In preparing the Consolidated Financial Statements, we followed Mexican GAAP, which differs in certain respects from U.S. GAAP. Note 17 to the Consolidated Financial Statements provides a description of the main differences between Mexican GAAP and U.S. GAAP as they relate to us; a reconciliation to U.S. GAAP of total stockholders’ equity, net income and operating income, and a condensed statement of cash flows under U.S. GAAP as of December 31, 2005 and 2006 and for the years ended December 31, 2004, 2005 and 2006. Our financial statements were prepared pursuant to Bulletin B-10, as amended, and Bulletin B-12, issued by the Mexican Institute of Public Accountants, which became effective on January 1, 1990.

 

Bulletin B-10 is designed to account for the effects of inflation on financial disclosures by requiring us to:

 

·

restate non-monetary assets at current replacement cost or by using the Mexican National Consumer Price Index (“NCPI”), except for the biological assets (see Note 4 of the Financial Statement);

 

·

restate non-monetary liabilities using the NCPI;

 

·

restate the components of stockholders’ equity using the NCPI; and

 

·

record gains or losses in purchasing power that result from the monetary liabilities or assets that we hold.

 

Bulletin B-10 also requires restatement of all financial statements in constant pesos as of the date of the most recent balance sheet presented. Except as otherwise indicated, we have restated all financial information taken from the financial statements or derived from them, as explained below, in constant pesos as of December 31, 2006. Bulletin B-12 requires that the statement of changes in financial position reconcile the differences between the restated historical balance sheet and the current balance sheet. The effects of price-level restatement under Mexican GAAP have not been reversed in the reconciliation to U.S. GAAP. See Note 17 to the Consolidated Financial Statements.

 

1

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			As of and for the year ended December 31,
			2002			2003			2004			2005			2006			2006(2)
			(millions of constant pesos as of December 31, 2006)(1)															(millions of U.S. dollars)
Income Statement Data
Mexican GAAP:
Net revenues		Ps.	12,180.5		Ps.	12,159.5		Ps.	14,299.2		Ps.	15,051.9		Ps.	14,987.6			1,387.8
Cost of sales			9,035.5			9,891.6			11,596.5			10,827.2			11,616.3			1,075.6
Gross profit			3,145.0			2,267.9			2,702.7			4,224.7			3,371.3			312.2
Operating income			1,460.5			488.8			917.9			2,291.9			1,374.7			127.3
Comprehensive financing income (loss)			16.9			141.5			( 76.9	)		( 71.3	)		59.2			5.5
Majority net income			1,741.0			610.2			759.7			1,839.3			873.4			80.9
Majority net income per Share(3)			2.90			1.02			1.27			3.07			1.46			0.13
Majority net income per ADS(4)			34.82			12.20			15.19			36.79			17.47			1.62
Dividends per Share(5)			0.55			0.58			0.44			0.42			0.59			0.05
Weighted average Shares outstanding (thousands)			595,796			598,738			599,260			599,694			599,571			599,571
U.S. GAAP:
Net revenues		Ps.	12,180.5		Ps.	12,183.8		Ps.	14,322.0		Ps.	15,024.8		Ps.	14,977.1			1,386.8
Cost of sales			9,035.5			9,891.6			11,596.5			10,827.2			11,616.3			1,075.6
Gross profit			3,144.9			2,292.2			2,725.5			4,197.6			3,360.8			311.2
Operating income			1,476.0			528.2			953.9			2,258.7			1,336.8			123.8
Comprehensive financing income (loss)			12.9			131.6			( 68.3	)		( 59.4	)		67.6			6.3
Majority net income		Ps.	1,761.2		Ps.	569.0		Ps.	796.0		Ps.	1,824.7		Ps.	863.1			79.9
Majority net income per Share(3)			2.94			0.95			1.33			3.0			5.8			0.5
Majority net income per ADS(4)			35.22			11.38			15.92			36.5			35.0			3.2
Dividends per Share(5)			0.55			0.58			0.44			0.42			0.59			0.05
Statement of Financial Position Data
Mexican GAAP:
Cash and cash equivalents		Ps.	1,994.5		Ps.	1,774.8		Ps.	2,513.9		Ps.	3,296.0		Ps.	3,454.1			319.8
Total assets			13,599.4			14,029.7			14,531.8			15,392.0			16,923.1			1,567.0
Short-term debt(6)			138.4			65.7			107.2			96.4			9.4			0.9
Long-term debt			86.2			105.0			78.0			54.0			34.2			3.2
Stockholders’ equity			11,141.1			11,377.5			11,693.1			13,013.5			13,592.0			1,258.6
U.S. GAAP:
Cash and cash equivalents		Ps.	1,994.5		Ps.	1,774.8		Ps.	2,513.9		Ps.	3,296.0		Ps.	3,454.1			319.8
Total assets		Ps.	13,657.5		Ps.	14,048.3		Ps.	14,531.8		Ps.	15,980.5		Ps.	16,945.2			1,569.1
Short-term debt(6)			138.4			65.7			107.2			96.4			9.4			0.9
Long-term debt			86.2			105.0			78.0			54.0			34.2			3.2
Stockholders’ equity			11,144.6			11,346.2			11,704.7			13,010.0			13,544.1			1,254.1
Selected Operating Data
Sales volume (thousands of tonnes):
Chicken			665.4			655.4			733.0			773.0			773.7
Eggs			131.7			132.1			138.1			140.6			143.4
Swine			9.0			8.5			9.1			9.6			8.9
Balanced Feed			324.7			316.2			320.7			389.6			484.4
Gross margin (%)			25.8	%		18.7	%		18.9	%		28.1	%		22.5	%
Operating margin (%)			12.0	%		4.0	%		6.4	%		15.2	%		9.2	%
Net margin (%)			14.3	%		5.0	%		5.3	%		12.2	%		5.8	%
Total employees			18,306			18,495			18,896			20,432			21,035

(1)	Except per share and per ADS amounts and operating data.

 

(2)	Peso amounts have been translated into U.S. dollars, solely for the convenience of the reader, at the rate of Ps.10.7995 per U.S. dollar.

 

(3)	Net income per share has been computed based on the weighted average number of common Shares outstanding.

 

(4)	Net income per ADS has been computed by multiplying net income per share by twelve, to reflect the ratio of twelve Shares per ADS.

 

(5)	Dividends per share have been computed by dividing the total amount of dividends paid (in constant pesos as of December 31, 2006) by the weighted average Shares outstanding.

 

(6)	Includes notes payable to banks and current portion of long term debt.

 

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Exchange Rates

 

The Mexican peso remained stable during the first four months of 2002. Its volatility increased, however, during the rest of the year. Growth in the Mexican economy was sluggish in 2002 and the beginning of 2003, and the peso depreciated by 12.2% against the U.S. dollar between December 31, 2001 and December 31, 2002.

 

The Mexican peso showed high levels of volatility during the first four months of 2003; it appreciated and remained stable during the middle of the year and in the last four months of the year the Mexican peso increased in its volatility. Overall, the peso declined in 2003.

 

In 2004, the Mexican peso showed volatility for the first four months of the year with a general trend to depreciate with respect to the U.S. dollar. In the following months, the Mexican peso fluctuated around the same exchange rate level before finishing the year stronger against the dollar as compared to the exchange rate at the end of 2003.

 

During 2005, the Mexican peso continued showing volatility mainly at the beginning and at the end of the year, with a general trend to appreciate with respect to the U.S. dollar. At the end of 2005, the Mexican peso finished stronger against the U.S. dollar.

 

During 2006, the Mexican economy showed signs of stability with an annual inflation rate of 4.1%. After showing volatility during the first part of the year, the Mexican peso showed a reasonably stable peso-dollar exchange rate with a final depreciation of 1.6%, compared with the exchange rate at the end of 2005.

 

The following table sets forth for the periods indicated the high, low, average and year-end exchange rates for the purchase and sale of U.S. dollars (presented in each case as the average between such purchase and sale rates):

 

		Exchange Rate(1) (in current pesos per U.S. dollar)
Year Ended December 31,		High			Low			Average(2)			Year End
2002			10.43			9.00			9.66			10.43
2003			11.41			10.11			10.79			11.24
2004			11.64			10.81			11.29			11.15
2005			11.41			10.41			10.89			10.63
2006			11.46			10.43			10.91			10.80

(1)

The exchange rates are the noon buying rates in New York City for cable transfers in pesos as certified for customs purposes by the Federal Reserve Bank of New York (the “noon buying rate”).

 

(2)

Average of month-end rates for each period shown.

		Exchange Rate(1)  (in current pesos per U.S. dollar)
Period		High			Low
December 2006			10.99			10.77
January 2007			11.09			10.77
February 2007			11.16			10.92
March 2007			11.18			11.01
April 2007			11.03			10.92
May 2007			10.93			10.74

(1)

The exchange rates are the noon buying rates in New York City for cable transfers in pesos as certified for customs purposes by the Federal Reserve Bank of New York.

On June 27, 2007, the exchange rate for cable transfers in pesos as certified for customs purposes by the Federal Reserve Bank of New York was Ps.10.867 per $1.00 US dollar.

 

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Risk Factors

 

Risks Relating to México, Other Emerging Market Countries and the U.S. Economy

 

México has experienced adverse economic conditions

 

·

In 2002, México’s gross domestic product, or GDP, increased by 0.9% and the inflation rate was 5.7%.

 

·

In 2003, GDP increased by 1.3% and the inflation rate was 3.98%.

 

·

In 2004, México’s GDP increased by 4.4% and the inflation rate was 5.19%.

 

·

In 2005, México’s GDP improved and increased by 3.0%, and the inflation rate was 3.33%, lower than expected.

 

·

In 2006, GDP increased by 4.8% while the inflation rate was 4.05%.

 

Should the Mexican economy fall into a recession or if inflation and interest rates increase significantly, consumers may find it difficult to pay for the products we offer. This and other effects of recession or increased inflation and interest rates could have adverse consequences on our business, financial condition and results of operations.

 

Depreciation or fluctuation of the peso relative to the U.S. dollar could adversely affect our financial condition and results of operations

 

The single largest component of our cost of sales, our feed, is comprised partially of ingredients we purchase in the United States, where prices are denominated in U.S. dollars. In addition, the prices of ingredients we purchase in México may be influenced by U.S. commodity markets. Therefore, should the peso fall relative to the U.S. dollar, both the cost of our operations and our debt payments would increase. Any future depreciation or devaluation of the peso may result in further net foreign exchange losses.

 

·

In 2003, the peso depreciated against the U.S. dollar by 7.3% at year-end, and the average value of the peso against the U.S. dollar during 2003 was 10.5% lower than in 2002.

 

·

In 2004, the Mexican peso appreciated with respect to the U.S. dollar by 0.8% at year end, whereas the average value of the Mexican peso against the U.S. dollar was 4.4% lower, since the peso appreciated at the end of the year.

 

·

In 2005, the Mexican peso appreciated with respect to the U.S. dollar by 4.9% at the end of the year and also the average value of the Mexican peso was 3.6% higher.

 

·

In 2006, the Mexican peso was reasonably stable in its peso-dollar exchange rate with a final depreciation of 1.6%, compared to the end of 2005. The average value of the Mexican peso was 0.10% lower than the average of 2005.

 

Severe devaluation or depreciation of the peso may also result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert pesos into U.S. dollars for the purpose of making timely payments of interest and principal on our indebtedness. While the Mexican government does not currently restrict, and for many years has not restricted, the right or ability of Mexican or foreign persons or entities to convert pesos into U.S. dollars or to transfer other currencies out of México, the government could institute restrictive exchange rate policies in the future. Currency fluctuations will probably continue to affect our revenues and expenses.

 

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Furthermore, fluctuations in the exchange rate between the peso and the U.S. dollar will also affect the U.S. dollar equivalent of the peso price of our Shares (the “Shares” or “Series B Shares”) in the Mexican Stock Exchange and the price of American Depository Shares (“ADSs”) on the New York Stock Exchange. Because we pay cash dividends in pesos, exchange rate fluctuations will affect the U.S. dollar amounts received by holders of American Depository Receipts (“ADRs”) upon conversion of such cash dividends by the Depositary.

 

High levels of inflation and high interest rates in México could adversely affect our financial condition and results of operations

 

México has experienced high levels of inflation and high domestic interest rates in the past. The annual rate of inflation, as measured by changes in the National Consumer Price Index was 5.7% in 2002, 3.98% in 2003, 5.19% in 2004, 3.33% in 2005 and 4.05% in 2006. Inflation for the first four months of 2006 was 0.96% according to the Mexican Central Bank. 

 

According to Banamex, the average interest rates on 28-day Mexican treasury bills, or Cetes, was 6.23%, 6.82%, 9.20% and 7.19% during 2003, 2004, 2005 and 2006 respectively. On May 21, 2007, the 28-day Cetes rate was 7.23%. High interest rates in México could adversely affect our costs. Our earnings may also be affected by changes in interest rates due to the impact those changes have on our variable-rate debt instruments and beneficed by the interest we earn in our cash balance.

 

Political events in México could affect Mexican economic policy and our operations

 

In July 2006, we had presidential election, where Felipe Calderón was elected as the new President of México. President Calderón’s election initially met resistance from members of the political opposition in the form of legal challenges and protests. These protests could return as President Calderón seeks to enact his legislative agenda. We cannot predict the impact that future protests may have on the Mexican government or on business conditions in México. Although President Calderón’s party, the Parido Accíon Nacional, or PAN, obtained a plurality of the seats in the Mexican Congress after the election, no party succeeded in securing a majority in either chamber of the Mexican Congress. The absence of a clear majority by a single party and the lack of alignment between the president-elect and the legislature are likely to continue until the next Congressional election in 2009. This situation may result in government gridlock and political uncertainty, which could have an adverse effect on our business, financial position and results of operations. We cannot provide any assurance that future political developments in México, over which we have no control, will not have an adverse effect on our financial position or results of operations.

 

Developments in other emerging market countries may adversely affect our business or the market price of our securities

 

The market value of securities of Mexican companies is, to varying degrees, affected by economic and market conditions in other emerging market countries. Although economic conditions in such countries may differ significantly from economic conditions in México, investors’ reactions to developments in any of these other countries may have an adverse effect on the market value of securities of Mexican issuers. We cannot assure you that the market value of our securities will not be adversely affected by events elsewhere, especially in emerging markets.

 

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Developments in the U.S. economy may adversely affect our business

 

Economic conditions in México are heavily influenced by the condition of the U.S. economy due to various factors, including commercial trade pursuant to the North American Free Trade Agreement (“NAFTA”), U.S. investment in México and emigration from México to the United States. Events and conditions affecting the U.S. economy may adversely affect our business, results of operations, prospects and financial condition.

 

Risks Relating to our Organization

 

The chicken industry is characterized by long-term price declines and cyclical periods

 

The Mexican chicken industry, like the chicken industry in other countries, has been characterized by a long-term decline in prices in real terms. The industry has undergone cyclical periods of higher prices and profitability, followed by overproduction, leading to periods of lower prices and profitability. Real prices for eggs and swine in México have also declined over the long term and have varied cyclically. The market that we serve is subject to volatility with respect to supply, which affects prices. We cannot assure you that future cyclicality, excess supply and downturns in real prices will not adversely affect our results.

 

The price of feed ingredients is subject to significant volatility

 

The largest single component of our cost of sales is the cost of ingredients used to prepare feed, including sorghum, soybean meal, corn, fish meal, meat meal and, for certain chicken products, marigold extract. The price of most of our feed ingredients is subject to significant volatility resulting from weather, the size of harvests, transportation and storage costs, governmental agricultural policies, currency exchange rates and other factors. Given the long-term declining trends in real chicken prices, we may experience difficulty or delays in passing any increase in grain costs to customers. Accordingly, increases in the prices of the main ingredients used in the preparation of feed may have a material adverse effect on our margins and results of operations. Since we purchase many feed ingredients in U.S. dollars, from time to time we may acquire financial instruments to protect us against exchange rate fluctuations that may affect future purchases of feed ingredients.

