Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 20-F
¨
|
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES
EXCHANGE ACT OF 1934
|
OR
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 31, 2009
OR
¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
OR
¨
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SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
|
Date
of event requiring this shell company report ____________
For
the transition period from ____________ to ___________
Commission
File Number: 333-7480
INDUSTRIAS
BACHOCO, S.A.B. DE C.V.
(Exact
name of Registrant as specified in its charter)
Bachoco
Industries
(Translation
of Registrant’s name into English)
The
United Mexican States
(Jurisdiction
of incorporation
or
organization)
Avenida
Tecnológico No. 401
Ciudad
Industrial C.P. 38010
Celaya,
Guanajuato, Mexico.
(Address
of principal executive offices)
Daniel
Salazar Ferrer
Avenida
Tecnológico No. 401
Ciudad
Industrial C.P. 38010
Celaya,
Guanajuato, Mexico
Telephone: (+011-52-461-618-3555)
Facsimile: (+011-52-461-611-6502)
Email: inversionistas@bachoco.net
(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact
Person)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
Title of each class
|
|
Name of each exchange on which
registered
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|
|
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American
Depositary Shares, each representing twelve Series B
Shares.
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New
York Stock Exchange
|
Securities registered or to be
registered pursuant to Section 12(g) of the
Act: None
Securities for which there is a
reporting obligation pursuant to Section 15(d) of the
Act: None
Indicate
the number of outstanding Shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report:
Series B
Capital Stock: 600,000,000
Shares
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No x
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
Yes x No ¨
Note: Checking
the box above will not relieve any registrant required to file reports pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those Sections.
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes o No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨
Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
U.S.
GAAP ¨
|
International
Financial Reporting
|
Other
x
|
|
Standards
as issued by the International
|
|
|
Accounting
Standards Board ¨
|
|
If “Other
has been checked in response to the previous question, indicate by check mark
which financial statements item the registrant has elected to
follow:
Item 17 ¨ Item 18 x
If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No
x
(APPLICABLE ONLY TO
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
YEARS)
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 23 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by the court.
Yes ¨ No o
TABLE
OF CONTENTS
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Page
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PART
I
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3
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ITEM
1.
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IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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3
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ITEM
2.
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OFFER
STATISTICS AND EXPECTED TIMETABLE
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3
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ITEM
3.
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KEY
INFORMATION
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3
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A.
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Selected
Financial Data
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3
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B.
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Capitalization
and Indebtedness
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6
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C.
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Reasons
for the Offer and Use of Proceeds
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6
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D.
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Risk
Factors
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6
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ITEM
4.
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INFORMATION
ON THE COMPANY
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12
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A.
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History
and Development of the Company
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12
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B.
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Business
Overview
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16
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C.
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Organizational
Structure
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25
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D.
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Property,
Plant and Equipment
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26
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ITEM
4.A.
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UNRESOLVED
STAFF COMMENTS
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27
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ITEM
5.
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OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
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27
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A.
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Operating
Results
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32
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B.
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Liquidity
and Capital Resources
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41
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C.
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Research
and Development, Patents and Licenses, etc.
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42
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D.
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Trend
Information
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42
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E.
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Off-Balance
Sheet Arrangements
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42
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F.
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Tabular
Disclosure of Contractual Obligations
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42
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G.
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Safe
Harbor
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43
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ITEM
6.
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DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
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43
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A.
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Directors
and Senior Management
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43
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B.
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Compensation
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48
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C.
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Board
Practices
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48
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D.
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Employees
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49
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E.
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Share
Ownership
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49
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ITEM
7.
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MAJOR
STOCKHOLDERS AND RELATED PARTY TRANSACTIONS
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49
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A.
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Major
Shareholders
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49
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B.
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Related
Party Transactions
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50
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C.
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Interests
of Experts and Counsel
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51
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ITEM
8.
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FINANCIAL
INFORMATION
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51
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A.
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Consolidated
Statements and Other Financial Information
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51
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B.
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Significant
Changes
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52
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ITEM
9.
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THE
OFFER AND LISTING
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53
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A.
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Offer
and Listing Details
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53
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B.
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Plan
of Distribution
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54
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C.
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Markets
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54
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D.
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Selling
Shareholders
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56
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E.
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Dilution
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56
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F.
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Expenses
of the Issue
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56
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ITEM
10.
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ADDITIONAL
INFORMATION
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56
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A.
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Share
Capital
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56
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B.
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Memorandum
and Articles of Association
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56
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C.
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Material
Contracts
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65
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D.
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Exchange
Controls
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65
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E.
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Taxation
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65
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F.
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Dividends
and Paying Agents
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71
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G.
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Statement
by Experts
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71
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H.
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Documents
on Display
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71
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I.
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Subsidiary
Information
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71
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ITEM
11.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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71
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ITEM
12.
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DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
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73
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A.
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Debt
Securities
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73
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B.
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Warrants
and Rights
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73
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C.
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Other
Securities
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73
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D.
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American
Depository Receipts
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73
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PART
II
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73
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ITEM
13.
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DEFAULT,
DIVIDEND ARREARAGES AND DELINQUENCIES
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73
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ITEM
14.
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MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
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73
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ITEM
15.
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CONTROLS
AND PROCEDURES
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73
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ITEM
16.
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[RESERVED]
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75
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ITEM
16.A.
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AUDIT
COMMITTEE FINANCIAL EXPERT
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75
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ITEM
16.B.
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CODE
OF ETHICS
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76
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ITEM
16.C.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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76
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ITEM
16.D.
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EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
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76
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ITEM
16.E.
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PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
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77
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ITEM
16.F.
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CHANGES
IN REGISTRANT’S CERTIFYING ACCOUNTANT
|
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77
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ITEM
16.G.
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CORPORATE
GOVERNANCE
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77
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PART
III
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82
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ITEM
17.
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FINANCIAL
STATEMENTS
|
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82
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ITEM
18.
|
FINANCIAL
STATEMENTS
|
|
82
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ITEM
19.
|
EXHIBITS
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82
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INDEX
OF EXHIBITS
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82
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Industrias
Bachoco, S.A.B. de C.V. is a holding company with no operations other than
holding the stock of its subsidiaries. During an extraordinary stockholders’
meeting held on November 23, 2007, our shareholders approved our name
change from Industrias Bachoco S.A. de C.V. to Industrias Bachoco, S.A.B. de
C.V., by operation of law and amended article one of our bylaws. Our principal
operating subsidiary is Bachoco, S.A. de C.V. (“BSACV”), which owns the
principal operating assets of Industrias Bachoco, S.A.B. de C.V. and accounted
for 91.9% of consolidated total assets on December 31, 2009. References
herein to “Bachoco,” “we,” “us,” “our,” “its” or the “Company” are, unless the
context requires otherwise, to Industrias Bachoco, S.A.B. de C.V. and its
consolidated subsidiaries as a whole.
We are
incorporated under the laws of the United Mexican States (“Mexico”), and all of
our operations are in Mexico. Our principal executive offices are located at
Avenida Tecnológico No. 401, Ciudad Industrial C.P. 38010, Celaya, Guanajuato,
Mexico, and our telephone number is +52 -461- 618-3555.
Presentation
of Information
We
publish our financial statements in Mexican pesos and present our financial
statements in accordance with Mexican Financial Reporting Standards (“Mexican
FRS”) in effect as of the balance sheet date and include the recognition of the
effects of inflation on the financial information through December 31, 2007,
based on the Mexican National Consumer Price Index (NCPI) published by Banco de
Mexico (the “Central Bank”).
Mexican
FRS B-10 supersedes Bulletin B-10 "Recognition of the effects of inflation on
the financial information" and its five amendment documents as well as the
related circulars and Interpretation of Financial Reporting Standards 2. The
principal considerations established by this FRS are:
Recognition
of the effects of inflation – An entity operates in (a) an inflationary economic
environment when cumulative inflation over the immediately preceding 3-year
period is equal to or greater than 26.0%; and (b) a non-inflationary economic
environment, when inflation over the aforementioned period is less than 26.0%.
For more detail, see Note 2-c in our Audited Consolidated Financial
Statements.
With
respect to (a) above, similarly to the superseded Bulletin B-10, the
comprehensive recognition of the effects of inflation is required. For case (b),
the effects of inflation are not recognized; however, at the effective date of
this FRS and when an entity ceases to operate in an inflationary economic
environment, the restatement effects determined through the last period in which
the entity operated in an inflationary economic environment (in our case 2007),
must be kept and shall be reclassified on the same date and using the same
procedure as that of the corresponding assets, liabilities and stockholders'
equity. Should the entity once more operate in an inflationary economic
environment, the cumulative effects of inflation not recognized in the periods
where the environment was deemed to be non-inflationary should be recognized
retrospectively.
Except as
otherwise indicated, all data in the financial statements included below in Item
18 (which together with the attached notes constitute the “Audited Consolidated
Financial Statements”) and the selected financial information included
throughout this Form 20-F (this “Annual Report”) have been presented in nominal
pesos for the years 2009 and 2008 and in constant pesos as of December 31, 2007
for the years 2007 - 2005.
Mexican
FRS differs in certain respects from generally accepted accounting principles in
the United States (“U.S. GAAP”). For a discussion of certain significant
differences between Mexican FRS and U.S. GAAP as they apply to us, together with
a reconciliation of consolidated operating income, consolidated net income,
consolidated stockholders’ equity to U.S. GAAP, and a consolidated statement of
cash flows under U.S. GAAP, see Note 21 to the Audited Consolidated Financial
Statements. The effect of price-level restatement under Mexican FRS has not been
reversed in the reconciliation to U.S. GAAP. See Note 21 to the Audited
Consolidated Financial Statements.
References
herein to “U.S. dollars,” “U.S.$” or “$” are to the lawful currency of the
United States of America. References herein to “pesos” or “Ps.” are to the
lawful currency of Mexico. This Annual Report contains translations of certain
peso amounts into U.S. dollars at specified rates solely for the convenience of
the reader. Unless otherwise indicated, such U.S. dollar amounts have been
translated from pesos at an exchange rate of Ps.13.08 to U.S.$1.00, the exchange
rate on December 31, 2009.
As used
herein, the term “tonnes” refers to metric tons of 1,000 kilograms (equal to
2,204.6 pounds) and the term “billion” refers to one thousand million
(1,000,000,000). One square meter is equivalent to 10.764 square
feet.
Market
Data
This
Annual Report contains certain statistical information regarding the Mexican
chicken, beef, egg, balanced feed (or “feed”), turkey and swine markets and our
market share. We have obtained this information from a variety of sources,
including the producers’ associations Unión Nacional de Avicultores (the
National Poultry Union or the “UNA”), Consejo Nacional Agropecuario (the
National Agricultural Council or “CNA”); Consejo Mexicano de Porcicultura
(the Mexican Pork Council or “CMP”), as well as Banco de Mexico (the Central
Bank), Secretaría de
Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentos (“Ministry of
Agriculture, Livestock, Rural Development, Fishing and Food” or “SAGARPA”) and
publications of the U.S. Department of Agriculture (“USDA”). The producers’
associations rely principally on data provided by their members. Information for
which no source is cited was prepared by us on the basis of our knowledge of the
Mexican chicken, egg, feed, turkey and swine markets and the wide variety of
information available regarding these markets. The methodology and terminology
used by different sources are not always consistent, and data from different
sources are not readily comparable.
Forward-Looking
Statements
We may
from time to time make written or oral forward-looking statements in our
periodic reports to the Securities and Exchange Commission on Forms 20-F
and 6-K, in our annual report to stockholders, in offering circulars and
prospectuses, in press releases and other written materials and in oral
statements made by one of our officers, directors or employees to analysts,
institutional investors, representatives of the media and others.
Examples
of such forward-looking statements include, but are not limited to:
(i) projections of revenues, income (or loss), earnings (or loss) per
Share, capital expenditures, dividends, capital structure or other financial
items or ratios; (ii) statements of our plans, objectives or goals or those
of our management, including those relating to new contracts;
(iii) statements about future economic performance; and
(iv) statements of assumptions underlying such statements. Words such as
“believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,”
“project,” “predict,” “forecast,” “guideline,” “should” and similar expressions
are intended to identify forward-looking statements but are not the exclusive
means of identifying such statements.
Forward-looking
statements involve inherent risks and uncertainties, and a number of unexpected
changes could cause actual results to deviate from our plans, objectives,
expectations, estimates and intentions. We recognize that the accuracy of our
predictions and our ability to follow through on our intentions depend on
factors beyond our control. The potential risks are many and varied, but include
unexpected changes in: economic, weather and political conditions; raw material
prices; competitive conditions; and demand for chicken, eggs, turkey, balanced
feed and swine.
PART
I
ITEM
1.
|
Identity
of Directors, Senior Management and
Advisers
|
Not
applicable.
ITEM
2.
|
Offer
Statistics and Expected Timetable
|
Not
applicable.
A.
|
Selected
Financial Data
|
The
financial information set forth below is derived from Bachoco’s Audited
Consolidated Financial Statements, which are included in Item 18. In this
disclosure, we explain the figures and year-to-year changes in our Audited
Consolidated Financial Statements.
