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Edited Transcript of LALAB.MX earnings conference call or presentation 25-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Grupo LALA SAB de CV Earnings Call

GOMEZ PALACIO Apr 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Grupo LALA SAB de CV earnings conference call or presentation Tuesday, April 25, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alberto Arellano

Grupo LALA SAB de CV - CFO

* Scot Rank

Grupo LALA SAB de CV - CEO

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Conference Call Participants

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* Fernando Olvera

BofA Merrill Lynch - Analyst

* Felipe Ucros

Scotiabank - Analyst

* Pedro Leduc

JPMorgan - Analyst

* Antonio Gonzalez

Credit Suisse - Analyst

* Sergio Matsumoto

Citigroup - Analyst

* Rodolfo Ramos

Franklin Templeton Investments - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Robert and I will be your conference call operator today. At this time, I would like to welcome everyone to Grupo LALA's first-quarter 2017 results conference call. All participants are in a listen-only mode to prevent any background noise. Later, we will conduct a question-and-answer session.

I would now like to turn the call over to your host for today, Mr. Alberto Arellano, Grupo LALA's Chief Financial Officer. Please go ahead, sir.

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Alberto Arellano, Grupo LALA SAB de CV - CFO [2]

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Good morning and thank you for joining our call today. This is Alberto Arellano, Grupo LALA's CFO. Please go ahead, sir.

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Alberto Arellano, Grupo LALA SAB de CV - CFO [3]

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Good morning and thank you for joining our call today. This is Alberto Arellano, Grupo LALA's CFO.

Yesterday, we issued our earnings press release after market close. It can be downloaded from the Investors section of Grupo LALA's website. This review is being made available via webcast, accessible on LALA's website. For those of you listening via telephone who also wish to view the slide presentation, please click on the listen by phone button tab underneath the player window. For anyone who wasn't able to connect to this presentation, there will be a replay service once this live session is finished. Access will be available on LALA's webpage or the information can be found on our earnings release document.

Before we get started, I would like to remind you that this conference includes forward-looking statements which are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with Mexican [VOISA].

On our call today, Scot Rank, Grupo LALA's CEO, will be joining me. I will start with the remarks of Grupo LALA's first-quarter results and the financial position. Later, Scot will share an update about LALA's 2017 strategic priorities. Then we will open the line to take your questions.

We will start on Slide 3. 2017 has started with good sales momentum. Over the last quarters, we continuously accelerated topline growth in Mexico, Central America, and the United States.

Revenues for the quarter reached MXN14.8 billion, a 18.3% increase versus the same period last year. Sales from ongoing operations contributed to 10.9 percent points of growth from higher volume, pricing actions, and favorable product mix effect. Inorganic growth from last year's acquisition contributed another 7.4% to the growth.

Moving to Slide 4, I want to highlight the growth of the segment, especially on the other dairy products category, which grew 38.6% on a year-on-year basis. New production capacities (inaudible) last year for cheese and yogurt categories helped us to support the growth of the segments and will allow us continue accelerating topline growth throughout the end of the year.

Another important achievement was on the milk category, where we experienced an 11.4% growth supported in general by an overall good performance in our portfolio, and in particular by the introduction of LALA 100 in Mexico in its fresh and UHT versions.

On Slide 5, I want to highlight the EBITDA margin recovery we have experienced as a result of the efforts and initiatives implemented over the last two quarters. As many of you remember, in the third quarter of 2016, our margins were compressed due to the Mexican peso depreciation, import cost inflation, the consolidation of the acquired business in Central America and the US, plus some one-time impacts related to the integration of the new businesses and the corporate restructure program.

Even though our margins continue to be pressured by the current economic situation, we have implemented productivity projects, portfolio management, and pricing actions to partially offset this impact. I am confident, therefore, that margin will continue to recover throughout the rest of 2017.

Continuing on Slide 6, we show consolidated financial information. Net sales increased 18.3% to MXN14.799 billion. Cost of goods increased 25%, due to raw material and energy costs in Mexico, and the effect of fixed costs related to recently expanded plans in Nebraska and Colorado that are operating at low capacity. As a result, gross margin was 36.2% of sales and only 8.1% above the same period last year.

