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Independent auditors’ report

To the Board of Directors and Stockholders of Grupo Lamosa, S. A. B. de C.V.

 

Opinion
We have audited the consolidated financial statements of Grupo Lamosa, S. A. B. de C. V. and Subsidiaries (the Company), which comprise the consolidated statements of financial position as of December 31, 2021 and 2020, and the consolidated statements of income, consolidated statements of other comprehensive income, consolidated statements of changes in stockholders’ equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all the material respects, the consolidated financial position of the Grupo Lamosa, S. A. B. de C. V. and Subsidiaries (the Company) as of December 31, 2021 and 2020, and their consolidated financial performance and their consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”), issued by the International Accounting Standards Board (“IASB”).

Basis for Opinion
We conducted our audits in accordance with International Standards on Auditing (“ISA”). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (“IESBA Code”) and with the Ethics Code issued by the Mexican Institute of Public Accountants (“IMCP Code”), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code and IMCP Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

The accompanying consolidated financial statements have been translated into English for the convenience of readers.

Emphasis of Matter
As mentioned in note 2b., on September 1, 2021, the Company acquired 100% of the shares representing the common stock of Tiles Investments and Holdings, S.L., together with those of its subsidiaries (“Roca Tiles”). Its main business activity involves the manufacture and marketing of ceramic coverings for floors and walls. As this acquisition classifies as a business combination according to the requirements of International Financial Reporting Standard 3, “Business combinations”, the purchase method will be applied to measure the assets acquired and the liabilities assumed in the transaction. The acquisition amount, settled on a debt-free basis, was the equivalent of $241.1 million US dollars, net of received cash, thereby generating preliminary goodwill of $2,240,291. The Company is currently in the 12-month period established for obtaining the fair values of certain tangible and intangible assets with the support of independent expert appraisers. Accordingly, these headings and the goodwill heading must be considered as preliminary and may be modified according to the guidelines permitted by IFRS.

Key Audit Matters
Key audit maters are those matters that, in our professional judgment, were of most significance in our audit of the 2021 consolidated financial statements. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon; therefore, we did not express a separate opinion on those audit matters.

  • Evaluation of impairment tests applied to intangible assets with an undefined useful life and goodwill
    As described in Notes 4i., 4j. and 13 to the consolidated financial statements, the Company applies annual impairment tests to its intangible assets with an undefined useful life and goodwill. The Company utilizes the “Discounted cash flows” (“DCF”) valuation method with a revenue approach, which requires the Company’s Management to utilize significant estimates and assumptions involving the selection of discount rates, future revenue forecasts, financial projections, cash flows, operating margins and profits to estimate the recovery value of cash generating units (“CGUs”). Changes to these assumptions could have a significant effect on their value and the amount of any impairment charge, or both. As of December 31, 2021, the balance presented in the Company’s consolidated financial statements is composed by intangible assets with an undefined useful life of $4,893,717 and goodwill of $2,997,201.

    We have identified intangible assets with an undefined useful life and goodwill as a key audit matter, mainly because impairment testing requires the Management use of judgments and significant estimates to estimate the recovery value of the CGUs. This requires the auditor to utilize a high level of judgment, together with an increased audit effort, including the need to incorporate our fair value expert specialists.

    We applied the following audit procedures to the significant assumptions considered by the Company when estimating future projections to assess the recovery value of intangible assets with an undefined useful life and goodwill, as follows:


    • We evaluated the factors and variables used to identify the Cash Generating Units (CGU), including the analysis of cash flows and debt policies, an analysis of the legal structure and production allocation, while also obtaining an understanding of the operation of the commercial and sales area.
    • - We analyzed the methodology and projection assumptions used in the impairment model, specifically including cash flow, operating margin, earnings before interest, taxes, depreciation and amortization (“EBITDA”) and long-term growth projections. We tested the mathematical exactness, completeness and accuracy of the impairment model. Our fair value specialists performed a sensitivity analysis of all the CGUs, while independently calculating the recovery value to evaluate whether the utilized assumptions should be modified, as well as the probability of these modifications arising.
    • An independent valuation of the discount rates utilized, which were matched with the discount rates used by Management.
    The results of our procedures were satisfactory and we agree with the recovery value determined for the CGUs and consider that the utilized assumptions are appropriate.
  • Evaluation of the recoverability of the deferred income tax asset derived from tax losses and undeducted interest

    The Company records a deferred income tax asset derived from tax loss carryforwards and undeducted interest. For this purpose, Management estimates the probability of applying these deferred income tax assets to generate a future economic benefit and supports their recognition in its consolidated financial statements.