In
preparing the Audited Consolidated Financial Statements, we followed Mexican
FRS, which differ in certain respects from U.S. GAAP. Note 21 to the Audited
Consolidated Financial Statements provides a description of the main differences
between Mexican FRS and U.S. GAAP as they apply to us; a reconciliation from
Mexican FRS to U.S. GAAP of total stockholders’ equity, net income, and a
condensed statement of cash flows under U.S. GAAP as of December 31, 2009
and 2008 and for the years ended December 31, 2009, 2008 and 2007. Our
financial statements were prepared pursuant to Bulletin B-10, as superseded by
Mexican FRS B-10, as well as Bulletin B-12, as superseded by Mexican FRS B-2,
both issued by the Consejo Mexicano para la Investigación y Desarrollo de Normas
de Información Financiera, A.C. (the “Mexican Board for Research and Development
of Financial Reporting Standards” or “CINIF”). See the summary on Mexican FRS
B-10 in “Presentation of information” above.
Except as
otherwise indicated, all data in the Audited Consolidated Financial Statements
included below in Item 18 and the selected financial information included
throughout this Form 20-F (this “Annual Report”) have been presented in
nominal pesos for the years 2009 and 2008 and in constant pesos as of
December 31, 2007 for the years 2005 - 2007. The effects of this
price-level restatement under Mexican FRS have not been reversed in the
reconciliation of Mexican FRS to U.S. GAAP. See Note 21 to the Audited
Consolidated Financial Statements.
As of
January 1, 2008, a new financial reporting standard came into effect, which
eliminates the recognition of inflationary effects in our financial information.
Consequently, financial information corresponding to periods prior to
December 31, 2007 is expressed in millions of Mexican Pesos with purchasing
power as of December 31, 2007, while the financial information for
December 31, 2009 and 2008, is stated in millions of nominal Mexican
Pesos.
|
|
As
of and for the year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement Data |
|
in
millions of constant pesos as of December 31, 2007 for years 2005 –
2007 and in
millions
of nominal pesos for years 2009 and 2008(1)
|
|
|
In
millions of
U.S.
dollars(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
FRS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
Ps. |
15,617.7 |
|
|
Ps. |
15,551.0 |
|
|
Ps. |
18,219.6 |
|
|
Ps. |
20,125.3 |
|
|
Ps. |
23,262.9 |
|
|
|
1,778.5 |
|
Cost
of sales
|
|
|
11,234.2 |
|
|
|
12,053.0 |
|
|
|
14,477.9 |
|
|
|
17,482.5 |
|
|
|
19,326.8 |
|
|
|
1,477.6 |
|
Gross
profit
|
|
|
4,383.5 |
|
|
|
3,498.0 |
|
|
|
3,741.8 |
|
|
|
2,642.9 |
|
|
|
3,936.1 |
|
|
|
300.9 |
|
Operating
income
|
|
|
2,378.1 |
|
|
|
1,425.4 |
|
|
|
1,496.3 |
|
|
|
230.1 |
|
|
|
1,413.8 |
|
|
|
108.1 |
|
Comprehensive
financing income (loss)
|
|
|
(74.0 |
) |
|
|
61.4 |
|
|
|
19.1 |
|
|
|
(1,369.2 |
) |
|
|
(133.2 |
) |
|
|
(10.2 |
) |
Net
controlling interest income (loss)
|
|
|
1,908.4 |
|
|
|
906.2 |
|
|
|
1,270.9 |
|
|
|
(879.0 |
) |
|
|
797.6 |
|
|
|
61.0 |
|
Net
consolidated income (loss) per Share(3)
|
|
|
3.2 |
|
|
|
1.5 |
|
|
|
2.1 |
|
|
|
(1.5 |
) |
|
|
1.3 |
|
|
|
0.1 |
|
Net
consolidated income (loss) per ADS(4)
|
|
|
38.2 |
|
|
|
18.1 |
|
|
|
25.4 |
|
|
|
(17.5 |
) |
|
|
16.0 |
|
|
|
1.2 |
|
Dividends
per Share(5)
|
|
|
0.44 |
|
|
|
0.61 |
|
|
|
0.59 |
|
|
|
0.59 |
|
|
|
0.42 |
|
|
|
0.03 |
|
Weighted
average Shares outstanding (thousands)
|
|
|
599,694 |
|
|
|
599,571 |
|
|
|
600,000 |
|
|
|
600,000 |
|
|
|
599,946 |
|
|
|
599,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
Ps. |
15,617.7 |
|
|
Ps. |
15,551.0 |
|
|
Ps. |
18,219.6 |
|
|
Ps. |
20,125.3 |
|
|
Ps. |
23,262.9 |
|
|
|
1,778.5 |
|
Operating
income
|
|
|
2,356.0 |
|
|
|
1,395.7 |
|
|
|
1,481.0 |
|
|
|
185.6 |
|
|
|
1,391.0 |
|
|
|
106.3 |
|
Majority
net income (loss)
|
|
|
1,893.3 |
|
|
|
895.6 |
|
|
|
1,261.9 |
|
|
|
(869.4 |
) |
|
|
787.0 |
|
|
|
60.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Financial Position Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
FRS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
Ps. |
3,419.9 |
|
|
Ps. |
3,583.9 |
|
|
Ps. |
3,039.9 |
|
|
Ps. |
1,998.2 |
|
|
Ps. |
2,551.0 |
|
|
|
195.0 |
|
Total
assets
|
|
|
16,530.9 |
|
|
|
17,559.2 |
|
|
|
19,116.4 |
|
|
|
19,455.0 |
|
|
|
19,877.9 |
|
|
|
1,519.7 |
|
Short-term
debt(6)
|
|
|
100.0 |
|
|
|
9.8 |
|
|
|
58.8 |
|
|
|
234.2 |
|
|
|
591.9 |
|
|
|
45.2 |
|
Long-term
debt
|
|
|
56.0 |
|
|
|
35.5 |
|
|
|
50.8 |
|
|
|
391.7 |
|
|
|
372.0 |
|
|
|
28.4 |
|
Total
stockholders’ equity
|
|
|
13,502.7 |
|
|
|
14,102.9 |
|
|
|
15,127.2 |
|
|
|
14,079.4 |
|
|
|
14,638.5 |
|
|
|
1,119.1 |
|
Capital
Stock
|
|
|
2,294.6 |
|
|
|
2,294.9 |
|
|
|
2,294.9 |
|
|
|
2,294.9 |
|
|
|
2,294.9 |
|
|
|
175.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
controlling interest equity
|
|
|
13,499.0 |
|
|
|
14,053.2 |
|
|
|
15,071.7 |
|
|
|
13,786.7 |
|
|
|
14,329.2 |
|
|
|
1,095.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
volume (thousands of tonnes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicken
|
|
|
773.0 |
|
|
|
773.7 |
|
|
|
837.2 |
|
|
|
878.1 |
|
|
|
918.1 |
|
|
|
|
|
Eggs
|
|
|
140.6 |
|
|
|
143.4 |
|
|
|
147.8 |
|
|
|
143.6 |
|
|
|
143.4 |
|
|
|
|
|
Swine
and Others
|
|
|
9.6 |
|
|
|
8.9 |
|
|
|
16.1 |
|
|
|
18.8 |
|
|
|
19.0 |
|
|
|
|
|
Balanced
Feed
|
|
|
389.6 |
|
|
|
484.4 |
|
|
|
438.8 |
|
|
|
370.7 |
|
|
|
337.9 |
|
|
|
|
|
Margins
(Mexican FRS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin (%)
|
|
|
28.1 |
% |
|
|
22.5 |
% |
|
|
20.5 |
% |
|
|
13.1 |
% |
|
|
16.9 |
% |
|
|
|
|
Operating
margin (%)
|
|
|
15.2 |
% |
|
|
9.2 |
% |
|
|
8.2 |
% |
|
|
1.1 |
% |
|
|
6.1 |
% |
|
|
|
|
Consolidated
net margin (%)
|
|
|
12.2 |
% |
|
|
5.8 |
% |
|
|
7.0 |
% |
|
|
(4.4 |
)% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
employees
|
|
|
20,432 |
|
|
|
21,035 |
|
|
|
23,088 |
|
|
|
23,248 |
|
|
|
24,065 |
|
|
|
|
|
(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.13.08 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 by
the weighted average Shares outstanding.
(6) Includes
notes payable to banks and current portion of long term debt.
Exchange
Rates
During
2005, the Mexican peso was volatile, mainly at the beginning and at the end of
the year, and trended towards appreciation 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.
In 2007,
the Mexican economy was stable overall, with an annual inflation rate of 3.8%,
while the peso-dollar exchange rate at year-end depreciated by 1.1% with respect
to December 31, 2006.
In 2008,
the Mexican economy suffered a sharp slowdown and ended the year with an
inflation rate of 6.5%. The exchange rate of the peso against the
U.S. dollar was highly volatile. While during the first half of the
year, the Mexican peso strengthened its position with respect to the U.S.
dollar, the Mexican peso experienced a steep depreciation during the second half
of the year and the peso-dollar exchange rate at year-end had depreciated by
21.0% with respect to December 31, 2007.
During
2009, the Mexican economy continued to be affected by the global economic
crisis, ending the year with an inflation rate of 3.57%. However,
although the Mexican peso-dollar exchange rate depreciated during the first half
of 2009, the peso stabilized and strengthened its position in the second half of
2009, leading the Mexican peso-dollar exchange rate to appreciate 5.4% in 2009
with respect to the exchange rate in effect on December 31, 2008.
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
11.41 |
|
|
|
10.41 |
|
|
|
10.89 |
|
|
|
10.63 |
|
2006
|
|
|
11.46 |
|
|
|
10.43 |
|
|
|
10.91 |
|
|
|
10.80 |
|
2007
|
|
|
11.27 |
|
|
|
10.67 |
|
|
|
10.93 |
|
|
|
10.92 |
|
2008
|
|
|
13.94 |
|
|
|
9.92 |
|
|
|
11.14 |
|
|
|
13.83 |
|
2009
|
|
|
15.41 |
|
|
|
12.63 |
|
|
|
13.50 |
|
|
|
13.08 |
|
(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
|
|
|
|
|
|
|
December 2009
|
|
|
13.08 |
|
|
|
12.63 |
|
January 2010
|
|
|
13.03 |
|
|
|
12.65 |
|
February 2010
|
|
|
13.19 |
|
|
|
12.76 |
|
March 2010
|
|
|
12.74 |
|
|
|
12.30 |
|
April 2010
|
|
|
12.41 |
|
|
|
12.16 |
|
May 2010
|
|
|
13.14 |
|
|
|
12.27 |
|
(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 14, 2010, the exchange rate for cable transfers in pesos as certified
for customs purposes by the Federal Reserve Bank of New York was Ps.12.54 per
$1.00 U.S. dollar.
B.
|
Capitalization
and Indebtedness
|
Not
applicable
C.
|
Reasons
for the Offer and Use of Proceeds
|
Not
Applicable
Risks
Relating to Mexico, Other Emerging Market Countries and the U.S.
Economy
Mexico
has experienced adverse economic conditions
If the
Mexican economy experiences decreased output in a recession, or if inflation or
interest rates significantly increase, consumers may not be able to purchase our
products. These and other effects could have adverse consequences on
our business, financial condition and results of operations.
The chart
below includes Mexican gross domestic product (“GDP”) and Inflation Rate data
from 2005-2009, as provided by
the Central Bank.
Period
|
|
|
|
|
|
|
2005
|
|
|
3.0 |
% |
|
|
3.33 |
% |
2006
|
|
|
4.8 |
% |
|
|
4.05 |
% |
2007
|
|
|
3.3 |
% |
|
|
3.80 |
% |
2008
|
|
|
1.3 |
% |
|
|
6.50 |
% |
2009
|
|
|
-6.5 |
% |
|
|
3.57 |
% |
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 from the United States, where prices are denominated
in U.S. dollars. In addition, the prices of ingredients we purchase
in Mexico may be influenced by U.S. commodity markets. Therefore,
should the peso fall relative to the U.S. dollar, the cost of our operations,
some accounts payable due and our debt payments would increase. Any future
depreciation or devaluation of the peso may result in further net foreign
exchange losses.
|
·
|
In
2005, the Mexican peso appreciated with respect to the U.S. dollar by 4.9%
at the end of the year and 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 0.1% lower than
the average of 2005.
|
|
·
|
In
2007, the Mexican peso remained reasonably stable in its peso-dollar
exchange rate. According to the U.S. Federal Reserve Bank, the
peso depreciated with respect to the U.S. dollar by 1.1% at
year-end. The average value of the Mexican peso was 0.2% lower
than the average of 2006.
|
|
·
|
In
2008, the Mexican peso was highly volatile during the year in its
peso-dollar exchange rate with a final depreciation of 21.0%, compared to
the end of 2007. The average value of the Mexican peso was 1.9%
lower than the average in 2007.
|
|
·
|
In
2009, the Mexican peso experienced greater stability during the second
half of the year in its peso-dollar exchange rate, with a final
appreciation of 5.4%, compared to the end of 2008. The average value of
the Mexican peso was 17.4% lower than the average in
2008.
|
The
Company uses financial instruments to counter financial risks on the exchange
rate of the Mexican peso versus the U.S. dollar; a drastic change in the
exchange rate could have an adverse impact on the financial position of the
Company.
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 and some accounts
payable. 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 Mexico, the government could institute restrictive
exchange rate policies in the future. Currency fluctuations will
probably continue to affect our revenues and expenses.
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 Mexico could adversely affect our
financial condition and results of operations
According
to the Central Bank, the average interest rates on 28-day Mexican treasury
bills, or Cetes, was
9.2%, 7.2% , 7.2%, 7.6% and 5.4% during 2005, 2006, 2007, 2008 and
2009, respectively. On June 14, 2010, the 28-day Cetes rate was
4.6%. High interest rates in Mexico 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
may benefit from the interest we earn in our cash balance.