 

Our operations depend on raising animals and meat processing, which are subject to risks such as disease, contamination and adverse weather conditions

 

Our operations involve raising animals and are subject to a variety of risks, including disease, contamination and adverse weather conditions. Chickens, in particular, are susceptible to infections by a variety of microbiological agents. Since 1983, the avian influenza virus (“AIV”) has been widespread in the United States and in México. During 2003, AIV was widespread in Asian countries and the United States. México, to avoid having the disease spread from the United States, imposed certain restrictions on the importation of chicken from affected U.S. states. The AIV was still present in Asian countries and the United States. At the present México has been eliminating some restrictions on the importation of chicken from certain U.S. states as the sanitary conditions in those states improve. In 2004 and 2005, AIV was still present in Asian countries and the United States. During 2004 and 2005, México has been eliminating some restrictions on the importation of chicken from certain U.S. states as the sanitary conditions in those states improve. In October 2005, México lifted importation restrictions on all U.S. states, except for 11 counties in the state of Texas.

 

In the past we have experienced limited outbreaks of various diseases that have resulted in higher mortality rates.

 

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During 2005, there was an ample diffusion on the media worldwide of the widespread of a particular strain of AIV (H5N1), mainly in Asia and some European countries, which affected consumption of chicken in those countries. At the present time, this strain has not been found in the United States or in Latin America.

 

Meat and eggs are subject to contamination during processing and distribution. We do not believe that contamination of individual shipments during distribution would have a material adverse effect on our operations. Contamination during processing, however, could affect a larger number of our poultry products and therefore could have a more significant impact on operations.

 

In 2002, we experienced a loss of chickens at our Peninsula Complex due to the effects of Hurricane Isidore. Future hurricanes or other adverse weather conditions could result in additional losses of inventory and damage to our plants and equipment. Our facilities near México’s coast are most vulnerable to the risk of severe weather

 

The use of nutritional supplements and the possibility of contamination expose us to risk of loss of consumer confidence in the chicken industry

 

To reduce contamination, we use specialized feedstock and nutritional supplements that have been approved by the Mexican government and meet international industry standards. We cannot assure you, however, that in the future we will not be materially adversely affected by claims or consumer concerns arising out of the use of these products in raising our animals.

 

Our sales are entirely dependent on consumer preferences, and the loss of consumer confidence in the products sold by Mexican meat and egg producers as a result of disease, contamination or other reasons, even if not related to our own products, could have a material adverse effect on the results of our operations.

 

We face significant competition from other chicken producers in all of our geographic markets and product lines

 

We are México’s largest chicken producer, but we face significant competition from other producers in all of the markets in which we sell our products. In 2006, we accounted for approximately 29.9% of total chicken production in México. There are two other major vertically integrated chicken producers in México, which together with Bachoco account for more than 50.0% of Mexican chicken production, with the balance distributed among approximately two hundred small- and medium-sized integrated and non-integrated producers.

 

Each of the two other major companies has substantial financial resources and strengths in particular product lines and regions. We expect to continue to face strong competition in every market, as our existing or new competitors are likely to broaden their product lines and extend their geographic coverage. Accordingly, we cannot assure you that our performance will not be adversely affected by increased competition.

 

We face increased competition from U.S. producers

 

In January 2003, import quotas and most tariffs on poultry, eggs and swine were eliminated through NAFTA. Poultry producers in the United States have developed extremely low-cost production methods and have been successful in exporting primarily frozen and value-added poultry to other countries, especially in periods of overcapacity in the United States. As tariff barriers decline under NAFTA, U.S. producers can be expected to increase exports to México, which could have a material adverse effect on our performance.

 

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In July 2003, the Mexican government imposed temporary restrictions on chicken leg quarters imported from the U.S. and both governments confirmed this safeguard in July 2003. The safeguard consists of a five-year limited poultry import measure. The measure, which became effective in 2003, includes quotas and an initial tariff of 98.8% on chicken leg quarters that will slowly decrease until it reaches 0% in 2008.

 

We are a holding company with no substantial operations and depend on our subsidiaries for cash flow

 

We are a holding company with no substantial operations and, consequently, we are dependent on dividends and other payments from subsidiaries for virtually all of our cash flow, including cash flow to pay taxes, service debt, make equity investments, finance the growth of subsidiaries and pay dividends to stockholders. Together with Mexican law, our ability to pay dividends may, in the future, be limited by financial covenants in debt instruments that we, or our subsidiaries, may acquire.

 

Risks Relating to the ADS, and the Shares in the Mexican Market

 

The Robinson Bours family controls our management and their interests may differ from other security holders

 

Certain members of the Robinson Bours family hold the power to elect a majority of the members of our Board of Directors and have the power to determine the outcome of certain other actions requiring the approval of our stockholders, including whether or not dividends are to be paid and the amount of such dividends. The Robinson Bours family has established two Mexican trusts, which they control (“Control Trust”), that together hold 496,500,000 Shares outstanding on December 31, 2006.

 

Future sales of Shares by the controlling stockholders may affect prevailing market prices for the ADSs and the Shares trading at the Mexican Market.

 

The prevailing market prices for the ADSs and Shares could decline if either:

 

·

the Robinson Bours family were to sell substantial amounts of their Shares, whether

 

·

directly, or

 

·

indirectly, through the Mexican trusts through which they hold Shares; or

 

·

the perception arose that such a sale could occur.

 

The protections afforded to minority stockholders in México are different from those in the United States

 

Under Mexican law, the protections afforded to minority stockholders are different from those in the United States. In particular, the law concerning fiduciary duties of directors is not well developed, there is no procedure for class actions or stockholder derivative actions, and there are different procedural requirements for bringing stockholder lawsuits. As a result, in practice it may be more difficult for our minority stockholders of Bachoco to enforce their rights against us or our directors or our controlling stockholder than it would be for stockholders of a U.S. company.

 

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Our bylaws restrict the ability of non-Mexican stockholders to invoke the protection of their governments with respect to their rights as stockholders

 

As required by Mexican law, our bylaws provide that non-Mexican stockholders shall be considered as Mexicans with respect to their ownership interests in Bachoco and shall be deemed to have agreed not to invoke the protection of their governments in certain circumstances. Under this provision, a non-Mexican stockholder is deemed to have agreed not to invoke the protection of its own government by asking such government to interpose a diplomatic claim against the Mexican government with respect to the stockholder’s rights as a stockholder, but is not deemed to have waived any other rights it may have, including any rights under the U.S. securities laws, with respect to its investment in Bachoco. If you invoke such governmental protection in violation of this agreement, your Shares could be forfeited to the Mexican government.

 

Our bylaws may only be enforced in México

 

Our bylaws provide that legal actions relating to the execution, interpretation or performance of the bylaws may be brought only in Mexican courts. As a result, it may be difficult for non-Mexican stockholders to enforce their stockholder rights pursuant to the bylaws.

 

It may be difficult to enforce civil liabilities against us or our directors, officers and controlling persons

 

We are organized under the laws of México, and most of our directors, officers and controlling persons reside outside the United States. In addition, all of our assets and their assets are located in México. As a result, it may be difficult for investors to affect service of process within the United States on such persons or to enforce judgments against them. This pertains also to any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in México, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.

 

Non-Mexican stockholders may not be entitled to participate in future preemptive rights offerings

 

Under Mexican law and our bylaws, if we issue new Shares for cash as part of a capital increase, we must grant our stockholders the right to purchase a sufficient number of Shares to maintain their existing ownership percentage in the Company (“preemptive rights”). We can allow holders of ADSs in the United States to exercise preemptive rights in any future capital increase only in one of the following two circumstances:

 

·

we file a registration statement with the Securities and Exchange Commission with respect to that future issuance of Shares; or

 

·

the offering qualifies for an exemption from the registration requirements of the Securities Act.

 

We make no promises that we will file a registration statement with the Securities and Exchange Commission to allow holders of ADSs in the United States to participate in a preemptive rights offering. As a result, the equity interests of such holders in the Company may be diluted proportionately. In addition, under current Mexican law, it is not practicable for the depositary to sell preemptive rights and distribute the proceeds from such sales to ADS holders.

 

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Corporate disclosure and accounting in México may differ from other countries

 

There may be less, or different, publicly available information about issuers of securities in México than is regularly published by or about issuers of securities in other countries with highly developed capital markets. In addition, due to country-by-country differences in accounting and other reporting principles and standards, our corporate disclosures may differ in content from disclosures made under other principles and standards, such as U.S. GAAP.

 

ITEM 4.

Information on the Company

 

General

 

Our legal name is Industrias Bachoco, S.A.B. de C.V., and we frequently refer to ourselves commercially as Bachoco. We were incorporated in México on April 17, 1980. Our headquarters are located at Avenida Tecnológico No. 401, Ciudad Industrial 38010, Celaya, Guanajuato, México, telephone (011)(52)(461) 618-3500. We have four principal product lines: chicken, table eggs, balanced feed and swine and other lines. All of our production and sales are made in México.

 

We are the largest poultry producer in México. In 2006, we produced more than 8.0 million chickens per week and accounted for approximately 29.9% of total chicken production in México. As a vertically integrated producer, we control virtually all aspects of the production and distribution process, which enables us to exercise cost controls and to maintain high standards of quality, service and efficiency. With over 700 production and distribution facilities dispersed throughout México, our operations include the following:

 

·

preparing balanced feed;

 

·

breeding, hatching and growing chickens; and

 

·

processing, packaging and distributing chicken products.

 

Sales of chicken products accounted for 77.6% of our net revenues in 2006. Please also see the table under Item 5. “General—Results of Operations for the Years Ended December 31, 2005 and 2006.”

 

We are also a significant producer of commercial balanced feed. We sell our feed both through distributors and directly to small producers. During 2006, we sold approximately 480,000 tonnes of balanced feed to external customers, which amounted to 9.0% of our total revenues for that year.

 

Currently Bachoco is the second largest producer of table eggs products. In 2006, we sold approximately 143,000 tons. Table egg sales accounted for 9.2% of our net revenues in 2006.

 

As part of our other product lines we also sell swine on the hoof to meat packers for pork product production. In 2006, sales of swine and other lines accounted for 4.2% of our net revenues.

 

The remaining portion of our net revenues in 2006 consisted of miscellaneous poultry-related products.

 

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The following table sets forth, for each of the periods presented, the volume of chicken, balanced feed, table eggs and swine that we sold:

 

		Bachoco Sales Volume (in thousands of tonnes)
		Year Ended December 31,
		2002			2003			2004			2005			2006
Chicken			665.4			655.5			733.0			773.0			773.7
Eggs			131.7			132.1			138.1			140.6			143.4
Swine(1)			9.0			8.5			9.1			9.6			8.9
Balanced Feed			324.7			316.2			320.7			389.6			484.4

(1) Swine are the only product sold by the ton in the swine and other lines product line.

 

In the Mexican poultry industry few producers operate in multiple regions. We believe we have the broadest geographic market coverage in the Mexican poultry industry and that we are one of the largest poultry suppliers in the México City metropolitan region (which accounts for a significant portion of overall Mexican chicken consumption). We currently compete in every major product category and channel of distribution for poultry products within the regions that we serve. We expect to continue to do so in order to meet growing consumer demand and needs.

 

Background and Ownership Structure

 

Founded in 1952 by the Robinson Bours family as a small commercial table egg operation in the state of Sonora, we grew by expanding our existing facilities and acquiring additional facilities from other poultry producers. In 1974, we established operations in Celaya, located in the agricultural region of Bajio, to begin serving the México City metropolitan region. Beginning in 1988, our management recognized the potential for growth in Mexican chicken consumption, as well as the advantages of a large, vertically integrated operation.  As a result, we began to seek opportunities for geographic expansion and to increase production capacity and market share. We extended our market coverage (particularly in 1993 and 1994) by purchasing fixed assets and inventory from major regional producers that faced financial difficulties. Following each acquisition, we made substantial investments to apply our production and distribution methods and reap the benefits of vertical integration and economies of scale, improving the performance of the acquired facilities.

 

In April 1995, Robinson Bours stockholders created a trust (the “Control Trust”), the principal purpose of which was to hold a controlling interest in our Series B Shares. Before September 2006, our common stock (“Common Stock”) consisted of Series B Shares and Series L Shares of limited voting stock (“Series L Shares”) (collectively, the “Old Shares”). The Old Shares were grouped into units. Each Unit (the “Unit” or “UBL”) consisted of one Series B Share and one Series L Share. Each B Unit (“B Unit” or “UBB”) consists of two Series B Shares.

 

In September 1997, we made an initial public offering of Units representing 17.25% of the outstanding Old Shares. Following such offering, the Control Trust held Units and B Units representing 68.0% of the outstanding Series B Shares.

 

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In September 2006, we separate the UBL and UBB units trading on the Mexican Exchange into their component L and B Shares. The Series L Shares was converted into Series B Shares, on a one -to -one basis, thereby creating a single Share class, the Series B Shares, which represent our entire Common Stock This change did not modify the face value of the Shares. These Shares are trading on the Mexican stock market. The ADS still consist of twelve underlying Shares, but they are all Series B Shares, with full rights.

 

As of December 31, 2006, the Robinson Bours Stockholders owned B Shares representing 82.75% of the Series B Shares outstanding. As a result, the Robinson Bours Stockholders continue to have the power to control the Company.

 

Members of the Robinson Bours family, together with certain of our executive officers, hold a majority of the seats on our Board of Directors.

 

In April 2002, Javier Robinson Bours Castelo assumed the position of Chairman of the Board of Directors, replacing Enrique Robinson Bours Almada.

 

In November 1998, we approved a stock repurchase plan (the “Repurchase Plan”), which allows us to repurchase up to 3% of the total Shares outstanding and trading on the Mexican Stock Exchange (Bolsa Mexicana de Valores), in accordance with Mexican securities laws. To execute the Repurchase Plan, we created a reserve of Ps.292.9 million (expressed in constant pesos as of December 31, 2006), which reduced retained earnings on our balance sheet. As of May 31, 2007, currently we had repurchased zero Shares.

 

During 2003, we implemented two important projects to expand the facilities at our Northwest Complex and Yucatán Peninsula Complex to increase production capacity in our chicken business. Both of these projects were completed by the end of the third quarter of 2004. These facilities are ideally suited for the expansion projects due to their sanitary status and their geographical location. Both complexes were expanded to increase capacity by approximately 50%, which will increase opportunities for potential future exports as well as for meeting consumer demand in those regions and in other regions in México. The new facilities in both complexes have been equipped with the best technology available.

 

In July 2004, we reached an agreement for renting the farms of UPAVAT and UPATEC, a small producer of table eggs in the state of Puebla, south of México City, with a capacity of about 0.75 million of lying hens. This operation allows us to start the production of table eggs in southern México.

 

On June 29, 2005 we acquired certain assets of Grupo Sanjor, a private poultry company located in the Yucatan Peninsula, with production of approximately 300 thousand chickens per week and 100 thousand table egg laying hens, which allow us to reinforce our leadership in this region of the country.

 

In December 2006, we acquired most of the assets and working capital of “Del Mezquital” to start a new complex in the State of Sonora, located in northern México, close to the border of the United States.

 

In February 2007, we reached a business agreement with “Grupo Libra” a Company in Northeast of México that includes the buying of all their working capital and long term rent agreement of their facilities to strengthen our national presence.

 

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Business Strategy

 

Over the past decade, we have substantially increased our chicken production, establishing ourselves in every major product category and distribution channel for chicken and expanding to cover a geographic market in México that is more widespread than any other chicken producer. We have also increased the efficiency of our production process and built a reputation for the freshness of our chicken products and quality of our customer service.

 

The Mexican poultry industry has experienced considerable consolidation in recent years, in which we have participated. We continue to evaluate possible acquisitions of other poultry producers or production facilities from time to time and may pursue certain opportunities consistent with our business strategy.

 

The key elements of our business strategy are as follows:

 

·

Increased market penetration through expanded distribution. We have an extensive distribution network, supported by our own transportation fleet, superior knowledge of existing wholesale channels and strategically located cold storage warehouses and facilities. We have substantially increased our distribution routes during the past years. We plan to continue to develop and improve our distribution network and systems in every product category and throughout our expanded geographic coverage in México.

