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

 

  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

OR

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

  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 Tecnologico 401

Ciudad Industrial, 38010 

Celaya, Guanajuato, Mexico.

(Address of principal executive offices)

 

Daniel Salazar Ferrer

Avenida Tecnologico 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 Trading Symbol(s) Name of each exchange on which registered
American Depositary Shares, each representing twelve
Series B Shares.
IBA 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  ☒

 

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  ☒   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  ☒   No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

 

Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐          Accelerated filer ☒          Non-accelerated filer ☐          Emerging growth company ☐

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

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 Standards as issued by the
International Accounting Standards Board ☒
Other

 

 

 

 

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 ☐

 

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 ☒

 

(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 ☐

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

      Page
       
Part I     7
Item 1.   Identity of Directors, Senior Management and Advisers 7
Item 2.   Offer Statistics and Expected Timetable 7
Item 3.   Key Information 7
A.   Selected Financial Data 7
B.   Capitalization and Indebtedness 10
C.   Reasons for the Offer and Use of Proceeds 10
D.   Risk Factors 10
Item 4.   Information of the Company 15
A.   History and Development of the Company 15
B.   Business Overview 17
C.   Organizational Structure 27
D.   Property, Plant and Equipment 27
ITEM 4. A. Unresolved Staff Comments 29
Item 5.   Operating and Financial Review and Prospects 29
A.   Operating Results 29
B.   Liquidity and Capital Resources 36
C.   Research and Development, Patents and Licenses, etc. 41
D.   Trend Information 41
E.   Off-Balance Sheet Arrangements 41
F.   Tabular Disclosure of Contractual Obligations 41
G.   Safe Harbor 42
Item 6.   Directors, Senior Management and Employees 42
A.   Directors and Senior Management 42
B.   Compensation 49
C.   Board Practices 49
D.   Employees 50
E.   Share Ownership 50
Item 7.   Major Stockholders and Related Party Transactions 50
A.   Major Shareholders 51
B.   Related Party Transactions 52
C.   Interests of Experts and Counsel 53
Item 8.   Financial Information 54
A.   Consolidated Statements and Other Financial Information 54
B.   Significant Changes 55
Item 9.   The Offer and Listing 55
A.   Offer and Listing Details 55
B.   Plan of Distribution 56
C.   Markets 56
D.   Selling Shareholders 56
E.   Dilution 56
F.   Expenses of the Issue 56
Item 10.   Additional Information 56
A.   Share Capital 56
B.   Memorandum and Articles of Association 56
C.   Material Contracts 64
D.   Exchange Controls 64
E.   Taxation 64
F.   Dividends and Paying Agents 70

 

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G.   Statement by Experts 70
H.   Documents on Display 70
I.   Subsidiary Information 70
Item 11.   Quantitative and Qualitative Disclosures about Market Risk 70
Item 12.   Description of Securities Other Than Equity Securities 71
A.   Debt Securities 71
B.   Warrants and Rights 72
C.   Other Securities 72
D.   American Depositary Receipts 72
Part II   74
Item 13.   Default, Dividend Arrearages and Delinquencies 74
Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds 74
Item 15.   Controls and Procedures 74
Item 16.   [Reserved] 76
ITEM 16.  A. Audit Committee Financial Expert 76
ITEM 16.  B. Code of Ethics 76
ITEM 16.  C. Principal Accountant Fees and Services 76
ITEM 16.  .D Exemptions from the Listing Standards for Audit Committees 77
ITEM 16.  E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 77
ITEM 16.  F. Changes in Registrant’s Certifying Accountant 78
ITEM 16.  G. Corporate Governance 79
ITEM 16.  H. Mine Safety Disclosure 82
Part III   82
Item 17.   Financial Statements 82
Item 18.   Financial Statements 82
Item 19.   Exhibits 82

  Index of Exhibits 83

 

3 

 

  

Introduction

 

Industrias Bachoco, S.A.B. de C.V. is a holding company with no operations other than holding the stock of its subsidiaries. Our two main subsidiaries are Bachoco, S.A. de C.V. (“BSACV”), located in Mexico, and Bachoco USA, LLC (“Bachoco USA”) located in the United States of America (“United States” or “U.S.”).

 

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.

 

Additionally, references herein to “OK Industries” or “OK Foods” are, unless the context requires otherwise, to Bachoco USA and its consolidated subsidiaries as a whole.

 

We are incorporated under the laws of the United Mexican States (“Mexico”), but we have operations in both Mexico and the U.S. Our principal executive offices are located in Mexico at Avenida Tecnologico 401, Ciudad Industrial, zip code 38010, Celaya, State of Guanajuato, Mexico, and our main telephone number is +52 (461) 618 3500 or +52 (461) 618 3555.

 

Presentation of Information

 

Fiscal Year

 

The fiscal year for Bachoco and its subsidiaries in Mexico ends in December each year. The fiscal year for Bachoco USA and its subsidiaries in the U.S. ends in April each year. Notwithstanding the foregoing, for purposes of our consolidated financial statements, the accounting year period for all the Company’s subsidiaries ends on December 31.

 

Currency

 

Except as otherwise indicated, all data in the financial statements included below and in Item 18 (which together with the attached notes constitute our “Audited Consolidated Financial Statements”) and the selected financial information included throughout this Form 20-F (this “Annual Report”) have been presented in millions of nominal pesos unless otherwise indicated. References herein to “pesos” or “$” are to the lawful currency of Mexico.

 

 

References herein to “U.S. dollar” or “USD” are to the lawful currency of the United States of America.

 

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 $18.89 to USD1.00 (one U.S. dollar), the exchange rate on December 31, 2019, according to the Banco de México (the “Mexican Central Bank”).

 

Accounting Practices

 

In January 2009, the Comisión Nacional Bancaria y de Valores (Mexican Banking and Securities Commission or “CNBV”) published certain amendments to the Rules for Public Companies and other participants in the Mexican Securities Market that require public companies to report financial information in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), effective as of January 1, 2012. Following these amendments, on January 1, 2012, we adopted IFRS, meeting the CNBV requirements.

 

Our Audited Consolidated Financial Statements included elsewhere in this Annual Report have been prepared in accordance with IFRS, as issued by the IASB.

 

4 

 

 

The rules and regulations of the Securities and Exchange Commission (the “SEC”), do not require foreign private issuers that prepare their financial statements on the basis of IFRS (as published by the IASB) to reconcile such financial statements to generally accepted accounting principles in the United States of America (“U.S. GAAP”). As such, while Bachoco has in the past reconciled its consolidated financial statements prepared in accordance with Mexican Financial Reporting Standards (MFRS) to U.S. GAAP, those reconciliations are no longer presented in Bachoco’s filings with the SEC.

 

Other References

 

Bachoco’s production volume is measured in “tons”, which term refers to metric tons of 1,000 kilograms, equal to 2,204.6 pounds.; the term “billion” refers to one thousand million (1,000,000,000).

 

Non-GAAP Financial Measures

 

The body of generally accepted accounting principles is commonly referred to as “GAAP.” For this purpose, a non-GAAP financial measure is generally defined by the SEC as a numerical measure of a company’s historical or financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of comprehensive income, statement of financial position or statement of cash flows (or equivalent statements) of the company; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.

 

The Company discloses in this Annual Report the so-called non-GAAP financial measures of EBITDA result, EBITDA margin, and net debt. EBITDA result is defined as profit before income tax expense (benefit), financial income (expense), net and depreciation. EBITDA margin is defined as EBITDA result divided by total net revenues. Net debt is defined as long-term debt (including the current portion) plus short term debt minus cash and cash equivalents, primary financial instruments and derivative financial instruments. The non-GAAP financial measures of EBITDA result and EBITDA margin are not substitutes for the GAAP measure of profit for the year. Rather, these measures are provided as additional information to complement the GAAP measure of profit for the year by providing further understanding of the Company’s results of operations from management’s perspective. Additionally, the non-GAAP financial measure of net debt is not a substitute for the GAAP measure of total debt. Rather, this measure is provided as additional information to contemplate the GAAP measure of total debt by providing further understanding of the Company’s debt obligations. Accordingly, EBITDA result, EBITDA margin and net debt should not be considered in isolation or as substitutes for an analysis of the Company’s financial performance, liquidity or debt obligations.

 

Company management believes that disclosure of these non-GAAP measures are an important supplemental measure of the Company’s operating performance and debt obligations because investors, financial analysts and other interested parties frequently use EBITDA and net debt in the evaluation of other companies in the same industry in which the Company operates.

 

Market Data

 

This Annual Report contains certain statistical information regarding the Mexican chicken, egg and balanced feed (or “feed”) markets. We have obtained this information from a variety of sources, including but not limited to Unión Nacional de Avicultores (the National Poultry Association or “UNA”), the Consejo Nacional de Fabricantes de Alimentos Balanceados y de la Nutrición Animal, A.C. (or “CONAFAB”), the U.S. Department of Agriculture (or “USDA”) and the Mexican Central Bank, among others.

 

Other sources of statistical information used by the Company include Consejo Mexicano de Porcicultura (the Mexican Pork Council or “CMP”) and Secretaría de Agricultura y Desarrollo Rural (Ministry of Agriculture and Rural Development or “SADER”), among others.