    Given the importance of the deferred income tax asset derived from tax losses and undeducted interest as of December 31, 2021, for the amount of $937,844 and $221,551, respectively, the determination of which require the use of significant judgments and estimates to calculate future projections of the Company’s tax results, we focused on this heading and performed the following procedures, among others:

    • We verified the fairness of the projections used to determine future tax results.
    • We reviewed the projections utilized by matching them with the performance and historical trends of the business to verify variation explanations with Management.
    • With the support of our tax experts, we evaluated the processes utilized to determine projected tax results, as well of the assumptions used by Management when preparing tax projections. We then discussed the sensitivity of these projections with Management.

The results of our audit procedures were satisfactory. The accounting policy established by the Company for recording deferred income taxes, together with details of their disclosure, are included in Notes 4t. and 22, respectively, to the accompanying consolidated financial statements.

  • Business combination – Eurocerámica, S.A.S

    As discussed in Note 2a., to the consolidated financial statements, the Company acquired all the shares representing the common stock of Eurocerámica, S.A.S. (“Eurocerámica”), which is primarily engaged in the manufacture and sale of ceramic products for walls and floors in Colombia. The total payment was the equivalent of US$35.6 million and was paid in Colombian pesos in two stages: 51% on October 1, 2020 and the remaining 49% on January 20, 2021. The fair value of the acquired assets and assumed liabilities determined and recognized at the acquisition date were $981,769 and $323,841, respectively. Goodwill of $94,713 was also recognized.

    Given the significant level of judgment used by Management in the valuation models utilized to determine the payment and the fair values of the acquired assets and assumed liabilities, we involved our valuation experts to evaluate the premises and criteria used by Management and its independent expert, subsequently applying the following procedures:

    • We evaluated the capacity and independence of the independent expert.
    • We verified that the models used by management to determine the fair values were utilized and recognized for the valuation of assets with similar characteristics within the industry.
    • We challenged management’s financial projections and matched them with the performance and historical trends of the Company’s businesses.
    • We verified that management’s projections were consistent with those approved by the Company’s Board of Directors.
    • We reviewed the most relevant valuation assumptions (discount rate, intangible asset valuation assumptions and the determination of the useful life of property, plant and equipment), which we matched with independent market sources.

The results of our procedures were satisfactory and we agree with the fair value amount determined for recognized assets and assumed liabilities.

Other matters
As mentioned in Note 2a., as of December 31, 2020, the preliminary figures reported for the fair values of acquired assets and assumed liabilities derived from the acquisition of Eurocerámica were reclassified to noncurrent assets to reflect the price allocation.

Information other than the Consolidated Financial Statements and Independent Auditors Report there on
The Company’s Management is responsible for the other information. The other information will include the information that will be incorporated in the Annual Report that the Company must prepare pursuant to Article 33, Section I, Subsection b) of the Fourth Title, First Chapter of the General Provisions Applicable to Issuers and other Participants in the Mexican Stock Exchange and the Instructions attached to these provisions (the Provisions). The Annual Report will be available for our reading after the date of this audit report.

Our opinion on the consolidated financial statements will not cover the other information, and we will not express any form of assurance about it.

In connection with our audit of the consolidated financial statements, our responsibility will be to read the Annual Report, when available, and when we do so, to consider whether the other information contained therein is materially inconsistent with the consolidated financial statements or with our knowledge obtained during the audit, or it appears to contain a material error. When we read the Annual Report, we will issue the legend on the reading of the annual report required by Article 33, Section I, Subsection b), number 1.2 of the Provisions. If, based on the work we have performed, we conclude that there is a material error in the information, we would have to report this fact. At the date of this report, we have nothing to report on this matter.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the accompanying consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, Management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters, related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements
The objective of our audit is to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISA, we exercise professional judgement and maintain professional skepticism throughout the audit. We also:

  • Identify and asses the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or override of internal control.
  • Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management.
  • Conclude on the appropriateness of Management’s use of the going-concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors´ report. However, future events or conditions may cause the Company to cease to continue as a going concern.
  • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events, quantitatively and qualitatively, in a manner that achieves fair presentation.
  • Obtained sufficient appropriate audit evidence related to the financial information of the entities or the business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Company’s audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We will also provide those responsible for the Company’s government with a statement on our fulfillment of relevant ethical requirements regarding independence and will communicate any relationship and other matters that might be thought to affect our independence and, when applicable, the related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulations precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public benefits of such communication.