Political
events in Mexico could affect Mexican economic policy and our
operations
Felipe
Calderón was elected as President of Mexico in July of
2006. President Calderón’s party, the Partido Acción 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 have
continued following the 2009 Congressional election. 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 Mexico 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 Mexico, 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.
Developments
in the U.S. economy may adversely affect our business
Economic
conditions in Mexico 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 Mexico and
emigration from Mexico 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 Mexico 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.
In
particular, corn prices began to decline in comparison with previous years by
the end of 2008. In 2009, such prices were lower and more
stable.
We can
offer no assurance that corn and soybean meal prices will not continue to
experience strong volatility in the future. If such prices begin to
increase again, our profits could be adversely affected.
The
Company uses financial instruments to counter financial risks as protection
against adverse fluctuations in the prices of corn and soybean. A
drastic change in grain prices could have an adverse impact on the financial
position of the Company.
Our
operations depend on raising animals and meat processing, which are subject to
risks such as diseases, contamination, adverse weather conditions or natural
disasters
Our
operations involve raising animals and are subject to a variety of
risks. Chickens in particular are susceptible to infections by a
variety of microbiological agents.
In the
past, we have experienced limited outbreaks of various diseases that have
resulted in higher mortality rates.
During
2005, there was an ample diffusion in the media worldwide 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 birds 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.
Hurricanes
or other adverse weather conditions could result in additional losses of
inventory and damage to our plants and equipment. Our facilities near
Mexico’s coast are most vulnerable to the risk of severe weather. In 2006, we
experienced a loss of chickens in our Norwest Complex due to the effects of
Hurricane Lane.
In April
2010, the table eggs operation located in Mexicali, B.C. was affected by an
earthquake that hit northwestern Mexico on April 4. The earthquake
partially affected almost all of the farms located in this region, including our
farm. Our affected farm represents approximately 9.0% of our total
egg production. Other facilities, such as feed mill and distribution
centers, were essentially undamaged.
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 can offer no assurance, 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
According
to the UNA, we are Mexico’s largest chicken producer, but we face competition
from other producers in all of the markets in which we sell our
products. In 2009, we accounted for approximately 34.0% of total
chicken production in Mexico. There are two other major vertically
integrated chicken producers in Mexico, which together with Bachoco account for
approximately 59.0% of Mexican chicken production, with the balance distributed
among 178 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
Since
2003, chicken (excluding leg quarters for which the Mexican government imposed
some temporary restrictions), eggs and swine import quotas were eliminated
through the North America Free Trade Agreement or “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 Mexico, which could have a material adverse
effect on our performance.
On
January 1, 2008, the restrictions for leg quarters were phased out. At
present there are no restrictions on importing these products into
Mexico.
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 held
496,500,000 Shares
outstanding on December 31, 2007. In November of 2008, the
Robinson Bours family created a third trust with 102,000,000 Shares, which were
taken from one of the existing trusts. The purpose of this new trust
was to serve as collateral for the Company’s loan indebtedness. In the second
half of 2009, this third trust was eliminated and the Shares were returned to
the original trust. The trusts together accounted for
496,500,000 Shares outstanding on December 31, 2009 and there has been no
change in the position of each holder.
Future
sales of Shares by the controlling stockholders may affect prevailing market
prices for the ADS’s and the Shares trading at the Mexican Market.
The
prevailing market prices for the ADS’s and the Shares could decline if the
Robinson Bours family sold substantial amounts of their Shares, whether
directly, or indirectly, through the Mexican trusts through which they hold
their Shares, or if the perception arose that such a sale could
occur.
The
protection afforded to minority stockholders in Mexico is different from that in
the United States
Under
Mexican law, the protection afforded to minority stockholders is 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 the 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.
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 Mexico
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 Mexico, 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 Mexico. 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 Mexico, 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: (i) we file a registration statement with
the Securities and Exchange Commission with respect to that future issuance of
Shares; or (ii) 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.
Corporate
disclosure and accounting in Mexico may differ from other countries
There may
be less, or different, publicly available information about issuers of
securities in Mexico 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
|
A.
|
History
and Development of the Company
|
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 Mexico on April 17, 1980. Our headquarters are
located at Avenida Tecnológico No. 401, Ciudad Industrial 38010, Celaya,
Guanajuato, Mexico, telephone +52461 618-3500 and +52461
618-3555. Our investor relations agent in the U.S. is Grayling, which
is located in New York, New York. Our main product lines
are: chicken, table egg, balanced feed and swine. At
present, almost all of our production and almost all of our sales are in
Mexico.
According
to the UNA, we are the largest poultry producer in Mexico. In 2009,
we produced approximately 9.5 million chickens per week and accounted
for approximately 34.0% of total chicken production in Mexico. 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 800 production and distribution facilities
dispersed throughout Mexico, 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 78.3% of our net revenues in
2009. Please also see the table under Item 5.
A. “Operating Results.”
We are
also a significant producer of commercial balanced feed. We sell our
feed both through distributors and directly to small
producers. During 2009, we sold 338 thousand tons of balanced feed to
external customers, which amounted to 6.3% of our total revenues for that
year.
Currently,
Bachoco is the second largest producer of table egg products. In
2009, we sold approximately 143 thousand tons. Table egg sales
accounted for 10.1% of our net revenues in 2009.
As part
of our other product lines we also sell swine on the hoof to meat packers for
pork product production, miscellaneous poultry-related products, and in 2007, we
entered into two new business lines: turkey and beef value-added
products. In 2009, sales of swine and these other lines accounted for
5.3% of our net revenues.
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicken
|
|
|
773.0 |
|
|
|
773.7 |
|
|
|
837.2 |
|
|
|
878.1 |
|
|
|
918.1 |
|
Eggs
|
|
|
140.6 |
|
|
|
143.4 |
|
|
|
147.8 |
|
|
|
143.6 |
|
|
|
143.4 |
|
Swine(1)
|
|
|
9.6 |
|
|
|
8.9 |
|
|
|
16.1 |
|
|
|
18.8 |
|
|
|
19.0 |
|
Balanced
Feed
|
|
|
389.6 |
|
|
|
484.4 |
|
|
|
438.8 |
|
|
|
370.7 |
|
|
|
337.9 |
|
(1) Includes
Swine, Turkey and Beef products.
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 Mexico 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 Mexico 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 (“Unit”) consisted of one Series B Share and one Series L
Share. Each B Unit (“B Unit”) consisted 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.
In
September 2006, we separated the units trading on the Mexican Exchange into
their component. 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 trade 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, 2009, 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
November 1998, we approved a stock repurchase plan (the “Repurchase Plan”),
which allows us to repurchase 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. 180.0 million (Ps.
$303.9 million in constant Mexican pesos as of December 31, 2007), which
reduced retained earnings on our balance sheet. See Note 15d to the
Consolidated Audited Financial Statements for more detail. During 2009, we
undertook certain repurchases as disclosed in Item 16.F below. As of
June 18, 2010, we had no Shares repurchased.
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 inventories of Del
Mezquital to start a new complex in the State of Sonora, located in northern
Mexico, close to the border with the United States.
In
February 2007, we reached a business agreement with Grupo Libra, a Company
in the Northeast of Mexico, that includes the buying of all their inventories
and long term rent agreement of their facilities to strengthen our presence in
that market. See Item 5: “Operating and Financial Review and Prospects -
Acquisitions and Dispositions” in this Annual Report for more details on these
transactions.
In
December 2007, we reached an agreement with “Grupo Agra,” a table eggs
company located in the states of Nuevo Leon and Coahuila in Northeast
Mexico. The agreement provides for leasing of their facilities, which
include laying hen farms (with a capacity of approximately 1.0 million hens), a
processing table eggs plant, distribution centers and the Agra
brands. In addition, we acquired their entire inventory.
In July
2009, the Company undertook several measures to improve capacity and efficiency
in our Northeast production complex headquartered in Monterrey,
N.L. These were: (i) acquiring the assets of a balanced feed mill and
a soybean processing plant from Productora de Alimentos Pecuarios de Nuevo León,
S.A. de C.V. through our Campi subsidiary; (ii) acquiring the assets of a
chicken processing plant from Avi Carnes Monterrey, S.A. de C.V. through our
Bachoco subsidiary with a production capacity of 9,000 chickens per hour; (iii)
entering into agreements to rent breeder farms and egg incubation plants from
Reproductoras Asociadas, S.A. de C.V. and one-day-old breeder capacity farms and
egg incubation plants from Producción Avicola Especializada, S.A. de C.V.; and
(iv) making arrangements with contract growers to acquire their
inventories.
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 Mexico 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 the last
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 Mexico.
|
|
·
|
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 Mexico’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 developed a brand image for premium
fresh chicken and table eggs in Mexico. 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. We successfully launched Bachoco’s new image two years ago,
which was well-received by our
clients.
|
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 (in nominal pesos):
|
·
|
In
2007, we made capital expenditures of Ps. 991.7 million net, with which
we:
|
|
-
|
Began
the construction of the new complex in the state of
Sonora.
|
|
-
|
Finished
the construction of our new feed mill in the state of
Aguascalientes;
|
|
-
|
Increased
capacity in the production of live
chicken;
|
|
-
|
Increased
capacity of the secondary processor at some of our processing plants;
and
|
|
-
|
Updated
our transportation fleet, processing plants and feed
mills.
|
|
·
|
In
2008, we made capital expenditures of Ps. 1.1 billion, with which
we:
|
|
-
|
Increased
capacity and implemented new technology in the processing plants located
in Celaya and Culiacan;
|
|
-
|
Increased
chicken capacity in farms located in Mérida and
Veracruz;
|
|
-
|
Finished
the construction of new farms located in Ciudad Obregon and
Hermosillo;
|
|
-
|
Began
the construction of new farms located in the state of Chiapas;
and
|
|
-
|
Updated
our transportation fleet;
|
|
·
|
In
2009, we made capital expenditures of Ps. 988.2 million, with which
we:
|
|
-
|
Entered
into a business agreement with a company located at the Northeast of
Mexico;
|
|
-
|
Increased
capacity in chicken farms in the states of Chiapas, Sonora, and the
Peninsula de Yucatan; and
|
|
-
|
Updated
our transportation fleet.
|
Chicken
Market
Mexican
consumers value distinct characteristics in their chicken. Virtually
all chicken sold by us and other major chicken producers in Mexico is
fresh. Fresh chicken is a central ingredient in many traditional
Mexican dishes and it is the leading meat consumed in Mexico according to data
from the UNA. Traditionally, value-added chicken products, 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.
The
value-added chicken products are a new market in Mexico; we participate
significantly in the market and try to lead the supply of these
products. According to the UNA, value-added chicken products
currently account for approximately 3.0% of the chicken sold in Mexico; this
represents a decrease from the 4.0% market share in 2008.
Mexican
consumers traditionally 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), which
have developed rapidly in Mexico.
According
to data obtained from the UNA, total Mexican chicken consumption per capita
increased by 1.6% from 2007 to 2009. Chicken is the leading meat
consumed in Mexico, and it accounted for approximately 50.0% of all meat
produced in Mexico in 2009. The following table sets forth total
Mexican production of chicken, pork and beef for 2007 to 2009:
Mexican
Production of Chicken, Beef and Pork
(in
thousands of tonnes)
|
|
|
|
|
|
|
|
|
|
Chicken
|
|
|
2,683 |
|
|
|
2,853 |
|
|
|
2,781 |
|
Beef
|
|
|
1,628 |
|
|
|
1,673 |
|
|
|
1,700 |
|
Swine
|
|
|
1,116 |
|
|
|
1,149 |
|
|
|
1,162 |
|
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.
During
2007, our chicken prices increased by 8.3% as compared with 2006, due to
increases in the price of the main feed ingredients and a strong demand for
chicken.
In 2008,
our chicken prices increased by 4.4% compared to prices in 2007, which was
primarily a result of increases in the prices of raw materials, partially offset
by (i) excess domestic supply, particularly during the second half of the year,
and (ii) a
decrease in the purchasing power of the average consumer.
In 2009,
our chicken prices increased by 12.6% compared to prices in 2008 due to a good
balance between supply and demand, mainly during the first half of
2009.
We
believe that changes in Mexican chicken consumption correlate closely with
changing chicken prices and their effect on consumer purchasing
power. According to data from the UNA, chicken per capita consumption
increased 3.5% in 2005, 2.6% in 2006, 2.5% in 2007, 5.3% in 2008 and decreased
by 3.5% in 2009.
Chicken
Products
Six main
product categories exist for fresh chicken in Mexico: live, public market,
rotisserie, supermarket broiler, chicken parts and value-added
products.