 

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.

 

5 

 

 

Forward-looking Statements

 

We may from time to time make written or oral forward-looking statements in our periodic reports to the SEC 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, beef and swine. 

 

6 

 

 

 

Part I

 

Item 1. Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2.Offer Statistics and Expected Timetable

 

Not applicable

 

Item 3. Key Information

 

A.Selected Financial Data

 

The financial information set forth below is derived from our Audited Consolidated Financial Statements, which are included in Item 18. We provide details on the figures and year-to-year changes in our Audited Consolidated Financial Statements.

 

The tables below present our key financial information for the fiscal years indicated. Except as otherwise indicated, the amounts are presented in millions of nominal pesos, except per share amounts, which are presented in pesos.

 

STATEMENT OF PROFIT OR LOSS DATA

 

In millions, except per share and share amounts,
for the year ended December 31,
  2019     2019(5)     2018     2017     2016     2015  
    USD     $     $     $     $     $  
Net revenues     3,263.9       61,655.2       61,052.1       58,050.0       52,020.3       46,229.0  
Cost of sales     2,729.3       51,557.4       51,422.4       47,503.0       42,635.1       36,847.5  
Gross profit     534.6       10,097.9       9,629.7       10,547.1       9,385.2       9,381.5  
General, selling and administrative expenses     323.8       6,116.6       6,024.4       5,423.4       4,847.9       4,323.4  
Other income (expenses), net     (0.3     (4.7     102.7       167.6       260.2       (4.6 )
Operating income     210.5       3,976.5       3,708.0       5,291.3       4,797.6       5,053.5  
Net finance income     20.2       381.3       808.6       747.6       797.0       446.6  
Income tax     59.6       1,125.0       1,155.0       1,084.4       1,643.4       1,680.6  
Profit attributable to controlling interest     170.5       3,219.9       3,350.0       4,948.2       3,946.6       3,812.8  
Profit attributable to non-controlling interest     0.7       12.9       11.6       6.2       4.5       6.7  
Profit for the year     171.1       3,232.8       3,361.6       4,954.4       3,951.2       3,819.5  
Basic and diluted earnings per share(1)     0.3       5.37       5.58       8.25       6.58       6.36  
Basic and diluted earnings per ADR(2)     3.4       64.40       67.00       98.97       78.90       76.30  
Dividends per share(3)     0.1       1.400       1.420       1.300       1.300       1.500  
Weighted average shares outstanding(4)     599,972        599,972       599,981       599,998       599,980       599,631  

 

7 

 

 

  (1) Basic and diluted earnings per share are calculated based on the weighted average number of basic and diluted shares and presented in pesos. No potentially dilutive shares exist in any of the years presented, for which reason basic and diluted earnings per share are the same.
  (2) Each ADR represents twelve shares. Earnings per ADR are presented in pesos.
  (3) Dividends per share have been computed by dividing the total amount of dividends paid by the weighted average shares outstanding and are presented in pesos.
  (4) In thousands of shares.
  (5) Our 2019 results include the effects of the adoption of IFRS 16. For more information regarding the adoption of IFRS 16, see Note 2(e) of our Audited Consolidated Financial Statements included herein.

 

STATEMENT OF FINANCIAL POSITION DATA

 

In millions as of
December 31,
  2019     2019     2018     2017     2016     2015  
    USD     $     $     $     $     $  
Total assets     2,948.8       55,702.5       52,865.6       50,557.4       45,090.5       40,446.6  
Cash and cash equivalents     988.0       18,662.8       17,901.8       16,112.3       14,681.2       14,046.3  
Total liabilities     817.5       15,442.2       14,699.9       14,879.5       13,374.3       12,667.2  
Short-term debt(1)     182.1       3,440.4       3,492.8       3,695.1       3,097.5       1,631.9  
Long-term debt     78.8       1,488.2       1,544.8       1,554.0       950.4       2,495.1  
Total stockholders’ equity     2,131.3       40,260.3       38,165.7       35,677.9       31,716.2       27,779.4  
Capital stock     62.2       1,174.4       1,174.4       1,174.4       1,174.4       1,174.4  

 

(1) Includes notes payable to banks and current installments of long-term debt.

  

MARGINS

 

In percentage, for the years ended December 31,   2019     2018     2017     2016     2015    
Gross margin     16.4 %     15.8 %     18.2 %     18.0 %     20.3 %  
Operating margin     6.4 %     6.1 %     9.1 %     9.2 %     10.9 %  
Net margin for the year     5.2 %     5.5 %     8.5 %     7.6 %     8.4 %  

 

Other Indicators

 

The tables set below present key indicators.

 

VOLUME SOLD BY OPERATING SEGMENT

 

In thousands of tons, as of December 31,   2019     2018     2017     2016     2015  
Total sales volume:     2,254.8       2,206.2       2,201.4       2,122.8       2,034.3  
Poultry     1,739.4       1,752.9       1,723.8       1,668.6       1,613.4  
Others     515.4       453.3       477.6       454.2       420.9  

 

Gross Domestic Product, Inflation Rate and CETES

 

The chart below includes Mexican gross domestic product (“GDP”) and inflation rate data from 2015 to 2019, and the average interest rates on 28-day Mexican treasury bills (“CETES”), as provided by the Mexican Central Bank.

 

8 

 

 

Gross Domestic Product

 

Mexico had experienced economic growth in the last four years ended December 31, 2018. In 2018, the Mexican GDP was 2.0%. In each of 2017 and 2016, Mexican GDP was 2.3% and in 2015 it was 2.5%. However, in 2019, Mexican GDP was largely stagnant and reported a small 0.1% annual decrease.

 

Interest Rates

 

Mexico historically has had, and may continue to have, high real and nominal interest rates. The interest rates on 28-day Mexican government treasury securities averaged 7.8%, 7.6%, 6.7%, 4.2% and 2.9% for 2019, 2018, 2017, 2016 and 2015, respectively. High interest rates in Mexico could increase our financing costs and thereby impair our financial condition, results of operations and cash flow.

 

Inflation Rates

 

The annual rate of inflation, as measured by changes in the Mexican National Consumer Price Index, or NCPI, was 2.83% in 2019, 4.83% in 2018, 6.77% in 2017, 3.36 in 2016 and 2.13% in 2015, according to the Mexican Central Bank. An adverse change in the Mexican economy may have a negative impact on price stability and result in higher inflation than its main trading partners, including the United States.

 

GDP, INFLATION RATE AND CETES DATA

 

Year   GDP     Inflation Rate     CETES  
2019     -0.1 %     2.83 %     7.8 %
2018     2.0 %     4.83 %     7.6 %
2017     2.3 %     6.77 %     6.7 %
2016     2.3 %     3.36 %     4.2 %
2015     2.5 %     2.13 %     2.9 %

 

On March 26, 2020, the 28-day CETES rate was 6.59%.

 

Exchange Rates

 

As of December 31, 2019, the exchange rate for the year end published by the Mexican Central Bank was $18.89 per one U.S. dollar. On March 31, 2020, the exchange rate for cable transfers in pesos as certified for customs purposes by the Federal Reserve Bank of New York was $23.45 per one U.S. dollar.

 

9 

 

 

B.Capitalization and Indebtedness

 

Not applicable.

 

C.Reasons for the Offer and Use of Proceeds

 

Not Applicable.

 

D.Risk Factors

 

The Company is exposed to a wide range of risks. Note that the order in which the below risks are described does not necessarily reflect the effect that any of the below risks would have on the Company.

 

Risks Related to Economic, Political and Regulatory Conditions

 

Bachoco’s core businesses are conducted in Mexico and in the United States and, therefore its performance depends on, among other factors, the economic conditions prevailing in those countries, and particularly in Mexico. The Company’s risk exposure related to economic conditions includes risks related to economic performance, exchange rates, interest rates, as well as other political, economic and social events that may negatively affect the Company’s performance and may result in lower demand for, and lower real pricing of, our products.

 

Additionally, the Mexican economy continues to be heavily influenced by the U.S. economy, therefore, deterioration in economic conditions in the U.S. economy may affect the Mexican economy. Prolonged periods of weak economic conditions in Mexico may have, and in the past have had, a negative effect on our Company and a material adverse effect on our results and financial condition.

  

10 

 

 

Unfavorable economic conditions in Mexico or the United States, such as a recession or increases in interest and inflation rates, could have an adverse effect on our financial performance.

 

If the Mexican or U.S. economies experience a high inflation rate, recession or economic slowdown, consumers may not be able to purchase our products as usual, especially in Mexico, where these factors have a direct impact on the consumers. As a consequence, our earnings may be adversely affected.

 

High interest rates in Mexico or in the U.S. could adversely affect our costs and our earnings due to the impact those changes have on our variable-rate debt instruments. Alternatively, we may benefit from the interest we earn on our cash balance. Mexico historically has had, and may continue to have, high real and nominal interest rates.

 

A strong variation in the exchange rates between the peso and the U.S. dollar could negatively affect our financial results, as a greater percentage of our sales are made in pesos, and a large percentage of our raw material purchases are made in U.S. dollars.