Operating income decreased 19.5% compared to the first quarter of 2016. This contraction is mainly resulting from heightened operating expenses in the US and Central America. As a result, EBITDA for the first quarter of 2017 ended in MXN1.725 billion, a 345 basis point EBITDA margin contraction compared to the first quarter of 2016. Based on the pricing actions implemented at the end of the quarter in Mexico, and as volume keeps growing in the US to absorb fixed costs at the new manufacturing facilities, EBITDA margins should gradually increase over the year.

The net income for the quarter ended in MXN704 million, significantly impacted by financial losses which we will explain in the next slide.

On Slide 7, we show the composition of the net financial charges, which were negative MXN234 million for the quarter, primarily due to the appreciation of 9.7% of the Mexican peso and the impact of our hedging policies. MXN50 million in financial losses came from our hedging policy to cover from three to six months of dollar denominated operating costs and CapEx equipment with our plain-vanilla forwards policy. Another MXN105 million of losses realized from the adjusted value of dollar denominated intercompany receivables, and additional MXN102 million from the adjusted value of dollar forward yet to be exercised.

On Slide 8, we observe a healthy balance sheet. At March closing, Grupo LALA continued having a negative net debt. Our cash position extends at MXN3.5 billion. Our noncurrent assets increased from MXN17.3 billion to MXN23.7 billion, reflecting our investments in technology, distribution, manufacturing capabilities, and acquisitions.

As shown on this slide, our total cash position decreased MXN5.6 billion, mainly as a result of La Perfecta and the US acquisitions.

Total debt grew from MXN87 million to MXN1.195 billion. This increase was the result of the short-term loan used to fund working capital needs. The debt has been fully paid during the month of April.

With that, I would like to pass the call over to Scot, who will be providing details about the progress made throughout the first quarter as well as to provide an outlook on the implementation of our four strategies for 2017. Thank you again. And Scot, please go ahead.

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Scot Rank, Grupo LALA SAB de CV - CEO [4]

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Thank you Alberto. Good morning, everyone, and thanks again for joining our results conference call today.

Turning to Slide 9, let me provide you with an overview of the progress we are making towards delivering on our four strategic priorities announced for 2017. The first is protecting our business in Mexico, strengthening our product portfolio via innovation, consolidating and expanding the US and Central America operations, and M&A and strategic alliances.

On Slide 10, we share our approach to protecting the core operations of our Mexico division, its brands, infrastructure and margins, which are key to delivering Grupo LALA's results. To protect and grow our brands, we launched national TV and digital advertising campaigns in milk, yogurts and cheese in the first four months of 2017. We also launched an aggressive productivity plan designed to save over MXN1,000 million in calendar 2017.

At the same time, we are investing in optimizing our infrastructure, as shown on the next slide. We have aggressive plans to streamline our operations, and one example is our national distribution network. An example of this is the Mexico City metropolitan area, where, just last year, we operated 17 distribution centers. We will be consolidating 17 distribution centers into only five by 2019. This will significantly improve customer service, reduce operating expenses, and allow us to grow our distribution capacity in this region.

On Slide 12, we show two examples of how LALA is driving innovation in the dairy category. At the beginning of March, LALA Delicias was introduced to the market, our first indulgent yogurt, in line with the strategy to strengthen the LALA branded premium categories. It comes in three different flavors -- lemon pie, strawberry pie and red velvet -- offering new and delicious varieties to our consumers.

Another important innovation was done in the cheese category with new resealable packaging for Panela style cheese, the most popular cheese in Mexico commonly used as an ingredient for many traditional Mexican dishes.

On Slide 13, as we have shared before, Central America is an integral part of our growth strategy for the years to come. We are investing in additional infrastructure with two new plants, one in Costa Rica and another one in Guatemala, that will help us expand our manufacturing and distribution footprint in the region. At the same time, we are consolidating from three to two plants in Nicaragua to improve efficiency and customer service.

Moving to Slide 14, I want to highlight the progress of the US branded business. Revenues for the US branded business closed at MXN870 million in the first quarter, fueled by the growth of our drinkable yogurt business.