 

·

Increased service and market responsiveness. We seek to remain a leader in the Mexican poultry market by maintaining high standards of customer service and continuing to be responsive to the changing needs of varying market segments. As part of this strategy, we have structured our operations in such a way as to enable us to vary the size, weight, color and presentation of our chicken products, depending upon the particular demands of the market segment. In addition, we have decentralized order and sales services from our headquarters to our cold storage warehouses and facilities, which serve as midpoints in the distribution chain to wholesalers and local customers. This strategy allows us to stay closer to our customer base and to better cultivate growing customer segments, such as food-service operators, supermarkets and food wholesale clubs.

 

·

Low-cost production and operating efficiency. We are among México’s lowest-cost producers and distributors of chicken, due in part to economies of scale and vertically integrated operations. We pursue on-going programs to increase operating efficiencies and reduce operating costs.

 

·

Continued brand differentiation. We have developed a brand image for premium fresh chicken and table eggs in México. Building on the success of our branded products to date, we seek to continue to promote our brand name through billboards, packaging, special publicity campaigns and through development of brand loyalty among wholesale and retail distributors.

 

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Capital Expenditures

 

Over the last three years, we have financed our capital expenditures with resources generated by our operations. We made the following capital expenditures during the last three years:

 

·

In 2004, we made capital expenditures of Ps.471.2 million net, with which we:

 

·

continued to update our transportation fleet, farms, processing plants and feed mills;

 

·

improved and expanded our distribution network;

 

·

increased capacity projects in our Northwest and Yucatán Peninsula Complex; and

 

·

increased production capacity of table eggs in our Northwest Complex, at Mexicali, near the border with the U.S.

 

·

In 2005, we made capital expenditures of Ps.805.3 million net, with which we:

 

·

continued to update our transportation fleet, farms, processing plants and feed mills

 

·

increased the capacity and updated our rendering plants, which expenditures continue to the present; and

 

·

made the acquisition of certain assets of Grupo Sanjor.

 

·

In 2006, we made capital expenditures of Ps.863.2 million net, with which we:

 

·

continued to update our transportation fleet, farms, processing plants and feed mills, which expenditures continue to the present;

 

·

increased capacity, mainly for the production of live chickens and;

 

·

building of a new feed mill in the state of Aguascalientes.

 

Business Overview

 

Chicken Market

 

Mexican consumers value distinct characteristics in their chicken. Virtually all chicken sold by us and other major chicken producers in México is fresh. Fresh chicken is a central ingredient in many traditional Mexican dishes and it is the leading meat consumed in México according to data from UNA. Traditionally, value-added chicken, such as heat-and-serve products, frozen dinners, chicken nuggets and other similar foods, have found limited acceptance among Mexican consumers due to historical consumer preferences for fresh chicken.

 

In recent years, the value-added chicken line is growing rapidly; we participate significantly in the market and try to lead the supplying of these products. According to UNA value-added chicken products currently account for approximately 6.0% of the chicken sold in México.

 

Mexican consumers also generally prefer chicken with pronounced yellow skin pigmentation, a characteristic found mainly in our public-market and supermarket-broiler chicken products that we attain by including marigold extract in our chicken feed. We have also noticed an increased demand for smaller, whole, fresh chicken from various fast-food outlets, principally chicken roasting shops (rosticerías and asaderos), which have developed rapidly in recent years.

 

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According to data obtained from the UNA, total Mexican chicken consumption per capita increased by 15.0% from 2002 to 2006. Chicken is the leading meat consumed in México, and it accounted for approximately 33.4% of all meat produced in México in 2006. The following table sets forth total Mexican production of chicken, pork and beef for 2002 to 2006:

 

Mexican Production of Chicken, Beef and Pork

(in thousands of tonnes)(1)

 

		2002			2003			2004			2005			2006
Chicken			2,187			2,290			2,390			2,498			2,592
Beef			1,451			1,496			1,543			1,559			1,602
Swine			1,085			1,100			1,150			1,088			1,102

 

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(1) Source: UNA

 

The Mexican chicken industry, like chicken industries in other countries, is characterized by a long-term decline in real prices in real terms in conjunction with cyclical periods of higher profitability leading to overproduction followed by periods of lower prices and lower profitability. In 2002, chicken prices increased slightly by approximately 2.5% over 2001, as a result of the worldwide increase in the cost of feed ingredients at the end of the year. In 2003, chicken prices decreased by approximately 4.0% over 2002, mainly due to an oversupply in domestic production that was present mainly in the second half of the year and a decrease in the purchasing power of the average consumer. In 2004, chicken prices increased by approximately 6.7%, mainly as a result of an increase in the cost of the main feed ingredients worldwide, and a more normalized supply in México during the second half of the year. In 2005, chicken prices decreased by approximately 1.7%, mainly as a result of a decrease in the cost of the main feed ingredients worldwide, and a strong oversupply during the last quarter of the year. We believe that Mexican chicken prices may decline further in real terms and that prices for chicken may also vary cyclically. In 2006 prices declined 3.6% when compared to the previous year mainly as a result of an oversupply in the Mexican poultry market at the beginning of 2006.

 

We believe that changes in Mexican chicken consumption correlate closely with changing chicken prices and their effect on consumer purchasing power. Chicken per capita consumption increased 3.1% in 2002, 4.9% in 2003, 3.3% 2004, 3.5% in 2005 and 2.6% in 2006.

 

Chicken Products

 

Six main product categories exist for fresh chicken in México: live, public market, rotisserie, supermarket broiler, chicken parts and value-added products.

 

“Live” chicken is delivered alive to small independent slaughtering operations or to wholesalers that contract with independent slaughtering operations for processing. The freshly slaughtered chicken is then sold to chicken shops and other specialized retailers for sale to consumers and in some areas is sold directly to consumers by the slaughterhouse. According to UNA, live chicken accounts for approximately 27.0% by volume of the chicken sold by producers in México.

 

“Public Market” chicken is a whole broiler presented uneviscerated, generally sold within 48 hours after slaughter in public markets throughout México, but primarily concentrated in the México City metropolitan region. According to UNA, public market chicken accounts for approximately 24.0% by volume of the chicken sold by producers in México.

 

“Rotisserie” chicken is a whole broiler presented eviscerated and ready to cook. Rotisserie chicken is sold by wholesalers and directly by producers to small shops, stands (rosticerías or asaderos) and supermarkets, which cook the chicken and sell it whole and freshly cooked to the end-consumer, providing an economical form of fast-food. According to UNA, rotisserie chicken accounts for approximately 26.0% by volume of the chicken sold by producers in México.

 

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“Supermarket Broiler” chicken is a fresh whole broiler presented with the edible viscera packed separately. In most cases it is sold directly by producers to supermarkets and, in some regions, to other independent food shops. Mexican consumers’ preference for freshness requires regular deliveries of chicken to supermarkets and other food shops. According to UNA, supermarket broiler chicken accounts for approximately 7.0% of the volume of the chicken sold by producers in México.

 

“Chicken Parts” refers to cut-up fresh chicken parts sold wrapped in trays or in bulk principally to supermarket chains, the fast-food industry and other institutional food-service providers. Producers generally sell directly to the supermarket chains and deliver the chicken directly to the outlet. Sales to the institutional market often require customized cutting and presentation. According to UNA, chicken parts account for approximately 10.0% by volume of the chicken sold by producers in México.

 

“Value-added Products” refers mainly to cut-up fresh chicken parts with a value-added treatment like marinating, either sold wrapped in trays or in bulk principally to supermarket chains. Producers generally sell directly to the supermarket chains and deliver the chicken directly to the store. Sales to the institutional market often require customized cutting and presentation. According to UNA, chicken parts account for approximately 6% by volume of the chicken sold by producers in México.

 

We sell value-added chicken products to supermarkets and other retailers. The following table sets forth, for the periods indicated, the sales volume in tonnes and as a percentage of the total volume of chicken sold for each of our principal lines of chicken products:

 

		Year Ended December 31,
		2002						2003						2004						2005						2006
		Volume			% of Total			Volume			% of Total			Volume			% of Total			Volume			% of Total			Volume			% of Total
		(thousands of tonnes, except percentages)
Public Market and Rotisserie			307.1			46.2			288.1			44.0			319.1			43.5			349.6			45.2			344.3			44.5
Supermarket Broiler, Chicken Parts and Other(1)			191.6			28.8			194.9			29.7			219.6			30.0			219.1			28.4			228.2			29.5
Live			166.7			25.0			172.5			26.3			194.4			26.5			204.3			26.4			201.2			26.0
Total			665.4			100.0	%		655.5			100.0	%		733.1			100.0	%		773.0			100.0	%		773.7			100.0	%

(1) “Other” comprises sales of value-added poultry products, viscera and other products.

 

Our product mix varies from region to region, reflecting different consumption and distribution patterns. Based on market demand, we believe that fresh, rather than frozen, chicken will continue to dominate the Mexican market. Furthermore, we believe that consumer demand for value-added fresh chicken products, such as rotisserie chicken, supermarket broilers and chicken parts, will increase over time. Accordingly, we continue to focus principally on producing fresh chicken, including value-added fresh chicken products.

 

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Chicken Marketing, Sales and Distribution

 

We have developed an extensive distribution system that we believe is the largest and most modern of any chicken or egg producer in México. We use various distribution channels in every major product category to service different market segments. We use our own fleet to transport the majority of rotisserie chickens, supermarket broilers and other chicken products to our customers. We try to cooperate with existing distribution channels and do not compete with wholesale distributors, except in areas where we supply our own distribution capacity where needed for market penetration.

 

We distribute products from our nine processing plants (located in Celaya, Culiacán, Puebla, Lagos de Moreno, Coatzacoalcos, Mérida, Gómez Palacio, Monterrey and Hermosillo) to our cold-storage facilities and warehouses, which serve as a midpoint in distribution to wholesalers and local customers. From our cold-storage facilities, we service wholesalers (who in turn deliver to their customers) and transport certain products directly to supermarkets and food-service operations. Our distribution infrastructure includes 60 cold-storage warehouses and facilities and a large fleet of vehicles. The decentralized sales force permits us to remain attuned to developments in the regions we serve and to develop close relationships with customers.

 

We have expanded our distribution network, which now covers almost all of México:

 

·

In 2002, we consolidated our presence in the northeastern part of the country, mainly in the state of Nuevo León, due to the consolidation of acquisitions, made at the end of 2001.

 

·

During 2003, we implemented two important projects to expand the facilities at our Northwest Complex and Peninsula Complex to increase production capacity in our chicken business. These facilities are ideally suited for the expansion projects due to their sanitary status and their geographical location. Both complexes were expanded in the third quarter of 2004 by approximately 50%, which increased opportunities for future exports as well as for meeting consumer demand in those regions and in other regions in México.

 

·

During 2004, we finished our projects to expand the facilities at our Northwest Complex and Peninsula Complex.

 

·

In 2005, we acquired assets of Grupo Sanjor, a private producer of chicken and table eggs located in the Yucatán Peninsula.

 

·

At the end of 2006, we acquired assets of “Del Mezquital,” a private broiler producer located in the state of Sonora.

 

·

At the beginning of 2007, we reached a business agreement with “Grupo Libra,” a chicken producer located in northeast México.

 

In the following paragraphs, we provide a description of our marketing, sales and distribution strategies for each of our major chicken products.

 

·

Live Chicken - We sell live chicken primarily to wholesalers, which contract out the processing to independent slaughterhouses and then resell the processed product as public market chicken. To a lesser extent, we sell to small independent slaughterhouses in the southeast, where live chicken continues to be the standard for consumption. Additionally, customers can purchase live chicken directly from us on our farms. However, we believe that the market as a whole is moving away from live chicken.

 

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·

Public Market Chicken - We believe that we are the largest producer of public market chicken in México. We regularly sell to more than 50 of the approximately 200 whole fresh chicken wholesalers operating in the México City region. Most of our wholesale customers rely primarily on us for public market chicken, although we have no exclusive supply agreements. Our principal focus in this market has been to provide superior distribution and service to selected wholesalers in order to maintain and further develop loyalty. Public market chicken is ordinarily sold to consumers without any packaging or other identification of the producer, but our distribution system encourages wholesalers to sell to retailers from our own “Bachoco” trailers, reinforcing our reputation for freshness and efficiency of service and fostering brand loyalty among retailers. We believe we have developed excellent relationships with the wholesalers we serve.

 

·

Rotisserie Chicken -We sell rotisserie chicken directly to rosticerías, asaderos and supermarkets. We attribute the growth in our sales of rotisserie chicken in large part to the rapid growth of the market for freshly cooked chicken sold by rosticerías and asaderos and in the rotisserie sections of supermarkets. We expect this market to continue to grow because of an ever-increasing consumer demand for convenient, low-priced and high-quality fast food. Success in supplying rotisserie chicken depends on consistency and good service, and only larger producers with more modern processing facilities and distribution capacity can compete in this market. We expect to expand sales of rotisserie chicken by leveraging our increasingly developed transportation and distribution network.

 

·

Supermarket Broiler Chicken - We sell supermarket broilers, as well as chicken parts and eggs, directly to the principal supermarkets, convenience store chains and wholesale clubs in México. In order to build consumer loyalty for our supermarket broiler chicken, we emphasize our brand image as well as our superior service, reinforced by frequent delivery to ensure freshness. Each chain negotiates purchases centrally, but we deliver directly to every point of sale, ordinarily at least once every 48 hours. We believe that we lead the market in frequency of deliveries to supermarkets.

 

·

Chicken Parts - We sell chicken parts principally to supermarkets, using the same marketing strategy that we use for supermarket broiler chicken. We are also an important supplier of chicken parts to the growing franchise fast-food and institutional food-service industries. We continue to develop custom-cutting processes to help meet demand from fast-food and institutional customers for a wider variety of chicken parts.

 

·

Value-Added Products -Mexican consumers have a greater preference for fresh chicken than their U.S. counterparts. Frozen, heat and serve and other further processed poultry products make up only a small proportion of total Mexican poultry consumption today. Demand for these kinds of fresh products is growing rapidly. The potential for substantial growth in this market is large and we believe that our distribution network, our large market share for supermarket chicken sales, our brand name and our experience in a wide range of existing Mexican distribution channels will be important competitive strengths in this area.

 

Sales of our fresh value-added products increased approximately 12% over 2005 sales. We are moving to produce and introduce various value-added products in México, which we have developed in accordance with Mexican customer preferences. We will continue to do so, as this market grows.

 

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Table Eggs

 

According with the UNA, México has the largest per capita consumption of table eggs in the world with 22.1 kilograms per capita a year. Mexican egg consumption per capita increased 8.3% from 2002 to 2006. This high level of consumption is due in part to the fact that eggs are among the cheapest sources of protein in México.

 

The Mexican table egg industry is more fragmented than the chicken industry but has experienced some degree of consolidation in recent years, including acquisitions made by us. According to UNA, the ten largest producers of table eggs in México now account for approximately 43.0% of the market.

 

Eggs in México have traditionally been distributed in large 360-egg cases through wholesalers to retailers. The retailers, which are typically small grocery shops, sell the eggs by weight to consumers. At present, approximately 21% of the eggs sold in México are sold in packaged form, 9% are sold in processed form and approximately 70% are sold in bulk to wholesalers. The sales trend in recent years has been moving towards packaged and processed egg sales. We expect that the convenience, the development of brand loyalty and the growth of supermarket chains will contribute to the continuance of this trend toward packaged eggs.

 

Bachoco is the second largest producer of table eggs in México with 8% of the market. We sell both brown and white eggs. We are the largest producer of brown eggs in México. Our marketing efforts for egg products focus on increasing our brand recognition.

 

The branded carton of brown eggs is a premium product in the Mexican market. We believe that brown eggs are less vulnerable to price fluctuations than white or unbranded eggs, because consumers perceive them to be of higher quality. Brown eggs command a small premium over white eggs.  