 

Furthermore, the Company could be adversely affected by negative economic conditions prevalent in the U.S. or other countries, even when economic conditions in such countries may differ significantly from economic conditions in Mexico, as investors’ reactions to developments in any of these other countries may have an adverse effect on our securities. Consequently, the market value of our securities may be adversely affected by events taking place outside of Mexico or the U.S.

 

Political events and regulatory changes in Mexico could affect Mexican economic conditions and negatively affect our operations.

 

The Company has operations in both Mexico and the U.S. However, it is incorporated under the laws of Mexico, where a greater percentage of its sales are made. Accordingly, we foresee an impact mainly from negative developments in the political, regulatory and economic conditions in Mexico.

 

Mexican political events may significantly affect our operations. In July 2018, the presidential election in Mexico led to the election of a new president and political party, Andrés Manuel López Obrador of the Movimiento Regeneracion Nacional. Mexico’s new president has started to implement changes in laws, public policy and regulations that could eventually affect Mexico’s political and economic situation. Any such changes may have an adverse effect on our business.

 

The direct correlation between economic conditions in Mexico and the U.S. has strengthened in recent years because of the North American Free Trade Agreement (“NAFTA”), now United States – Mexico – Canada Agreement (“USMCA”). During 2017 the renegotiation process of NAFTA began between U.S., Canada and Mexico. The three countries reached an agreement in November 2018, which was later ratified in March 2020. With regard to the industry in which we compete, the trade agreement remained practically unchanged. Because the Mexican economy is heavily influenced by the U.S. economy, any potential re-negotiation of USMCA and/or other U.S. government policies that may be adopted by the U.S. administration (which may result in regulatory gridlock or, on the contrary, a major regulatory change) could have a material adverse effect on the Mexican economy, which, in turn, could affect our business, financial condition and results of operations.

 

In November 2020, presidential elections will take place in the U.S. that may result in a change of the nation’s leadership. Such political change and any other political or regulatory change in the U.S. regarding Mexico may affect economic conditions in Mexico and, as a result, affect our results of operations and financial condition.

 

International trade policies may impact demand for our products and our competitive position.

 

Government policies on international trade and investment, such as sanctions, import quotas, capital controls or tariffs, whether adopted by individual governments, multinational organizations or addressed by regional trade blocs, may affect the demand for our products lines, impact the competitive position of our products or prevent us from being able to sell products in certain countries. The implementation of more protectionist trade policies, such as more detailed inspections, higher tariffs, or new barriers to entry, in countries where we sell products could negatively impact our business, results of operations and financial position. For example, trade disputes between the U.S. and Mexico could negatively affect demand for export products from both countries and directly or indirectly affect the markets in which we compete.

 

Government regulations in Mexico and the U.S. could cause a material increase in the Company’s costs of operations and thus could have a negative impact on our results of operations.

 

Every region in which Bachoco operates is subject to extensive federal, state and foreign laws and regulations that govern the production, packaging, storage, moving and marketing in the food industry and the poultry industry in particular, including several provisions relating to the discharge of materials into the environment.

 

11 

 

 

We may be subject to fines, closures of our facilities, asset seizures, injunctions or criminal sanctions if we are held by a court of competent jurisdiction to be non-compliant with any of the applicable laws and regulations.

 

The adoption of new regulations or changes in the prevailing regulatory environment governing the food industry may entail restrictions in the daily operation of our Company, or increases in our expenses or production costs, conditions that could negatively affect our financial results.

 

Additionally, the imposition of new taxes or changes in the existing tax laws or rates in Mexico or the U.S. could have an adverse impact on our operations and, as a result, negatively affect our financial results.

 

Risks Related to Bachoco and the Poultry Industry

 

The poultry industry in Mexico and the U.S., as well as the chicken industry in other countries, has undergone cyclical periods of higher prices and profitability, followed by overproduction, leading to periods of lower prices and profitability.

 

The market that we serve is subject to volatility with respect to supply and raw material prices, which affects our product prices. We cannot provide assurance that future cyclicality, excess supply, increases in main raw materials prices or downturns in real prices will not adversely affect our financial results.

 

The largest single component of our cost of sales is the cost of grains used to prepare balanced feed, including sorghum and corn, and some other ingredients such as: soybean meal and marigold extract, among others.

 

Increase or volatility in main raw materials prices may adversely affect our operating and financial results.

 

The price of most of these raw materials is subject to significant volatility resulting from weather conditions, the size of harvests, governmental agricultural policies, currency exchange rates, transportation, storage costs, and other factors.

 

Furthermore, the cost of corn in the U.S. may be affected by an increase in the demand both of ethanol and feed production, which can reduce the supply of corn in the U.S. market, adversely affecting our operations in the U.S. 

 

High prices or volatility in main raw materials could adversely affect our production costs and, therefore, our financial results.

 

Supply, demand and the prices we are able to charge for our products may fluctuate due to competition from other food producers and the economic performance in the countries we are present may adversely affect our operating and financial results.

 

Excess in chicken or egg supply caused by increases in production from our competitors, coupled with a weak demand for our products in the markets we operate in, may result in a downturn in prices for these products and, as a result, our operating margins and financial results could be negatively affected.

 

We face competition from other chicken producers in all markets in which we sell our products. These chicken producers have the financial resources and operating strengths to directly compete with our Company. 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 markets. Accordingly, we can provide no assurance that our performance will not be adversely affected by increased competition.

 

12 

 

 

Raising animals and meat processing involve animal health and disease control risks, which can have an adverse impact on our results of operations.

 

Our operations in Mexico and in the U.S. depend on raising animals and meat processing, which are subject to risks such as diseases (like different types of avian flu) and contamination during production, packaging, storage or distribution processes. Such diseases may cause bans from countries we export to. Any such ban could affect export prices, and therefore our financial results.

 

Live chickens and swine are susceptible to infections by a variety of microbiological agents that may result in higher mortality rates, which could affect our earnings and financial results.

 

Our chicken, turkey, beef and egg products are subject to contamination during processing, packaging, distribution or conservation. Potential contamination of our products during processing, however, could affect a larger number of our products, which may have a significant impact on our results.

 

Natural disasters or other events beyond our control, such as hurricanes, tornadoes or earthquakes could have an adverse impact on our results of operations.

 

Natural disasters may result in additional losses of inventory and could significantly damage our facilities. Our facilities in Mexico are susceptible mainly to earthquakes and hurricanes. Our facilities near Mexico’s coast are most vulnerable to the risk of severe weather. Our U.S. facilities are located in Georgia, Alabama, Arkansas and Oklahoma, a region vulnerable to tornadoes. Extensive damage to these facilities could affect our ability to conduct our regular production and, as a result, reduce our operation results.

 

Bachoco’s business operations could be disrupted by COVID-19 or other pandemic disease and health events.

 

Pandemic disease and health events, such as the recent outbreak of the novel strain of coronavirus infection (COVID-19) have the potential to negatively impact economic activities in many countries, including Mexico, with consequent adverse effects on our customers and business.

 

The ongoing outbreak of COVID-19 was first reported on December 31, 2019 in Wuhan, Hubei Province, China. From Wuhan, the disease spread rapidly to other parts of China as well as other countries, including Mexico and the United States, growing into a global pandemic. Since the outbreak began, countries have responded by taking various measures including imposing quarantines and medical screenings, restricting travel, limiting public gatherings and suspending certain activities. In addition, concerns related to COVID-19 have negatively impacted global financial markets, resulting in, among others, exchange rate volatility (including the Mexican peso to U.S. dollar exchange rate) and the fall of stock prices (including the price of our stock), trends which may continue. There are other broad and continuing concerns related to the potential effects of COVID-19 on international trade (including shipping and transportation channels, supply chains and export levels), travel, employee productivity, securities markets, and other economic activities that may have a destabilizing effect on financial markets and economic activity. There may also be changes in domestic and international governmental policies in response to the COVID-19 pandemic that could negatively affect our daily operations and our ability to supply our products. In addition, we are likely to experience reduced demands in certain sectors in which we compete, as our customers limit visits to certain food markets. Furthermore, although we are considered an essential productive sector in both Mexico and the U.S., in the case of a shutdown involving Bachoco, any of our subsidiaries or our customers, we may be unable to meet the needs of our customers for an unknown period of time, which could adversely affect our business, financial condition and results of operations.

 

Our growth through mergers, acquisitions or joint ventures may be impacted by challenges in integrating significant acquisitions.

 

We have made in the past, and may make in the future, certain acquisitions in order to continue our growth. Acquisitions involve risks including, among others, the following: failure of the acquired businesses to achieve expected results, inability to retain or hire key personnel of the acquired businesses, inability to retain the same client and supplier base and inability to achieve expected synergies and/or economies of scale. If we are unable to successfully integrate or manage our acquired businesses, we may not realize anticipated cost savings and revenue growth, which may result in reduced profitability or losses.

 

Elimination of tariff barriers may adversely affect our performance.

 

U.S. producers may increase exports to Mexico because chicken, eggs and swine are free of import quotas to Mexico according to the USMCA. Poultry producers in the United States have developed 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, a condition that could have a material adverse effect on our performance in Mexico.

