS Capped IRS Long Economic Long Economic Annual Report Alsea 2013 || Annual Report Alsea 2013 104 105 g. Credit risk management h. Liquidity risk management Credit risk refers to the uncertainty of whether one or several of the counterparties will comply with their contractual obligations, which would The ultimate responsibility for managing liquidity lies in the Financial Director, for which purpose the Entity has established policies to control result in a financial loss for the Entity. The Entity has adopted the policy of only operating with solvent institutions and obtaining sufficient and follow up on working capital, thus making it possible to manage the Entity’s short–term and long–term financing requirements. In keeping collateral, when deemed necessary, as a way to mitigate the risk of financial loss caused by non–compliance. this type of control, cash flows are prepared periodically to manage risk and maintain proper reserves, credit lines are contracted and investments The Entity’s exposure and the credit ratings of its counterparties are supervised on a regular basis. The maximum credit exposure levels allowed are established in the Entity’s risk management internal policies. Credit risk over liquid funds and derivative financial instruments is limited The Entity’s main source of liquidity is the cash earned from its operations. because the counterparties are banks with high credit ratings issued by accepted rating agencies. are planned. In order to reduce to a minimum the credit risk associated to counterparties, the Entity contracts its financial instruments with domestic and been designed based on undiscounted, projected cash flows and financial liabilities considering the respective payment dates. The table includes foreign institutions that are duly authorized to engage in those operations and which form part of the Mexican Financial System. the projected interest rate flows and the capital disbursements made towards the financial debt included in the statement of financial position. If interest is agreed at variable rates, the undiscounted amount is calculated based on the interest rate curves at the end of the period being Investment surpluses are managed based on the Entity’s policy in place, which has been designed to mitigate the credit risk of counterparties reported. Contractual maturities are based on the minimum date on which the Entity must make the respective payments. The following table describes the contractual maturities of the Entity’s financial liabilities considering agreed payment periods. The table has and streamline its resources. The policies include certain guidelines, such as maximum amounts per counterparty, instruments and terms. All operations carried out in both local and foreign currencies are covered under a stock–exchange intermediation master agreement, which has been signed by both parties with regulated institutions that form part of the Mexican Financial System and that have all the guarantees required Average effective Up to by the Entity and have been awarded high credit ratings. The instruments authorized for temporary investments are only those issued by the As of December 31, 2013, interest rate 1 year federal government, corporations and banks, all under repurchase agreements. Up to 2 year Up to 3 year Up to 4 year Up to 5 years or more Total With respect to derivative financial instruments, the Entity signs a standard agreement approved by the International Swapws and Derivatives Association Inc. with each counterparty along with the standard confirmation forms for each operation. Additionally, the Entity signs bilateral guarantee agreements with each counterparty that establish the margin, collateral and credit line policies to Long–term debt Debt instruments Suppliers Other accounts payable and others 4.79% $ 520,240 $ 581,546 $ 629,085 $ 748,952 $ 451,006 $ 2,930,829 4.54% 115,014 123,861 106,167 123,861 2,541,933 3,010,836 1,408,565 901,589 – – – – – – – – 1,408,565 901,589 be followed. Such agreements, commonly known as “Credit Support Annexes”, establish the credit limits offered by credit institutions that would Total $ 2,945,408 $ 705,407 $ 735,252 $ 872,813 $ 2,992,939 $ 8,251,819 apply in the event of negative scenarios or fluctuations that might affect the fair value of open positions of derivative financial instruments. Such agreements establish