 

In some regions, however, we have reallocated part of our production from brown eggs to white eggs due to local market preferences.  Our marketing strategy in the eggs business is to gradually move from bulk to packaged white eggs. Packaged eggs are less vulnerable to price fluctuation and create brand loyalty.

 

In 2004, we started to build new farms to increase production capacity of table eggs in our Northwest Complex, at Mexicali, near the U.S. border. We completed this project in the second half of 2005.

 

We have designed our egg distribution system to transport eggs from our laying farms at Celaya, Los Mochis, Ciudad Obregón, Mexicali, Tecamachalco and La Laguna regions to customers in all sales regions. We sell packaged eggs directly to all of the principal supermarket chains in México, with daily deliveries directly to their outlets.

 

Seasonality

 

Our sales are moderately seasonal, with the highest levels of sales, in general, in the second and fourth quarter due to higher chicken consumption during the holiday season and lower sales levels earlier in the year during Lent (particularly in the week prior to Easter).

 

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Balanced Feed

 

According to Consejo Nacional de Fabricantes de Alimento Balanceado y de la Nutricion Animal, A.C) (”CONAFAB”) , Mexican production of balanced feed increased from 21.2 million tonnes in 2000 to 24.6 million tonnes in 2005. In 2005, México was ranked the fourth largest producer of feed in the world and the second largest in Latin America.

 

Local production is composed of commercial and integrated manufacturers. Commercial manufacturers produce for the market, while integrated manufacturers mostly produce for themselves and occasionally for other producers. Integrated producers account for approximately 64.4% of total production. Imports of feed come almost entirely from the United States and represent approximately 1.4% of the total consumption in México.

 

We entered the feed business as a result of our acquisition of Grupo Campi at the end of 1999. We sell to small livestock producers and through a network of small distributors located mainly in central and southern México. We have benefited from economies of scale and synergies derived from producing feed both for our own internal consumption and for sale to third parties. Currently, we have four feed plants dedicated to produce balanced feed to third parties. We estimate that our balanced feed business comprises approximately 5.4% of the market share of the commercial (non-integrated) balanced feed business in México.

 

Swine

 

We purchase breeder swine live from the United States and breed them at facilities in Navojoa. We then raise swine to maturity at our farms in Celaya and three other locations in México. Mature swine is sold on the hoof to Mexican swine meat packers for the production of pork products. In 2002, our swine prices decreased by 21.3% as a result of an oversupply in the swine market due primarily to increased imports from the United States. In 2003, swine prices began to recover, increasing by7.0%, due mostly to the fact that there was very modest growth in domestic production and imports. In 2004, our swine prices increased by more than 20.0% as a result of an increase in the cost of feed ingredients and a more normalized supply and imports, and, during 2005, our swine prices decreased 9.0% due to larger supplies in the Mexican market which continued in 2006 where prices went down about 11.9%. Traditionally, Mexicans consume less swine and swine products than chicken and eggs.  

 

Raw Materials

 

We purchase our breeding stock for broilers and layers from high-quality suppliers. All of our breeder swine currently come from one supplier, but we have changed suppliers from time to time and have numerous alternative sources of supply.

 

The largest single component of our cost of sales is the cost of ingredients used in the preparation of feed including, principally, sorghum, soy meal, corn, fish meal, meat meal, and for certain chicken products, marigold extract. The price of these ingredients is subject to significant volatility resulting from weather, the size of harvests, transportation and storage costs, governmental agricultural policies, currency exchange rates and other factors. To reduce the potential adverse effect of grain price fluctuations, we vary the composition of our feed to take advantage of current market prices for the various types of ingredients used.

 

Under NAFTA, the government eliminated the tariff on sorghum effective January 1, 1994, and eliminated tariffs on all other grains that we use, except corn, on January 1, 2003. Corn tariffs will be eliminated by 2008. We expect these developments to lower our cost of production as the cost of our ingredients more closely tracks prices in the international commodity markets.

 

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At present, we take advantage of lower-cost feed ingredients from Mexican sources, when available. In 2006, we obtained approximately 31.3% of our total grain needs from the domestic market. We believe that the quality of local feed ingredients, particularly sorghum, is superior to that of imported feed ingredients. In addition, the use of local feed ingredients allows us to save on transportation costs and import duties. However, in southern México where Grupo Campi’s complexes are located, domestic crops and feed ingredients are not available. As such, these complexes use mainly imported grain. We may, from time to time, engage in hedging of our feed costs in the future.

 

Competition

 

Chicken

 

According to the UNA, we are México’s largest chicken producer. We face significant competition from other producers in all of the markets in which we sell our products. When combined with our two largest vertically integrated competitors, we account for approximately 54.0% of total Mexican poultry production; the balance is distributed among approximately two hundred small- and medium-sized integrated and non-integrated producers. The major producers, including Bachoco, have substantial cost advantages over smaller, non-integrated producers arising from economies of scale and control of feed preparation. To varying degrees, each of these companies has substantial financial resources and strengths in particular product lines and regions. We believe, however, that we have substantial competitive strengths over our competitors, including a broader range of chicken products and broader geographic coverage.

 

Furthermore, there are considerable barriers to entry into large-scale chicken production and distribution in México, including, among others, the consumer preference for fresh chicken, the weaknesses of transportation infrastructure and varying regional consumer preferences among the various product categories. The channels for distribution of chicken products, in particular, are highly specialized and varied, and they call for in-depth experience in market practices.

 

Nonetheless, we expect that we will continue to face strong competition in every market and that existing or new competitors are likely to broaden their product lines and to extend their geographic coverage.

 

Poultry producers in the United States have developed low-cost production techniques and have been successful in exporting primarily frozen and value-added poultry to other countries, especially in periods of overcapacity in the United States. As tariff barriers have declined under NAFTA, we have experienced increased competition from U.S. poultry producers. According to UNA, in 2006, imports of poultry products increased 17.6% in volume over imports in 2005. This increase was caused in part by a strong demand in México, and the elimination of temporary bans of imports by sanitary and health authorities. Mechanically de-boned poultry accounted for approximately 40.0% of the imports.

 

We expect that competition from U.S. exporters will continue to increase. However, Mexican consumer acceptance of frozen poultry products is still low, and we do not anticipate significant growth in the near future.

 

Table Eggs

 

We are one of the largest producers of table eggs in México, with approximately 6.2% of total Mexican egg production at the end of 2006.

 

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Balanced Feed

 

Of the registered producers of feed in México, integrated firms produce approximately 64.4% of total production for their internal use, and the remaining 35.6% is produced for sale to third parties. We estimate a market share of approximately 5.4% in our feed product line.

 

Swine

 

The Mexican swine industry is highly fragmented, and no producer has more than 15.0% of the market. On December 31, 2006, we had less than 1.0% of the Mexican market share in swine. U.S. producers already compete in this market in México because tariff barriers on swine are moderate.

 

Mexican Regulation

 

Mexican Import Regulation and Price Controls

 

As required by NAFTA, the Mexican government eliminated all permanent quotas and tariffs on poultry, table eggs and swine in January 2003. With certain specific exceptions described below, there are now no quotas or tariffs on imports of poultry, eggs and swine from the United States. We expect the elimination of these trade protections to stabilize the level of imports over time and to permit improved private control over imports, which may result in increased competition from importers.

 

The pre-2003 scheme of quotas and tariffs, which has now been eliminated, was as follows:

 

·

The quota for chicken was 120.3 thousand tonnes, which represents 5.7% of national consumption. Above the quota, imports were taxed ad valorem at 49.4%.

 

·

Within the chicken quota, there were sub-quotas for whole chicken (16.6 thousand tonnes), poultry parts (31.6 thousand tonnes), whole turkeys, turkey parts, and de-boned chicken. Imports above the quota were also taxed at 49.4%. There was no quota amount for value-added chicken; all imports were taxed at 49.4%.

 

·

The quota for eggs was 8.2 thousand tonnes, which is less than 1% of national consumption. Imports above the amount were taxed at 9.5% ad valorem.

 

·

Imports of swine were subject to a quota of 80.3 thousand tonnes of fresh, frozen and chilled meat, but were also taxed 2% on amounts below the quota. Amounts above the quota were taxed at 10% in 2002.

 

Import limits and short-term tariffs that remain after January 2003 are as follows:

 

The Mexican government has put in place a number of short-term tariffs and import limits on poultry, eggs and swine:

 

·

In January 2003, the Mexican government announced a temporary safeguard to stabilize the flow of poultry imports, which included an initial tariff of 98.8% on imports of chicken leg quarters. This safeguard will decrease annually until it reaches 0% in 2008. All other chicken products from the United States, including whole chicken, chicken parts other than leg quarters and eggs, remain tariff-free.

 

·

According to the safeguard, for 2006 the tariff in effect was 39.5% for imports of chicken leg quarters above the quota of 103 tonnes.

 

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In addition to NAFTA, México has entered into free trade agreements with several other countries including Chile, Europe, Colombia and Venezuela. Although such agreements may result in lower tariffs on our own products, we believe that imports from such countries will not increase substantially in the future due to high transportation and distribution costs.

 

Antitrust Regulations

 

The Ley Federal de Competencia Económica (“Mexican Economic Competition Law”), which took effect on June 22, 1993, regulates monopolies and monopolistic practices. Under this law, all companies (including Bachoco) are required to notify the Comisión Federal de Competencia (“Federal Competition Commission”) of all proposed transactions exceeding specified threshold amounts as set forth in the Mexican Economic Competition Law. The Federal Competition Commission can impose conditions on, and prevent or unwind, any such transactions by Mexican companies. We have complied with all requirements under this law.

 

Environmental and Sanitary Regulation

 

Our operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment. The principal laws are Ley General de Equilibrio Ecológico y Protección Ambiental (General Law of Ecological Balance and Environmental Protection—the “Environmental Law”) and Ley de Aguas Nacionales (“National Waters Law”). The Secretaría del Medio Ambiente y Recursos Naturales (Ministry of Environment and Natural Resources, or “Semarnat”) administers the Environmental Law, and Comisión Nacional del Agua (“National Water Commission”) administers the National Waters Law.

 

The Environmental Law regulates water pollution, air pollution, noise control and hazardous substances. Semarnat can bring administrative and criminal proceedings against companies that violate environmental laws, and after certain administrative procedures, it also has the power to close non-complying facilities. Every company in México is required to provide Semarnat with periodic reports regarding compliance with the Environmental Law and the regulations thereunder.

 

The level of environmental regulation in México has increased in recent years, and enforcement of the law is improving. We expect this trend to continue and to intensify with international agreements between México and the United States.

 

In particular, Mexican environmental laws set forth standards for water discharge that are applicable to poultry processing operations. Our processing plants have water treatment facilities that comply with Mexican environmental standards. We are implementing other investment projects in anticipation of stricter environmental requirements in the future. We do not expect that compliance with those Mexican federal environmental laws or Mexican state environmental laws will have a material effect on our financial condition or performance.

 

The production, distribution and sale of chicken, eggs and swine are subject to Mexican federal and state sanitary regulations. The principal legislation is Ley General de Salud (“General Health Law”) and Ley Federal de Sanidad Animal (“Federal Animal Health Law”). The Federal Animal Health Law was enacted in 1993, and, since then, we have been working closely with Mexican authorities to develop regulatory standards and inspection methods for chicken processing. Currently, Mexican authorities do not monitor production or inspect products to the same degree as sanitary authorities in other countries, such as the USDA in the United States. However, we believe that we are in compliance with all applicable sanitary regulations.

 

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Organizational Structure

 

We are a holding company with no operations other than holding the stock of our subsidiaries, all of which are incorporated in México, and engaging in transactions with our subsidiaries. Our principal operating subsidiary is BSACV, which owns our principal operating assets, and which accounted for 93.4% of consolidated total assets as of December 31, 2006, and 88.1% of our consolidated revenues for the year ended December 31, 2006. All of our subsidiaries are directly owned by us in the percentage listed below. None of these subsidiaries have any subsidiaries of their own.

 

The following table shows our main subsidiaries as of December 31, 2004, 2005 and 2006:

 

		Percentage Equity Interest
		2004			2005			2006
Acuícola Bachoco, S.A. de C.V.			100			100			100
Aviser, S.A. de C.V.			100			100			100
Bachoco, S.A. de C.V. (“BSACV”)			100			100			100
Campi Alimentos, S.A. de C.V.			100			100			100
Huevo y Derivados, S.A. de C.V.			97			97			97
Operadora de Servicios de Personal, S.A. de C.V.			100			100			100
Pecuarius Laboratorios, S.A. de C.V.			64			64			64
Secba, S.A. de C.V.			100			100			100
Sepetec, S. A. de C.V.			100			100			100
Servicios de Personal Administrativo, S.A. de C.V.			100			100			100
Induba Pavos, S.A. de C.V.			-			-			100

In November 2004, the Company acquired all the Shares of Secba, S.A. de C.V. from a related party for Ps.15 million. As of the date of acquisition, the figures of Secba, S.A. de C.V. have been consolidated with the Company’s figures. The excess of the purchase price paid over the book value of this investment amounted to Ps.0.3 million, which was recorded in other income.

Induba Pavos, S.A. de C.V. was created in December 2006 and is a 100% owned subsidiary of Bachoco.

 

Property, Plants and Equipment

 

Our production and storage facilities are located throughout the regions we serve in order to ensure freshness and minimize transportation time and costs. The most extensive facilities are grouped in nine complexes that include farms and processing plants. The largest of our complexes is in Celaya, where we have broiler grow-out farms, a broiler processing plant and egg production farms. The complex at Culiacán includes broiler grow-out farms and a broiler processing plant, as do the complexes located in Puebla, Lagos de Moreno, Coatzacoalcos, Mérida, Hermosillo and Monterrey. There are smaller egg production farms at Los Mochis, Ciudad Obregón and Mexicali. In Gómez Palacio, Durango, we have a complex which consists of broiler grow-out farms, a broiler processing plant and egg production farms representing nearly half of our total egg production capacity.

 

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The following table summarizes the types and number of each type of our production facilities as March 2007:

 

Bachoco Production Facilities

 

Type		Number
Chicken breeding farms			159
Broiler grow-out farms			479
Broiler processing plants			9
Egg incubation plants			21
Egg production farms			100
Swine breeding farms			1
Swine grow-out farms			12
Feed mills			17
Further process plants			4

On September 22, 2002, Hurricane Isidore hit the Yucatán Peninsula and affected approximately 60% of our chicken growing farms in the region. The remainder of our facilities in the area, including a poultry processing plant, feed mills, breeder farms and incubator plants, suffered minor damages. The chicken growing farms in this region represented approximately 7% of our total capacity in our chicken business. We were able to divert products from our other facilities to maintain a consistent level of service to our customers in this region.

 

The Company repaired its Peninsula Complex on schedule and by the end of 2003 the complex had returned to the level of capacity maintained prior to sustaining the damage caused by Hurricane Isidore. In 2003, the Company implemented projects to expand the facilities at the Peninsula Complex as well as the Northwest Complex. Both complexes were expanded to increase capacity by approximately 50% by the third quarter of 2004. These projects were financed with internal resources generated by our own operations.

 

On September 16, 2006, Hurricane Lane, hit the southern part of the state of Sinaloa affecting some of our chicken growing farms in that region. We were able to keep a proper supply to our customers in that region from our other complexes.

 

We operate 17 feed mills for our own chickens, feed sales to third parties and egg and swine operations. The total production capacity of our feed plants is approximately 365,000 tonnes per month. We estimate that we are the largest producer of animal feed in México.

 

Our other facilities include two poultry manure-processing plants. Our headquarters are located in Celaya Guanajuato, México, and we have 60 sales centers throughout the regions we serve. While we own most of our facilities, we lease a limited number of farms and sales centers. We also employ a network of contract growers.

 

Our fleet of trucks carries feed from feed mills to farms, live chicken from farms to processing plants, day-old chickens from egg incubation plants to farms, eggs from farms to distribution centers and, ultimately, products from distribution centers to customers.

 

ITEM 5.