 

Regulations on animal health and environmental changes in Mexico could affect Mexican poultry industry conditions and, as a consequence, negatively affect the Company.

 

Our processes are subject to several animal health and environmental regulations that include animal raising, transportation, packaging, storage and distribution regulations. Drastic changes in any of these regulations could negatively affect our daily operations and ability to supply our products and, as a result, affect our financial results. Changes in regulations may also require the implementation of new processes or equipment to comply with the new regulations, a condition that may negatively affect our liquidity, as our capital investments could increase.

 

13 

 

 

Our inability to maintain good relationships with our work force and its labor union may affect our processes, and as a consequence, our financial results.

 

If we are unable to maintain good relations with our employees and labor union we may be faced with significant work stoppages as a result of labor problems, a condition that may affect our processes and our operating results.

 

Risks relating to Bachoco’s investors and its American Depositary Receipts (or ADRs)

 

The Robinson Bours family owns 73.25% of our total shares outstanding and their interests may differ from the interests of other security holders. With that percentage, the Robinson Bours family holds 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 Company trades its ADRs on the New York Stock Exchange (“NYSE”) with each ADR representing twelve common shares.

 

The prevailing market prices for the ADRs and the shares could decline if the Robinson Bours family sold substantial amounts of their shares, whether directly, or indirectly, through two Mexican trusts through which they hold their shares, or if the perception arose that such a sale could occur. See Item 7 for more details about the Company’s trusts.

 

The market value of our securities may be affected by economic and market conditions prevailing in any other country, 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 perception and, consequently, the market value of our securities may be adversely affected by events elsewhere.

 

Payment of cash dividends may be affected by the exchange rate of the peso versus the U.S. dollar.

 

Because we pay cash dividends in pesos, exchange rate fluctuations will affect the U.S. dollar amounts received by holders of ADRs upon conversion of such cash dividends by the Bank of New York (BNY) Mellon, who acts as our Depositary Bank.

 

The protection afforded to non-controlling stockholders in Mexico is different from that in the United States.

 

Under Mexican law, the protection afforded to minority stockholders is different from that 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 stockholders 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. federal 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.

 

14 

 

 

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. 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 includes 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 ADRs 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 SEC with respect to that future issuance of shares; or (ii) the offering qualifies for an exemption from the registration requirements of the Securities Act of 1933, as amended.

 

We make no promises that we will file a registration statement with the SEC to allow holders of ADRs 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 ADR holders.

 

Item 4. Information of the Company

 

A.History and Development of the Company

 

The Company was legally formed in Mexico as Industrias Bachoco, S.A.B. de C.V., on April 17, 1980, in Obregon, State of Sonora, Mexico, and is frequently referred to as Bachoco.

 

We are incorporated under the laws of Mexico, but we have operations in both Mexico and the U.S. Our principal executive offices are located in Mexico at Avenida Tecnologico 401, Ciudad Industrial, zip code 38010, Celaya, State of Guanajuato, Mexico, and our telephone number is +52 (461) 618 3500.

 

Our investor relations department is located at the address above and can be reached by email at inversionistas@bachoco.net or by telephone at +52 (461) 618 3555.

 

The SEC maintains an Internet website that contains reports and other information regarding issuers that file electronically with the SEC. This annual report and the exhibits thereto and any other document we file pursuant to the Securities Exchange Act E of 1934, as amended (the “Exchange Act”) may be viewed on the SEC Internet site (http://www.sec.gov) and on our website (www.bachoco.com.mx). However, the content of our website is not incorporated by reference into this annual report.

 

Our operating segments, which are comprised of our product lines, are identified on the basis of our core principles in accordance with IFRS 8.10. Accordingly, our operating segments are comprised of the following five components: chicken, eggs, pork, balanced feed and other meat products. The chicken and eggs segments meet, in an aggregate basis, the quantitative thresholds for separate reporting, while the pork, balanced feed and other meat products lines are immaterial, both on an individual and aggregate basis, and have therefore been reported on a combined basis in the “other operating segments” category. We have aggregated the chicken and eggs operating segments into one reportable segment. As a result, we end up with two reportable operating segments, “Poultry” and “Others”.

 

15 

 

 

Important events in the development of the Company’s business

 

We were founded in 1952 and have grown from a small commercial table egg operation in the state of Sonora into a vertically integrated Company and the leading poultry company in Mexico, as well as, in our opinion, one of the most important poultry companies worldwide.

 

In 1963, we started operations in the cities of Navojoa, Los Mochis and Culiacan, producing just table eggs. In 1971, we commenced the production of chicken in an operating facility that we opened in the city of Culiacan.

 

In 1974, we established a new complex in Celaya, Guanajuato, Mexico and in 1980 we legally incorporated as Industrias Bachoco, S.A.B. de C.V. in Obregon, State of Sonora, Mexico. As our products were increasingly widely accepted, we opened offices and distribution centers in Mexico City. In 1993, we moved our headquarters from Obregon to Celaya, and opened a new complex in the city of Tecamachalco, in the Southeast of Mexico.

 

In 1994, we continued expanding our coverage, this time with a new complex in the city of Lagos de Moreno, in Western Mexico. By 1994, we had four productive complexes strategically located throughout Mexico and an important presence in the Mexican poultry market share.

 

In September 1997, we began trading on the Mexican Stock Exchange (or “BMV”) and on the NYSE, through our ADR Level III Facility.

 

Furthermore, in December, 1999, we acquired Campi. With this acquisition we entered the chicken market in the South of Mexico, starting a new business line selling balanced feed to third parties. In 2001, we established our sixth productive complex in the city of Gomez Palacio, located in the Northeast of Mexico.

 

In December 2006, we acquired most of the assets and inventories of Del Mezquital to start a new complex in the city of Hermosillo, located in Northern Mexico, close to the border with the United States.

 

In 2007, through a business agreement with Grupo Libra and Grupo Agra we entered a new business, the sales of turkey and beef value-added products, and increased our production capacity of table eggs. Both companies are located in the Northeast of Mexico.

 

In 2009, we made diverse business agreements with companies located at the Northeast of Mexico. Specifically, to improve capacity and efficiency in our Northeast production complex headquartered in Monterrey, we: (i) acquired the assets of a balanced feed mill and a soybean processing plant from Productora de Alimentos Pecuarios de Nuevo León; (ii) acquired the assets of a chicken processing plant from Avi Carnes Monterrey; (iii) entered into agreements to rent breeder farms and egg incubation plants from Reproductoras Asociadas, and one-day-old breeder capacity farms and egg incubation plants from Produccion Avicola Especializada; and (iv) made arrangements with contract growers to acquire their inventories.

 

In August 20, 2011, we acquired Trosi de Carnes, S.A. de C.V. (or “Trosi”); this facility is located in Monterrey, Northern Mexico. Trosi produces and sells processed beef and chicken.

 

On November 1, 2011, the Company entered the U.S. market and increased its export business with the acquisition of the American poultry company OK Foods. This company has operations across the River Valley area in Arkansas and Oklahoma. It supplies grocery retailers, food service distributors and commodity customers throughout the U.S., as well as foreign markets. Our U.S. subsidiary, Bachoco USA, is the holding company of OK Foods.

 

In December 2011, the Company carried out a transaction to buy certain property assets of Mercantil Agropecuaria Coromuel, S.A. de C.V. (or “MACSA”), whereby the Company reinforced its presence in the State of Baja California in Mexico with three distribution centers.

 

In July 2013, the Company reached an agreement to acquire the Arkansas breeding assets of Morris Hatchery Inc., a U.S. company. These assets are comprised mainly of equipment and bird inventory (laying hens that produce hatching eggs).

 

 

16 

 

 

In July 2015, the Company reached an agreement to acquire the Georgia breeding assets of Morris Hatchery Inc. These assets are comprised of mainly equipment and bird inventory (laying hens that produce hatching eggs), with a capacity of approximately one million laying hens. See Notes 4 and 12 of our Audited Consolidated Financial Statements for more detail.

 

In December 2015, the Company reached an agreement to acquire the Oklahoma City Fully Cooked facility from American Foods Group, a U.S. Company. This acquisition is comprised of all of American Foods Group’s Chicken assets located in Oklahoma City, with a capacity to produce over 700,000 pounds per week of fully cooked chicken products. The Company closed the transaction in February 2016 through its subsidiary, OK Foods.

 

In 2017, the Company made two acquisitions: (a) Proveedora La Perla S.A. de C.V. (hereinafter “La Perla”), a pet food plant located in central Mexico. This acquisition includes all of La Perla’s assets owned in the State of Queretaro, Mexico. These assets have the capacity to produce over 65,000 tons a year of dry pet food and are comprised of a facility for producing pet food treats; and (b) Albertville Quality Foods Inc. (hereafter “AQF”), a U.S. company located in the State of Alabama that produces and sells value-added further processed products. This acquisition is comprised of two value-added, further processing plants. We merged AQF with OK Foods, Inc. at the end of 2017 and, thus, it is not operating as a separate subsidiary.