the margin calls for instances in which credit facility limits are exceeded. In addition to the bilateral agreements signed further to the ISDA maser agreement, known as Credit Support Annexes (CSA), the Entity monitors the favorable or negative fair value on a monthly basis. Should the Entity incur a positive result, and that result be considered material in light of the amount, a CDS could be contracted to reduce the risk of breach by counterparties. The Entity has the policy of monitoring the volume of operations contracted with each institution, in order to avoid margin calls and mitigate credit risks with counterparties. At the December 31, 2013 and 2012 closing, the Entity has incurred no margin calls, nor does it hold any type of securities pledged as a guarantee by a counterparty with which it may have carried out interest rate hedging operations. At December 31, 2013 and 2012, the Entity has recorded no breaches to the agreements signed with different financial entities for exchange rate hedging operations. The Entity’s maximum exposure to credit risk is represented by the carrying value of its financial assets. At December 31, 2013, that risk amounts to $1,292,088. As of December 31, 2012, interest rate 1 year Average effective Up to Up to 2 year Up to 3 year Up to 4 year Up to 5 years or more Total Long–term debt Suppliers Other accounts payable and others 6.18% $ 537,967 $ 625,666 $ 753,496 $ 918,868 $ – $ 2,835,997 1,129,612 871,404 – – – – – – – – 1,129,612 871,404 Total $ 2,538,983 $ 625,666 $ 753,496 $ 918,868 $ – $ 4,837,013 Annual Report Alsea 2013 || Annual Report Alsea 2013 106 107 i. Fair value of financial instruments a. Fair value of financial assets and liabilities that are not valued at fair value on a recurring basis (but that require fair value disclosure) This notes provides information on the manner in which the Entity determines the fair values of the different financial assets and liabilities. Except for the matter described in the following table, Management considers that the carrying values of financial assets and liabilities recognized at amortized cost in the financial statements approximate their fair value. 1. Fair value of the Entity’s financial assets and liabilities measured at fair value on recurring bases. Some of the Entity’s financial assets and liabilities are valued at fair value at each reporting period. The following table contains information on the procedure for determining the fair values of financial assets and financial liabilities (specifically the valuation technique(s) and input data used). Financial assets/liabilities Fair value (1) (2) Figures in USD Fair value hierarchy Valuation technique(s) and main input data 12/31/2013 12/31/2012 1) Forwards and currency $ (25) $ (44) Level 2 Plain vanilla forwards are calculated based options agreements on discounted cash flows on forward exchange type bases. The main input data are the Spot, the risk–free rates in MXN and USD + a rate that reflects the credit risk of counterparties. In the case of options, the methods used are Black and Scholes and Montecarlo digital and/or binary algorithms. 2) Interest rate swaps $ 482 $ 33 Level 2 Discounted cash flows are estimated based 12/31/2013 12/31/2012 Carrying value Fair value Carrying value Fair value Financial liabilities Financial liabilities maintained at amortized cost: Bank loans Long–term bank loans Debt instruments $ 388,486 $ 395,680 $ 396,647 $ 2,166,281 2,488,850 2,166,281 2,507,550 2,077,533 – 396,647 2,077,533 – Total $ 5,043,617 $ 5,069,511 $ 2,474,180 $ 2,474,180 Financial liabilities Level 1 Level 2 Financial liabilities maintained at amortized cost: Bank loans Long–term bank loans Debt instruments $ – – – $ 395,680 2,166,281 2,507,550 $ – $ 5,069,511 on forwards interest rates (using the observable yield curves at the end of the period being reported) and the contractual rates, discounted at a rate that reflects the credit risk of the counterparties. Total Valuation No transfers were made during the period between levels. a. Description of valuation techniques, policies and frequency: (1) The fair value is presented from a bank’s perspective, which means that a negative amount represents a favorable result for the Entity. The derivative financial instruments used by Alsea (forwards and swaps) are contracted to reduce the risk of adverse fluctuations