Galaz, Yamazaki, Ruiz Urquiza, S. C.
Member of Deloitte Touche Tohmatsu Limited.

C. P. C. Emeterio Barrón Perales
January 31, 2022

 

Consolidated statements of financial position

Grupo Lamosa, S. A. B. de C. V. and Subsidiaries
As of December 31, 2021 and 2020
(In thousands of Mexican pesos

  Notes   2021   2020
Assets
         
Current assets:          
Cash and cash equivalents 7 $ 3,413,435 $ 2,609,180
Accounts receivable, net 8   4,762,991   3,144,228
Inventories 9   3,353,299   1,880,571
Other current assets 10   502,048   238,147
Current assets     12,031,773   7,872,126
Real estate inventories 11   98,202   114,545
Property, plant and equipment, net 12   9,532,195   8,681,142
Right-of-use assets, net 17   800,001   314,190
Intangible assets, net 13   8,279,269   6,149,541
Deferred income taxes 22   1,131,708   1,274,772
Other non-current assets 14   438,805   226,677
Total   $ 32,311,953 $ 24,632,993
Liabilities and stockholders’ equity          
Current liabilities:          
Current portion of long-term debt 16 $ 409,853 $ 218,238
Current portion of finance lease liability 17   167,849   100,882
Trade accounts payable     3,106,486   1,905,321
Income taxes 22   854,097   559,534
Other current liabilities 15   2,961,365   2,016,800
Current liabilities     7,499,650   4,800,775
Long-term debt 16   9,468,423   6,694,914
Finance leases 17   678,698   205,015
Derivative financial instruments     -   80,045
Employee benefits 18   595,370   567,088
Long term provisions 24   155,335   120,795
Income taxes 22   148,058   348,064
Deferred income taxes 22   408,222   344,086
Total liabilities     18,953,756   13,160,782
Stockholders’ equity:          
Capital stock 19   203,053   203,053
Purchase of treasury stock 19   (937,204)   (417,849)
Additional paid-in-capital 19   139,386   139,386
Retained earnings     15,027,523   11,931,904
Other comprehensive loss items 6 and 18   (1,074,561)   (702,441)
Stockholders’ equity attributable to controlling interest     13,358,197   11,154,053
Non-controlling interest     -   318,158
Total stockholders’ equity     13,358,197   11,472,211
Total liabilities and stockholders’ equity   $ 32,311,953 $ 24,632,993

See accompanying notes to these consolidated financial statements.

Federico Toussaint Elosúa
Chief Executive Officer

Jorge Antonio Touché Zambrano
Chief Financial Officer

 

Consolidated statements of income

Grupo Lamosa, S. A. B. de C. V. and Subsidiaries
For the years ended December 31, 2021 and 2020
(In thousands of Mexican pesos, except for the earning per share, which is in Mexican pesos)

  Notes   2021   2020
Net sales 25 $ 27,186,757 $ 19,473,442
Cost and expenses:          
Cost of sales     14,666,359   11,289,194
Operating expenses 20   6,084,408   4,639,232
Other operating income (expenses), net     158   (4,449)
      20,750,925   15,923,977
Operating income     6,435,832   3,549,465
           
Interest expense     471,721   569,495
Interest income     (166,866)   (118,915)
Hyperinflation effects on net monetary position     141,719   (4,349)
Exchange loss, net     269,560   347,749
Derivative financial instruments 6   3,225   138,463
      719,359   932,443
           
Income before income taxes     5,716,473   2,617,022
Income taxes 22   2,287,384   953,819
Net income of the year   $ 3,429,089 $ 1,663,203
Attributable to:          
Controlling interest     3,429,089   1,647,276
Non-controlling interest     -   15,927
    $ 3,429,089 $ 1,663,203
Earnings per basic and diluted share 4.v $ 9.49 $ 4.46

See accompanying notes to these consolidated financial statements.

 

Consolidated statements of other comprehensive income

Grupo Lamosa, S. A. B. de C. V. and Subsidiaries
For the years ended December 31, 2021 and 2020
(In thousands of Mexican pesos)

  Notes   2021   2020
Net income of the year   $ 3,429,089 $ 1,663,203
Other comprehensive income items:          
Item that can be potentially reclassified to net income of the year:          
Valuation of derivative financial instruments, net of taxes 22   169,379   (24,520)
Cumulative translation adjustments 19.h   (543,388)   59,817
      (374,009)   35,297
Item that cannot be reclassified to net income of the year:          
Actuarial remeasurements of defined benefits obligation 18 and 22   1,889   (24,878)
      1,889   (24,878)
Total other comprehensive items     (372,120)   10,419
Total comprehensive income of the year   $ 3,056,969   1,673,622
Comprehensive income attributable to:          
Controlling interest   $ 3,056,969   1,655,252
Non-controlling interest     -   18,370
    $ 3,056,969 $ 1,673,622

See accompanying notes to these consolidated financial statements.