 

In 2019, the Company announced that it reached an agreement to invest in the company Sonora Agropecuaria S.A. de C.V. (“SASA”), a swine processing and distributor company with operations in the Mexican States of Sonora and Jalisco. This investment is expected to create synergies with the Company’s current live swine business, accelerate the Company’s rhythm of growth and continue to move forward the process of diversification in other animal proteins. As of the date of this Annual Report, the Company is awaiting approval of this investment from the Mexican antitrust authorities. We expect to complete the acquisition process in 2020 and thereafter capture the opportunities that we have identified.

 

Capital Expenditures

 

We finance most of our capital expenditures with resources generated by our operations.

 

The following is a summary of the capital expenditures incurred by the Company during the periods covered by this Annual Report with the amounts having been computed under IFRS.

 

In 2019, we made capital expenditures of $2,069.3, which were mainly allocated towards our organic growth plans, productivity and upgrading bottle necks in different parts of our process.

 

In 2018, we made capital expenditures of $1,982.6, which were mainly allocated towards our organic growth plans, productivity and upgrading bottle necks in different parts of our process as described above.

 

In 2017, we made capital expenditures of $3,513.4, which were mainly allocated towards our organic growth plans and the acquisitions made during the year as described above.

 

In 2016, we made capital expenditures of $2,459.7, which were mainly allocated towards our organic growth plans by investing in projects that will make our processes more efficient, alleviating bottlenecks, as well as in the replacement of part of our transportation fleet and of other equipment in all of our facilities.

 

At present, as part of its regular course of business, the Company continues with its replacement of equipment and productivity projects.

 

B.Business Overview

 

General

 

Bachoco owns and manages more than a thousand facilities, organized in nine production complexes and more than 80 distribution centers in Mexico, and one production complex in the United States.

 

We participate in the food industry in Mexico and in the U.S., mainly in the poultry industry.

 

We are the leader in the Mexican poultry industry, and one of the largest poultry producers globally. In 2011, we entered the U.S. chicken market through our acquisition of OK Foods.

 

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In Mexico, our core business is poultry (chicken and egg products), but we also produce and sell a wide range of other products, which we refer to as “others,” including, among others, balanced feed, pet food, live swine, beef and turkey value-added products, one day old breeders and chicks, as well as a laboratory that produces vaccines for the poultry industry and other similar industries.

 

Sales generated by these other product lines, except for balanced feed/pet food sales, each on an individual basis, do not represent more than 1.0% of our total sales.

 

In the United States, our sole product line is almost exclusively chicken products.

 

In the recent years, we have not experienced material changes in the development or production of our products.

 

Principal Markets

 

We operate mainly in Mexico and the U.S. We estimate that we are the biggest producer of chicken products in Mexico. Based on our internal estimates, we currently account for approximately 35.0% of the Mexican chicken production market and are the second largest producer of eggs with an estimated market share of approximately 5.1%. We currently estimate that we have approximately 3.4% market share in balanced feed products.

 

As noted previously, in the U.S. we produce and distribute only chicken products. Based on our internal estimates, we currently account for approximately 1.9% of the chicken production market in the U.S.

 

The following table sets forth, for each of the periods indicated, our net revenues by main product lines as a percentage of total net revenues, as of December 31, 2019, 2018 and 2017:

 

NET REVENUES BY OPERATING SEGMENTS

 

In millions of pesos, for the year ended
December 31,
  2019     2018     2017  
    $     %     $     %     $     %  
Net Revenues     61,655.2       100       61,052.1       100       58,050.0       100  
Poultry     55,653.0       90.3       55,308.1       90.6       52,479.4       90.4  
Others     6,002.2       9.7       5,744.0       9.4       5,570.6       9.6  

 

Our poultry operating segment is our largest product line in terms of revenue. Within our poultry operating segment, our main product lines are chicken and eggs, which are described in more detail in the following paragraphs. Within our “Others” segment, our main product line is balanced feed, which is also described in more detail in the following paragraphs.

 

Overview of the Chicken Industry in Mexico

 

According to the UNA, chicken products are the main source of protein consumed in Mexico.

 

Mexico is among the ten main chicken producers worldwide, with an estimated production of 3,550.4 thousand tons of chicken meat in 2019, and a per capita consumption of 33.1 kilograms a year in 2019, a 1.8% increase from 32.5 kilograms a year in 2018.

 

Fresh chicken is the most popular meat consumed in Mexico. According to the UNA, more than 90% of chicken is sold fresh, and just a small percentage is sold frozen and with value added (marinated, breaded, partially cooked and fully cooked, among others). These products have found limited acceptance among Mexican consumers due to tradition and historical consumer preferences for fresh chicken.

 

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We estimate that we are Mexico’s largest chicken producer with around a 35.0% share of the chicken production market, and, when combined with our largest vertically integrated competitor in Mexico, we account for approximately 60.0% of total Mexican poultry production.

 

According to the USDA, Mexico is a main destination for U.S. chicken exports. Chicken imports from the U.S. have increased from 204.1 thousand tons in 2008 (when restrictions for leg quarters imports were phased out in January 2008) to approximately 459.5 thousand tons in 2019.

 

In particular, in 2019 total chicken imports increased 9.8% when compared to 2018. This increase was primarily due to a decrease in the prices of products coming from the United States.

 

Chicken products in Mexico are classified into six main categories: live, public market, rotisserie, supermarket broiler, chicken parts and value-added products. Bachoco operates in all of these categories. For a better understanding of the chicken market in Mexico, the following is a brief description of each category of chicken products: 

 

 

Live chicken is sold live to small independent slaughtering operations or to wholesalers that contract with independent slaughtering operations for processing.

 

 

Public market chicken is a whole broiler presented either un-eviscerated or eviscerated, generally sold within 48 hours after slaughter. This product is sold to consumers without any packaging or brand identification.

 

 

Rotisserie chicken is a whole broiler presented eviscerated and ready to cook.

 

 

Supermarket chicken is a fresh whole broiler presented with the edible viscera packed separately.

 

 

Chicken cuts 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.

 

 

Value-added products refer mainly to cut-up fresh chicken parts with value-added treatment like marinating, breading and individual quantity frozen.

 

While we operate in all six of these chicken categories, our product mix varies from region to region, reflecting different consumption and distribution patterns.

 

SALES AND VOLUME OF CHICKEN BY CATEGORY

 

In 2019

 

Industry /volume(1)

 

Bachoco /volume

 

 

Bachoco /sales

 

Live

 

n/a

 

 

39

%

 

 

31

%

Public market

 

n/a

 

 

11

%

 

 

11

%

Rotisserie

 

n/a

 

 

28

%

 

 

29

%

Supermarket

 

n/a

 

 

4

%

 

 

4

%

Chicken parts

 

n/a

 

 

13

%

 

 

15

%

Value-added products

 

n/a

 

 

5

%

 

 

10

%

 

 

In 2018

 

Industry /volume(1)

 

Bachoco /volume

 

 

Bachoco /sales

 

Live

 

37

 

40

%

 

 

32

%

Public market

 

9

 

11

%

 

 

11

%

Rotisserie

 

37

 

28

%

 

 

29

%

Supermarket

 

3

 %

 

4

%

 

 

5

%

Chicken parts

 

11

 %

 

12

%

 

 

14

%

Value-added products

 

3

 %

 

5

%

 

 

9

%

 

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In 2017

 

Industry /volume(2)

 

 

Bachoco /volume

 

 

Bachoco /sales

 

Live

 

 

37

%

 

 

41

%

 

 

32

%

Public market

 

 

11

%

 

 

11

%

 

 

11

%

Rotisserie

 

 

35

%

 

 

24

%

 

 

26

%

Supermarket

 

 

5

%

 

 

5

%

 

 

5

%

Chicken parts

 

 

9

%

 

 

12

%

 

 

14

%

Value-added products

 

 

3

%

 

 

8

%

 

 

13

%

 

 

(1)

Industry information for 2019 is not available as of the date of this report.

 

(2)

Source: UNA.

 

Overview of the Chicken Industry in the U.S.

 

According to the USDA and the UNA, chicken is the main protein consumed in the U.S., but, unlike in Mexico, most of the chicken is sold by producers in cuts, and the cuts are mainly sold frozen and with value-added (more than 85%). This is due to a large increase in demand for the three main components of chicken: the breast, wing, and leg quarters.

 

The U.S. is the world’s largest producer of chicken. Its annual production is estimated at 19.9 million tons or 43.9 billion pounds in 2019. This represents a 3.1% increase over the 19.3 million tons produced in 2018, with per capita consumption among the highest worldwide, per annum, estimated at 43.0 kilograms (around 94.8 pounds).

 

The U.S. chicken industry is substantially consolidated and vertically integrated. Most producers of chicken use state-of-the-art technology in their processes. It is estimated that the three main chicken producers account for 53.4% of the total chicken production in the U.S.

 

Another characteristic of the chicken industry in the U.S. is the use of contract growers, with approximately 95% of chicken produced by contract growers. Such production consists of providing the growers with chickens, balanced feed, vaccines, medicines and training required for the growing of chickens. The grower supplies its facilities and labor required in order to bring the chickens to slaughter-ready weight. The contract grower is then paid based on the productivity and efficiency of its flock.