in exchange and interest rates. Those instruments require the Entity to exchange cash flows at future fixed dates on the face value or reference value and are (2) 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. Techniques and valuations applied are those generally used by financial entities, with official price sources from banks such as Banxico for exchange rates, Proveedor Integral de Precios (PIP) and Valmer for supply and databases of rate prices, volatility, etc. In order to reduce to a minimum the credit risk associated with counterparties, the Entity contracts its financial instruments with domestic and foreign institutions that are duly authorized to engage in those operations. valued at fair value. b. Liquidity in Derivative Financial Operations: 1. 2. The resources used to address financial instrument requirements will derive from the resources generated by the issuer. External sources of liquidity: No external sources of financing will be used to address requirements pertaining to derivative financial instruments. Annual Report Alsea 2013 || Annual Report Alsea 2013 108 109 24. Stockholders’ equity Following is a description of the principal features of the stockholders’ equity accounts: a. Capital stock structure The movements in capital stock and premium on share issue are shown below: Figures at January 1, 2012 Repurchased shares Dividends declared in shares Purchase of non–controlling interest Placement of shares Figures at December 31, 2012 Purchase of non–controlling interest Placement of shares Number Capital stock of shares (thousands of pesos) Premium on issuance of share 606,001,924 $ 362,461 $ 1,092,047 11,802,800 16,465,957 – 53,488,373 5,901 8,233 – 26,744 1,090 300,669 (15,262) 1,088,278 687,759,054 403,339 $ 2,466,822 – – – – (429,262) (170) Figures at December 31, 2013 687,759,054 $ 403,339 $ 2,037,390 In December 2012, Alsea issued 46,511,628 shares with an overallotment of 6,976,745 shares, which was issued at the offering price of 21.50 (twenty one pesos and fifty cents) per share. The issue was recorded net of placement expenses (see Note 1h.) In April 2012, Alsea declared dividends in shares of $308,902 by capitalizing the amount corresponding to the after–tax earnings account, in order to cover the subscription value of 16,465,957 shares to be issued and used as payment of the declared dividend in proportion to the 37.52 shares. In order to determine the number of shares to be declared, the price per share was authorized based on the closing price of share of $18.76 (eighteen pesos and 76 cents), of which $0.50 (zero pesos fifty cents) corresponds to the notional amount, and the difference to a premium on share subscription. In April 2013, Alsea declared a dividend payment of $343,880 with a charge to the after–tax earnings account, which is to be paid against net earnings at the $0.50 (zero pesos fifty cents) per share. The fixed minimum capital with no withdrawal rights is comprised of Class I shares, while the variable portion is represented by Class II shares, and it must in no case exceed 10 times the value of the minimum capital with no withdrawal rights. At December 31, 2013 and December 31, 2012, subscribed fixed and variable capital stock is comprised of 687,759,054 common nominative shares with no par value, as shown below: Description Number of shares Amount Fixed portion of capital stock at December 31, 2013 Fixed portion of capital stock at December 31, 2012 Fixed capital stock Variable capital stock Repurchased shares (par value) Capital stock at January 1, 2012 $ $ $ 687,759,054 687,759,054 489,157,480 128,647,244 (11,802,800) 403,339 403,339 304,038 64,324 (5,901) 606,001,924 $ 362,461 The National Banking and Securities Commission has established a mechanism that allows the Entity to acquire its own shares in the market, for which purpose a reserve for repurchase of shares must be created and charged to retained earnings, which Alsea has created as of December 31, 2013. Total repurchased shares must not exceed 5% of total issued shares; they must be replaced in no more than one year, and they 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 notional value (paid–in capital stock divided by the number of outstanding shares) in the case of shares with no par value, including inflation, at December 31, 2012. Available repurchased shares are reclassified