EBITDA for the same period was negative MXN35 million, MXN111 million better than last quarter. The improvement on EBITDA margin was attributed to sales growth, the absorption of fixed cost, and the reduction of sales and marketing expenses. As we previously shared, we expect to see a positive evolution of the business and plan to deliver breakeven EBITDA results in the second half of the year.

Moving on to Slide 15, I would like to share our plan to increase geographical distribution of Promised Land premium milk beginning May of this year. With the new extended shelf life line installed in our Sinton, Colorado plant, we will be able to transform Promised Land from a local brand into a multi-regional brand. Promised Land is an extended shelf life premium milk naturally high in protein and calcium that comes 100% from original Jersey cows.

Premium and specialty milks are one of our three growth platforms for LALA US. These also include drinkable yogurt and Hispanic dairy.

Regarding our fourth strategy, as we move towards our goal to become the favorite dairy company in the Americas, we will continue to look for M&A and strategic alliances to complement and boost the organic performance of the business.

On Slide 16, we show that LALA is committed to generating value for society and other stakeholders, and as a socially responsible company, we are continuously working and developing activities in the best interest of the communities and the environment. Through the LALA Foundation and our NGO partners, we deliver milk to 34,000 children every day, and annually benefit over 540,000 people in Mexico and Guatemala. We are also working hard to improve the environmental sustainability of our operation, and we have reduced the amount of CO2 emissions in our primary and secondary distribution networks, as well as in our production network, continuously since 2012. I am pleased to share that Grupo LALA is among the top 10 companies with the highest investment in social programs in Mexico.

I would like to close by confirming our focus on the four strategic priorities that I've shared with you today. These priorities will help us deliver sustainable and profitable growth to our shareholders.

With that, I would like to turn the call over to the operator and open the line for the Q&A session. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Fernando Olvera, Bank of America Merrill Lynch.

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Fernando Olvera, BofA Merrill Lynch - Analyst [2]

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Hi, hello. Good morning everyone. Scot, Alberto, thanks for the call. I have two questions. The first one is regarding Mexico. Can you tell us how much was the price increase and how do you expect volumes to perform in coming quarters?

And my second question is about the US. Previously, you mentioned that the US business could perform at breakeven EBITDA at some point in 3Q 2017. And now in the press release, you mentioned that it will be in the second half of the year. So, I just want to know if something changed or not. Thanks.

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Alberto Arellano, Grupo LALA SAB de CV - CFO [3]

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It's Alberto. On your first question, in terms of the price increase, we have taken two price increases already over the last six months. The first one was pretty much ran with let's say inflation. We did that in late Q3.

And then on the second price increase, this we pretty much took it at the last week of Q1. So we still don't have much of the benefit of the pricing actions, or let's say the full benefit of the pricing actions, but we'll start seeing that more in Q2. But we believe (inaudible) has been a responsible pricing action based on the input costs we have faced over the last let's say nine to 10 months. So that's kind of the first one.

Then for the second one, in reality, we are not changing our guidance for the US. We are happy with what we've seen in terms of margin improvement over the last quarter. We do see let's say a continuous acceleration of the drinkable market in the US. We are very confident on what we see. The market is still expanding double digits. Our own share of that market as well is growing, and so we are happy on that.

We are looking forward as well to more kind of a regional expansion we will be doing on our specialty milk, Promised Land, over the next couple of months, and this will happen -- will start to happen in May. We know that this milk has cornered out very good acceptance on the Texas area as well as the Southeast of the US. So expanding this milk let's say into a more regional approach will obviously give us more volume and allows for exceptional fixed cost.

So, the guidance is not changing. It really -- the regional breakeven will really depend on how our national expansion is going on Promised Land. But again, we maintain our confidence that that target is achievable and happy in what we have seen over the last couple of weeks on drinkable yogurt in the States.

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Fernando Olvera, BofA Merrill Lynch - Analyst [4]

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Okay, thanks Alberto. Regarding the price increase, do you sort of think that the price increase or the accumulated price increase is around 7% to 8% with the two increases?

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Alberto Arellano, Grupo LALA SAB de CV - CFO [5]

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Yes, it's more north of that, Fernando.

