The HR Ratings Agency observed pressure on Grupo Lala’s cost of sales, with an increase of 2.3% compared to the base scenario.

This increase is the result of higher production costs in Mexico, the increase in raw material prices in Latin America and an effect of the exchange rate on the main inputs, resulting in a drop in the Gross Margin to 34.0% (from an expected of 35.2% in the base scenario and 35.0% in the stress scenario).

HR Ratings assigned a rating of HR AA- with a Stable Outlook for Grupo Lala’s Lala 20 and Lala 20-2 issues.

The rating is also based on the fact that during the last 12 months to the second quarter of 2020, the company reached the expected levels of sales (0.4% above the projected).

At the same time, HR Ratings estimates improvements at the operating level with an Adjusted EBITDA Margin of 12.0%, in Mexico, and 9.5% at the consolidated level in 2020 and 10.1% in 2021 due to lower selling and marketing expenses, derived from the change in strategy with focus on profitability, SKU rationalization (mix improvement) and price increases and a more focused business activity.

Grupo Lala 

HR Ratings considered as additional factors:

• Solid market positioning. Grupo Lala is the leader in UHT and fresh milk in Mexico and one of the main players in cheese, yogurts and desserts.
• Focus on profitability. Given the recent replacement of the CEO, the focus was shifted towards higher profitability, which was considered in the projections.
• COVID-19. Given that the company has a wide range of products and is in the food sector, a strong impact on sales is not assumed within the baseline scenario. However, in our stress scenario due to the deteriorated economic situation that is estimated for the second half of 2020, a lower generation of operating results is assumed due to the possible limitation of transferring the cost increases in the price to the final consumer.

Profile

Grupo Lala S.A.B. de C.V. is a Mexican company focused on the dairy industry, and is a leader in fresh milk and UHT, as well as one of the main producers of yogurt and cheeses in Mexico.

The company was founded in 1949 and Mexico is its main market, with 76% of sales in 2019, with a presence in Brazil since 2017 (16% of sales in 2019), the United States since 2016 (4% of sales) and Central America (made up of Costa Rica, Nicaragua and Guatemala, 4% of sales).

At the end of 2019, Grupo Lala has a presence in six countries, operates 31 production plants and 185 distribution centers in Mexico, the United States of North America, Central America and Brazil.

The company has more than 38,000 employees and operates its own fleet that covers more than 6,500 distribution routes for the delivery of more than 600 products corresponding to a portfolio of more than 50 brands in more than 628,000 points of sale in Mexico.

Additionally, they market a wide variety of dairy products under the LALA and Nutri brands, positioned as the third and fourth most recognized brand of consumer products in Mexico.

Grupo Lala classifies its operations into three divisions:

• Milk: Fresh pasteurized milk, UHT (Ultra-Pasteurized Milk) and functional products.
• Dairy derivatives: Cream, butter, half cream, yogurt, cheeses, ice cream and desserts.
• Drinks and Others: Non-dairy drinks, juices, sausages and other products.