to contributed capital. In January 2012, Café Sirena, S. de R.L. de C.V. declared a cash dividend of $150,000, paid in proportion to the value of each of the equity participation units comprising the company’s capital stock. The amount corresponding to the non–controlling interest totaled $27,000. In February 2013, Café Sirena, S. de R.L. de C.V. declared a cash dividend of $170,000, which was paid in proportion to the value of each of the equity participation units comprising capital stock. The amount corresponding to the non–controlling interest was $30,600. In August 2012, it was agreed to convert variable capital stock to fixed minimum capital stock, by converting 145,113,201 single series, Class II shares currently comprising the variable portion of the capital stock to the same number of single series, Class I shares comprising the minimum fixed portion, after which the shareholders continue to hold the same number of shares. b. Stockholders’ equity restrictions I. Five percent of net earnings for the period must be set aside to create the legal reserve until it reaches 20 percent of the capital stock. At December 31, 2013, the legal reserve amounted to $100,736, which amount does not cover the required 20%. II. Dividends paid from retained earnings are not subject to ISR 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 accrued 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 two years. Annual Report Alsea 2013 || Annual Report Alsea 2013 110 111 25. Non–controlling interest Following is a deatil of the non–controlling interest: Beginning balance at January 1, 2012 Equity in results for the year ended December 31, 2012 Café Sirena dividends declared in 2012 Acquisition of the non–controlling interest of Grupo Calpik Acquisition of the non–controlling interest of Panadería y Alimentos para Food Service Non–controlling interest resulting from acquisition of Italianni’s Ending balance at December 31, 2012 Equity in results for the year ended December 31, 2013 Café Sirena dividends declared in 2013 Non–controlling interest resulting from the acquisition of Burger King Mexicana Purchase of non–controlling interest of Café Sirena Purchase of non–controlling interest of Starbucks Coffee Argentina Amount $ 298,803 36,880 (27,000) (15,172) (11,748) 26,426 308,189 (17,694) (30,600) 217,534 (201,445) (44,109) b. Acquisition of the non–controlling interest of Starbucks Coffee Mexico In April 2013, the Entity acquired from SCI the 18% that it did not hold in Café Sirena, a subsidiary of Alsea that operates in the different Starbucks® stores in Mexico. For consolidation purposes, the transaction did not constitute a change in control over Café Sirena prior to the purchase of the non–controlling interest. As the Entity had been previously consolidating the subsidiary, such accounting remained unchanged. The change of interest in Café Sirena by Alsea upon acquisition of the non–controlling interest (from 82% to 100%) qualified as an equity transaction. Accordingly, the difference between the carrying value of the non–controlling interest at the time of acquisition and the fair value of amount paid was recorded directly in stockholders’equity. The accounting entry gave rise to a decrease in the non–controlling interest of $201,445. 26. Earnings per share Basic earnings per share is calculated by dividing the net profit for the period attributable to the controlling interest holders of ordinary capital by the average weighted number of ordinary shares outstanding during the period. Diluted earnings per share is calculated by dividing the net profit attributable to controlling interest holders of ordinary capital (after adjusting for interest on the convertible preferential shares, if any) by the average weighted ordinary shares outstanding during the year plus average weighted ordinary shares issued when converting all potentially ordinary diluted shares to ordinary shares. For the years ended December 31, Ending balance at December 31, 2013 $ 231,875 2013 and 2012, the Entity has no potentially dilutive shares, for which reason diluted earnings per share is equal to basic earnings per share. a. Acquisition of the non–controlling interest of Starbucks Coffee Argentina– The following table contains data on income and shares used in calculating basic and diluted earnings per share: The Entity acquired from Starbucks