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Fernando Olvera, BofA Merrill Lynch - Analyst [6]

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Okay. And how do you expect volumes to perform after that price increase? Because this first quarter, I think volume was pretty good. I don't know what is your view for coming quarters.

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Alberto Arellano, Grupo LALA SAB de CV - CFO [7]

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What we've seen in the past is that, whenever we do a price increase, we do see additional acceleration on the volume. We didn't see that in a price increase late last year. We haven't seen that obviously in Q1. We see a solid consumption. We see our volumes going up. But yes, we might see kind of a hockey stick effect in the short-term, I'm thinking here April and May volume, but at the end of the day, we do believe that consumption will continue to be positive, and our volumes should recuperate in case of any shortfall in the short-term.

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Fernando Olvera, BofA Merrill Lynch - Analyst [8]

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Perfect. Thank you very much.

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Alberto Arellano, Grupo LALA SAB de CV - CFO [9]

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My pleasure Fernando.

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Operator [10]

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Felipe Ucros, Scotiabank.

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Felipe Ucros, Scotiabank - Analyst [11]

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Good morning Scot, Alberto. Thanks for the space for questions. Let me begin with this one. The release disclosed a little less information than in prior quarters where you guys were doing a breakout of Mexico, and therefore we could sort of back into what happened in Central America. And it seemed like Central America, of course mainly because of the one-offs, had been in negative EBITDA territory. Is that still the case or what margins are we seeing in Central America?

And if could you also comment on the one-offs, how that has evolved. You were reporting some one-offs on integration costs and also on the shared services center. If you can tell us how that has evolved and what you expect going forward.

And finally, this is sort of rehashing a bit on what my colleague just mentioned. But it seems that the Promised Land launch is now slated for May, which is a little later than we initially expected. How long will this take? And where I'm going with this is I'm thinking this will probably bleed to 3Q 2017, the launch, and the one-off costs associated with the launch. So I'm thinking that maybe breakeven in 3Q 2017 is less achievable now that the Promised Land launch is going to sort of bleed into the third quarter. Thanks.

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Alberto Arellano, Grupo LALA SAB de CV - CFO [12]

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Sure. It's Alberto. Thanks for your question. On the [CAM] margin, we are happy to announce that we are on the positive margins here. Yes, we had I would say a couple of headaches at the end of last year with some integration costs and so on. We have already closed the La Perfecta plant late in March, which, again, it was one of our targets when it comes to really synergies and integration. So on that front, I would say we are on track versus what we had expected.

We are not expecting any major integration costs again. Yes, we had a minor one in Q1, nothing important, again, pretty much related to what I just mentioned in terms of closing of this plant, but we are not expecting anything significant going forward in the year.

Now, as for the Promised Land launch an expansion, this is -- we are doing this on a regional expansion and it's going to be a gradual, I would say, launch. It will start, as I mentioned, in May, and it will continue growing throughout the year.

And one of the good things here is that we do have now two different facilities that is able to -- capable of producing and shipping this product. We have the one in Texas and the one in Colorado as well. So with that, also we have I would say more strength in terms of geographical footprint and distribution to be able to be successful on that launch. Yes, it was a little bit later than what we had originally expected, but we believe that the delay was a worthy one, because, again, we now have two sites that are capable of producing Promised Land in its full product range.

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Felipe Ucros, Scotiabank - Analyst [13]

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Okay, that helps. But does that mean that the launch costs will bleed into 3Q?

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Alberto Arellano, Grupo LALA SAB de CV - CFO [14]

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No. We will rather I would say account for that in Q2, Q3 and Q4, and this should not impact what we have guided in terms of breaking even in H2.

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Felipe Ucros, Scotiabank - Analyst [15]

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Okay, got it. Thanks. And lastly, I'll do a very quick one. On Page 4, you showed that beverages and others have shrank a little bit and maybe you mentioned a little bit of this but I got disconnected. That minus 2.4%, what was driving that negative sales impact on that category?

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Scot Rank, Grupo LALA SAB de CV - CEO [16]

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This is Scot. I'll take that. It's we had a decrease in excess milk sales that are included in this other category as well, so that when we have excess raw milk, we sell that sometimes to third parties. There was a decline in excess raw milk sales, and there was also a decline in some of the packaging sales that we sold to third parties as well. So, it really was not affected by -- we had very good sales on things like our plant-based milks and things like that.