Below is
a brief description of each chicken product line as well as its respective
percentage of the total Mexican chicken production in 2009:
|
-
|
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 the UNA, live chicken accounted
for approximately 29.0% by volume of the chicken sold by producers in
Mexico.
|
|
-
|
Public market chicken,
is a whole broiler presented either uneviscerated or eviscerated,
generally sold within 48 hours after slaughter in public markets
throughout Mexico, but primarily concentrated in the Mexico City
metropolitan region. According to the UNA, public market
chicken accounts for 20.0% by volume of the chicken sold by producers in
Mexico.
|
|
-
|
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 called rosticerías 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 the UNA, rotisserie chicken accounts
for 26.0% by volume of the chicken sold by producers in
Mexico.
|
|
-
|
Supermarket 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 information provided by the UNA, the
supermarket broiler chicken accounted by the 14.0% of the volume of the
chicken sold by producers in
Mexico.
|
|
-
|
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 the UNA,
chicken parts accounts for 8.0% of the chicken volume sold by producers in
Mexico.
|
|
-
|
Value-added Products,
refers mainly to cut up fresh chicken parts with value-added
treatment like marinating, breading and individual quantity frozen, sold
mainly wrapped in trays principally to supermarkets and other
institutional 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 the UNA,
these products accounted for 3.0% of the chicken volume sold by producers
in 2009.
|
We sell
value-added chicken products mainly 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:
|
|
Bachoco’s
chicken volume sold
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
Tonnes
|
|
|
%
|
|
|
Tonnes
|
|
|
%
|
|
|
Tonnes
|
|
|
%
|
|
Public
market and rotisserie
|
|
|
371.0 |
|
|
|
44.3 |
|
|
|
402.1 |
|
|
|
45.8 |
|
|
|
418.2 |
|
|
|
45.5 |
|
Supermarket,
chicken parts and others(1)
|
|
|
245.1 |
|
|
|
29.3 |
|
|
|
239.0 |
|
|
|
27.2 |
|
|
|
217.1 |
|
|
|
23.7 |
|
Live
|
|
|
221.2 |
|
|
|
26.4 |
|
|
|
237.0 |
|
|
|
27.0 |
|
|
|
282.8 |
|
|
|
30.8 |
|
Total
|
|
|
837.2 |
|
|
|
100.0 |
% |
|
|
878.1 |
|
|
|
100.0 |
% |
|
|
918.1 |
|
|
|
100.0 |
% |
(1)
|
“Other”
comprises sales of value-added poultry products, viscera and other
products.
|
Our
product mix varies from region to region in Mexico, 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.
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 Mexico. 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 processing plants located in: Celaya, Culiacan,
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), retailers and transport certain products directly to supermarkets
and food-service operations. Our distribution infrastructure includes
58 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.
Below is
a summary of the expansions we have made to our distribution network (which now
covers almost all of Mexico) in the last five years:
|
-
|
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 Mexico. We also started
to build a new complex in Hermosillo
City.
|
|
-
|
In
2008, we finished several projects to expand our facilities in Mérida and
continued increasing our production in Northern Mexico, specifically in
the city of Hermosillo and in the state of
Chiapas.
|
|
-
|
In
2009, we (i) acquired the assets of a balanced feed mill and a soybean
processing plant from Productora de Alimentos Pecuarios de Nuevo León,
S.A. de C.V. through our Campi subsidiary; (ii) acquired the assets of a
chicken processing plant from Avi Carnes Monterrey, S.A. de C.V. through
our Bachoco subsidiary with a production capacity of 9,000 chickens per
hour; (iii) entered into agreements to rent breeder farms and egg
incubation plants from Reproductoras Asociadas, S.A. de C.V. and
one-day-old breeder capacity farms and egg incubation plants from
Producción Avicola Especializada, S.A. de C.V.; and (iv) made arrangements
with contract growers to acquire their
inventories.
|
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 slowly away from live
chicken.
|
|
-
|
Public Market Chicken –
We believe that we are the largest producer of public market chicken in
Mexico. We regularly sell to more than 50 of the approximately
200 whole fresh chicken wholesalers operating in the Mexico 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 in containers 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 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 these stores 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.
|
|
-
|
Supermarket Chicken – We
sell supermarket broilers, as well as chicken parts and eggs, directly to
the principal supermarkets, convenience store chains and wholesale clubs
in Mexico. 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 many points 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. Even though sales of value-added products have increased during
recent years, fresh chicken still dominates the industry and its growth
rate will depend on the purchasing power of consumers. The
Company is constantly developing new, convenient value-added
products.
|
Table
Eggs
According
to the UNA, Mexico has one of the largest per capita consumption of table eggs
in the world with 22.2 kilograms per capita consumed per year, compared with
21.7 kilograms per capita consumed in 2008. This high level of
consumption is due in part to the fact that eggs are among the cheapest sources
of protein in Mexico.
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 the UNA, the nine largest producers of table
eggs in Mexico now account for approximately 44.0% of the market.
Eggs in
Mexico 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, the
15.0% of the eggs sold in Mexico are sold in packaged form, 5.0% are sold in
processed form and approximately 80.0% are sold in bulk to
wholesalers. The sales trend in recent years has
slowly 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.
We are
the second largest producer of table eggs in Mexico with approximately 10.0% of
the market. We sell both brown and white eggs. We are the
largest producer of brown eggs in Mexico. 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 2005,
as part of the acquisition of Grupo Sanjor, we acquired some table egg farms
located in the Yucatán Peninsula.
In
December 2007, we reached an agreement with Grupo Agra, located in the
states of Nuevo Leon and Coahuila in Northeast Mexico. The agreement
provides for leasing of their facilities, which include laying hens farms with a
capacity of approximately 1.0 million hens, a processing table eggs plant,
distribution centers and the Agra brands. In addition, we acquired
all of their working capital.
In 2007,
we began to enter into foreign markets. We are testing our brand by
selling table eggs in the southern U.S. states with products produced in the
U.S. This test will allow us to see how our brand is received and
identify opportunities and strategies going forward.
In 2008
and 2009, our table egg production remained stable with a slight reduction in
production capacity due to some adjustments we made in production.
In April
2010, the table eggs operation located in Mexicali, B.C. was affected by an
earthquake that hit northwestern Mexico on April 4. The earthquake
partially affected almost all of the farms located in this region, including our
farm. Our affected farm represents approximately 9.0% of our total
egg production. Other facilities, such as feed mill and distribution
centers, were essentially undamaged.
We have
designed our egg distribution system to transport eggs from our laying farms at
Celaya, Los Mochis, Obregón, Mexicali, Tecamachalco, Mérida, Saltillo and La
Laguna regions to customers in all sales regions. We sell packaged
eggs directly to all of the principal supermarket chains in Mexico, 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.
Balanced
Feed
The Consejo Nacional de Fabricantes de
Alimento Balanceado y de la Nutrición Animal, A.C. (”CONAFAB”), estimates
that Mexican production of balanced feed has been in constant growth, increasing
from 24.6 million tons in 2005 to an estimated 26.6 million tons in
2009. In 2008, Mexico was ranked the third largest producer of feed
in the world and the second largest in Latin America. Information for 2009 is
not yet available.
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 63.0%
of total production. Imports of feed come almost entirely from the
United States and represent approximately 1.0% of the total consumption in
Mexico.
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
Mexico. 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
producing balanced feed to third parties.
We
estimate that our balanced feed business currently comprises approximately 3.4%
of the market share of the commercial (non-integrated) balanced feed business in
Mexico, a reduction from the 3.9% market share in 2008. The decrease
in our balanced feed sales volume is due to a reduction in our production levels
as we improve our sales mix.
Swine
We
purchase breeder swine live from the United States and breed them at facilities
in the state of Sonora. We then raise swine to maturity at our farms
in Celaya and three other locations in Mexico. Mature swine is sold
on the hoof to Mexican swine meat packers for the production of pork
products.
In 2007,
swine prices decrease 5.5% as a result of over-supply conditions in the swine
market. In 2008, our swine prices increase by 19.6% as a result of a
better balance in the commercial market. During 2009, swine business
remained generally stable as prices increased 10.7% for the whole
year. Traditionally, Mexicans consume fewer swine products than
chicken and egg products.
Turkey
and Prepared Beef Products
In 2007,
as a result of the “Del Mezquital” and “Grupo Libra” agreements, we introduced
two new product lines: turkey and value-added beef and pork
products. We do not raise either turkey or cattle; we only process
these products. See Item 5: “Operating and Financial Review and Prospects -
Acquisitions & Dispositions” in this Annual Report for more details on the
“Del Mezquital” and “Grupo Libra” agreements.
In 2009,
these product lines represented less than 1.0% of our total
sales. However, we see opportunities to grow these businesses by
taking advantage of our distribution network.
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, corn tariffs were eliminated on January 1, 2008. This new
condition has been positive for the Company, allowing us more flexibility in our
cost of production as the cost of our ingredients more closely tracks prices in
the international commodity markets.
Throughout
all of 2007 and most of 2008, prices of corn and soybean meal have experienced
high volatility and have demonstrated historically high prices
world-wide. By the end of 2008, prices of corn and soybean meal
started to decrease and have continued their downward trend into the year 2009,
where we observed more stable prices for these ingredients.
We take
advantage of lower-cost feed ingredients from Mexican sources, when
available. In 2009, we obtained approximately 50.0% of our total
grain 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
Mexico domestic crops and feed ingredients are limited. As such, our
complexes use mainly imported grain. The Company engages in hedging
of its feed costs in order to assure more stable cost of grains.
Competition
Chicken
According
to the UNA, we are Mexico’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 59.0% of total Mexican
poultry production; the balance is distributed among approximately 170 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 Mexico, 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 the UNA, in 2009, imports of poultry products
increased 17.4% in volume over imports in 2008. This increase was due
to lower level of prices in the U.S. and others foreign markets.
We expect
that competition from U.S. exporters could increase. However, Mexican
consumer acceptance of frozen poultry products is still low.
Table
Eggs
We are
one of the largest producers of table eggs in Mexico, with approximately 10.0%
of total Mexican egg production at the end of 2009. The Mexican table
egg industry is very fragmented and the principal 9 companies only account for
44.0% of total table egg production in Mexico.
Balanced
Feed
The
Consejo Nacional de Fabricantes de Alimento Balanceado y de la Industria Animal,
A.C. (“CONAFAB”), estimates that the balanced feed production in Mexico recorded
a cumulative increase of 3.5% from 2007 to 2009, where the integrated firms
produce approximately 63.0% of total production for their internal use, and the
remaining 37.0% is produced for sale to third parties. We estimate a
market share of approximately 3.4% in our balanced 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, 2009, we had less than 1.0% of
the Mexican market share in swine. U.S. producers compete in this
market in Mexico.
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.
Import
Status
Effective
January 1, 2008, there is a free chicken market between Mexico and the
U.S. This allows U.S. producers to export any amount of chicken leg
quarters free of tariffs to Mexico.
In
addition to NAFTA, Mexico 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.
On
December 2009, Mexico’s Federal Commission of Economic Competition published a
notice announcing an investigation of the Mexican poultry sector regarding
possible monopolistic business practices. No specific companies have been cited
as conducting business in this manner. We, along with other
companies, were required to provide information to the commission. We
expect that the commission will require additional information.
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 Mexico is required to provide Semarnat
with periodic reports regarding compliance with the Environmental Law and the
regulations thereunder.
The level
of environmental regulation in Mexico 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 Mexico 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.
C.
|
Organizational
Structure
|
We are a
holding company with no operations other than holding the stock of our
subsidiaries, all of which are incorporated in Mexico, and engaging in
transactions with our subsidiaries. Our principal operating
subsidiary is BSACV, which owns our principal operating assets, and which
accounted for 91.9% of consolidated total assets as of December 31, 2009,
and 92.1% of our consolidated revenues for the year ended December 31,
2009. All of our subsidiaries are directly owned by us in the
percentage listed below.
The
following table shows our main subsidiaries as of December 31, 2007, 2008
and 2009:
|
|
Percentage Equity Interest
|
|
|
|
|
|
|
|
|
|
|
|
Acuícola
Bachoco, S.A. de C.V.
|
|
|
100 |
|
|
|
100 |
|
|
|
- |
|
Aviser,
S.A. de C.V.
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
Bachoco,
S.A. de C.V.
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
Bachoco
Comercial, S.A. de C.V.
|
|
|
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 |
|
|
|
100 |
|
|
|
100 |
|
In
December 2006 and July 2007, we created Induba Pavos, S.A. de C.V. and
Bachoco Comercial, S.A. de C.V. respectively. They are both 100.0%
owned subsidiaries of Industrias Bachoco.
In 2009,
Acuícola Bachoco, S.A. de C.V. merged with Campi Alimentos, S.A. de
C.V.
D.
|
Property,
Plant 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, Puebla and Mexicali. In Gómez Palacio and Saltillo,
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.
The
following table summarizes the types and number of each type of our production
facilities as of March 2010:
Bachoco Production Facilities
|
|
Number
|
Chicken
breeding farms
|
|
183
|
Broiler
grow-out farms
|
|
529
|
Broiler
processing plants
|
|
9
|
Egg
incubation plants
|
|
25
|
Egg
production farms
|
|
106
|
Swine
breeding farms
|
|
1
|
Swine
grow-out farms
|
|
10
|
Feed
mills
|
|
18
|
Further
process plants
|
|
3
|
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 provide a proper supply to our customers in
that region from our other complexes.
On
April 13, 2008, the secondary processor at our processing plant in
Monterrey caught fire. While the fire destroyed the entire secondary
processor, the primary processor, which is physically separate from the second,
did not suffer any damage and is operating under nearly normal
conditions. The assets were properly covered by an insurance
policy.
In April
2010, the table eggs operation located in Mexicali, B.C. was affected by an
earthquake that hit northwestern Mexico on April 4. The earthquake
partially affected almost all of the farms located in this region, including our
farm. Our affected farm represents approximately 9.0% of our total
egg production. Other facilities, such as feed mill and distribution
centers, were essentially undamaged.
We
operate 18 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 419,000 tons per month. We estimate that we
are the largest producer of animal feed in Mexico.