Coffe International (an affiliate of Starbucks Coffee Company) the remaining 18% of Starbucks Coffee Argentina, S.R.L. (Starbucks Argentina), a subsidiary of Alsea that operates the Starbucks Coffee stores in Argentina. For accounting purposes, the transaction did not constitute a change in control over Starbucks Coffee Argentina prior to the purchase of the non–controlling interest. As the Entity had been previously consolidating with the subsidiary, such accounting remained unchanged. Net profit (in thousands of pesos): Attributable to shareholders Shares (in thousands of shares): Weighted average of shares outstanding The change of interest in Starbucks Coffee Argentina by Alsea upon acquisition of the non–controlling interest (from 82% to 100%) qualified Basic earnings per share as a equity transaction. Accordingly, the difference between the carrying of the non–controlling interest at the time of acquisition and the fair value of the amount paid 27. Revenues was recorded directly in stockholders’ equity. The accounting entry gave rise to a $44,109 decrease in the non–controlling interest. Revenues from the sale of goods Services Royalties Total 2013 2012 $ 681,014 $ 364,918 687,514 637,329 $ 0.99 $ 0.57 2013 2012 $ 15,305,418 249,174 163,951 $ 13,202,516 223,685 93,305 $ 15,718,543 $ 13,519,506 Annual Report Alsea 2013 || Annual Report Alsea 2013 112 113 28. Employee benefit expenses 31. Financial information by segments Following are the expenses incurred for employee benefits included under other operating costs and expenses in the consolidated statements of The Entity is organized into three large operating divisions comprised of sales of food and beverages in Mexico andn South America and income. Wages and salaries Social Security costs Retirement benefits Total 29. Other income In 2013 and 2012, this caption is comprised as follows: 2013 2012 The accounting policies of the segments are the same as those of the Entity’s described in Note 3. distribution services, all headed by the same management. $ 2,837,545 $ 2,552,834 The Food and Beverages segments in which Alsea in Mexico and Latin America (LATAM) participates are as follows: 517,627 27,678 309,891 21,923 Fast Food: This segment has the following features: i) fixed and restricted menus, ii) food for immediate consumption, iii) strict control over individual portions of each ingredient and finished product, and iv) individual packages, among others. This type of segment can be easily $ 3,382,850 $ 2,884,648 accessed and therefore penetration is feasible at any location. Coffee Shops: Specialized shops where coffee is the main item on the menu. The distinguishing aspects are top quality services and competitive prices, and the image/ambiance is aimed at attracting all types of customers. 2013 2012 restaurants. The main features of casual dining stores are i) easy access, ii) informal dress code, iii) casual atmosphere, iv) modern ambiance, v) simple decor, vi) top quality services, and vii) reasonable prices. Alcoholic beverages are usually sold at those establishments. Casual Dining: This segment comprises service restaurants where orders are taken from customers and there are also to–go and home delivery services. The image/ambiance of these restaurants is aimed at attracting all types of customers. This segment covers fast food and gourmet Legal expenses Loss on fixed assets disposals, net PTU on tax base Inflation and interest on tax refund Other (income) expenses, net $ $ 18,552 24,386 3,920 (24,347) (45,310) 1,425 64,200 4,782 (2,220) (77,991) Fast Casual Dining: This is a combination of the fast food and casual dining segments. The Distribution and Production segment is defined as follows: Total $ (22,799) $ (9,804) refrigerated and dry food products to supply all Domino’s Pizza, Burger King, Starbucks, Chilis Grill & Bar, P.F. Chang’s China Bistro, Pei Wei and Distribuidora e Importadora Alsea, S.A. de C.V. (DIA) specializes in domestic purchase, importation, transporting, storage and distribution of frozen, Italianni’s establishments in Mexico. 