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Felipe Ucros, Scotiabank - Analyst [17]

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Great, thanks a lot, Scot. Thanks for your time guys.

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Operator [18]

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Pedro Leduc, JPMorgan.

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Pedro Leduc, JPMorgan - Analyst [19]

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Good morning everybody. Thank you for taking the question. In respect to the profitability behavior in Mexico specifically, assuming Central America is still close to breakeven (inaudible) there, but insofar (inaudible) is closer to the 14th by now, and if so, do you think that the stronger peso that we are seeing post or sequentially, but when should it help lift the margins in Mexico as well as lower the cost? Is there something you guys have some visibility on, or is it already locked in at a higher price? So these two questions, New Mexico specific trends, and when the stronger peso will help you, if at all. Thank you.

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Alberto Arellano, Grupo LALA SAB de CV - CFO [20]

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Thanks for your question. On the profitability of Mexico, we are unfortunately not yet on your expectation of 14%. We are a little bit south of that. But we are confident that we will have implemented in terms of first of all productivity projects that are driving our costs down, the sweeping of the mix of our portfolio, number two, which, as you have seen, it's growing close to 40%. And then the third one, the recent pricing action we took on Q1 should definitely help us to recover margins gradually during the year. And we should start seeing this somewhere in Q2.

As for the exchange rate, this is certainly going to be helping us in our financial equation. Most of the inflation I would say that happened in our input costs I would say has been reflected. We have suffered from a solid I would say inflation, not necessarily in meat, but pretty much in the rest of the COGS element. We have obviously a lot of pressure on energy, a lot of pressure on gas, electricity and so on. But then again, I do believe that that is already factored into our cost, and whatever we have in terms of benefit and exchange rate. What I would say (inaudible) any further input cost increase. So we are confident again on the fact that we are done in terms of optimizing our equation and pricing actions should allow us to gradually recover margins better.

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Pedro Leduc, JPMorgan - Analyst [21]

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Thank you Alberto. Congrats on the quarter.

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Operator [22]

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Antonio Gonzalez, Credit Suisse.

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Antonio Gonzalez, Credit Suisse - Analyst [23]

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Hi. Good morning Scot and Alberto. Thank you for taking my question. I just have two. The first one is on the US. I wanted to know if you can help us quantify just the magnitude of your premium milk project vis-a-vis the drinkable yogurt project. I don't know if you can share with us what's target ACV you have worked for premium milk for example relative to what you had in drinkable yogurt.

And I just wanted to clarify as well in the US whether there's been any management or strategic changes with the US team specifically.

And then secondly on the innovation front in Mexico, it seems to me like you're getting into a new wave with the products that you described today, the Delicias product and so on. So, I just wanted to make reference to the previous wave of innovation, LALA (inaudible) and LALA (inaudible). I wanted to ask if you can give us an indication of what's been the repeat purchase in those brands and whether you feel confident that they continue to make progress and take a larger share in your overall portfolio prior to these new products that you make reference to. Thanks so much.

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Scot Rank, Grupo LALA SAB de CV - CEO [24]

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This is Scot. Promised Land super-premium milk is our second most important product in the lineup of items that we sell in LALA US after drinkable yogurt, so it's our number two product category ahead of things like cream and cottage cheese and spoonable yogurt and some other items that we have. So, it's our second most important product line, currently regional essentially in kind of Southern Midwest and parts of the Southeast today. And the expansion of -- this brand-new extended shelf life line that we have in the Colorado plant allows it to start to take it to new geographies that we currently have orders for, and those orders will start to be filled gradually in the second quarter, in the third quarter and the fourth quarter for the rest of this year. So it's, our number two product line. It's a great tasting product, too, if you haven't tried it. So, you should try Promised Land milk sometime.

Regarding the team, we did make a change. We have a new leader for LALA US. Her name is [Yvonne Garcia Lamonteguero]. Yvonne was the former President of the Americas for Mead Johnson. Prior to that, she has experience with consumer goods companies like Procter & Gamble, and she also is experienced in retailing. She was the former head of Superama and Sam's Club in Mexico. So Yvonne has joined our team as the leader for the US business. So, that's regarding the US.