Operating and Financial Review and Prospects

 

The following discussion should be read in conjunction with our Consolidated Financial Statements. The Consolidated Financial Statements have been prepared in accordance with Mexican GAAP, which differs in certain respects from U.S. GAAP. Note 17 to the Consolidated Financial Statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP, as they relate to us, and a reconciliation to U.S. GAAP of total stockholders’ equity, net income and operating income, a consolidated statement of changes in stockholders’ equity and a condensed statement of cash flows under U.S. GAAP as of December 31, 2005 and 2006 and for the years ended December 31, 2004, 2005 and 2006.

 

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In accordance with Mexican GAAP rules on price-level restatement of financial statements, the financial statements included with this disclosure recognize certain effects of inflation. In addition, the financial statements and, unless otherwise specified, the other financial data included herein are restated in constant pesos as of December 31, 2006. The effects of price-level restatement in accordance with Mexican GAAP have not been reversed in the reconciliation to U.S. GAAP.

 

General

 

In the following discussion we describe various trends and how they affected our results of operations for the years ended December 31, 2004, 2005 and 2006.

 

Mexican Economic Conditions

 

In 2004, the Mexican economy showed signs of recovery; GDP growth was 4.4%, which was better than initial expectations. Interest rates on 28-day Cetes increased to an average of 6.8% for the year and an average of 8.5% in the last month of the year. Inflation increased to a rate of 5.2%, and the peso appreciated against the U.S. dollar by 0.8% at year-end.

 

In 2005, the Mexican economy was stable and GDP increased by 3.0%; the inflation rate was 3.3%, and rates on 28-day Cetes increased to an average of 9.2% for the year and an average of 8.2% during December 2005. The peso appreciated against the U.S. dollar by 4.9% at year-end.

 

In 2006, the Mexican economy showed signs of volatility during the first part of the year, before the president election. After the election the economy showed stability with an annual inflation rate of 4.1% and a reasonably stable peso-dollar exchange rate with a final depreciation of the peso against the dollar of 1.6%, as compared to the end of 2005. Rates on 28-day Cetes decreased to an average of 7.2% for the year.

 

In addition to the effects that the Mexican economy has on our business and results of operations, Mexican political events may significantly affect our operations and the performance of Mexican securities generally. See Item 3, “Key Information—Risk Factors.” A downturn in México’s economic conditions, civil unrest or other adverse social, political or economic developments in or affecting México could adversely affect our business, results of operations, financial condition, ability to obtain financing and prospects for future business.

 

The Mexican economy and financial and securities markets are, to varying degrees, influenced by economic conditions in other countries. Economic or financial conditions in one country or region may undermine investors’ confidence in other countries, such as México, and decrease the attractiveness of securities investments in such countries. See Item 3, “Key Information — Risk Factors.”.

 

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Effects of Economic Conditions on the Company

 

Mexican economic conditions have had an important impact on México’s chicken market. Feed costs constitute a substantial portion of the cost of goods sold and are priced with reference to U.S. dollars. We use financial instruments to mitigate the cost of goods sold in currencies other than Mexican pesos. See Note 2-q of the Consolidated Financial Statements. In 2003, average producer prices increased significantly by 10.6%, due primarily to an increase in raw materials prices during most of the year. In 2004, average producer prices increased by 6.7%, due mainly to strong increases in the cost of feed ingredients, in particular soybean meal, and a moderate increase of supply in the Mexican market. In 2005, average producer prices decreased by approximately 1.7%, mainly as a result of a decrease in the cost of the main feed ingredients worldwide, and a strong oversupply during the last quarter of the year. In 2006 average producer prices decreased by approximately 3.0% mainly from oversupply conditions in the market during the first part of the year and as market conditions return to more normalized levels as compared with the first three quarters of 2005.

 

As of December 31, 2006, we have an outstanding total indebtedness of Ps.43.6 million all denominated in Mexican pesos. In 2006, we had foreign exchange gain of Ps.39.3 million due to fluctuations of the peso against the U.S. dollar, as compared to a foreign exchange loss of Ps.60.0 million in 2005 and a foreign exchange gain of Ps.48.4 million in 2004.

 

Any erosion of the purchasing power of Mexican consumers may adversely affect demand for our products and, as a result, our net revenues and profitability. Inflation and changing prices affect our ability to raise prices as well as consumer demand, supplier prices and other costs and expenses, consumer purchasing power and competitive factors, all of which in turn affect our net revenues and operating results. Peso devaluations and high inflation levels could further adversely affect our operations and financial position.

 

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Volume of Chicken Sold

 

The volume of our chicken sold decreased by 1.5% in 2003, increased by 11.8% in 2004, increased by 5.5% in 2005 and increased 0.1% in 2006.

 

The decrease in volume in 2003 was mainly due to the effects of Hurricane Isidore on our Peninsula Complex during most of the year.

 

The increase in 2004 was due mainly to the completion of growing projects in our Northwest and Peninsula complexes, and productivity improvements in the rest of our operations.

 

The increase in 2005 was due mainly to productivity improvements achieved by the Company and the Sanjor acquisition in the second quarter of the year.

 

The increase in 2006 was due mainly to productivity improvements, offset by the negative effects Hurricane Lane on our Northwest Complex during the second half of the year, and a reduction in yield as the Company moves to offering value-added products.

 

Trends in Product Prices

 

Our results of operations are significantly affected by the cyclical and volatile nature of Mexican prices for chicken, feed, eggs and swine.

 

In 2003, the Company was affected by higher feed ingredient costs and oversupply conditions due to an increase in domestic production. The continued weakness of the Mexican economy affected the purchasing power of customers, and as a result the Company was unable to increase its prices. During 2003, our chicken prices decreased 2.7% primarily as a result of oversupply conditions in the domestic chicken market as well as a decrease in consumer purchasing power.

 

In 2004, our chicken prices increased by 6.4%, mainly as a result of an increase in the cost of our main feed ingredients which pushed the prices up in the industry, a moderate supply of chicken in the Mexican market, mainly in the second part of the year, and our commercial and marketing strategies.

 

In 2005, our chicken prices increased 1.6%, as a result of a strong demand in the first three quarters of the year, partially compensated by weak prices in the last quarter of the year.

 

In 2006, our chicken prices decreased 3.7% due to oversupply in the market, in the first part of the year, and a lower more normalized historical demand compared to 2005.

 

Prices for feed tend to follow trends in prices of feed ingredients, which we discuss below.

 

In 2003, egg prices increased by 17.5% mainly due to a reduced supply of this product in the market.

 

In 2004, our egg prices increased by 7.3% mainly due to an increase in the price of feed ingredients and a moderate supply during the first part of the year in the Mexican market.

 

In 2005, our egg prices decreased by 15.7% as a result of continued oversupply conditions in the Mexican market due to domestic production.

 

In 2006, our egg prices increased 3.9% compared to 2005, as a result of a more stable supply.

 

Bachoco continues to work to improve its sales mix by introducing a packaged product with brand identification with better profit margins.

 

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In 2003, swine prices began to recover, increasing by 7.0%, due mostly to very modest growth in domestic production and imports.

 

In 2004, our swine price increased by 25.8% as there was only a moderate supply in the Mexican market.

 

In 2005, our swine prices decreased by 9.0% as imports into México increased.

 

In 2006, our swine prices declined 11.9% as a result of greater competition from imports and a more fragmented Mexican market.

 

We believe that, among other factors, industry price competition may continue to exert downward pressure on real chicken prices, and that prices for chicken, feed, eggs and swine are also likely to remain volatile and subject to cyclical variation. Due to the time needed to complete the chicken growth cycle, chicken producers generally cannot adjust production to respond immediately to cyclical variations, and, accordingly, in times of oversupply, prices may decline due to overproduction.

 

Trends in Prices of Feed Ingredients

 

The single largest component of our cost of sales is the cost of ingredients used to prepare feed, including sorghum, soybean meal, corn, fish meal, meat meal and, for certain chicken products, marigold extract. The prices of these feed ingredients are subject to significant volatility due to a number of variables, including, among other factors, weather, harvest size, transportation and storage costs, government agricultural policies and currency exchange rates. The price at which we may obtain feed ingredients from Mexican producers relative to U.S. producers is also subject to volatility depending on these variables.

 

At present, Mexican feed prices tend to parallel U.S. and international prices. In 2002, the percentage of grain purchased from local markets fell to 30%, with the remaining imported primarily from the United States. In 2003, the percentage of grain purchased from domestic markets was 38%. In 2004, it was approximately 35%, in 2005 it was 30% and in 2006 it was 31.3%. 

 

Due to low inventories worldwide at the end of 2003 and during most of 2004, soybean meal reached historically high prices worldwide. Consequently, the price of other sources of protein, including grain, increased. As a result, the cost of our feed increased substantially. It was not possible for us to pass these increases to our customers, leading us to poor results during the first part of the year. In the second part of the year, mainly in the last quarter, prices resumed more normalized levels, allowing us to improve our results. In 2005, prices of our raw materials were on the average lower compared to 2004; during the year prices were rather constant with a slight trend to increase during the second part of the year.

 

During the second part of 2006, international corn prices increased significantly as a result of lower inventories and increases in alternative uses of corn, such as ethanol production.

 

In recent years, reductions in tariffs under NAFTA have generally resulted in reductions of our costs of importing feed ingredients.

 

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Acquisitions & Dispositions

 

Our operations have been affected during the periods we discuss herein, by a series of acquisitions and production arrangements that we have made in recent years:

 

·

During 2002, our acquisitions contributed to the expansion and consolidation of our leadership position in the egg and chicken industries in México. Through these acquisitions, we expanded our distribution network throughout almost the entire country and increased our market presence in both La Laguna and the northeastern regions of México. We financed these acquisitions through our own working capital resources.

 

·

During 2003, we implemented two important projects to expand the facilities at our Northwest Complex and Peninsula Complex to increase production capacity in our chicken business. Both complexes were expanded to increase capacity by approximately 50% and were completed by the third quarter of 2004.

 

·

In July 2004, we reached an agreement for renting the facilities of UPAVAT and UPATEC, a small producer of table eggs in the state of Puebla, south of México City, with a annual capacity of about 0.7 million of lying hens.

 

·

In November 2004, the Company acquired all the shares of Secba, S.A. de C.V., from a related party for Ps.15.0 million. As of the date of the acquisition, the figures of Secba, S.A. de C.V. have been consolidated with the Company’s figures. The excess of the purchase price paid over the book value of this investment amounted to Ps. 0.3 million and was recognized in other income.

 

·

In June 2005, the Company acquired certain assets of Sanjor, a private poultry company located in the Yucatán Peninsula, with production of approximately 300 thousand chickens per week and 100 thousand table egg laying hens, which allow us to reinforce our leadership in this region of the country.

 

·

In December 2006, the company starting operations at a new complex in the state of Sonora by acquiring the farms from and leasing the processing plant and feed mill of “Del Mezquital Alimentos” in accordance with our strategic plans.

 

·

In February 2007, the Company reached a business agreement with “Grupo Libra” a company located in northeast México. The agreement establishes a rent scheme of the facilities, which include breeders and chicken farms with a capacity of approximately 3.0 million chickens per cycle, along with a slaughter plant, and a processing center. In addition, Bachoco acquired all of Grupo Libra’s working capital and brands.

 

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Summary of Results of Operations

 

The following table sets forth selected components of our results of operations as a percentage of net revenues for each of the periods indicated:

 

		Year Ended December 31,
		2004			2005			2006
		(percentage of net revenues)
Net revenues			100.0	%		100.0	%		100.0	%
Cost of sales			(81.1	)		(71.9	)		(77.5	)
Gross profit			18.9			28.1			22.5
Selling, general and administrative expenses			(12.5	)		(12.8	)		(13.3	)
Operating income			6.4			15.2			9.2
Comprehensive financing (cost) income			(0.5	)		(0.5	)		0.4
Income tax, asset tax and employee profit sharing			(0.8	)		(2.4	)		(3.9	)
Net income			5.3			12.2			5.8

The following table sets forth, for each of the periods indicated, our net revenues of chicken, feed, eggs, swine and other products as a percentage of total net revenues in each period:

 

			Year Ended December 31,
			2004			2005			2006
			(percentage of net revenues)
Chicken			78.5	%		80.1	%		77.6	%
Feed			6.6	%		7.2	%		9.0	%
Eggs			10.9	%		8.7	%		9.2	%
Swine and Others			4.0	%		4.0	%		4.2	%
Total			100.0	%		100.0	%		100.0	%

Results of Operations for the Years Ended December 31, 2005 and 2006

 

General

 

In 2006, the Mexican economy showed signs of stability: GDP grew by 4.8%, an annual inflation was 4.1% and the peso-dollar exchange rates was reasonably stable with a final depreciation of 1.6% of the peso against the dollar at the end of the year, as compared to 2005.

 

According to UNA, the production volume of the Mexican chicken industry grew approximately 3.7% in 2006. Consumer preference for healthier products, income increases per capita, and chicken as a low-cost protein alternative to other meat sources, have all had a favorable effect on per capita poultry consumption in the country.

 

With respect to the egg industry, domestic production increased by almost 1.3%, which contributed to the excess supply in the market during the year.

 

We were able to increase our sales volume in all our main product lines. We sold our entire production and achieved an operating margin of 9.2%.

 

Net revenues

 

Consolidated net revenues during 2006 amounted to Ps.15.0 billion, compared to $15.1 billion reported in 2005 a 0.4% decrease. This was mostly due to decrease in the sales of chicken, our main product line.

 

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Our chicken sales decrease by 3.5% due to an decrease in price of 3.6%, while volume increased smoothly by 0.1%, mainly as a result of conditions going back to normal, compared to the previous year.

 

Our revenues from egg sales increased by 5.9% in 2006, as a result of a 3.9% price increase, and 1.9 % increase in volume, due to more stable supply and prices in the year throughout the industry.

 

In 2006, there was a significant growth in sales of 25.4% of balanced feed, while the volume achieved 24.3% compared to 2005. This was the result of focused strategies that Bachoco has implemented in this line of business.

 

We recognized Ps.10.5 million in our 2006 revenue as a result of fair valuing part of the Company’s inventories, see Note 2-i, and 4-b in our audited financial statements.

 

Cost of sales

 

The consolidated cost of sales in 2006 was Ps.11.6 billion, representing an increase over 2005 of Ps.0.79 billion, or 7.3%, as a result of higher costs in raw materials, particularly during the second half of the year.

 

Gross profit

 

Bachoco’s gross profit reached Ps.3.4 billion during 2006, a decrease of 20.2% compared with the previous year. Gross profit, as a percentage of net sales, was 22.5%, compared to 28.1% reached in 2005. The decline was mostly due to cost increase and a decrease in sales.

 

Sales, general and administrative expenses

 

Sales and administrative expenses in 2006 amounted to Ps.2.0 billion. This represents an increase of only 3.3% over 2005 and is mainly attributable to sales expenses due mainly to delivering product to more points of sales.

 

Operating income

 

Consolidated operating income in 2006 totaled Ps.1.4 billion, a decrease of 40% over the previous year’s results, largely due a lower gross profit and higher operating expenses. The operating margin for the year was 9.2% compared to 15.2% in 2005.

 

Comprehensive cost of financing

 

Comprehensive financing income (cost) represents the net effect of interest expense, interest income, foreign exchange gain (loss) and gain (loss) on net monetary position, which arises from the effect of inflation on the average net balance of monetary assets and liabilities. Comprehensive financing cost had a positive impact (gain) of Ps.59.2 million in 2006 compared with a cost of Ps. 71.3 million in 2005.

 

This change was due mainly to a net gain in foreign exchange of Ps. 39.1 million achieved through greater efficiency in buying US dollars needed for our normal operations and a larger net interest income due to higher level of cash, partially offset by a higher loss on net monetary positions since the inflation rate was higher in 2006.