30. Balances and transactions with related parties Additionally, DIA is responsible for preparing and distributing pizza dough to the entire Domino’s Pizza System in Mexico. Officer Compensations and Benefits Panadería y Alimentos para Food Service, S.A. de C.V. This plant produces sandwiches and bread that are supplied to Starbucks and the other Alsea brands. The business model contemplates a central plant located in Lerma, in the State of Mexico, where the Pastry and Bakery products The total amount of compensation paid by the Entity to its main advisors and officers for the nine–month period ended December 31, 2013 and and sandwiches are prepared. 2012 was of approximately $159,000 and $109,000, respectively. That amount includes payments determined at a General Stockholders’ Meeting for performance of their duties during that year, as well as for salaries and wages. The definition of the operating segments is based on the financial information provided by General Management and it is reported on the same bases as those used internally by each operating segment. Likewise, the performance evaluations of the operating segments are The Entity continuously reviews salaries, bonuses and other compensation plans in order to ensure more competitive employee compensation periodically reviewed. conditions. Annual Report Alsea 2013 || Annual Report Alsea 2013 114 115 Information on the segments for the years ended December 31, 2013 and 2012 is as follows: (figures in millions of pesos) 32. Foreign currency position Figures in millions of pesos at December 31, 2013 Assets and liabilities expressed in US dollars, shown in the reporting currency at December 31, 2013 and 2012, are as follows: Food and beverages – Mexico segment Food and beverages – LATAM segment Distribution and production segment Eliminations Consolidated 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Revenues From third parties $ 10,346 $ 8,752 $ 4,219 $ 3,416 $ 1,130 $ 1,331 $ 24 $ 20 $ 15,719 $ 13,519 Between segments Revenues Costs Other operating costs and expenses Depreciation and amortization Interest paid Interest earned Other financial expenses Equity in results of associated companies Income taxes Results of segments Non–controlling interest 25 10,371 3,378 5,431 637 156 (123) 2 890 – 201 689 – – 8,752 2,957 4,421 558 122 (76) 13 757 – 182 575 – – 4,219 1,440 – 3,416 1,129 3,200 4,330 3,615 2,701 4,032 3,366 (3,225) (3,201) (3,205) (2,701) (2,681) (2,696) – 15,719 5,228 – 13,519 4,756 2,501 2,073 178 54 (26) 18 54 – 71 (17) – 168 28 (6) 2 22 13 49 (27) – 461 62 10 (2) – 184 – 30 154 – 459 51 9 – 34 113 – (8) 121 – 59 47 21 112 (12) (223) 43 (17) (163) – 202 34 86 35 (57) (285) (1) (4) (282) – 8,452 7,155 924 241 (39) 8 905 43 285 663 (18) 811 245 (47) (8) 607 12 219 400 37 Controlling interest $ 689 $ 575 $ (17) $ (27) $ 154 $ 121 $ (163) $ (282) $ 681 $ 363 Assets: $ 10,564 $ 12,200 $ 2,388 $ 1,294 $ 2,022 $ 1,674 $ (4,562) $ (6,396) $ 10,412 $ 8,772 Investment in performing assets (Investment in associated companies) – – – 40 (Investment in fixed assets and Int. Assets) 1,031 628 216 277 – 31 – 34 789 (20) – 47 789 40 1,258 986 Assets Liabilities Thousands of dollars 2013 Thousands of dollars 2012 $ 621,813 (742,732) $ 484,233 (390,432) Net monetary asset (liability) position $ (120,919) $ 93,802 The exchange rate to the US dollar at December 31, 2013 and 2012 was $13.05 and $13.01, respectively. At February 21, 2014, date of issuance of the financial statements, the exchange rate was $12.3438 to the US dollar. The exchange rates used in the different conversions to the reporting currency at December 31, 2013 and 2012 and at the date of issuance of these financial statements are shown below: Country of origin Currency Closing exchange rate Issue February 21, 2014 2013 Argentina Chile Colombia Argentinian peso (ARP) Chilean peso (CLP) Colombian peso (COP) 2.0108 0.0248 0.0067 1.7091 0.0240 0.0065 Country of origin Currency Closing exchange rate Issue 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 Total assets $ 11,595 $ 12,828 $ 2,604 $ 1,611 $ 2,053 $ 1,708 $ (3,793) $ (6,349) $ 12,459 $ 9,798 Total liabilities $ 6,449 $ 6,556 $ 2,371 $ 1,137 $ 1,335 $ 1,003 $ (2,277) $ (3,727) $ 7,878 $ 4,969 In converting the figures, the Entity used the following exchange rates: Foreign transaction Country of origin Currency Recording Functional Presentation 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 Argentina Argentina Argentina Chile Chile Colombia Colombia Colombia ARP ARP ARP CLP CLP COP COP COP ARP ARP ARP CLP CLP COP COP COP MXP MXP MXP MXP MXP MXP MXP MXP Annual Report Alsea 2013 || Annual Report Alsea 2013 116 