Our other
facilities include two poultry manure-processing plants. Our
headquarters are located in Celaya Guanajuato, Mexico, and we have 58 sales
centers throughout the regions we serve.
We own
most of our facilities. We lease a limited number of farms and sales
centers, all of which we do not consider material. We also employ a
network of contract growers.
Our fleet
of trucks carries part of the feed from feed mills to farms, live chickens 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
4.A. Unresolved Staff
Comments
None
ITEM
5.
|
Operating
and Financial Review and Prospects
|
The
following discussion should be read in conjunction with our Audited Consolidated
Financial Statements. The Audited Consolidated Financial Statements
have been prepared in accordance with Mexican FRS, which differs in certain
respects from U.S. GAAP. Note 21 to the Audited Consolidated
Financial Statements provides a description of the principal differences between
Mexican FRS and U.S. GAAP, as they relate to us, and a reconciliation to U.S.
GAAP of consolidated stockholders’ equity, net income, a consolidated statement
of stockholders’ equity and a consolidated statement of cash flows under U.S.
GAAP as of December 31, 2008 and 2009 and for the years ended
December 31, 2007, 2008 and 2009.
As of
January 1, 2008, we have adopted the new standard related to “Inflationary
Effects” in accordance with Mexican FRS (Mexican FRS B-10). Due to
the relatively low inflation that the country has consistently achieved during
the past several years, a new financial reporting standard came into effect on
January 1, 2008, which terminates the recognition of inflationary effects
in our financial information. Consequently, financial information
corresponding to periods prior to December 31, 2007 is expressed in
millions of Mexican Pesos with purchasing power as of December 31, 2007,
while the financial information for periods after December 31, 2007 is
stated in millions of nominal Mexican Pesos. The effects of this price-level
restatement in accordance with Mexican FRS have not been reversed in the
reconciliation from Mexican FRS to U.S. GAAP. See the Audited
Consolidated Financial Statements for more detail.
General
In the
following discussion we describe various trends and how they affected our
results of operations for the years ended December 31, 2007, 2008 and
2009.
Mexican
Economic Conditions
In 2007,
the Mexican economy was stable with an annual inflation rate of 3.8% and a final
dollar-peso depreciation rate of the peso against the dollar of 1.1%, as
compared to the end of 2006. Rates on 28-day Cetes had an average of
7.19% for the year.
During
2008, the Mexican economy was very volatile. In the first half of the
year, the Mexican economy showed little signs of volatility. However,
as a result of the global economic slowdown and particularly the financial
crisis in the U.S., the Mexican economy experienced a drastic downturn in the
second half of the year. In particular, the Mexican peso experienced
a sharp depreciation; the Mexican economy had a general slowdown and economic
forecasts deteriorated.
In 2008,
the annual inflation rate was 6.5% and the final dollar-peso depreciation rate
of the peso against the U.S. dollar was approximately 21.0%, as compared to the
end of 2007. The rate on 28 day Cetes had an average of 7.6%
for the year.
During
2009, the Mexican economy continued to show signs of volatility as a result of
the global economic slowdown and particularly the financial crisis in the United
States. In particular, the Mexican peso experienced significant
volatility during the first half of the year but tended to appreciate against
the U.S. dollar towards the end of the year.
In 2009,
the annual inflation rate was 3.57%. The Mexican peso appreciated
5.4% against the U.S. dollar as compared with the end of 2008.
Effects
of Economic Conditions on the Industry and the Company
A
contraction 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.
Mexican
economic conditions have had an important impact on Mexico’s chicken market,
especially in the feed costs and the exchange rate as we noted
above. Balanced feed constitutes a substantial portion of our cost
and is priced mostly in U.S. dollars.
We use
financial instruments to mitigate the cost of goods sold in currencies other
than Mexican pesos. See Note 2-q and Note 10-a of the Audited
Consolidated Financial Statements.
In 2007,
average Mexican producer prices increased by approximately 10.0% mainly due to
increases in the cost of raw materials and a balance between supply and demand
in the market, particularly in the second and third quarter of the
year.
During
2008, average Mexican producer prices increased by approximately 0.2% mainly due
to increases in the cost of raw materials, partially offset by oversupply
conditions primarily in the second part of the year.
In 2009,
average Mexican producer prices increased by approximately
18.8%. This increase is mainly attributable to (i) the adequate
balance between supply and demand present during the first half of the year, and
(ii) the general increase in the cost of raw materials throughout the
year.
Our
outstanding total indebtedness at the end of 2009 increased to Ps. 963.8 million
as compared to the Ps. 625.9 million in 2008, as we increased our debt in order
to ensure sufficient liquidity. In 2009, we had a foreign exchange
loss of Ps. 37.9 million due to fluctuations in the exchange rate of the peso
against the U.S. dollar, as compared to a foreign exchange gain of Ps. 160.2
million in 2008 and a foreign exchange loss of Ps. 3.4 million in 2007. Our
valuation effects of financial instruments were a loss of Ps. 174.6 million in
2009, compared to a loss of Ps. 1.7 billion in 2008, as a result of a lower
amount of financial instruments. See note 10-a in our Audited Consolidated
Financial Statements.
Volume
of Chicken Sold
The 8.2%
increase in the volume of chicken sold in 2007 was mainly due to the business
agreements entered into in 2007, domestic growth and productivity
efforts.
In 2008,
the Company reported an increase in volume of chicken sold of 4.9%, compared to
2007. This increase is due mainly to new farms in the cities of
Hermosillo and an expansion in capacity at our Mérida and Coatzacoalcos
complexes.
In 2009,
the Company increased its volume of chicken sold by 4.6%, compared to 2008,
mainly due to the business agreement reached with producers in the Northeast, as
mentioned above in Item 4: “Information on the Company – History and Development
of the Company – Background and Ownership Structure.”
Trends
in Product Prices for Bachoco
Our
results of operations may also be significantly affected by the cyclical and
volatile nature of Mexican prices for chicken, feed, eggs and
swine.
Chicken
Prices
In 2007,
our chicken prices increased 8.3% as a result of a stable market conditions and
increases in the cost of our main raw materials.
In 2008,
our chicken prices increased 4.4% as a result of increases in our costs of
sales, partially offset by oversupply conditions, which were present throughout
the year.
During
2009, chicken prices increased 12.6% as a result of increases in our cost of
sales and a more stable supply-demand balance during the first half of the
year.
Egg
Prices
In 2007,
our egg prices increased 18.5% as a result of a strong demand, particularly in
the second half of the year.
In 2008,
our egg business was strong and egg prices increased by 23.9% as a result of a
better balance between the demand and supply in the market and improvements in
our mix of products sold.
During
2009, our egg business continued its strong performance as prices increased
12.0% over the previous year as a result of strong demand in the Mexican
market.
Balanced
Feed Prices
Through
2007, international corn prices increased significantly as a result of lower
inventories and increases in alternative uses of corn, such as ethanol
production.
International
grain prices also increased dramatically in 2007, reaching historically high
prices worldwide, due mainly to strong demand and alternative uses for grain,
such as ethanol production. Soybean meal prices also increased, particularly in
the second half of the year, due to strong demand, and lower inventories
worldwide.
In 2007,
balanced feed prices increased by 15.1% in comparison with the prior year, as a
result of increases in the costs of raw materials.
In 2008
our balanced feed prices increased by 19.4% over 2007, however such increase did
not fully reflect the worldwide increase of feed ingredient costs and oversupply
conditions which resulted principally from the global economic
slowdown.
During
2009, balanced feed prices increased by 9.3% as a result of an increase in the
cost of feed ingredients. See “Trends in Prices of Feed Ingredients”
below.
Swine
Prices
In 2007,
our swine prices declined 5.5% as a result of greater competition from imports
and a more fragmented Mexican market.
During
2008, demand and supply were stable for most of the year and swine prices
increased by 19.6% as compared to 2007.
In 2009,
swine prices increased 10.7% over the previous year as a result of a stable
supply of swine.
In
general, we believe that, among other factors, industry price competition may
continue to exert downward pressure on 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 2007, the percentage of grain purchased from domestic
markets was 36.4%, in 2008 it was approximately 48.0% and in 2009 it was
approximately 50.0%.
During
2007, international corn prices increased significantly as a result of lower
inventories and increases in alternative uses of corn, such as ethanol
production.
Beginning
in 2007 and throughout most of 2008, international grain prices increased
drastically reaching new historically high prices worldwide and exceeding the
corn prices reached in 2004, due to strong demand and lower inventories
worldwide. These price increases put strong pressure on our
production costs.
Restrictions
on importing grain under NAFTA have been phased out as of the beginning of
2008. We expect this development to benefit the Company and result in
a reduction of the costs associated with importing our feed
ingredients.
In 2009,
international corn prices showed more stability and were in fact lower when
compared with previous years. However, the high level of inventories
and exchange rate volatility did not result in a net decrease in our cost of
sales.
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:
|
·
|
In
February 2007 and December 2007, the Company reached a business
agreement with “Grupo Libra” and “Grupo AGRA,” respectively, as described
below:
|
|
a)
|
Grupo
Libra is a company located in northeast Mexico. The agreement
establishes a lease for the use of their facilities, which included
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
inventories and brands.
|
|
b)
|
Grupo
Agra is an egg producing company located in the states of Nuevo Leon and
Coahuila in Northeast Mexico. The agreement provides for
leasing of their facilities, which include laying hens farms with a
capacity of approximately 1.0 million hens, a processing table eggs plant,
distribution centers and the Agra brands. In addition, we
acquired all their inventories.
|
The two
transactions in 2007 individually represent less than 1.0% of our total
sales. We analyzed both transactions to determine whether these
agreements should be considered as business acquisitions, under SFAS141R
(previously SFAS141) “Business Combination”. Per the terms of the
agreements, we did not acquire any employees, customer base or production
techniques. For these and other reasons, we concluded that the
transactions did not qualify as a business in accordance with SFAS141R
(EITF98-3) “Determining Whether a non-monetary transaction Involves Receipt of
Productive Assets or of a Business” (paragraph 6) and therefore were not
deemed to be business combinations, in accordance with FAS 141.
Instead,
these transactions were accounted for as asset acquisitions. The
accounting is the same for Mexican FRS. The FAS 141 disclosure
requirements described in paragraph 51-53 therefore do not apply to these
transactions.
Additionally,
we analyzed the appropriate accounting treatment related to leases as described
in FASB 13, “Accounting for Leases,” and concluded that the transactions were
operating leases. These transactions did not qualify as capital
leases because there was no transfer of ownership of the property to Bachoco
before the end of the lease term, the lease did not contain an option to
purchase the leased property at a bargain price, the lease term was not equal to
or greater than 75.0% of the estimated economic life of the leased property and
the present value of rental and other minimum lease payments was not equal to or
greater than 90.0% of the fair value of the leased property. We concluded that
these were operating leases under both the Mexican FRS and U.S. GAAP. The lease
commitments were appropriately included in footnote No. 11 to the Audited
Consolidated Financial Statements. For more detail, see Note 2-j of our Audited
Consolidated Financial Statements.
|
·
|
On
April 13, 2008, the second phase of our production process at our
processing plant in Monterrey caught fire. While the fire destroyed the
entire second phase of our production process, the first phase of our
production process, which is physically separate from the second, did not
suffer any damage and is operating under nearly normal conditions. All the
assets were properly covered by an insurance
policy.
|
|
·
|
In
July 2009, the Company made several asset acquisitions and reached a
series of agreements to improve productivity and efficiency in the
Northeast production complex headquartered in Monterrey,
N.L. The specific acquisitions and agreements made
were:
|
|
a)
|
The
acquisition of the assets of a balanced feed mill from Productora de
Alimentos Pecuarios de Nuevo León, S.A. de C.V. through our Campi
subsidiary. The purpose of this acquisition was to improve the
quality and production capacity of balanced feed. The mill’s production
capacity is about 3,000 tons of pellet feed per
week.
|
|
b)
|
The
acquisition of the assets of a chicken processing plant from Avi Carnes
Monterrey, S.A. de C.V., through our Bachoco subsidiary, with a production
capacity of 9,000 chickens per hour. The goal of this
acquisition was to reduce production costs, replace the Monterrey
processing plant and to increase production capacity and diversify the
chicken business in that region.
|
|
c)
|
An
agreement to rent breeder farms and egg incubation plants from
Reproductoras Asociadas, S.A. de C.V. and one-day-old breeder capacity
farms and egg incubation plants from Producción Avicola Especializada,
S.A. de C.V.
|
|
d)
|
The
Company also made arrangements with contract growers to acquire their
inventories.
|
After
analyzing these transactions for 2009, and the terms of the agreements, we did
not acquire any of their employees, customer base, or debt or production
techniques. As a result, we concluded that the transactions did not
qualify as a business in accordance with ASC topic 805 “Business Combination”
before SFAS141R (EITF98-3) “Determining Whether a non-monetary transaction
Involves Receipt of Productive Assets or of a Business” (paragraph 6) and
therefore were not deemed to be business combinations, in accordance with FAS
141R.