 

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Other income, net

 

Other income, net represented a net gain of Ps.22.0 million in 2006 as compared to a net expense of Ps.21.7 million in 2005. Other income, net in both 2006 and 2005 was attributable mainly to sales of used equipment, income from government supports and miscellaneous services. It represented a net gain of Ps.22.0 million in 2006 as compared to a net expense of Ps.21.7 million in 2005. This variation was mainly due to better results of used equipment less amount of obsolete inventories and larger government supports.

 

Income before provision for income tax, asset tax, employee profit sharing

 

Income before provision for income tax, asset tax, employee profit sharing and cumulative effect of accounting change decreased in 2006, from Ps.2,199.0 million to Ps.1,455.9 million, due primarily to a decrease in operating income.

 

Net income

 

Net income for 2006 decreased to Ps.874.3 million compared to Ps.1,841.1 million reached in 2005. This result includes a Ps.324.2 million decrease due to deferred taxes as a result of rate changes in the taxation of the Mexican agricultural and livestock sector, in place as of 2007. This change had no effect on the Company’s cash flow.

 

Results of Operations for the Years Ended December 31, 2004 and 2005

 

General

 

In 2005, the Mexican economy showed signs of stability: GDP grew by 3.0%, the annual inflation increased by 3.3%, and the Mexican peso appreciated against the U.S. dollar by 4.9% at year-end.

 

According to UNA, the production volume of the Mexican chicken industry grew approximately 4.5% in 2005. This increase in supply in the chicken industry, combined with the stability of the Mexican economy, and a stable cost of main raw materials, resulted in an increase in our chicken prices, mostly during the first nine months of the year.

 

With respect to the egg industry, domestic production increased by almost 3.6%, which contributed to the excess supply in the market during the year.

 

In spite of a significant increase in the supply, we were able to increase our sales volume in all our main product lines; we sold our entire production and achieved an operating margin of 15.2%.

 

Net revenues

 

Consolidated net revenues during 2005 amounted to Ps.15.0 billion, an increase of Ps.0.8 billion (or 5.3%), from Ps.14.3 billion in 2004. This increase was mostly due to increases in the sales of all our main product lines, which resulted from increases in volume and prices of those lines.

 

Our chicken sales increased by 7.2% due to an increase in price of 1.6% and in volume of 5.5%. This increase was due mainly to productivity improvements achieved by the Company and the Sanjor acquisition in the second quarter of this past year.

 

Our revenues from egg sales decreased by 14.1% in 2005, as a result of a 15.7% price decrease, partially offset by an increase of 1.9% in sales volume. This reduction in price was mainly due to oversupply conditions in the Mexican market during most of the year.

 

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There was a significant growth in sales of 14.0% of balanced feed, while the volume achieved 21.5% compared to 2004. This was the result of focused strategies that Bachoco has implemented in this line of business.

 

We recognized Ps.27.1 million in our 2005 revenue as a result of fair valuing part of the Company’s inventories, see

Note 4-b.

 

Cost of sales

 

The consolidated cost of sales in 2005 was Ps.10.8 billion, representing a decrease over 2004 of Ps.08 billion, or 6.6%, as a result of lower costs of our main feed supplies compared to 2004, and also the Company’s ongoing efforts to improve efficiency in all its processes.

 

Gross profit

 

Bachoco’s gross profit reached Ps.4.2 billion during 2005, a significant improvement when compared with Ps.2.7 billion reached in 2004. Gross profit, as a percentage of net sales, was 28.1%, compared to 18.9% reached in 2004. The increase in our gross profit and profit margins resulted mainly from a decline in costs and an increase in volume sold.

 

Sales, general and administrative expenses

 

Sales and administrative expenses in 2005 amounted to Ps.1.9 billion. This represents an increase of only 8.3% over 2004. The increase was used to market and distribute the larger volume sold of our products. As a percentage of net revenues, selling, general and administrative expenses increased to 12.8% in 2005, compared to 12.5% in 2004.

 

Operating income

 

Consolidated operating income in 2005 totaled Ps.2.3 billion, an increase of 149.7% over the previous year, as a result of an increase in sales and a decrease in the cost of sales. The operating margin was 15.2% in 2005 compared to 6.4% in 2004.

 

Comprehensive cost of financing

 

Comprehensive cost of financing had negative impact (loss) of Ps.71.3 million, as a result of a foreign exchange loss, loss in the monetary position and financial expenses that were partially offset by larger financial products.

 

Other income, net

 

Other income net represented a net expense of Ps.21.6 million in 2005 as compared to a net income of Ps.33.2 million in 2004. Other income net in both 2005 and 2004 was attributable mainly to sales of used equipment, income from government supports and miscellaneous services.

 

Income before provision for income tax, asset tax, employee profit

 

Income before provision for income tax, asset tax, employee profit sharing and cumulative effect of accounting change increased more than double reached in 2004, from Ps.874.2 million in 2004 to Ps.2,198.9 million in 2005, due primarily to an increase in operating income.

 

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Net income

 

Net income for 2005 increased more than twice, to Ps.1,841.1 million compared to Ps.759.8 million in 2004. The increase was mainly due to better operating results. We increased our net income in 2005 by Ps.18.8 million derived from the elimination of goodwill amortization.

 

Income Tax, Asset Tax and Employee Profit Sharing, Year 2006

 

For a more detailed discussion on this topic, please see Note 14 of our Consolidated Financial Statements. We and each of our subsidiaries file individual tax returns and may be subject to different tax regimes. 

 

In December 2004, a reduction in the 33% general income tax rate was approved, so that the rate was 30% in 2005, and 29% in 2006 and will be 28% in 2007 and succeeding years.

 

The Simplified Regime taxed corporate income at a rate of 35% for 2002, with a gradual yearly decrease of one percent, until the tax rate was reduced to 29% in 2006; however, companies subject to the New Simplified Regime also received reductions on the above corporate rates, so that companies under this regime had an effective tax rate of 16% for 2004, 2005 and 2006.

As of January 1, 2006, the tax rate for taxpayers that pay income tax under the New Simplified Regime was determined by applying the reduction of 44.83% in 2006, to the regular income tax rates of 29%, resulting in the fixed rate of 16%.

In 2006 changes were made to Mexican Law that will increase the tax rate from 16% to 19% for 2007. This charge resulted in a charge of Ps.324.2 millions to income, reflected in deferred taxes.

 

In addition to income tax, we, along with our subsidiaries, are also subject to an alternative minimum tax known as “asset tax,” which is assessed on the average value of most assets, net of certain liabilities. The general asset tax rate is 1.8%; BSACV is subject to a 0.9% rate pursuant to the New Simplified Regime (unchanged from the Simplified Regime). We benefit from special rules that exclude a number of assets from the asset tax and from tax incentives in connection with certain of our investments. We (together with our subsidiaries) are subject to asset tax if the amount of asset tax exceeds the computed income tax liability. Asset tax can be credited against income tax in subsequent years (up to ten years). The asset tax in 2004, 2005 and 2006 amounted to Ps.13.7 millions, Ps.20.6 million and Ps.27.2 million, respectively. In each of the three years we credited against these amounts the income tax paid in such years of Ps.11.5 million, Ps.17.6 million and Ps.24.8 million, respectively.

 

As of December 31, 2006, we had Ps.13.4 million in asset tax credits.

 

In 2006, we recognized a total income tax and asset tax charge of Ps.577.4 million, compared to a total income and asset tax charge of Ps.354.5 million in 2005 and Ps.111.2 million in 2004, due to larger deferred tax due to the tax rate increase for 2007. (See Note 14 of the Financial Statements).

 

Neither Industrias Bachoco, S.A.B. de C.V. nor BSACV have employees, but each of our other subsidiaries is required under Mexican law to pay employees, in addition to their compensation and benefits, profit sharing in an aggregate amount equal to 10% of such subsidiary’s taxable income subject to certain adjustments. (See Note 14-e of the Financial Statements).

 

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Liquidity and Capital Resources

 

Our working capital (current assets less current liabilities) increased year-over-year from Ps.4.9 billion on December 31, 2005 to Ps.5.5 billion on December 31, 2006. We believe that our working capital is sufficient for our present requirements.  The ratio of current assets to current liabilities on December 31, 2006 was 5.9.

 

Cash and cash equivalents were Ps.3.5 billion on December 31, 2006, representing an increase of Ps.157.9 million from the previous year primarily due to cash generated by operations. 

 

Inventories were Ps.2.1 billion as of December 31, 2006, representing an increase of Ps.438.8 million from the previous year.

 

Total debt, including the current portion of long-term debt, equaled Ps.43.6 million as of December 31, 2006, a decrease of Ps.106.9 million from December 31, 2005.

 

Stockholders’ equity increased to Ps.13.6 billion on December 31, 2006 from Ps.13.0 billion on December 31, 2005.

 

Long-term debt on December 31, 2006 represented 0.3% of our capitalization, as compared to 0.4% on December 31, 2005.

 

In 2006, capital investments amounted to Ps.863.2 million, all of which were financed from resources generated from our own operations. These capital investments were used mainly to finance productivity projects, production growing capabilities and infrastructure maintenance to keep facilities in good operating conditions.

 

We are a holding company with no significant operations of our own. We will have distributable profits and cash to pay dividends only to the extent that we receive dividends from our subsidiaries, principally BSACV. The amount of dividends payable by our subsidiaries and us is also subject to general limitations under Mexican corporate law.

 

We expect to finance our capital expenditures and debt service obligations from our current liquidity and capital resources, cash flows and from additional borrowings from our existing sources of debt financing, although we will also consider other sources of debt financing if they are available on advantageous terms. For a discussion of our use of hedging instruments, please see Item 8 below.

 

Our major categories of indebtedness included the following:

 

·

As of December 31, 2006, we did not have notes payable to banks.

 

·

Long-term debt to banks, as of December 31, 2006, was Ps.34.2 million outstanding (excluding current portion). The weighted average interest rate on long-term debt was 9.26%.

 

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The following table summarizes certain contractual liabilities as of December 31, 2006. The table does not include short-term debt, accounts payable or pension liabilities.

 

Payments Due by Period (millions of constant pesos as of December 31, 2006)

Contractual Obligations

Total

2008

2009

2010

2011

2012

Long-term debt

Ps.34.3

Ps. 10.1

Ps. 11.9

Ps. 12.3

Ps.0.0

Ps.0.0

Operating leases

63.8

18.1

14.6

11.3

10.3

9.5

Total

Ps.98.1

Ps. 28.2

Ps. 26.5

Ps. 23.6

Ps.10.3

Ps.9.5

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements of the type that we are required to disclose under Item 5.E of Form 20-F.

 

Reconciliation to U.S. GAAP

 

The principal differences between Mexican GAAP and U.S. GAAP, as they relate to us, concern (i) deferred income taxes, (ii) capitalization of financing costs, (iii) biological assets and agricultural products valuation at fair value, and (iv) the amortization of goodwill. Goodwill amortization is not required for fiscal years beginning January 2005, due to the new Statement B-7 issued by the Mexican Institute of Public Accountants (see Note 17 to the Consolidated Financial Statements for a detailed description). Each of these differences also affects our balance sheet.

 

Our consolidated net income under U.S. GAAP was Ps.796.0 million in 2004, Ps.1,824.8 million in 2005 and Ps.863.1 million in 2006, compared to Ps.759.8 million, Ps.1,841.1 million and Ps.874.3 million, respectively, under Mexican GAAP. For further explanation, please see Note 17 to the Consolidated Financial Statements.

 

Bachoco has applied Statement of Financial Accounting Standards (SFAS) No.109, Accounting For Income Taxes, for all periods presented. In the Company’s case the application of the rule did not generated a reconciling difference in 2004, 2005 and 2006, therefore, there is no difference between Mexican and US GAAP in those years.

 

The Company also adopted the requirements of Statement 144 on January 1, 2002 and has not identified any impairment adjustments to the carrying value of its long lived assets. 

 

Use of Estimates in Certain Accounting Policies

 

In preparing our financial statements, we make estimates concerning a variety of matters. Some of these matters are highly uncertain, and the estimates involve judgments based on the information available to us. The discussion below identifies matters for which the financial presentation would be materially affected (a) if we relied on different estimates that we could reasonably use, or (b) if in the future we change our estimates in response to changes that are reasonably likely to occur.

 

The discussion below addresses only those estimates that we consider most important based on the degree of uncertainty and the likelihood of a material impact if we used a different estimate. There are many other areas in which we use estimates about uncertain matters, but the reasonably likely effect of changed or different estimates would not be material to our financial presentation.

 

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Estimated Useful Lives of Property, Plant and Equipment

 

We estimate the useful lives of our property, plant and equipment in order to determine the amount of depreciation expense to be recorded in each period. The current estimates of useful lives are based on estimates made by an independent appraiser in 1996. Those estimates have been adjusted when applicable, based on historical experience with similar assets that we own. Accumulated depreciation expense for property, plant and equipment in 2006 amounted to Ps.6,037.2 million. As applied to our 2006 financial results, the depreciation was Ps.517.9 million, or 3.5% of our net revenues. For further explanation, see Notes 2 and 5 to the Consolidated Financial Statements.

 

Allowance for Productivity Declines

 

In estimating the inventory value of our breeder birds, swine and layers, we make allowances for productivity declines. We estimate such allowances based on expected future production and deduct them from inventories. The estimates of future production are based on standards for the breeder line and the performance of the most recent flocks. We refer to the standards provided by the company that sells us the breeder line in question. Each company that sells breeder lines publishes its own particular standards for its proprietary breeder line.

 

Inventory Valuation

 

Since January 1, 2003, for Mexican GAAP purposes, our inventories are valued using market prices. According to Bulletin E-1, biological assets and agricultural products (the latter at the time of their harvesting) are to be valued at their fair value, net of estimated costs at point of sale. Also, the Bulletin establishes that, whenever the fair value cannot be determined in a reliable, verifiable and objective manner, the assets are to be valued at their production cost, net of accumulated impairment.

 

Poultry being fattened (less than 6.5 weeks old), incubatable eggs, pigs and laying hens, are valued at production cost since it is not possible to determine their fair value in a reliable, verifiable and objective manner.

 

Poultry being fattened from age 6.5 weeks to the time birds are ready for sale is valued at fair value net of estimated costs at point of sale, considering the sales price per kilogram of processed chicken at the date of valuation.

 

Laying hens are depreciated based on eggs produced using an estimated factor for productive useful life.

 

Processed chicken and commercial eggs are valued at their fair value net of costs at point of sale, considering the sales price per kilogram of processed chicken and commercial eggs at the time such items are considered agricultural products; from this date, the valuation is considered to be cost up to the time of sale, not in excess of net realizable value.

 

For more details, see “Inventories and biological assets” in Note 4 of the Consolidated Financial Statements.

 

Allowance for Doubtful Accounts

 

We periodically and systematically review the aging and collection of our accounts receivable. As a result of this procedure, we set up an allowance for doubtful accounts of Ps.30.7 million in 2006 that represents 0.2% of our total annual sales. See Note 2-h of our Consolidated Financial Statements.

 

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Pension Plan

 

Pension benefits are based on the salary of workers in their final three years of service, the number of years worked and their age at retirement. See note 2-o in our Consolidated Financial Statements.

 

ITEM 6.

Directors, Senior Management and Employees

 

Directors

 

The Board of Directors is responsible for the management of our business. The Board of Directors consists of an odd number of directors, never fewer than five, and corresponding alternate directors, each of whom is elected for a term of one year.

 

Before September 2006, holders of Series B Shares elected directors and alternate directors at a general ordinary stockholders’ meeting, while holders of Series L Shares had the right to appoint or elect two directors and two alternate directors to the Board of Directors.

 

Since September 2006, we have only Series B Shares with full voting rights.