33. Commitments and contingent liabilities Commitments: a. The Entity leases locales to house its stores and distribution centers, as well as certain equipment further to the lease agreements entered into for defined periods (see Note 13). b. Operating lease agreements cannot be canceled. Future minimum lease payments are as follows: 1 year or less More than 1 to 5 years 2013 2012 $ 917,838 $ 1,049,809 4,061,677 3,577,643 c. The Entity has acquired several commitments with respect to the arrangements established in the agreements for purchase of the brands. d. In the regular course of operations, the Entity acquires commitments derived from supply agreements, which in some cases establish contractual penalties in the event of breach of such agreements. Contingent liabilities: In August 2012, Italcafé received an order for an on–site official review by the tax authorities. Such visit concluded in August 2013 with certain observations regarding income that the authorities considered had not been declared and differences in VAT paid. Italcafé is currently in the phase for submitting additional documentation in order to clarify the aforementioned differences. The authorities have a six–month term, that concludes in February 2014, to assess a tax debt of approximately $146 million. On the basis of the foregoing, Alsea will file an appeal against a possible tax debt. It is important to mention that the former owners of Italcafé will assume the economic effects arising from such tax debt in light of the terms and conditions set forth in the agreements signed by Alsea and the sellers. Italcafé is entitled to request the intervention of PRODECON (Taxpayer Protection Bureau) to support the Entity with this issue at the Federal District Treasury, which matter is being analyzed and processed by the Entity’s external advisors. 34. Financial statement authorization The enclosed consolidated financial statements were authorized for issuance on February 21, 2014 by Mr. Diego Gaxiola Cuevas, Administration and Financial Director, and therefore they do not reflect any facts that might occur after that date and are subject to the approval of the audit committee and the Entity’s stockholders, who can decide to modify them in accordance with the provisions of the Corporations Law. Mr. Fabián Gosselin Castro Mr. Diego Gaxiola Cuevas Mr. Alejandro Villarruel Morales General Director Administration and Financial Director Corporate Controller | Annual Report Alsea 2013 INVESTOR INFORMATION INVESTOR RELATIONS Diego Gaxiola Cuevas Chief Financial Officer 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, Mexico City 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, Mexico City Phone: +52 (55) 5080-6000 SOCIAL RESPONSIBILITY Ivonne Madrid Canudas responsabilidad-social@alsea.com.mx Phone: +52 (55) 5241-7100, ext. 7335 GRI 2.4, 3.1, 3.2, 3.3, 3.4, 3.6, 3.7, 3.10, 3.13, 4.12 INFORMATION ABOUT ALSEA’S SHARES 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) as of June 25, 1999. Ticker Symbol: BMV ALSEA* Alsea Annual Report 2013 (BMV: ALSEA*) 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 out of control of Alsea and its subsidiaries. ABOUT THIS REPORT Alsea’s 2013 Annual Report, “Expanding Our Horizons”, is the second Company’s integrated report, which reflects Alsea’s economic, social and environmental results of the period between January 1st and December 31st, 2013. The results shown are global, unless otherwise specified. Annually and for the third time, the report is prepared in accordance with the Global Reporting Initiative G3.1 Guidelines. It holds a Self- Declared B Application Level; it does not include external assurance, nor information restatements regarding previous years. The Company is committed to respect the UN Global Compact’s Ten Principles in all of its operations; therefore this report displays the initiatives supporting them, as well as for aligning such operations and strategies to the Millennium Development Goals. Available on iTunes Store “Alsea 2013” This report is available on: www.alsea.net/ annualreport2013 Our previous reports are available on: www.alsea.com.mx . y t i l i b i s n o p s e R l a i c o S d n a n o i t a c i n u m m o C e t a r o p r o C y b d e t a r o b a E l | : t x e T : n g i s e D www.alsea.com.mx 

Continue reading text version or see original annual report in PDF format above