Summary
The
following table sets forth selected components of our results of operations as a
percentage of net revenues for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(percentage
of net revenues)
|
|
Net
revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of sales
|
|
|
(79.5 |
) |
|
|
(86.9 |
) |
|
|
(83.1 |
) |
Gross
profit
|
|
|
20.5 |
|
|
|
13.1 |
|
|
|
16.9 |
|
Selling,
general and administrative expenses
|
|
|
(12.3 |
) |
|
|
(12.0 |
) |
|
|
(10.8 |
) |
Operating
income
|
|
|
8.2 |
|
|
|
1.1 |
|
|
|
6.1 |
|
Comprehensive
financing income (loss)
|
|
|
0.1 |
|
|
|
(6.8 |
) |
|
|
(0.6 |
) |
Taxes
|
|
|
(1.7 |
) |
|
|
1.4 |
|
|
|
(1.7 |
) |
Net
income (loss)
|
|
|
7.0 |
|
|
|
(4.4 |
) |
|
|
3.5 |
|
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,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(percentage
of net revenues) |
|
Chicken
|
|
|
77.6 |
% |
|
|
76.9 |
% |
|
|
78.3 |
% |
Feed
|
|
|
8.0 |
% |
|
|
7.3 |
% |
|
|
6.3 |
% |
Eggs
|
|
|
9.6 |
% |
|
|
10.5 |
% |
|
|
10.1 |
% |
Swine
and Others
|
|
|
4.8 |
% |
|
|
5.3 |
% |
|
|
5.3 |
% |
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Results
of Operations for the Years Ended December 31, 2008 and 2009
General
The
global financial crisis continues to affect the Mexican economy as the inflation
rate for 2009 increased by 3.57%, while national GDP experienced a sharp
contraction of 6.5%, according to information provided by the Central
Bank.
In 2009,
the exchange rate of the peso against the U.S. dollar appreciated 5.4% when
compared to the year-end exchange rate for 2008.
According
to the UNA, the production volume of the Mexican chicken industry decreased by
2.5% in 2009 due to lower demand for these products and lower purchasing power,
which resulted from the economic crisis in Mexico.
On the
other hand, the table egg industry, which is a low cost protein option in
Mexico, increased by 3.3% in terms of domestic production when compared to
fiscal year 2008, as a result of a better balance between supply and demand in
this market.
Additionally,
Bachoco achieved good operating results in several of its productive and
commercial operations of the Company as a result of adequate logistics, cost
controls, efficiency efforts and the continuous improvement in all our
processes.
Net
revenues
Bachoco’s
net sales during 2009 were Ps. 23.3 billion, 15.6% higher than the Ps. 20.1
billion reported in 2008. This was as a result of higher net sales in our main
business lines. For more detail see the table included in Item 5: “Operating and
Financial Review and Prospects - Summary” above.
Chicken
sales increased 17.6% compared to 2008, resulting from an increase in the price
of chicken of 12.6% and an increase in volume sold of 4.6%.
Table egg
sales rose 11.8%, as compared to 2008, mainly due to increases in selling prices
of 12.0%, partially offset by a decrease in volume sold of 0.2%. The
increase was also a result of the strong demand for this product throughout
2009.
Balanced
feed sales decreased 0.4% from the previous year and volume sold fell 8.9% as a
result of a decrease in demand, and was mainly attributed to high raw materials
costs. In 2009, prices for balanced feed rose 9.3%, as compared with 2008 as a
result of the increase in the costs of raw materials.
The
Company sells live swine to local processors. Swine sales increased 11.7% as a
result of a 10.7% increase in the price of swine and a 0.9% increase in the
volume of sales, as compared to 2008.
Sales of
our other business lines (including turkey and beef processed products)
increased by 16.2% as compared to 2008. This increase was mainly driven by an
increase in sales of turkey and by-products, such as poultry
manure.
In 2008
and 2009, we recognized an increase of Ps.16.3 million and decrease of Ps. 7.2
million, respectively, in revenue as a result of the fair valuing of the
Company’s biological assets and agricultural products . See Note 2-g,
and Note 6-b in our Audited Consolidated Financial Statements for more
detail.
Cost
of sales
The costs
of our raw materials were stable, but continued to remain high, especially for
soybean meal during the first half of the year. The high prices of raw
materials, coupled with higher costs associated with the increase in the volume
sold of chicken, lead us to a 10.5% increase in the cost of sales during 2009,
as our costs of sales amounted Ps. 19.3 billion compared to the Ps. 17.5 billion
reported in 2008.
Gross
profit
Gross
margin for 2009 was 16.9% in 2009, compared to the 13.1% reported in 2008, this
as a result of the sales increase of chicken and egg products.
Selling,
general and administrative expenses
Total
operating expenses in 2009 were Ps. 2.5 million, an increase of 4.5%, as
compared to 2008, which resulted primarily from the increase in our distribution
expenses. Total expenses accounted for 10.8% of the Company’s total net
revenues, a decrease when compared with the 12.0% reported for year
2008.
Operating
income
The
consolidated operating result for 2009 was a profit of Ps. 1.4 billion,
representing an increase from the Ps. 230.0 million reported in 2008. The
operating margin for 2009 was 6.1%, as compared to the 1.1% reported in
2008.
Other
income (expense), net
In 2009,
we had other expenses, net of Ps. 65.2 million, as compared to other expenses,
net of Ps. 21.0 million in 2008, mainly due to lower income attributable to
sales of waste animals, raw materials and by products and lower tax
incentives. See Note 17 to our Audited Consolidated Financial
Statements for more detail.
Comprehensive
financial results
During
2009, we recorded a comprehensive financing cost of Ps.133.2 million, compared
with a cost of Ps. 1.4 billion in 2008, which resulted from a reduction in the
valuation of financial instruments. Net interest position and the impact on the
valuation of our financial instruments was a loss of Ps. 95.3 million in 2009,
much lower than the loss of Ps. 1.5 billion reported in 2008. See
Note 10-a to our Audited Consolidated Financial Statements for more
detail.
Income
(loss) before income taxes and non-controlling interest
Income
before income taxes and non-controlling interest was Ps. 1.2 billion 2009 as
compared to a loss of Ps. 1.2 billion in 2008. This increase is
mainly attributable to an increase in gross profit and a decrease in our
comprehensive financing cost.
The total
taxes recognized by the Company at 2009 year end totaled Ps. 406.4 million; this
amount includes a one-time charge of Ps. 188.8 million based on the recognition
of a deferred income taxes relating to a change in the tax rate for 2010
following the Mexican tax reforms and does not affect the Company’s cash
flow. See Note 16-d of the Audited Consolidated Financial Statements
for more details.
Net
(loss) income
Net
income for 2009 was Ps. 809.0 million, representing a net income per share
outstanding of Ps. 1.35 pesos (or U.S. $1.24 per ADS), compared with a net loss
in 2008 of Ps. 886.0 million, or a loss of $1.48 per share (loss of U.S. $1.35
per ADS). This reversal was largely a result of our positive
operating and financial results, partially offset by the increase in our total
taxes.
Results
of Operations for the Years Ended December 31, 2007 and 2008
General
The
global financial crisis had severe repercussions in the Mexican economy,
especially in the second half of the year. In particular, there was a
slowdown in the Mexican economy and a reduction in economic growth
forecasts. In addition, the exchange rate of the peso against the
U.S. dollar experienced a sharp depreciation of 21.0% when compared to the
year-end exchange rate for 2007.
The
Mexican economy had a growth rate of only 1.3% and the annual inflation rate
increased to 6.5%.
According
to the UNA, the production volume of the Mexican chicken industry grew by
approximately 6.4% in 2008 as a result of consumer preference for healthier meat
products, income increases per capita and chicken as a low-cost protein
alternative to other meat sources.
With
respect to the table egg industry, domestic production increased by 1.2%, which
led to a better balance between supply and demand in the market.
Even
though we were able to increase sales in all our main product lines and sold our
entire production, the Mexican economic slowdown, the continued increases in the
cost of our main raw materials and oversupply conditions in the chicken markets
negatively affected our operating and financial
results. Consequently, we achieved an operating margin of 1.1%, which
is lower than the 8.2% reached in 2007 and one of the weakest margins in the
Company’s history.
Net
revenues
Net sales
during 2008 were Ps. 20.1 billion, 10.5% higher than the Ps. 18.2 million
reported in 2007. This was due to an increase in sales in all of our
business lines. For more detail, see the table included in Item 5:
“Operating and Financial Review and Prospects - Summary” above.
Chicken
sales grew by 9.5% as compared to sales in 2007. The increase was due
to an 4.4% price increase. Even when there were oversupply issues
throughout the year, the Company was able to sell its entire chicken
production. Chicken volume grew by 4.9% due to increases in capacity
driven by increases in capacity at several farms located in our Mérida and
Veracruz complexes and new farms located in Hermosillo.
Table egg
sales grew by 20.4% in 2008 as compared to sales in 2007 due to a 23.9% price
increase, partially offset by a 2.8% decrease in volume. The sales
increase was due to stable supply in the Mexican table eggs industry and strong
demand for our table eggs products during most part of the year, of which more
than 50.0% are packaged under our brand name.
During
2008, balanced feed sales grew slightly by 0.9% and the volume of balanced feed
sold dropped 15.5% in comparison to 2007. This business line was
strongly affected by high increases in the prices of raw
material. The 19.4% increase in our balanced feed prices was not
enough to offset the increases in our production costs.
We
increased our pork sales by 35.3% in 2008 as compared to sales in 2007, due to a
13.1% increase in volume sold and a 19.6% increase in our pork prices which
resulted from stable demand in the Mexican market and a slight reduction in
imports of pork products.
In 2008
and 2007, we recognized Ps.16.4 million and Ps. 10.8 million, respectively, in
revenue as a result of the fair valuing part of the Company’s biological assets
and agricultural products. See Note 2-g, and Note 6-b in our Audited
Consolidated Financial Statements for more detail.
Cost
of sales
Our
consolidated cost of sales in 2008 was Ps. 17.5 million, an increase of 20.8%
with respect to 2007, as a result of the substantial increases in the prices of
raw materials, particularly grains, which are the most important components of
our costs of sales.
Gross
profit
As a
percentage of net sales, gross profit was 13.1% in 2008, compared to 21.0%
reported in 2007. The decrease was mainly due to a sharp increase in
the cost of sales.
Selling,
general and administrative expenses
The
operating expenses of the Company in 2008 amounted to Ps. 2.4 billion, an
increase of 7.4% as compared to 2007, primarily due to increases in sales and
distribution expenses. Total expenses accounted for 12.0% of the
Company’s total net revenues, representing a decrease of 0.3% when compared with
the 12.3% reported for 2007.
Operating
income
The
consolidated operating result for 2008 was a profit of Ps. 230.1 million, lower
than the Ps. 1.5 billion profits reported in 2007. The operating
margin was 1.1% in 2008, as compared to the 8.2% reported in 2007.
Other
income, net
Other
income, net represented a net cost of Ps. 21.0 million in 2008 as compared to a
gain of Ps. 69.6 million in 2007, mainly due to lower income for sales of waste
animals, raw materials and by products, lower tax incentives and higher employee
profit sharing contributions. See Note 17 of the Audited Consolidated
Financial Statements for more detail.
Comprehensive
financial results
The
Company had negative comprehensive financial results of Ps. 1.4 billion in 2008,
as compared to the comprehensive financing income of Ps. 19.1 million achieved
in 2007. This reversal was primarily due to negative results in our
exchange rate derivative instruments and grain hedge positions. Our
net interest position and the impact on the valuation of our financial
instruments was a loss of Ps. 1.5 billion in 2008, partially offset by our
foreign exchange gain of Ps. 160.2 million. See Note 10-a of our
Audited Consolidated Financial Statements for more detail.
Income
(loss) before income taxes, and non-controlling interest
Loss
before income taxes and non-controlling interest was Ps. 1.2 billion in 2008, as
compared to an income of Ps. 1.6 billion in 2007.
At
December 31, 2008, the Company recognized an income tax benefit in an
amount totaling Ps. 274.0 million, compared to an income tax expense of Ps.
312.7 million reported in 2007. See Note 16-a of the Audited
Consolidated Financial Statements for more details.
Net
(loss) income
The
Company reported a consolidated net loss of Ps. 886.0 million for 2008,
representing a loss per share of Ps. 1.48 (equivalent to U.S.$1.35 per ADS), as
compared to a consolidated net profit in 2007 of Ps. 1.3 billion or Ps. 2.12 per
share (equivalent to U.S.$1.95 per ADS). This decrease is due to the
lower operating income and the negative comprehensive financial results in
2008.
Income
Tax, Asset Tax and Flat Rate Business Tax, Year 2009
Industrias
Bachoco and all of its subsidiaries file separate income tax
returns. Bachoco, the Company’s main subsidiary, is subject to the
simplified regime, which rate has been set at 19.0% since 2007. This
simplified regime is applicable to agriculture, cattle-raising and fishing,
among others.
Income Tax
In 2009,
a tax reform was authorized by which, as of 2010, the tax rate was increased
from 19.0% to 21.0% in the simplified regime and from 28.0% to 30.0% in the
general regime. The Company recognized the result of this change in 2009, in a
charge to results of Ps. 188.8 million, which is reflected in deferred taxes
under the line item “Adjustment to deferred tax assets and liabilities for
enacted changes in tax law and rates.”
Flat
Rate Business Tax (IETU)
On
October 1, 2007, new laws were published and a number of tax laws were revised
relating to the Flat Rate Business Tax (IETU). These laws came into effect on
January 1, 2008. The IETU rate was set at 16.5% for 2008, 17.0% for 2009 and
17.5% for 2010 and thereafter, based on cash flows, and limits certain
deductions. The IETU is required to be paid only when it is greater than the
income tax to be paid in any given year. To determine the IETU base
in a given year, gross income tax (before subtracting
deductions) is subtracted from the net income tax (after subtracting
deductions), with the difference being the IETU base. If a negative
IETU base is determined because deductions exceed income tax, there will be no
IETU payable. Instead, the amount of the negative IETU payable base
multiplied by the IETU rate results in an IETU credit, which may be applied
against the income tax due for the same year or, if applicable, against any IETU
payable in the next ten years.