 

Brazil and the U.S. are the main exporters of chickens worldwide, and their main destinations are Mexico, China, Russia and the Middle East, among other countries. We estimate that our market share is around 1.9% in the U.S.

 

Overview of the Egg Industry in Mexico

 

According to the UNA, Mexico has the largest per capita consumption of eggs (or “table eggs”) in the world.

 

There is an estimated per capita consumption of around 23.4 kilograms for 2019, a 2.2% increase when compared to 22.9 kilograms in 2018.

 

Mexico’s 2019 annual egg production is estimated at 2,871.6 million tons, an increase of 2.5% as compared to 2,802.7 million tons produced in 2018.

 

When compared to other protein sources, eggs are among the cheapest sources of protein in Mexico. The egg industry is more fragmented than the chicken industry.

 

Table eggs in Mexico are classified in three main categories: bulk, packaged and processed.

 

 

Bulk is distributed in large 360-egg cases.

 

 

Packaged is branded packages of mainly 12, 18, 24 or more eggs.

 

 

Processed is liquid or powdery eggs used mainly by the bakery industry.

 

20 

 

Bachoco participates in the bulk and packaged categories of eggs but does not participate in the processed egg market.

 

We estimate that we are the second largest producer of table eggs in Mexico. In each of 2019 and 2018, we produced approximately 5.1% of the total eggs produced in Mexico measured in tons. We sell both brown and white eggs. We estimate that we are the largest producer of brown eggs in Mexico, and the largest marketer of packaged eggs with brand identification.

 

In 2019, 2018 and 2017, the volume sold in the table eggs category in the Mexican industry and by the Company was:

 

SALES AND VOLUME OF EGG BY CATEGORY

 

In 2019

 

Industry /
volume(1)

 

Bachoco /volume

 

 

Bachoco /sales

 

Bulk

 

n/a

 

 

28

%

 

 

24

%

Packaged

 

n/a

 

 

72

%

 

 

76

%

Processed

 

n/a

 

 

0

%

 

 

0

%

 

In 2018

 

Industry /
volume(1)

 

Bachoco /volume

 

 

Bachoco /sales

 

Bulk

 

77

 

27

%

 

 

27

%

Packaged

 

15

 

73

%

 

 

73

%

Processed

 

8

 

0

%

 

 

0

%

In 2017

 

Industry /
volume(2)

 

 

Bachoco /volume

 

 

Bachoco /sales

 

Bulk

 

 

79

%

 

 

29

%

 

 

25

%

Packaged

 

 

14

%

 

 

71

%

 

 

75

%

Processed

 

 

7

%

 

 

0

%

 

 

0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Industry information for 2019 is not available as of the date of this report.

 

(2)

Source: UNA.

 

Overview of the Balanced Feed Market in Mexico

 

According to CONAFAB, Mexico is among the ten biggest producers of balanced feed worldwide.

 

According to CONAFAB, it is estimated that 36,204 thousand tons of balanced feed were produced in Mexico in 2019, a 4.5% increase from 34,637 thousand tons of balanced feed produced in 2018.

 

Producers of balanced feed are classified as either commercial or integrated; commercial manufacturers produce for the market while integrated manufacturers mostly produce for themselves and occasionally for other producers.

 

Bachoco participates in both integrated and commercial channels, as it produces balanced feed used for internal consumption as well as balanced feed it ultimately sells to third parties.

 

In 2019, CONAFAB estimated that the production mix between commercial and integrated was about 39.6% and 60.4%, respectively. This mix has not changed much over the last several years.

 

21 

 

The following table sets forth, for each of the periods indicated, our net volume sold of balanced feed:

 

BALANCED FEED VOLUME SOLD

 

Thousands of tons

 

Production

 

 

Bachoco’s
Production

 

 

Estimated Market
Share

 

2019(1)

 

 

14,327

 

 

 

492

 

 

 

3.4

%

2018(1)

 

 

13,203

 

 

 

429

 

 

 

3.2

%

2017(1)

 

 

12,616

 

 

 

451

 

 

 

3.6

%

 

 

(1)

CONAFAB estimates.

 

Seasonality Effects

 

The poultry industry worldwide is very susceptible to price changes in its main raw materials, such as corn, soybean meal and sorghum. As a result, the industry is characterized by cyclical periods of higher profitability leading to overproduction followed by periods of lower prices and lower profitability.

 

Our sales are moderately seasonal in Mexico. Generally, we experience the highest levels of sales in the second and fourth quarters due to higher chicken consumption during the holiday seasons.

 

As for our sales in the U.S., there is slightly less seasonality due to the mix of products offered in the market, but breast meat prices are typically higher in the second and third quarters and wings are more in demand in the first and fourth quarters.

 

Pricing for chicken and eggs products

 

Chicken and eggs are considered a commodity item. Changes to the supply or demand and changes in raw material prices can directly impact sale prices and, as a result, affect the profitability of main producers. Another factor that impacts chicken pricing, mainly in U.S., is the international demand.

 

Main Raw Materials and Sources of Supply

 

As a vertically integrated company, our processes start in our main product lines with production of balanced feed, as well as with the buying of grandparent breeder flocks.

 

Our production of chicken processes starts with the purchasing of one-day birds called “grandparent” birds. These birds are raised to maturity in our farms where fertile eggs are produced to continue through our production processes. Grandparent birds are bought mainly in the U.S. and also in some other countries from genetic bird firms.

 

The largest single component of our cost of sales is the cost of balanced feed raw materials, mainly grain (corn and sorghum), as well as soybean meal, used to prepare balanced feed. We operate our own feed mills to produce balanced feed for both our individual business consumption as well as to sell to third parties.

 

The prices of these ingredients are subject to significant volatility resulting from weather, the size of harvests, transportation and storage costs, governmental agricultural policies, currency exchange rates and other factors. The Company engages in hedging of its feed costs in order to assure a more stable cost of grains.

 

In Mexico, domestic crops are limited, therefore a large percentage of our raw materials are imported from the U.S. In 2019, in terms of volume, we bought approximately 19.0% of our total grain from the domestic market and the remaining 81.0% from the U.S.

 

22 

 

Marketing Channels Used by the Company

 

Marketing and Distribution of Chicken Products in Mexico

 

We have developed an extensive distribution system to participate in all the existing distribution channels of chicken and egg products. We consider our distribution system one of the Company’s strengths, where we have developed extensive expertise and knowledge of the business.

 

We participate and operate in all the following marketing channels:

 

 

Live Chicken. Unlike most other countries, Mexico has a large marketing channel of live chicken, which mainly operates in the central and southern regions of Mexico.

 

 

Wholesalers. Large percentages of our chicken sales operate via wholesalers. The main products marketed in this channel are live and public market chicken, as well as rotisserie. We do not have exclusive supply agreements with our customers.

 

 

Institutional. We sell a large amount of product to institutional customers. We mainly sell chicken cuts and rotisserie chicken in the institutional channel. Success in supplying the institutional channel depends on consistency and good service, and only larger producers with more modern processing facilities and distribution capacity can compete in this market.

 

 

Supermarket. We sell cuts and value-added products as well as supermarket chicken types through supermarket channels or convenience stores. In this channel we emphasize our brand image as well as our superior service, reinforced by frequent delivery to ensure freshness, to build consumer’s loyalty.

 

 

Retail. A wide range of products are sold under this marketing channel that goes from the live chicken to value-added or public market and supermarket chicken type. The Company supplies several points of sale that directly sell these products to the customers.

 

23 

 

We use our own fleet to transport the majority of rotisserie chickens, supermarket broilers and other chicken products to our customers in Mexico. 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 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 and retailers and transport certain products directly to supermarkets and food-service operations. Our distribution infrastructure includes more than 60 cold-storage warehouses and facilities and a large fleet of vehicles.

 

Marketing and Distribution of Chicken Products in the U.S.

 

Our U.S. operations, which lie across the River Valley area in Arkansas and Oklahoma, Alabama and Georgia, produce mainly chicken products. Those plants mainly supply grocery retailers, food service distributors, national accounts and commodity customers throughout the U.S. The U.S. complex also services the foreign market and exports to several countries including various Asian countries and Mexico. Our distribution line through our plants is handled mainly through third parties.

 

Marketing and Distribution of Eggs Products in Mexico

 

Eggs are mostly sold packaged with brand identification. We sell white and brown eggs. Our branded carton of brown eggs is a premium product in the Mexican market because consumers perceive them to be of higher quality.

 

Our marketing strategy in the egg business is to gradually move from bulk to packaged white eggs. Packaged eggs are less vulnerable to price fluctuation and create brand loyalty.

 

We have designed our egg distribution system to transport eggs from our laying farms to customers in all sales regions.

 

 

Wholesalers. We sell eggs in bulk; these wholesalers operate mainly in central Mexico. This product is sold to consumers mainly by kilogram and not by unit.

 

 

Institutional. We sell eggs in bulk in this institutional marketing channel.

 

 

Supermarket. We sell eggs packaged with brand identification and a large number of presentation patterns in packages of 12, 18, 24 or more eggs.