I think you had a question about innovation as well. Could you repeat the question? I missed part of it.

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Antonio Gonzalez, Credit Suisse - Analyst [25]

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Yes, absolutely. And thanks for the previous color. I just wanted -- it seems to me -- please correct me if I'm wrong -- but it seems to me like you are launching a new wave of innovation in terms of LALA releases and new product lines. So I just wanted to ask what's the progress on the repeat purchase of the previous wave of innovation, LALA 100 and LALA [Amigas] and where you feel comfortable that they are taking on a more sustainable basis a larger portion of the overall portfolio.

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Scot Rank, Grupo LALA SAB de CV - CEO [26]

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Sure. I think LALA 100, for example, we are increasing production capacity for LALA 100, and so I think that's a good sign, if you will, that that's doing well.

And regarding the launch, let's see, another recent launch was (inaudible) in yogurt. And generally speaking, we've also just increased production capacity in yogurt as well with some investments we made last year and some investments we are installing right now in Irapuato plant for the first half of this year. So, yes, the innovation has done well and the innovation is helping us drive growth, and so we are doing so far so good with what we've recently launched.

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Antonio Gonzalez, Credit Suisse - Analyst [27]

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That's very clear. Thank you. Just finally, the new team in the US, Yvonne starts when, or did she start already?

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Scot Rank, Grupo LALA SAB de CV - CEO [28]

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She has already started.

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Antonio Gonzalez, Credit Suisse - Analyst [29]

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Okay.

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Operator [30]

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Sergio Matsumoto, Citigroup.

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Sergio Matsumoto, Citigroup - Analyst [31]

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Yes, hi. I have a couple of questions. First is, Scot, if you could comment on the competitive landscape in the US drinkable yogurt category. It seems to me that there have been some product launches by other companies and perhaps there have been more of those than before, so if you could comment on how LALA plans to penetrate further into the US market vis-a-vis these competitors. That's my first question.

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Scot Rank, Grupo LALA SAB de CV - CEO [32]

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Sure, Sergio. The drinkable yogurt space is currently a category with a lot of interest in the US market. As you know, the spoonable yogurt business is flat to declining. And so most growth if not all the growth in the category today is coming from drinkable yogurt. The category is growing, according to IRI data, double-digit, so the overall category is growing. And LALA brand continues to grow above the entire category. So, we continue to be driving the growth. We continue to gain share.

And yes, there have been important launches in the third quarter of last year by some major competitors in the market. But so far, we are very happy with our performance on a per-store per-item basis. Sales velocity continues to grow, so we are happy so far, and I think that the competitor investment in the category will only help us drive the category growth. So, so far so good.

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Sergio Matsumoto, Citigroup - Analyst [33]

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Okay, that's great. My second question is on your M&A strategy. I understand that in the US you like to go into the value-added segments. But just a little more color there, or maybe overall in the Americas. Is the idea to buy several smaller assets in a few different countries, or would you be open to buying let's say just one or two relatively large assets if they made sense strategically?

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Scot Rank, Grupo LALA SAB de CV - CEO [34]

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I think it's -- our business strategy when we look north to the US is slightly different than what we're doing in Latin America. So, in Latin America, in every geographic region we compete in, we want to be a multi-category competitor with a significant presence in all of the core dairy categories, always trying to win the brand -- having the best brands and through innovation and production efficiency. So that's kind of the Latin America strategy.

As we look towards the US, it's a different strategy. It's focused on being a leader in the fast-growing profitable niches in the dairy market. And so as opportunities come up to either get a foothold in a fast-growing niche, profitable niche, or to reinforce our current position in one of the three areas we compete in today, we will be looking for those opportunities. I hope that answers your question.

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Sergio Matsumoto, Citigroup - Analyst [35]

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Yes. Thank you very much.

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Operator [36]

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Pedro Leduc, JPMorgan.

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Pedro Leduc, JPMorgan - Analyst [37]

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Thank you for the follow-up. Two quick ones. If you could tell us an update on the cold cuts. I remember last time you decided that it's no longer (inaudible). If there's anything here already or anything you can share in that regards.