Asset
Tax (AT)
In 2007,
a new law was enacted that resulted in the derogation of the asset tax law
beginning on January 1, 2008. In 2007, the asset tax rate was payable
at 1.25% and liabilities were no longer deductible from the asset tax
base. At December 31, 2009, the Company had Ps. 4.5 million in asset
tax credits. See Note 16-c to the Audited Consolidated Financial Statements for
more detail.
Base Year
|
|
Asset tax restated at
December 31, 2009
|
|
Year of
expiration
|
2005
|
|
|
1.5 |
|
2015
|
2006
|
|
|
3.2 |
|
2016
|
Million
of Ps.
|
|
|
4.7 |
|
|
Reconciliation
to U.S. GAAP
The
Company’s Audited Consolidated Financial Statements are prepared in accordance
with Mexican Financial Reporting Standards (“MexFRS”), which differ in certain
respects from U.S. GAAP.
The
principal differences between MexFRS and U.S. GAAP, as they relate to us, with
an explanation, where appropriate, of the method used to determine the
adjustments that affect income and stockholders’ equity, and any additional
applicable disclosures as applicable are described in the Note 21 of our Audited
Consolidated Financial Statements. Our consolidated majority net income under
U.S. GAAP was Ps. 1.3 billion in 2007, a net loss of Ps.
869.4 million in 2008, and a net income of Ps. 787 million in 2009 compared
to a net income of Ps. 1.3billion, a net loss of Ps. 886.0 million and net
income of Ps. 809.0 million, respectively, under Mexican FRS.
Bachoco
has applied Statement of Financial Accounting Standards (SFAS) No.109, (included
in FASB ASC Subtopic 740-10- Income taxes – Overall) (FIN 48.) Accounting for
Income Taxes, for all periods presented. The deferred tax adjustment included in
the net income (loss) and stockholders’ equity reconciliations includes the
effect of deferred taxes on all U.S. GAAP adjustments reflected in the
reconciliation from Mexican FRS to U.S. GAAP. Under U.S. GAAP, the Company
recognizes a deferred tax liability associated with profits originated during
the simplified regime that have not paid income tax previously, but would be
subject to taxation upon future distributions under the Mexican tax law. Due to
the accounting change in Mexican FRS in 2008, this concept generates a
reconciling difference to U.S. GAAP. The deferred tax liability under this
concept amounted Ps. 284.2 million and Ps. 275.0 million as of December 31, 2008
and 2009, respectively.
For U.S.
GAAP purposes, goodwill is reviewed for impairment at least annually in
accordance with the provisions of FASB ASC Topic 350, Intangibles – Goodwill and
Other (Statement No. 142, Goodwill and Other Intangible Assets.) Up to December
31, 2004, we recognized an accumulated effect (increase in equity) of Ps. 58.7
million for the non amortization of goodwill, under U.S. GAAP. In 2007, 2008 and
2009, we performed the required impairment tests of goodwill and did not result
an impairment charge.
The fair
value of financial instruments is the amount at which a financial instrument
could be exchanged in a current transaction between willing parties other than
in a forced sale or liquidation. When possible, we use quoted market prices to
determine fair value. Where quoted market prices are not available, the fair
value is internally derived based upon appropriate valuation methodologies with
respect to the amount and timing of future cash flows and estimated discount
rates for both counterparty and entity’s own risk. However, considerable
judgment is required in interpreting market data to develop estimates of fair
value, so the estimates are not necessarily indicative of the amounts that could
be realized or would be paid in a current market exchange. The effect of using
different market assumptions or estimation methodologies could be material to
the estimated fair values.
Fair
value information presented in Note 21 to our Audited Consolidated Financial
Statements is based on information available at December 31, 2009 and 2008.
Although we are not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been updated since those
dates; therefore, the current estimates of fair value at dates after December
31, 2009 and 2008, could differ significantly from these amounts.
Use
of Estimates in Certain Accounting Policies
In
preparing our Audited Consolidated 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
results.
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 2009 amounted to Ps.
7.7 billion. As applied to our 2009 financial results, the
depreciation was Ps. 662.6 million, or 3.0% of our net revenues. For
further explanation, see Notes 2-h and 7 to the Audited Consolidated Financial
Statements.
Allowance
for Productivity Declines
The
allowance for decline in productivity of our breeder chickens and swine is
estimated based on expected future life under straight line
method. See Note 2g in our Audited Consolidated Financial Statements
for more detail.
Inventory
Valuation
Inventories
At
December 31, 2008 and 2009, our inventories are stated at the lower of
historical cost determined by the average cost method or market (replacement
cost), provided that replacement cost is not less than net realizable
value.
Agriculture
Our
Audited Consolidated Financial Statements recognize the requirements of Mexican
FRS E-1, “Agriculture,” which establishes the rules for recognizing, measuring,
presenting and disclosing biological assets and agricultural
products.
Mexican
FRS E-1 requires biological assets and agricultural products (the latter at the
time of harvesting) to be valued at their fair value, net of the estimated costs
at the point of sale. Bulletin E-1 also 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 impairment loss.
Agricultural
products are live chickens, processed chickens, commercial eggs and pigs
available for sale. The Company’s biological assets are comprised of poultry in
their different stages, incubatable eggs and breeder pigs.
Broiler
chicks less than six and a half weeks old, incubatable eggs, breeder 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.
Broilers
more than six and a half weeks old through their date of sale are valued at fair
value net of estimated point-of-sale costs, considering the price per kilogram
of processed chicken at the valuation date.
Processed
chicken and commercial eggs are valued at fair value net of estimated
point-of-sale costs, considering the price per kilogram of processed chicken and
commercial eggs at the time such items are considered as agricultural products.
From such date through the date of sale, the fair value is considered to be the
cost of processed chicken or commercial eggs, not in excess of net realizable
value.
We are
exposed to financial risks due to changes in the price of chicken. We estimate
that the price of chicken will not fall sharply or significantly in the near
future; consequently, we have not entered into any derivative agreement or any
other type of agreement to offset the risk of a drop in the price of
chicken.
For more
details, see “Inventories and biological assets” in Note 6 of the Audited
Consolidated Financial Statements.
Allowance
for Doubtful Accounts
The
Company’s policy is to record an allowance for doubtful accounts for balances
which are not likely to be recovered. In establishing the required allowance,
management considers historical losses, current market conditions, and our
customers’ financial condition, the amount of receivables in dispute originated
by price differences and the aging of our current receivable and current payment
patterns.
Pension
Plan
We have a
retirement plan in which all non-union workers participate. 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-m and Note 14 to our Audited Consolidated Financial
Statements.
This plan
includes:
|
·
|
Defined
contribution plan: This fund consists of employee and Company
contributions. The employee contribution percentage ranges from 1.0% to
5.0%. The Company contribution ranges from 1.0% to 2.0% in the
case of employees with less than 10 years seniority, and the same
contribution percentage as the employee (up to 5.0%) when the employee has
more than 10 years’ seniority.
|
|
·
|
Defined
benefit plan: This fund consists solely of Company contributions and
covers the Company's labor obligations with each
employee.
|
Seniority
premiums and severance payments are paid to workers as required by Mexican labor
law.
We
recognize the liability for pension benefits, seniority premiums and termination
benefits (severance payments), based on independent actuarial computations using
the projected unit-credit method and financial assumptions net of
inflation.
Valuation
Allowance for Deferred Tax Assets
In
assessing our ability to realize deferred tax assets, management considers
whether it is more likely than not that part or all of the deferred tax assets
will not be realized taking into account that the final ability to
realize our deferred tax assets is dependent upon the generation of future
taxable income during the periods in which such assets become
deductible. We also consider the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. The valuation allowance for deferred tax assets as of January 1,
2008 and 2009 amounted to Ps. 4.6 million and Ps. 28.0 million, respectively.
See note 16-e to our Audited Consolidated Financial Statements.
B.
|
Liquidity
and Capital Resources
|
Our
working capital (current assets less current liabilities) increased year over
year from Ps. 4.6 billion on December 31, 2008 to Ps. 5.2 billion on
December 31, 2009. Such increase was mainly due to an increase
in the cash and investments and a decrease in derivative financial instruments
as current liabilities accounts. The ratio of current assets to
current liabilities on December 31, 2009 was 2.9.
Cash and
investments were Ps. 2.6 billion on December 31, 2009, representing an
increase of Ps.553 million or 27.7% from the previous year. The
increase was primarily due to our positive operating results.
Inventories
were Ps. 3.6 billion as of December 31, 2009, representing a decrease of
Ps. 360 million or 9.1% from the previous year, due mainly to a decrease in our
inventories in raw materials.
Total
debt, including the current portion of long term debt, equaled Ps. 963.8 million
as of December 31, 2009, higher than the Ps. 625.9 million reported as of
December 31, 2008. This 54.0% of increase is due to new debt
obligations taken in 2009, an increase in notes payable to banks to Ps. 234.3
million in 2009 from Ps. 40.0 million in 2008 and an increase in current
installments of long-term debt to Ps. 357.6 million in 2009 from Ps. 194.2
million reported in 2008.
Long term
debt on December 31, 2009 represented 2.5% of our capitalization, compared
to 2.7% reported on December 31, 2008.
Stockholders’
equity increased by 3.4%, to Ps. 14.6 billion on December 31, 2009 from Ps.
14.1 billion on December 31, 2008.
In 2009,
capital investments amounted to Ps. 988 million, most of which were financed
with resources generated from our own operations. These capital
investments were used mainly to finance a business agreement, productivity
projects, production growing capabilities and infrastructure improvements to
keep facilities in good operating conditions. See Item 4: “Capital
Expenditures” for more detail.
We are a
holding company with no significant operations of our own. We principally engage
in transactions with our subsidiaries. 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. See our Consolidated Statement of Cash Flow in our
Audited Consolidated Financial Statements for more details.
We
consider our current level of working capital to be sufficient for our
operations.
We
expect to finance our capital expenditures, additional working capital, 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 Note 10-a and 10-b of our Audited Consolidated
Financial Statements.
We
entered into operating leases for certain offices, production sites, computer
equipment, and automobiles. These agreements have terms ranging
between one and five year periods and some of them contain renewal
options. Rental expenses under these leases for 2007, 2008 and 2009
were Ps. 153.2 million, Ps. 167.9 million and Ps. 177.3
million, respectively. See Note 11 to our Audited
Consolidated Financial Statements for more detail.
C.
|
Research
and Development, Patents and Licenses,
etc.
|
None
For a
description of trends in our product lines, see Item 5: “General
– Trends in Product Prices for Bachoco” above.
E.
|
Off-Balance
Sheet Arrangements
|
We do not
have any off-balance sheet arrangements of the type that we are required to
disclose under this Item.
F.
|
Tabular
Disclosure of Contractual
Obligations
|
Our major
categories of indebtedness included the following:
|
·
|
As
of December 31, 2009, we have Ps. 591.9 million in notes payable to
banks and current installments of long term
debt.
|
|
·
|
Long
term debt to banks, as of December 31, 2009, was Ps. 372.0 million
outstanding (excluding current portion), which is less than the Ps. 391.7
million outstanding on December 31, 2008. The weighted average
interest rates on long term debt for 2008 and 2009 were 12.9% and 6.8%,
respectively. See Note 9 of the Audited Consolidated Financial
Statements for more detail.
|
The
following table summarizes long-tem debt as of December 31,
2009. 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, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
Ps. |
371.9 |
|
|
|
333.4 |
|
|
|
19.0 |
|
|
|
12.0 |
|
|
|
7.5 |
|
Operating
leases
|
|
Ps. |
446.1 |
|
|
|
131.0 |
|
|
|
115.2 |
|
|
|
101.5 |
|
|
|
98.4 |
|
Not
applicable.
ITEM
6.
|
Directors,
Senior Management and Employees
|
A.
|
Directors
and Senior Management
|
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 2010, their positions
and their years of service:
Name
|
Position
|
Years
as a
Member
of the
Board
of Directors
|
Enrique
Robinson Bours Almada
|
Honorary
Chairman of the board
|
56
|
Mario
Javier Robinson Bours Almada
|
Life
Honorary Shareholder Director
|
56
|
Francisco
Javier R. Bours Castelo
|
Chairman
of the Board and Proprietary Shareholder Director
|
28
|
Eduardo
Rojas Crespo
|
Secretary
of the Board
|
2
|
Jose
Gerardo Robinson Bours Castelo
|
Proprietary
Shareholder Director
|
2
|
Juan
Bautista Salvador Robinson Bours
|
Proprietary
Shareholder Director
|
56
|
Jesús
Enrique Robinson Bours Muñoz
|
Proprietary
Shareholder Director
|
16
|
Jesús
Rodolfo Robinson Bours Muñoz
|
Proprietary
Shareholder Director
|
8
|
Arturo
Bours Griffith
|
Proprietary
Shareholder Director
|
16
|
Octavio
Robinson Bours
|
Proprietary
Shareholder Director
|
13
|
Ricardo
Aguirre Borboa
|
Proprietary
Shareholder Director
|
16
|
José
Eduardo Robinson Bours Castelo
|
Alternate
Director
|
16
|
Juan
Salvador Robinson Bours Martínez
|
Alternate
Director
|
16
|
|
|
|
José
Francisco Bours Griffith
|
Alternate
Director
|
16
|
Guillermo
Pineda Cruz
|
Alternate
Director
|
16
|
Avelino
Fernández Salido
|
Independent
Director
|
7
|
Humberto
Schwarzbeck Noriega
|
Independent
Director
|
7
|
The
following table identifies the relationships among the Bours family
members:
Brothers and
Co- Founders
|
|
Sons
|
|
Nephews
|
|
Son in Law
|
Enrique
Robinson Bours Almada
|
|
· Jesús
Enrique Robinson Bours Muñoz
· Jesús
Rodolfo Robinson Bours Muñoz
|
|
· Arturo
Bours Griffith
|
|
Gillermo
Pineda Cruz
|
Mario
Javier Robinson Bours Almada
|
|
· Francisco
Javier R. Bours
· José
Gerardo Robinson Bours Castelo
· Jose
Eduardo Robinson Bours Castelo
|
|
· Jose
Francisco Bours Griffith
|
|
|
Juan
Bautista Salvador Robinson Bours Almada
|
|
Juan
Salvador Robinson Bours Martínez
|
|
· Octavio
Robinson Bours
|
|
Ricardo
Aguirre Borboa
|
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.