 

 

Retail. We distribute eggs directly to customers in packages with brand identification.

 

Marketing and Distribution of Balanced Feed in Mexico

 

Our production of balanced feed to third parties accounts for a wide range of products. We produce balanced feed products mainly in the poultry industry, but we also produce in other markets such as pet food, cattle, swine and fish, among other species.

 

We sell balanced feed products mainly to small livestock producers and through a network of small distributors located mainly in central and southern Mexico. Currently, we have six feed plants dedicated to producing balanced feed to third parties.

 

24 

 

Patents, Licenses and Other Contracts

 

At the end of 2019, we owned a total of 773 industrial and intellectual intangible assets as described below:

 

 

a)

623 registered brands; from them, 430 are brands registered in Mexico and 92 are brands registered outside of Mexico, and 101 commercial media communications brands.

 

 

b)

10 patents in Mexico.

 

 

c)

140 copyrights, from them 52 are software copyrights and 88 billboards copyrights.

 

The Company’s operations are not dependent on the existence of patents or licenses or contracts signed with customers or suppliers.

 

We own the rights to a wide range of brands that we use to market our products. These rights are renewed every ten years.

 

Material Effects of Government Regulations on the Company’s Business

 

Every region where Bachoco operates is subject to extensive federal, state and foreign laws and regulations, which can have a material effect on the Company. Such laws and regulations include, among others, the following:

 

Import and Export Regulations

 

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 (mainly leg quarters) free of tariffs to Mexico.

 

The U.S. chicken exports to Mexico have substantially increased since applicable restrictions on such imports have recently phased out. However, this development does impact the Mexican market for chicken because neither we, nor any other Mexican chicken producer, are yet able to export similar products to the U.S. Our production complex in the U.S. exports chicken products to several countries such as China and Mexico, among others, and therefore it is subject to various laws and regulations that apply in each of these countries.

 

Antitrust Regulations

 

In Mexico, the Ley Federal de Competencia Económica (“Mexican Economic Competition Law” or “LFCE”), regulates monopolies and monopolistic practices.

 

Under this law, Mexican producers, including Bachoco are required to notify the Comisión Federal de Competencia Económica (“Competition Federal Commission” or “COFECE”) of all proposed transactions exceeding specified threshold amounts as set forth in the Mexican Economic Competition Law. The COFECE can impose conditions on, and prevent or unwind, any such transactions by Mexican companies. We have complied with all requirements under this law. In December 2009, Mexico’s COFECE published a notice announcing an investigation of the Mexican poultry sector regarding possible monopolistic business practices. No specific companies were cited as conducting business in this manner. We, along with other Mexican producers and distributors, were required to provide information to the commission during the following years. As a result of this investigation, COFECE imposed several fines on us for supposedly having certain practices where the price of chicken was manipulated.

 

In all cases, the Company disagreed with the COFECE’s resolution and appealed all of the resolutions according to the provisions of Mexican law in order to assert our rights as a company that contributes to the development of the country and to a free market.

 

As of the date of this Annual Report, some of these judgments were concluded in favor of the Company; accordingly, the provision recorded for this purpose was cancelled.

 

25 

 

Anti-dumping Regulations

 

Since 2003, chicken (excluding leg quarters for which the Mexican government had imposed certain temporary restrictions), eggs and swine import quotas were eliminated by virtue of NAFTA and its successor, the USMCA. 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, including Mexico, especially in periods of overcapacity in the United States.

 

On January 1, 2008, the restrictions previously imposed for leg quarters were phased out. As a result, there are no restrictions on exporting these products to Mexico at this time.

 

In February 2011, the Secretaría de Economía (or “Mexican Ministry of Economy”) initiated an antidumping investigation focusing exclusively on imports of leg quarters to Mexico from the U.S. This investigation was requested by Bachoco and two other Mexican poultry companies.

 

As a result of this investigation, in January 2012, the Ministry of Economy issued a preliminary ruling on anti-dumping procedures and confirmed dumping conditions on chicken leg quarters imported from the U.S., including margins ranging from 62.90% to 129.77%, stating that such practices damaged the Mexican poultry industry.

 

The Mexican Ministry of Economy had the authority to impose anti-dumping duties but did not proceed as the interested parties expressed the desire to reach an agreement. The companies involved provided new arguments.

 

Consequently, on August 7, 2012, after examining all final arguments, the authorities confirmed the existence of dumping conditions that caused harm to the domestic poultry industry. The Mexican Ministry of Economy imposed anti-dumping duties on imports of chicken leg quarters from the U.S., but stated that such penalties would not be applied immediately, as the poultry industry was being affected by the presence of avian flu type H7N3 in the State of Jalisco. It is worth noting that the Company´s facilities were not affected by this outbreak of influenza.

 

As of the date of this report, we do not have any further information from the Mexican Ministry of Economy regarding the application of such duties to the chicken industry. We do not believe we will be subject to any anti-dumping fines and thus have not recorded any provisions in our consolidated financial information.

 

Environmental and Sanitary Regulation

 

The chicken industry is subject to government regulation in the health and environmental safety areas, including provisions relating to water, air pollution and noise control. Below is a description of the principal laws and administrative authorities in these areas in Mexico and the U.S.:

 

 

Mexico. The Servicio Nacional de Sanidad Inocuidad y Calidad Alimentaria (Mexican Sanitary Authority or “SENASICA”), the Ley General de Equilibrio Ecológico y Protección Ambiental (General Law of Ecological Balance and Environmental Protection) and the Secretaría del Medio Ambiente y Recursos Naturales (Ministry of Environment and Natural Resources or “SEMARNAT”).

 

 

The United States. The USDA, the Centers for Disease Control, the Environmental Protection Agency (or “EPA”), the U.S. Department of Homeland Security (or “DHS”) and the U.S. Department of Labor (or “DOL”).

 

All of these laws or regulations can bring administrative and criminal proceedings against companies that violate environmental and safety laws and regulations, and after certain administrative procedures, such violations can result in the closure of non-complying facilities.

 

The Company provides information to these authorities on a regular basis or whenever required to assure the Company’s compliance thereof. Our Mexican and U.S. subsidiaries are also in compliance with all current regulations and are constantly monitored to ensure compliance in case of any changes in the regulatory environment.

 

26 

 

The Comisión Nacional del Agua (CONAGUA, for its Spanish acronym) imposed fines on the Company for infractions the Company supposedly committed when extracting water from wells and other sources for livestock use. The Company is appealing the imposition of these fines and has registered a provision for the amount that it will probably pay. 

 

C.

Organizational Structure

 

The Company is a holding company with no operations other than holding the stock of its subsidiaries. Our main operating subsidiaries are BSACV and Bachoco USA (the holding company for OK Foods), which own our main operating assets.

 

In 2019, our subsidiary BSACV accounted for 60.8% of consolidated total assets and 63.4% of total consolidated sales and our subsidiary Bachoco USA, accounted for 16.7% of consolidated total assets and 27.6% of total consolidated sales.

 

All of our subsidiaries are directly owned by us in the percentages listed below. The following table shows our main subsidiaries as of December 31, 2019, 2018 and 2017:

 

PERCENTAGE EQUITY INTEREST 

 

Subsidiary

 

Country

 

2019

 

 

2018

 

 

2017

 

Aviser, S.A. de C.V.

 

Mexico

 

 

99.99

 

 

 

99.99

 

 

 

99.99

 

Bachoco, S.A. de C.V.

 

Mexico

 

 

99.99

 

 

 

99.99

 

 

 

99.99

 

Bachoco Comercial, S.A. de C.V.

 

Mexico

 

 

99.99

 

 

 

99.99

 

 

 

99.99

 

Campi Alimentos, S.A. de C.V.

 

Mexico

 

 

99.99

 

 

 

99.99

 

 

 

99.99

 

Operadora de Servicios de Personal, S.A. de C.V.

 

Mexico

 

 

99.99

 

 

 

99.99

 

 

 

99.99

 

PEC LAB, S.A. de C.V., and subsidiary

 

Mexico

 

 

64.00

 

 

 

64.00

 

 

 

64.00

 

Secba, S.A. de C.V.

 

Mexico

 

 

99.99

 

 

 

99.99

 

 

 

99.99

 

Sepetec, S. A. de C.V.

 

Mexico

 

 

99.99

 

 

 

99.99

 

 

 

99.99

 

Servicios de Personal Administrativo, S.A. de C.V.

 

Mexico

 

 

99.99

 

 

 

99.99

 

 

 

99.99

 

Induba Pavos, S.A. de C.V.

 

Mexico

 

 

99.99

 

 

 

99.99

 

 

 

99.99

 

Bachoco USA, LLC. and subsidiary

 

U.S.

 

 

100.00

 

 

 

100.00

 

 

 

100.00

 

Wii kit RE LTD.

 

Bermuda

 

 

100.00

 

 

 

100.00

 

 

 

100.00

 

Proveedora La Perla S.A. de C.V.

 

Mexico

 

 

100.00

 

 

 

100.00

 

 

 

100.00

 

 

Bachoco USA is a subsidiary incorporated on March 2, 2012 to serve as the holding company for O.K. Industries, Inc., the American poultry company we acquired in November 2011.