 

Consolidated statements of changes in stockholders’ equity

Grupo Lamosa, S. A. B. de C. V. and Subsidiaries
For the years ended December 31, 2021 and 2020
(In thousands of Mexican pesos)

                      Items of Other Comprehensive Income            
  Notes   Capital stock   Purchase of treasury stock   Additional Paid-In Capital   Retained Earnings   Valuation of Derivative Financial Instruments   Remeasurement of Defined Benefits Obligations   Cumulative Translation Adjustment   Total of participation controller   Total participation do not controller   Total Stockholders Equity
Balances as of January 1, 2020   $ 203,053 $ (130,180) $ 139,386 $ 10,594,946 $ (1,538) $ (135,252) $ (573,627) $ 10,096,788 $ - $ 10,096,788
Dividends declared 19.d               (310,318)               (310,318)       (310,318)
Non-controlling interest in acquired business                                     299,788   299,788
Purchase of treasury stock 19.b       (287,669)                       (287,669)       (287,669)
Comprehensive income 19.h               1,647,276   (24,520)   (24,878)   57,374   1,655,252   18,370   1,673,622
Balances as of December 31, 2020     203,053   (417,849)   139,386   11,931,904   (26,058)   (160,130)   (516,253)   11,154,053   318,158   11,472,211
Dividends declared 19.c               (333,470)               (333,470)       (333,470)
Non-controlling interest in acquired business                                     (318,158)   (318,158)
Purchase of treasury stock 19.b       (519,355)                       (519,355)       (519,355)
Comprehensive income 19.h               3,429,089   169,379   1,889   (543,388)   3,056,969       3,056,969
Balances as of December 31, 2021   $ 203,053 $ (937,204) $ 139,386 $ 15,027,523 $ 143,321 $ (158,241) $ (1,059,641) $ 13,358,197   -   13,358,197

See accompanying notes to these consolidated financial statements.

 

Consolidated statements of cash flows

Grupo Lamosa, S. A. B. de C. V. and Subsidiaries
For the years ended December 31, 2021 and 2020
(In thousands of Mexican pesos)

    2021   2020
Cash flows from operating activities:        
Income before income taxes $ 5,716,473 $ 2,617,022
Adjustment for:        
Depreciation and amortization   852,331   638,526
Other miscellaneous expenses   204,809   187,914
Interest income   (166,866)   (118,915)
Interest expense   471,720   569,495
Derivative financial instruments   3,225   138,463
Hyperinflation effects on net monetary position   141,719   (4,349)
Exchange loss, net   269,560   347,749
Asset impairment of property, plant and equipment   45,430   38,969
Inflationary effect   (126,220)   (23,449)
    7,412,181   4,391,425
Changes in working capital:        
Increase (decrease) in accounts receivable   (840,721)   116,722
Increase (decrease) in inventories   (339,064)   620,087
Increase in trade accounts payable   542,024   185,592
Increase (decrease) Other current liabilities   (91,253)   296,195
Income taxes paid   (1,319,783)   (769,054)
Net cash flows generated by operating activities   5,363,384   4,840,967
Cash flows from investing activities:        
Acquisition of property, plant and equipment   (632,214)   (271,129)
Interest income   166,866   118,915
Acquisition of intangible assets   (2,619)   (72,079)
Net cash flows used in acquisition in subsidiaries   (4,966,172)   (406,612)
Net cash flows used in investing activities   (5,434,139)   (630,905)
Cash flows from financing activities:        
Bank loans   4,379,956   3,957,222
Payments for bank liabilities and finance lease liability   (1,986,412)   (5,671,528)
Interest paid   (426,115)   (491,059)
Purchase of treasury stock   (519,355)   (287,669)
Dividends paid   (315,557)   (293,980)
Net cash flows (provided used) in financing activities   1,132,517   (2,787,014)
Net increase in cash and cash equivalents   1,061,762   1,423,048
Cash and cash equivalents at beginning of year   2,609,180   1,226,968
Effects from changes in cash value   (257,507)   (40,836)
Cash and cash equivalents at end of the year $ 3,413,435 $ 2,609,180

See accompanying notes to consolidated financial statements.