Mr. Enrique
Robinson Bours Almada, Chairman of the board and co-founder of the Company
retired in April 2002. 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 28 years as a
member of the board and served as Vice-Chairman for ten years.
Mr. Mario
Javier Robinson Bours Almada, member of the Board of Directors retired in
April 2008, and was named as a Life Honorary Propriety Shareholder
Director. On the same date, the Board named Mr. José Gerardo
Robinson Bours Castelo as a Proprietary Shareholder Director in the place of
Mr. Mario Javier Robinson Bours Almada.
In order
to fully comply with current Mexican Corporate and Securities Market Laws in
which Bachoco’s Shares are traded, we ratified our Board of Directors at our
stockholders’ meeting held on April 28, 2010. As of
June 2010, our Board of Directors is composed of the following
members:
|
o
|
Proprietary Shareholder
Directors: Francisco Javier R. Bours Castelo (Chairman of the
Board), Jose Gerardo Robinson Bours Castelo, Juan Bautista S. Robinson
Bours Almada, Jesús Enrique Robinson Bours Muñoz, Jesús Rodolfo Robinson
Bours Muñoz, Arturo Bours Griffith, Octavio Robinson Bours, Ricardo
Aguirre Borboa.
|
|
o
|
Alternate Directors:
José Eduardo Robinson Bours Castelo, Juan Salvador Robinson Bours
Martínez, José Francisco Bours Griffith, Guillermo Pineda
Cruz.
|
|
o
|
Independent Directors:
Avelino Fernández Salido, Humberto Schwarzbeck
Noriega.
|
|
o
|
Life Honorary: Enrique
Robinson Bours Almada and Mario Javier Robinson Bours
Almada.
|
|
o
|
Secretary of the Board of
Directors: Eduardo Rojas
Crespo
|
Francisco Javier R. Bours
Castelo, Chairman of the Board of Directors, has been a member of the
board for 28 years, and has been Chairman since 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: Megacable Holdings, S.A.B. de
C.V., Congeladora Hortícola, S.A. de C.V., Inmobiliaria of Trento S.A. de C.V.,
Agriexport S.A. de C.V., Acuícola Boca, S.A. de C.V., Industrias Boca, S.A. de
C.V., and Centro de Servicios Empresariales del Noreste, S.A. de
C.V.
José Gerardo Robinson Bours
Castelo, Proprietary Shareholder Director, is member of the board since
April 2008. He previously served as Systems
Manager. Mr. Bours, holds a degree in Computer Engineering from
the ITESM. He currently serves as member of the following
companies: Grupo Megacable, S.A. de C.V., Congeladora Hortícola, S.A.
de C.V., Acuícola Boca, S.A. de C.V., Industrias Boca, S.A. de C.V. and
Promotora Empresarial del Noroeste, S.A. de C.V. He is also Chairman
of Fundación Mexicana para el Desarrollo Rural del Valle del Yaqui and the ITESM
in Obregón.
Juan Bautista S. Robinson Bours
Almada, Proprietary Shareholder Director, has been a member of the board
for 56 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 16 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 8 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 16
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,
Proprietary Shareholder Director, has been a member of the board for 13
years. Mr. Robinson Bours holds a degree in Agricultural
Engineering from the 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
16 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
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 16
years. Mr. Robinson Bours holds a degree in Industrial
Engineering from the 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 16
years, and has served Bachoco as Purchasing
Manager. Mr. Robinson Bours holds a degree in Industrial
Engineering from the ITESM. His other appointments include Chairman
of the board and CEO of Llantas y Accesorios, S.A. de C.V. and member of the
Board of Mega Cable Holdings, S.A.B. de C.V.
José Francisco Bours Griffith,
Alternate Director, has been a member of the board for 16 years. He
holds a degree in Civil Engineering from the Universidad Autónoma de
Guadalajara. Mr. Robinson Bours has worked at Bachoco as
Engineering Manager. He is currently dedicated to agricultural
operations and has run an aquaculture farm for nine years.
Guillermo Pineda Cruz,
Alternate Director, has been a member of the board for 16 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
InverMexico. Mr. Pineda holds a degree in Civil Engineering from
the ITESM and a master’s degree in Business Administration from the Instituto
Tecnológico de Sonora. He co‑founded
Edificadora Pi‑Bo, S.A. de C.V.
in 1983 and is its President and CEO.
Avelino Fernández Salido,
Independent Director, is member of the board since 2003. He is also a
member of the board of Banco Nacional de Mexico, BBVA Bancomer, and Banca
Serfín. His business experience is in the marketing of
grains.
Humberto Schwarzbeck Noriega,
Independent Director, is member of the board since 2003. He holds a
degree in economics from the 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.
Eduardo Rojas Crespo, was
named Secretary of the Board of Directors on April 23,
2008. Mr. Rojas has worked for Bachoco since 2004 as our Chief
Legal Officer. Before joining Bachoco, Mr. Rojas worked for 10
years as the Chief Legal Officer of Grupo Fimex. He holds a law
degree from the Universidad Nacional Autónoma de Mexico (UNAM) and a
post-graduate diploma in Environmental Law and Due Diligence and a master’s
degree in Corporate Laws, both from the Anáhuac University.
Executive
Officers
Our
executive officers as of June 2010 are set forth in the table
below:
Name
|
|
Position
|
|
Age
|
Cristóbal
Mondragón Fragoso
|
|
Chief
Executive Officer
|
|
64
|
Daniel
Salazar Ferrer
|
|
Chief
Financial Officer
|
|
45
|
David
Gastélum Cazares
|
|
Director
of Sales
|
|
58
|
José
Luis López Lepe
|
|
Director
of Personnel
|
|
64
|
Rodolfo
Ramos Arvizu
|
|
Technical
Director
|
|
52
|
Ernesto
Salmón Castelo
|
|
Director
of Operations
|
|
47
|
Andres
Morales Astiazaran
|
|
Director
of Marketing and Value-added Products
|
|
41
|
Marco
Antonio Esparza Serrano
|
|
Comptroller
Director
|
|
54
|
Cristóbal
Mondragón Fragoso, Chief Executive Officer, 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 the
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 Mexico
and a master’s degree in Business Administration from the ITESM.
David Gastélum
Cazares, Director of Sales, joining 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 Mexico 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 the
UNAM.
José Luis López
Lepe, Director of Personnel
since 1993. Before joining us 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
Mexico.
Rodolfo Ramos
Arvizu, Technical Director,
joined us in 1980 and assumed his current position in
1992. 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 the 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 the ITESM.
Andrés Morales
Astiazaran, Director of Marketing
and Value-added Products since July 2006. Before joining us,
Mr. Morales worked for 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 the ITESM
and attended marketing courses at Northwestern University, the University of
Chicago, the ITESM and the IPADE (D1).
Marco Antonio
Esparza Serrano,
Comptroller Director since March 2009. Before joining
Bachoco, Mr. Esparza worked for more than 25 years in the pharmaceutical
industry for three multinational companies, two American companies and one
German company. During that time, Mr. Esparza managed and
directed every area within Finance and Administration as Accounting Manager, Tax
Manager Comptroller, Financial Planning Director and Finance
Director. Mr. Esparza holds a degree in public accounting and
several post-graduate diplomas in Business Administration, Economics and
Direction of Enterprises from universities such as Instituto Politecnico
Nacional, University of California at Berkeley, the ITESM, University of Almeria
Spain and the IPADE.
Audit
Committee
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 the Audit Committee 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.
|
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 a member of the audit committee and the audit committee is now comprised
of 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.
For the
year ended December 31, 2009, we paid approximately Ps. 35.2 million in
aggregate compensation to our directors and executive officers, for services
they rendered in their respective capacities.
We do not
have any special agreements or contracts with any member of our board. All of
our board members are subject to the specific expiration dates of their current
terms of office.
As of
December 31, 2007 2008 and 2009 we had 23,088, 23,248 and 24,065 employees,
respectively.
In 2009,
approximately 49.5% of our employees were members of labor
unions. Labor relations with our employees are governed by 58
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 Mexico, 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.
To the
best of our knowledge, no individual director or manager holds Shares of the
Company. At this time, we have not developed a share options plan for
our employees.
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 B Units consisting in two Series B Shares.
During
the extraordinary meeting held on April 26, 2006 Shareholders approved the
Company’s 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.
Control
Trust
After the
conversion of L Shares to B Shares in 2006, the Control Trust and the
Family Trust own the same number of Shares (496,500,000 Shares or 82.75% of
outstanding Shares). However, these Shares are all now Series B
Shares.
In
November 2008, the Robinson Bours family created a third trust with
102,000,000 Shares, which were taken from one of the existing
trusts. The purpose of this new trust is to serve as collateral for
the Company’s loan indebtedness. The three trusts together accounted
for 496,500,000 Shares outstanding on December 31, 2008 and there has been
no change in the position of each holder.
In the
second half of 2009, the third trust was eliminated and the Shares returned to
the original trust.
Apart
from the ownership set forth above, at the end of April 2010, Fidelity
Management & Research Co. owned 4.6% of our Common Stock, equal to a total
of 2,300,000 ADS’s.
Repurchase
of Shares
In
November 1998, in accordance with rules established by the CNBV, we
established a reserve in the amount of Ps. 180.0 million in nominal pesos, for
the repurchase of Shares. At the end of 2009, the Company had
repurchased zero Shares.
During
our stockholders’ meeting of April 28, 2010, we capped the share repurchase
program for 2010 at a maximum amount of Ps. 273 million. During 2010,
we did not repurchase Shares.
The
following table sets forth the estimated percentages of the Shares held in
Mexico and other Countries as of April 30, 2010.
|
|
|
|
|
|
Mexico
|
|
85.24%
|
Other
Countries
|
|
14.84.6%
|
As of
April 30, 2010, from the 100.0% of the total Shares of the Company, we accounted
for approximately 38 shareholders in the NYSE and 67 in the BMV.
B.
|
Related
Party 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 5 to the Audited
Consolidated Financial Statements. We expect to engage in similar
transactions in the future.
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. 96 million, Ps. 157 million and Ps. 139 million for
the years ended December 31, 2007, 2008 and 2009,
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., 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
Ps. 3 million, Ps. 2 million and Ps. 10 million for the years ended
December 31, 2007, 2008 and 209, respectively, for such
transportation.
We
purchased feed and packaging materials from enterprises owned by Robinson Bours
Stockholders, the family of Enrique Robinson Bours and the family of Juan
Bautista Robinson Bours. The cost of such purchases was Ps. 193
million, Ps. 428 million and Ps. 415 million for the years ended
December 31, 2007, 2008 and 2009, respectively.
Our
accounts payable to related parties totaled Ps. 50 million and Ps. 68 million as
of December 31, 2008 and 2009, respectively. These transactions
took place among companies owned by the same set of stockholders. See
Note 5 to the Audited 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.
C.
|
Interests
of Experts and Counsel
|
Not
applicable.
ITEM
8.
|
Financial
Information
|
A.
|
Consolidated
Statements and Other Financial
Information
|
Our
Audited Consolidated Financial Statements are included in
Item 18. The financial statements were audited by independent
registered public accounting firms and are accompanied by their audit
reports.
On
August 28, 2008, we announced that the Company’s Board of Directors, as per
the Audit Committee’s recommendation, approved the selection of KPMG Cárdenas
Dosal, S.C. as the Company’s independent auditor, effective as of
August 27, 2008.
The
Audited Consolidated Financial Statements have been prepared in accordance with
Mexican FRS, which differ in certain respects from U.S. GAAP. Note 21
to the Audited Consolidated Financial Statements provides a description of the
principal differences between Mexican FRS and U.S. GAAP as they relate to us and
a reconciliation to U.S. GAAP of Consolidated stockholders’ equity, consolidated
net income, a consolidated statement of stockholders’ equity and a consolidated
cash flow statement under U.S. GAAP as of December 31, 2008 and 2009, and
for the years ended December 31, 2007, 2008 and 2009.
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 the Company’s
Audited Consolidated Financial positions and consolidated results of
operations.
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.
In 2007,
2008 and 2009, we declared and paid cash dividends at nominal values of Ps.
353.9, Ps. 353.94 and Ps. 250.0 million, respectively.
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 of approximately 20.0% 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.