 

Alternate directors are authorized to serve on the Board of Directors in place of directors who are unable to attend meetings or otherwise participate in the activities of the Board of Directors

 

The following table identifies our directors, alternate directors, Honorary Chairman of the board and Secretary of the board as of June 2006, their positions and their years of service:

 

Name		Position		Years as a Member of the Board of Director
Enrique Robinson Bours Almada		Honorary Chairman of the board		53
Francisco Javier R. Bours Castelo		Chairman of the board and Proprietary Shareholder Director		25
Cristóbal Mondragón Fragoso		Secretary of the Board		11
Mario Javier Robinson Bours Almada		Proprietary Shareholder Director		53
Juan Bautista Salvador Robinson Bours		Proprietary Shareholder Director		53
Arturo Bours Griffith		Proprietary Shareholder Director		13
Jesús Enrique Robinson Bours Muñoz		Proprietary Shareholder Director		13
Ricardo Aguirre Borboa		Proprietary Shareholder Director		13
Octavio Robinson Bours Griffith		Proprietary Shareholder Director		10
Jesús Rodolfo Robinson Bours Muñoz		Proprietary Shareholder Director		5
José Eduardo Robinson Bours Castelo		Alternate Director		13
Juan Salvador Robinson Bours Martínez		Alternate Director		13
José Francisco Robinson Bours Griffith		Alternate Director		13
Guillermo Pineda Cruz		Alternate Independent Director		13
Avelino Fernández Salido		Independent Director		4
Humberto Schwarzbeck Noriega		Independent Director		4

 

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Enrique Robinson Bours, Mario Javier Robinson Bours and Juan Bautista Salvador Robinson Bours are brothers. Francisco Javier R. Bours Castelo and José Eduardo Robinson Bours Castelo are sons of Mario Javier Robinson Bours. Arturo Bours Griffith, José Francisco Bours Griffith and Octavio Robinson Bours are nephews of Enrique Robinson Bours, Mario Javier Robinson Bours and Juan Bautista Salvador Robinson Bours. Jesús Enrique Robinson Bours Muñoz and Jesús Rodolfo Robinson Bours Muñoz are sons of Enrique Robinson Bours. Juan Salvador Robinson Bours Martínez is the son of Juan Bautista Salvador Robinson Bours. Guillermo Pineda Cruz is the son-in-law of Enrique Robinson Bours, and Ricardo Aguirre Borboa is the son-in-law of Juan Bautista Salvador Robinson Bours.

 

Our bylaws provide for the creation of an executive committee of the Board of Directors, which may exercise certain of the board’s powers in full, subject to certain limitations.

 

In April 2002, we announced the retirement of Mr. Enrique Robinson Bours Almada, Chairman of the board and co-founder of the Company. Mr. Bours led the Company for 50 years. The board named as his successor Mr. Javier Robinson Bours Castelo, Mr. Enrique Robinson Bours’s nephew. Mr. Bours Castelo has been at Bachoco for 25 years as a member of the board and served as Vice-Chairman for nine years. Mr. Bours Castelo was named Chairman of the board in 2002.

 

In order to fully comply with current Mexican Corporate and Securities Market Laws as well as other recent regulatory amendments in the various markets in which Bachoco’s Shares are traded, we appointed a new Board of Directors at our ordinary stockholders’ meeting held on April 30, 2003. We ratified our Board of Directors at our stockholders’ meeting held on April 25, 2007.

 

Our board, as of June 2007, is composed of the following members:

 

Proprietary Shareholder Directors:

Francisco Javier R. Bours Castelo

Mario Javier Robinson Bours Almada

Juan Bautista S. Robinson Bours Almada

Jesús Enrique Robinson Bours Muñoz

Jesús Rodolfo Robinson Bours Muñoz

Arturo Bours Griffith

Octavio Robinson Bours Griffith

Ricardo Aguirre Borboa

Alternate Directors:

José Eduardo Robinson Bours Castelo

Juan Salvador Robinson Bours Martínez

José Francisco Robinson Bours Griffith

Guillermo Pineda Cruz

Independent Directors:

Avelino Fernández Salidos

Humberto Schwarzbeck Noriega

Life Honorary Chairman of the Board:

Enrique Robinson Bours Almada

 

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Francisco Javier R. Bours Castelo, Chairman of the Board of Directors, has been a member of the board for 25 years, and has been Chairman since April 2002. Before that, he was Vice-Chairman for several years. Mr. Bours holds a degree in Civil Engineering from the Instituto Tecnológico y de Estudios Superiores Monterrey (ITESM). He currently serves as Chairman of the boards of directors of the following companies: Grupo Megacable, S.A. de C.V., Congeladora Horticola, S.A. de C.V., Inmobiliaria of Trento S.A. de C.V., Acuicola Boca S.A. de C.V., Agriexport S.A. de C.V., Industrias Boca, S.A. de C.V., and Promotora Empresarial del Noroeste, S.A. de C.V.

 

Mario Javier Robinson Bours Almada, Proprietary Shareholder Director, has been a member of the board for 53 years, and is a co-founder of Industrias Bachoco S.A.B. de C.V.

 

Juan Bautista S. Robinson Bours Almada, Proprietary Shareholder Director, has been a member of the board for 53 years and is a co-founder of Industrias Bachoco S.A.B. de C.V.

 

Jesús Enrique Robinson Bours Muñoz, Proprietary Shareholder Director, has been a member of the board for 13 years, having previously served as Production Director and Divisional Manager. Mr. Robinson Bours holds a degree in Engineering from the University of Arizona. He is also a member of the Board of Directors of San Luis Corporación S.A. de C.V., and Megacable S.A. de C.V.

 

Jesús Rodolfo Robinson Bours Muñoz, Proprietary Shareholder Director, has been a member of the board for 5 years. Mr. Robinson Bours previously served in the Company as Production Manager in the Northwest and Bajio divisions, Commercial Manager in Northwest Division and Purchasing Manager at the Bajio Division. Mr. Robinson Bours holds a degree in Agricultural Engineering from the University of Arizona. He has business experience in agriculture and raising livestock with Agrícola Monte Cristo S.A. de C.V., Agrícola Río Yaqui S.P.R. de R.L., Agrícola Nacapul S.P.R. de R.L. and Ganadera Cocoreña S.P.R. de R.L.

 

Arturo Bours Griffith, Proprietary Shareholder Director, has been a member of the board for 13 years. Mr. Bours Griffith completed professional studies at the University of Arizona. He is also Chairman of the board of Qualyplast, S.A. de C.V., and a member of the board of Megacable, S.A. de C.V., Promotora Empresarial del Noroeste, S.A. de C.V., and Taxis Aereos del Noroeste, S.A. de C.V.

 

Octavio Robinson Bours Griffith, Proprietary Shareholder Director, has been a member of the board for 10 years. Mr. Robinson Bours holds a degree in Agricultural Engineering from the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). He has experience in producing swine, and is also a member of the board of Choya, S.A. de C.V., and Granos Santa Fe, S.A. de C.V.

 

Ricardo Aguirre Borboa, Proprietary Shareholder Director, was also an Independent Director until April 2007. Mr. Aguirre has been a member of the board for 13 years. He is also a member of the Board of Directors of the newspaper El Debate and he holds a degree in Agricultural Engineering from the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). He has experience in agriculture and pork production. Mr. Aguirre Borboa is also member of the board of Gasolinera Servicios del Valle del Fuerte S.A. de C.V., Periódico el Debate de los Mochis, and Tepeyac Produce, Inc.

 

José Eduardo Robinson Bours Castelo, Alternate Director, has been a member of the board for 13 years. Mr. Robinson Bours holds a degree in Industrial Engineering from the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). He was previously Commercial Director of Industrias Bachoco, a Senator of the Mexican Congress and is currently governor of the state of Sonora.

 

Juan Salvador Robinson Bours Martínez, Alternate Director, has been a member of the board for 13 years, and has served Bachoco as Purchasing Manager. Mr. Robinson Bours holds a degree in Industrial Engineering from the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). His other appointments include Chairman of the board and CEO of Llantas y Accesorios, S.A. de C.V.

 

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José Francisco Robinson Bours Griffith, Alternate Director, has been a member of the board for 13 years. He holds a degree in Civil Engineering from the Universidad Autónoma de Guadalajara. Mr. Robinson Bours has worked at Bachoco as Engineering Manager, and is currently dedicated to agricultural operations.

 

Guillermo Pineda Cruz, Alternate Director, has been a member of the board for 13 years. He is also a member of the Board of Directors of Banamex and was a regional member of the Board of Directors of Grupo Financiero Serfín, Inverlat and Inverméxico. Mr. Pineda holds a degree in Civil Engineering from the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM) and a master’s degree in Business Administration from the Instituto Tecnológico. y de Estudios Superiores de Sonora (ITSON). He co-founded Edificadora Pi-Bo, S.A. de C.V. in 1983 and is its President and CEO.

 

Avelino Fernández Salido, Independent Director, was named a member of the board on April 30, 2003. He is also a member of the board of Banco Nacional de México, BBVA Bancomer, and Banca Serfín. His business experience is in the marketing of grains.

 

Humberto Schwarzbeck Noriega, Independent Director, was named a member of the board on April 30, 2003. He holds a degree in economics from the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). He is currently CEO of Yeso Industrial de Navojoa S.A. de C.V. and Chairman of the Board of Promotora de Manufacturas S.A. de C.V.

 

Executive Officers

 

Our executive officers as of December 31, 2006 are set forth in the table below:

 

Name		Position		Age
Cristóbal Mondragón Fragoso		Chief Executive Officer		61
Daniel Salazar Ferrer		Chief Financial Officer		42
David Gastélum Cazares		Director of Sales		55
José Luis López Lepe		Director of Personnel		59
Rodolfo Ramos Arvizu		Technical Director		49
Ernesto Salmón Castelo		Director of Operations		45
Andres Morales Astiazaran		Director of Marketing and Value-added Products		38

Cristóbal Mondragón Fragoso, Chief Executive Officer and Secretary of the Board of Directors, joined us in 1982 and assumed his current position in 2001. Previously, Mr. Mondragón served as Administration Manager, as Manager of Corporate Finance and as Chief Financial Officer. Before joining us, Mr. Mondragón worked as an accountant for three years. Later he joined La Hacienda, S.A. de C.V., where he held the positions of Auditor, Accountant, Head of Processing Systems, Audit Manager, Administration Manager and Comptroller. Mr. Mondragón holds an Accounting degree from Universidad Nacional Autónoma de México (UNAM).

 

Daniel Salazar Ferrer, Chief Financial Officer, joined us in 2000 and assumed his current position in January 2003. Previously, Mr. Salazar worked for four years as Chief Financial Officer at Grupo Covarrubias and as Comptroller at Negromex, a company of Grupo Desc. Mr. Salazar holds an Accounting degree from Universidad Tecnológica de México and a master’s degree in Business Administration from Instituto Tecnológico de Estudios Superiores de Monterrey (ITESM).

 

David Gastélum Cazares, Director of Sales, joined us in 1979 and assumed his current position in 1992. Previously, Mr. Gastélum served as a pullet salesman in the states of Sonora and Sinaloa, National Sales Manager of Live Animals and Eggs, Manager of the Northwest Division, Manager of the México City Division and National Sales Manager. Before joining us, Mr. Gastelúm worked at La Hacienda, S.A. de C.V. as Technical Advisor and as Area Officer for the Southeast Division. Mr. Gastélum holds a degree in Veterinary Medicine from the school of Veterinary Medicine of Universidad Nacional Autónoma de México (UNAM).

 

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José Luis López Lepe, Director of Personnel, joined us in 1993. Previously, Mr. López worked as a teacher in several institutions as well as with Grupo Condumex, where he was Director of Personnel. Mr. López holds a degree in Physics and Chemistry from the Escuela Normal Superior and a degree in Business Administration from Instituto Tecnológico Autónomo de México.

 

Rodolfo Ramos Arvizu, Technical Director, joined us in 1980. Previously, Mr. Ramos held positions in the Egg Quality Control Training Program and in Poultry Management as well as serving as Supervisor of the Commercial Egg Production Training Program, Manager of Raw Material Purchasing and as a Director of Production. Mr. Ramos holds a degree in Agricultural Engineering from Instituto Tecnológico de Estudios Superiores de Monterrey (ITESM).

 

Ernesto Salmón Castelo, Director of Operations, joined us in 1991 and assumed his current position in 2000. Previously, Mr. Salmón worked for Gamesa, S.A. de C.V. and for us as Sales Manager in Sonora, Northwestern Distribution Manager, Manager of the Processing Plant in Celaya, Southeastern Division Manager and Bajio Division Manager. Mr. Salmón holds a degree in Chemical Engineering from Instituto Tecnológico de Sonora and a master’s degree in Business Administration from Instituto Tecnológico de Estudios Superiores de Monterrey (ITESM).

 

Andrés Morales Astiazaran, Director of Marketing and Value-added Products since July 2006. Before join us, Mr. Morales worked during 4 years as Sales and Marketing Vice President in Smithfield Foods a U.S. Company with offices in Sonora, Mexico. Previously Mr. Morales worked for Bachoco as Marketing Manager, Manager of the Northeast division and then as National Manager of Bachoco. Mr. Morales holds an accounting degree from Instituto Tecnológico de Monterrey (ITESM) and marketing courses by the universities of Northwestern University (Kellog), University of Chicago, ITESM and the IPADE (D1).

 

Statutory Auditor

 

According with the Mexican market security law, the Statutory Auditor is not required for public companies since June 2006. The activities of the Statutory Auditor will be performed by the Audit Committee.

 

Audit Committee

 

In January 2001, a Mexican Commission of Business Leaders (Consejo Coordinador Empresarial), with the support of the Comisión Nacional Bancaria y de Valores (Mexican Banking and Securities Commission, or “CNBV”), issued a Código de Mejores Prácticas Corporativas (“Code of Best Practices”) for publicly traded Mexican companies, recommending certain actions with respect to various areas of corporate governance. Subsequently, the Securities Market Law was amended, effective June 2006, to require that all publicly traded Mexican companies have an audit committee.

 

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The mandate of the Audit Committee is to establish and monitor procedures and controls in order to ensure that the financial information we distribute is useful, appropriate and reliable and accurately reflects our financial position. In particular, pursuant to our bylaws and Mexican law, among others, the Audit Committee must do the following:

 

(a)	Submit an annual report to the Board of Directors;

 

(b)	Provide the Board of Directors with its opinion on the matters that pertain to the Auditing Committee, in accordance with the Securities Market Law;

 

(c)	Inform the Board of Directors of the current condition of the internal controls and internal auditing system of the Company or of the entities it controls, including any irregularities detected;

 

(d)	Require the relevant directors and other employees of the Company, or of the entities it controls, to provide reports relative to the preparation of the financial information or any other kind of reports or information it deems appropriate to perform its duties;

 

(e)	Receive observations formulated by shareholders, Board members, relevant officers, employees and, in general, any third party with regard to the matters under his duties, as well as carry out the actions that, in its judgment, may be appropriate in connection with such observations;

 

(f)	Inform the Board of Directors of any material irregularities detected as a result of the performance of its duties and, as applicable, inform the Board of Directors of the corrective actions taken, or otherwise propose the actions that should be taken;

 

(g)	Call Shareholders Meetings and cause the items it deems pertinent to be inserted into the agendas of such Shareholders’Meetings, and

 

(h)

Assist the Board of Directors in selecting candidates for audit and reviewing the scope and terms of the auditor’s engagement, as well as evaluate the performance of the entity that provides the external auditing services and analyze the report, opinions, statements and other information prepared and signed by the external auditor.

 

In order to fully comply with current Mexican Corporate and Securities Market Laws as well as other recent regulatory amendments in the various markets in which Bachoco’s Shares are traded, we named an audit committee during our annual ordinary stockholders’ meeting on April 30, 2003.

 

There were changes in the audit committee during the ordinary stockholder’s meeting held on April 25, 2007; Mr. Francisco Javier R. Bours Castelo is no longer member of the audit committee and the audit committee is now comprised for the following members:

 

Avelino Fernández Salido (President)

Humberto Schwarzbeck Noriega

Ricardo Aguirre Borboa

 

Mr. Ricardo Aguirre Borboa represents the controlling shareholders and has no voting rights in the audit committee.

 

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Compensation of Directors and Officers

 

For the year ended December 31, 2006, we paid approximately Ps.30.3 million in aggregate compensation to our directors and executive officers, for services they rendered in their respective capacities.