And then second, early looks at your national distribution efficiency project, you mentioned big numbers here (inaudible) down [5] by 2019. If you could enlighten us a bit maybe how much savings or variable we can bring or if we should consider maybe some let's say restructuring of costs in the second half. So two quick follow-ups. Thank you.

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Alberto Arellano, Grupo LALA SAB de CV - CFO [38]

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Sure. So on the cold cuts, as we've shared a little bit over the last quarter, the relative (inaudible) let's say a new category for LALA. We have been there already over the last couple of years. And what we've learned I believe is that there are a lot of efficiencies that we can gain on reaching the same I would say points of sales with our distribution network. As you know, we are the biggest chilled distribution network in Mexico and this obviously allows us to get to an array of different places and utilizing our existing capacity, which certainly has opportunities, is what we believe is probably the best way of improving our margins there as well.

Now, the other thing as well is that, when you look at the per-kilogram price on cold cuts as well here, here you are talking about multiplying by three to four the current diary I would say price per kilo. So everything that you can transport on that same ship space will certainly help us on gaining efficiency. We are pretty much finished as we speak, our sites in the state of Hidalgo, and we will be starting I would say deploying our products over the next couple of months. We are I would say very eager and very optimistic about this opportunity, and, yes, we have been promised this to the market as well for long. So now it's a reality. On the --

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Pedro Leduc, JPMorgan - Analyst [39]

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Very useful, but do you think you can give us maybe how much you think this new site is going to add in terms of revenues or you prefer not to say that yet.

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Scot Rank, Grupo LALA SAB de CV - CEO [40]

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I think let's try to keep that for the next session, once we can share as well a little bit more about our expansion. But again, the main objective at this point in time is to utilize our existing assets, and we believe we have learned something to be bringing to the category some interesting news. I don't know, Scot if you (multiple speakers)

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Scot Rank, Grupo LALA SAB de CV - CEO [41]

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Let me take the distribution centers, the question on distribution centers. I guess what we wanted to do is alert you. You may see, in our reports, a decline in the number of distribution centers that we start to publish, and what we wanted to people to understand is what's happening here is we are not reducing capacity. To the contrary, we are optimizing the footprint. And so you will see fewer distribution centers in our reports as we start to publish our footprint every quarter, and that's because of this optimization project. The project is not large enough that it will have a significant impact on any -- on the cost in any particular quarter. The returns are very attractive. The paybacks are relatively short, and it will give us, I think, over the next year couple of years, through 2019, increasing efficiencies in our logistics operation. So, it's something -- we just wanted to give you kind of heads up on that because you will start to see, instead of 158, I'm not sure how many it is today, next time you may see it come down to 152 or 153 and then 140-something and that's because we are going through this process across the country. And it will take us at least through 2019 to finish this. So that's kind of a heads up there. And there are some interesting efficiencies that we are leveraging here. We are also increasing capacity at the same time.

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Pedro Leduc, JPMorgan - Analyst [42]

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Sounds good. Thank you very much, Scot.

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Operator [43]

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(Operator Instructions). Rodolfo Ramos, Franklin Templeton.

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Rodolfo Ramos, Franklin Templeton Investments - Analyst [44]

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Thank you for the call. Just a quick one. Can you quantify the integration costs that you saw this quarter in the US and Central America?

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Alberto Arellano, Grupo LALA SAB de CV - CFO [45]

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We are talking about a couple of hundred K. It was a couple of hundred K dollars. It was minor, and it was, again, pretty much to be able to close our site there in Nicaragua of La Perfecta. But we did not have any other, I would say, surprises that we had in Q4, neither in the US or Central America.

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Rodolfo Ramos, Franklin Templeton Investments - Analyst [46]

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Thank you.

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Operator [47]

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There are no further questions at this time. I would like to turn the call back to management for closing remarks.

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Alberto Arellano, Grupo LALA SAB de CV - CFO [48]

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We thank you for your time and interest in Grupo LALA. We hope you will join us again next quarter. Thank you again. We will be sure to provide you with important updates as developments unfold. Thank you again and goodbye.

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Operator [49]

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This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a great day.