 

Board Practices

 

In 2001, we began to review our board practices to bring them into compliance with the recent requirements for companies listed on the Mexican Stock Exchange. As a result of this review, we have changed the composition of our board and appointed an audit committee. See “Directors” and “Audit Committee.”

 

Employees

 

As of December 31, 2004, 2005 and 2006, we had approximately 18,896, 20,432 and 21,035 employees, respectively.

 

In 2006, approximately 78% of our employees were members of labor unions. Labor relations with our employees are governed by 59 separate collective labor agreements, each relating to a different group of employees and negotiated on behalf of each such group by a different labor union. As is typical in México, wages are renegotiated every year while other terms and conditions of employment are renegotiated every two years. We seek to attract dependable and responsible employees to train at each of our plants and facilities. We offer our employees attractive salary and benefit packages, including a pension and savings plan.

 

We believe that we have good relations with our employees. We have not experienced significant work stoppages as a result of labor problems.

 

Share Ownership

 

To the best of our knowledge, no individual director or managers holds share ownership of more than one percent our Shares. At this time, we have not developed a share options plan for our employees.

 

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Comparison of our Corporate Governance Rules and the Rules of the NYSE Applicable to U.S. Companies

 

On November 4, 2003, the SEC approved the final corporate governance rules of the NYSE. According to such rules, foreign private issuers are subject to a more limited set of requirements regarding corporate governance than those imposed on U.S. domestic issuers. As a foreign private issuer, we must comply with four rules imposed by the NYSE:

 

·	prior to July 31, 2005, we must comply with the requirements set forth by the SEC concerning audit committees;

 

·	we must submit an annual Written Affirmation to the NYSE and an Interrim Written Annual Affirmation each time a change occurs in the Board of Directors or the Audit Committee.

 

·	our CEO must promptly notify the NYSE in writing after any executive officer becomes aware of any material non-compliance with any of the applicable NYSE corporate governance rules; and

 

·	we must provide a brief description disclosing any significant ways in which our corporate governance practices differ from those followed by U.S. companies under NYSE listing standards.

A brief description disclosing the significant ways in which our corporate governance practices differ from those followed by U.S. companies under NYSE listing standards is available in our webpage www.bachoco.com.mx/english/inversionistas/corporate.asp.

 

ITEM 7.

Major Stockholders and Related Party Transactions

 

Before September 2006, our Common Stock consisted of 450,000,000 Series B Shares and 150,000,000 Series L Shares. Holders of Series B Shares were entitled to one vote at any general meeting of our stockholders for each Series B Share held. Holders of Series L Shares were entitled to one vote for each Series L Share held, but only with respect to certain matters. We had UBL units consisting of one Series B Share and one Series L Share and UBB units consisting of two Series B Shares.

 

During the extraordinary meeting hold on April 26, 2006 Shareholders approved the Company’s a plan to convert the Series L Shares into Series B Shares, with full voting rights, as well as the dissolution of UBL and UBB units into their components Shares.

 

This process was completed in September 2006, and included two steps: separating the UBL and UBB units trading on the Mexican Exchange into their component Shares and converting the Series L Shares into Series B Shares, thereby creating a single share class, the Series B Shares. These Shares are trading on the Mexican stock market. The ADS which trade on the NYSE still consist of twelve underlying Shares, but they are all Series B Shares, with full voting rights.

In April 1995, the Robinson Bours Stockholders created the Control Trust to hold certain Units owned by members of the Robinson Bours family. The Robinson Bours Stockholders, through the Control Trust and a separate trust established in connection with our 1997 initial public offering (the “Family Trust”). 

 

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Before September 2006, the Control Trust and the Family Trust was:

 

Title of Class		Identity of Group			Amount Owned			Percent of Class
Series B(1)			Control Trust and Family Trust			398,250,000			88.5	%
Series L(2)			Control Trust and Family Trust			98,250,000			65.5	%
All Classes(3)			Control Trust and Family Trust			496,500,000			82.8	%

 

(1)	Percentage is based on 450,000,000 Series B Shares, including 300,000,000 Shares not registered under Section 12 of the Securities and Exchange Act of 1934.

(2)	Percentage is based on 150,000,000 Series L Shares.

(3)	Percentage is based on 600,000,000 Shares.

  

As of December 31, 2006 the Control Trust and the Family Trust owned 496,500,000 Shares outstanding, (82.75%), all Series B Shares.

 

Apart from the ownership set forth above, at the end of March 2007, Fidelity Low Priced Stock Fund and Fidelity Management & Research Co. each own 5.0% of our Common Stock.

 

In November 1998, in accordance with rules established by the CNBV, we established a reserve in the amount of Ps.180.0 million (Ps.292.9 million in constant pesos as of December 31, 2006 purchasing power) for the repurchase of Shares. At the end of 2006, the Company had repurchased zero Shares.

 

During our stockholders’ meeting of April 25, 2007, we capped the share repurchase program for 2007 to a maximum amount of Ps.321.6 million. As of May 24, 2007, we had repurchased zero Shares.

 

The following table sets the percentages of the Shares held in México and in all other countries as of December 31, 2006.

 

Year		Amount Owned
México			85.2	%
Other Countries			14.8	%

 

From the 100% of the total Shares of the Company we accounted for approximately 45 shareholders in the NYSE and 81 in the BMV.

 

Interest of Management in Certain Transactions

 

It is our policy not to engage in any transaction with or for the benefit of any stockholder or member of the Board of Directors, or any entity controlled by such a person or in which such a person has a substantial economic interest, unless (i) the transaction is related to our business and (ii) the price and other terms are at least as favorable to us as those that could be obtained on an arm’s-length basis from a third party.

 

We have engaged in a variety of transactions with entities owned by members of the Robinson Bours family, all of which we believe were consistent with this policy and not material to our business and results of operations. All of these transactions are described below. See Note 3 to the Consolidated Financial Statements. We expect to engage in similar transactions in the future.

 

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We regularly purchase vehicles and related equipment from distributors owned by various members of the Robinson Bours family. The total amount spent on such purchases was Ps.40.6 million, Ps.56.4 million and Ps.61.1 million for the years ended December 31, 2004, 2005 and 2006, respectively. The distribution of vehicles and related equipment is a highly competitive aspect of business in the areas in which we operate. We are not dependent on affiliated distributors and are able to ensure that the pricing and service we obtain from affiliated distributors are competitive with those available from other suppliers.

 

The Robinson Bours Stockholders own Taxis Aéreos del Noroeste, S.A. de C.V. (“TAN”), an air transport company that provides transportation for members of the Board of Directors to and from meetings at our headquarters in Celaya. We paid TAN Ps.2.9 million, Ps.4.5 million and Ps.4.0 million for the years ended December 31, 2004, 2005 and 2006, respectively, for such transportation.

 

We purchased feed and packaging materials from enterprises owned by the family of Enrique Robinson Bours and the family of Juan Bautista Robinson Bours. The cost of such purchases was Ps.210.7 million, Ps.187.0 million and Ps.242.8 million for the years ended December 31, 2004, 2005 and 2006, respectively.

 

Our accounts payable to related parties totaled Ps.6.4 million and Ps.12.2 million as of ended December 31, 2005 and 2006, respectively. These transactions took place among companies owned by the same set of stockholders. See Note 3 to the Consolidated Financial Statements.

 

Neither we nor our subsidiaries have loaned any money to any of our directors or officers, controlling shareholders or entities controlled by these parties.

 

ITEM 8.

Financial Information

 

Our Consolidated Financial Statements are included in Item 18. The financial statements were audited by an independent registered public accounting firm and are accompanied by an audit report.

 

The financial statements include a consolidated balance sheet, consolidated statements of income, consolidated statements of changes in stockholders’ equity, and consolidated statements of changes in financial position and Notes relating to the Consolidated Financial Statements.

 

The Consolidated Financial Statements have been prepared in accordance with Mexican GAAP, which differs in certain respects from U.S. GAAP. Note 17 to the Consolidated Financial Statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to us and a reconciliation to U.S. GAAP of total stockholders’ equity, operating income and net income, a consolidated statement of changes in stockholders’ equity and a condensed cash flow statement under U.S. GAAP as of December 31, 2005 and 2006, and for the years ended December 31, 2004, 2005 and 2006.

 

Legal Proceedings

 

We are a party to certain legal proceedings in the ordinary course of our business. We believe that none of these proceedings, individually or in the aggregate, is likely to have a material adverse effect on us.

 

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Dividends Policy

 

Pursuant to Mexican law and our bylaws, the declaration, amount and payment of annual dividends are determined by a majority vote of the shareholders, generally but not necessarily on the recommendation of the Board of Directors.

 

We declared and paid dividends in nominal pesos of Ps.238.9 million in 2004, Ps.239.1 million in 2005 and Ps.353.9 million in 2006.

 

Although there can be no assurance as to the amount or timing of future dividends, we expect to pay an annual dividend pro rata to holders of outstanding Shares in an amount up to approximately 20% of the prior year’s net income. The declaration and payment of dividends will depend on our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors and the shareholders, including debt instruments which may limit our ability to pay dividends.

 

Because we are a holding company with no significant operations of our own, we will have distributable profits and cash to pay dividends only to the extent that we receive dividends from our subsidiaries, principally BSACV. Accordingly, there can be no assurance that we will pay dividends or of the amount of any such dividends. BSACV, our principal operating subsidiary, could, in the future, enter into loan agreements containing covenants whose terms limit its ability to pay dividends under certain circumstances.

 

Mexican law requires that 5% of our net income each year (after profit sharing and other deductions required by Mexican law) be allocated to a legal reserve fund until such fund reaches an amount equal to at least 20% of our capital stock. Mexican corporations may pay dividends only out of earnings (including retained earnings after all losses have been absorbed or paid up) and only after such allocation to the legal reserve fund. The level of earnings available for the payment of dividends is determined under Mexican GAAP.

 

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Significant Changes in Accounting Practices

 

Treatment of biological assets

 

On January 1, 2003, the Company adopted the requirements of the new Bulletin E-1 under Mexican GAAP. The Bulletin changes the way biological assets, including animals like chicken and swine, are treated under Mexican GAAP. Starting in January 2003, changes in the fair market value of these assets must be included as a potential profit in a company’s financial statements before they are harvested. We have to estimate the potential profit for these animals at a reasonable market price minus expected costs and operating expenses. That estimate may be higher or lower than the actual profits realized. The effect of Bulletin E-1 may be positive or negative for any particular period, depending on the price and inventories of animals in that period. For a more detailed description please see Note 2-i and Note 4 to our Consolidated Financial Statements.

 

Business acquisitions

 

Goodwill represents the difference between the purchase price and the fair value of the net assets acquired at the purchase date.

 

On January 1, 2005, we adopted the requirements of Mexican accounting bulletin B-7, Business Acquisitions, issued by the Mexican Institute of Public Accountants. The Company has valued all of its business acquisitions using the purchase method and, since 2005, no longer amortizes its goodwill. Through December 31, 2004, goodwill was being amortized using the straight-line method over a twenty-year period. See Note 2-l to our Consolidated Financial Statements.

 

Financial instruments

 

In order to reduce our financial risks, we use derivative financial instruments as hedges against certain risks. As of January 1, 2005, due to the adoption of Mexican accounting bulletin C-10, “Accounting for Derivative Instruments and Hedging Activities”, issued by the IMCP in April 2004, we modified its accounting policies for valuing and recognizing these instruments.

 

The derivatives are recognized in conformity with the regulations established in Mexican accounting bulletin C-10 (Mexican GAAP) and Statement of Financial Accounting Standard (SFAS) 133, “Accounting for Derivative Instruments and Hedging Activities”, and its related interpretations (US GAAP).

 

We entered into the following agreements involving derivative financial instruments:

 

a)

Options, that are derivatives that give the buyer the right, albeit not the obligation, to buy or sell an asset (in this case dollars) at an established exercise price, known as the strike price, at a defined date in exchange for the payment of a premium

 

b)

Futures, that are contracts that obligate two entities to exchange an asset or value (in this case grain) at a future date for a pre-established and agreed quantity, quality and price.

 

The effectiveness of our hedges is determined at the time the derivatives are designated as hedges and is assessed on a regular basis. An instrument is considered highly effective when the changes in the primary position cash flow are offset on a period-by-period or cumulative basis by a range of between 80% and 125%.

 

In conformity with bulletin C-10 and SFAS 133, paragraph 30, the effective portion of a loss or gain on a cash flow hedge is recorded in comprehensive income net of related income taxes (stockholders’ equity) while the ineffective portion is recorded in results of operations.

 

Also, in conformity with SFAS 133, we followed G-20, as a supplement to FRS, in regards to the measurement of effectiveness, “Cash flow hedges: assessing and measuring the effectiveness of a purchased option used in a cash flow hedge”

 

See Note 2 q to our audited financial statements.

 

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Labor obligations

 

In January 2004, the Mexican Institute issued the revised accounting Bulletin D-3, Labor Obligations. The revised Bulletin establishes the overall rules for the valuation, presentation and disclosure of so-called “other post-retirement benefits and the reduction and early extinguishment of such benefits,” thus nullifying the provisions of Circular 50. Bulletin D-3 also provides rules applicable to employee termination pay. The observance of these new rules is mandatory for fiscal years beginning on or after January 1, 2005. See Note 2-o to our audited financial statements.

 

New Accounting pronouncements

 

On December 22, 2006, the issuing council of the Mexican Financial Reporting Standards Research and Development Board (Consejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera, A.C. or CINIF) issued Financial Reporting Standard (FRS) B-3, Statements of Operations; FRS B-13, Subsequent Events; FRS C-13, Related Parties, and FRS D-6, Capitalization of the Comprehensive Cost of Financing, each of which come into force in the year beginning on January 1, 2007. For a detailed discussion see note 16 in our audited financial statements.

 

ITEM 9.

The Offer and Listing

 

On September 19, 1997, Bachoco commenced trading on the Mexican Stock Exchange through Units (each comprised of one Series B Share and one Series L Share),and on the New York Stock Exchange thought American Depositary Shares (“ADSs,” each comprised of six Units). The ADSs are evidenced by American Depositary Receipts (“ADRs”) issued by The Bank of New York, as Depositary under a Deposit Agreement among the Company, the Depositary and the holders from time to time of ADRs.

 

In September 2006, the Company separated the UBL and UBB units into their components, and converted their Series L Shares into Series B Shares, on a one to one basis. Consequently, now all our Common Stock Shares are Series B Shares with full voting rights. This change had not modified the face value of the Shares.

 

On December 31, 2006, there were 7,413,497 ADSs outstanding, representing 14.8% of the total Shares outstanding, which were held by five holders (including the Depositary Trust Company) with registered addresses in the United States.

 

The following tables set forth for each year from 2002 to 2006, for each quarter from 2005 and 2006 and for each complete month from December 2006 to May 2007, the high, low and period and close prices of the Shares on the Mexican Stock as reported by the Mexican Stock Exchange and the high, low and close price of the ADSs on the NYSE as reported by the New York Stock Exchange.

 

Mexican Stock Exchange (Nominal pesos per Share)
Year		High			Low			Close
2002			8.00			5.49			7.25
2003			9.65			7.00			9.45
2004			13.35			8.50			13.10
2005			20.70			12.22			17.25
2006			23.70			15.70			23.66

 

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New York Stock Exchange (U.S.$ per ADS)
Year		High			Low			Close
2002			10.00			7.15			8.52
2003			10.78			7.73			10.45
2004			14.19			8.8			14.19
2005			23.02			12.87			19.50
2006			29.00			16.33			29.00

Mexican Stock Exchange (Nominal pesos per Share)
Period		High			Low			Close
First Quarter 2005			14.00			12.22			13.5
Second Quarter 2005			14.80			13.50			14.76
Third Quarter 2005			20.70			14.75			19.77
Fourth Quarter 2005			19.74			15.95			17.25
First Quarter 2006			17.25			15.70			15.95
Second Quarter 2006			19.10			15.85			18.50
Third Quarter 2006			20.00			16.90			20.00
Fourth Quarter 2006			23.66			18.70