 

At the end of 2016 we set up Wii kit RE LTD, a captive reinsurance company to complement our risk management strategy, as a subsidiary of the Company, in which we own 100% of the shares. Wii kit RE LTD., is a Class I reinsurance company that provides insurance coverage to its affiliates.

 

In July 2017, we acquired La Perla, a Mexican corporation, as a fully owned subsidiary of the Company. This company is dedicated to the production and sale of pet food.

 

For more detail regarding the Company’s subsidiaries, see Note 5 of our Audited Consolidated Financial Statements included herein.

 

D.

Property, Plant and Equipment

 

We have more than a thousand production facilities in Mexico and in the U.S. (most of which are farms) and more than 80 distribution centers that are located throughout Mexico, to ensure freshness and minimize transportation time and costs.

 

We own most of our facilities, own around 75% of our farms and lease a limited number of other farms and sales centers. We also employ a network of contract growers.

 

27 

 

The following table indicates Bachoco’s production facilities and the number of each type of facility, both in Mexico and the U.S., as of December 31, 2019:

 

 BACHOCO’S FACILITIES

 

 

 

Number of Facilities:

 

Facilities

 

In Mexico

 

 

In The U.S.

 

Chicken breeding farms

 

 

127

 

 

 

200

 

Broiler grow-out farms

 

 

485

 

 

 

283

 

Broiler processing plants

 

 

7

 

 

 

2

 

Hatchery

 

 

21

 

 

 

2

 

Egg production farms

 

 

129

 

 

 

0

 

Swine breeding farms

 

 

1

 

 

 

0

 

Swine grow-out farms

 

 

19

 

 

 

0

 

Feed mills

 

 

20

 

 

 

2

 

Further process plants

 

 

4

 

 

 

5

 

 

Bachoco’s Facilities in Mexico

 

In the past, our facilities in Mexico were grouped in several complexes with main offices in Mérida, Coatzacoalcos, Tecamachalco, Celaya, Lagos de Moreno, Monterrey, Gómez Palacios, Culiacán and Hermosillo. In 2014, we implemented a new structure whereby our facilities are now grouped according to “business units” where each business unit is responsible not only for the production process but also for customer service in an assigned region.

 

Our eight processing plants process around 11.7 million chickens per week and our laying farms produce around 12.0 thousand tons of commercial eggs each month.

 

Six of the twenty feed mill plants in Mexico, are dedicated to the production of balanced feed for sales to third parties and the remaining fourteen are dedicated mainly to internal consumption. We produce around 40 thousand tons of balanced feed per month for sale to third parties.

 

We own other facilities, including two poultry manure-processing plants. We also own a laboratory that produces vaccines for the poultry industry, which we mainly use for internal purposes, but we also sell some vaccines to third parties.

 

Expansion, Construction or Issues Related to Our Facilities in Mexico

 

In 2019 and 2018, we continued with our organic growth plans and productivity projects to improve our efficiency and to alleviate bottlenecks, thereby increasing production, in some of our production centers. For instance, we increased our grow-out capacity, improved our productivity and increased our hatchery capacity, and made several improvements in our processing plants. We also replaced part of our fleet in all of our business units.

 

In July 2017, we acquired La Perla, a pet food company with the capacity to produce over 65,000 tons a year of dry pet food and that has a facility for producing pet food treats.

 

In 2016, we continued several projects to improve our efficiency and alleviate bottlenecks, thereby increasing production, in some of our production centers. For instance, we increased: our breeding and processing capacity in the Yucatan peninsula region, our table egg production capacity in the southwest region and our hatchery capacity in the northern region of Mexico.

 

28 

 

Bachoco’s Facilities in the U.S.

 

We have facilities across the River Valley area in Arkansas, Oklahoma, Alabama and Georgia. We process around 3.0 million chickens per week in those facilities. Our offices are in Fort Smith, Arkansas. Our slaughter and deboning plants and feed mills are located in Fort Smith, Arkansas and in Heavener, Oklahoma. We have further-processing plants to produce value-added chicken products in Fort Smith, Oklahoma City, Muldrow, Oklahoma and in Alabama; hatcheries in Heavener and Stigler, Oklahoma; broiler research farms, in Greenwood, Arkansas and Hartford, Arkansas; and our cooler storage and distribution center in Muldrow, Oklahoma.

 

Expansion, Construction or Issues Related to Our Facilities in the U.S.

 

In July 2013, the Company reached an agreement to acquire the Arkansas breeding assets of Morris Hatchery Inc., a U.S. company. These assets are comprised mainly of equipment and bird inventory (laying hens that produce hatching eggs), with a capacity of approximately 350 thousand laying hens.

 

In July 2015, the Company reached an agreement to acquire the Georgia breeding assets of Morris Hatchery Inc. These assets are comprised mainly of equipment and bird inventory (laying hens that produce hatching eggs), with a capacity of approximately one million laying hens.

 

In December 2015, the Company reached an agreement to acquire the Oklahoma City Fully Cooked facility from American Foods Group, a U.S. Company. This acquisition is comprised of all of American Foods Group’s chicken assets located in Oklahoma City, with a capacity to produce over 700 thousand pounds per week of fully cooked chicken products. The Company closed the transaction in February 2016 through its subsidiary, OK Foods.

 

In July 2017, we acquired AQF a company that produces and sells value-added further processed products.

 

See Note 4 of our Audited Consolidated Financial Statements for more detail. 

 

The Company plans to continue with several projects, primarily in Mexico, gradually increasing our chicken and egg production in the next few years.

 

ITEM 4.A.

Unresolved Staff Comments

 

None.

 

ITEM 5.

Operating and Financial Review and Prospects

 

A.

Operating Results

 

In January 2009, the CNBV published certain amendments to the Rules for Public Companies and other participants in the Mexican Securities Market that require public companies to report financial information in accordance with IFRS as issued by the IASB, effective as of January 1, 2012.

 

Following these amendments, for the year ended December 31, 2012, we adopted IFRS, with January 1, 2011 as our transition date. Thus, we timely issue our periodic reports under IFRS, meeting all of the CNBV requirements.

 

The rules and regulations of the SEC do not require foreign private issuers that prepare their financial statements on the basis of IFRS (as issued by the IASB) to reconcile such financial statements to U.S. GAAP. As such, while the Company has in the past reconciled its consolidated financial statements prepared in accordance with MFRS to U.S. GAAP, those reconciliations are no longer presented in Bachoco’s filings with the SEC.

 

29 

 

Year 2019 Overview

 

In 2019, we posted improvements in our total sales and volume sold, when compared to the previous year.

 

These results were driven by both external and internal conditions. Externally, we benefitted from (i) a stable cost of our main raw materials in U.S. dollar terms, (ii) stability in the average exchange rate of the Mexican Peso versus the U.S. dollar, and (iii) a strong level of demand in Mexico during the first half of the year. However, we were negatively impacted by (i) oversupply conditions, particularly in the fourth quarter, in both Mexico and the U.S. and (ii) low prices for animal protein in the U.S.

 

Internally, we increased the volume sold in our others segment and managed to keep our total cost of sales and SG&A expenses in line primarily due to (i) the implementation of our organic growth strategies, (ii) our ability to capture efficiencies to continue as a low cost producer company and (iii) the implementation of several projects to be closer to our customers and better understand and attend to their needs.

 

Macroeconomic Conditions in Mexico

 

In 2019 Mexican macroeconomic conditions were stable for most of the year. The annual inflation rate was 2.83%, and the Mexican peso depreciated 0.4% on average against the U.S. dollar and appreciated 4.0% at year-end. However, there were also some uncertainties regarding Mexico’s economic growth, with annual GDP growth in 2019 being negative 0.1%. This represents the first time Mexico has reported a contraction in ten years.

 

According to UNA estimates, in 2019, the volume of chicken in Mexico grew by approximately 2.3%, which is slightly below normalized levels. However, the production of eggs increased by approximately 2.5%.

 

Operating Performance

 

All figures discussed below are information for 2019, with comparative figures of 2018 and 2017 prepared in accordance with IFRS and presented in millions of pesos unless otherwise indicated. This information should be read in conjunction with our Audited Consolidated Financial Statements.

 

The following table sets forth selected components of our results of operations for each of the periods indicated:

 

STATEMENT OF PROFIT OR LOSS DATA

 

In millions of pesos, except per share and share amounts
for the years ended December 31,

 

2019(5)

 

 

2018

 

 

2017

 

 

 

$

 

 

$

 

 

$

 

Net revenues

 

 

61,655.2

 

 

 

61,052.1

 

 

 

58,050.0

 

Cost of sales

 

 

51,557.4

 

 

 

51,422.4

 

 

 

47,503.0

 

Gross profit

 

 

10,097.9

 

 

 

9,629.7

 

 

 

10,547.1

 

General, selling and administrative expenses

 

 

6,116.6

 

 

 

6,024.4

 

 

 

5,423.4

 

Other income (expenses), net

 

 

(4.7

 

 

102.7

 

 

 

167.6

 

Operating income

 

 

3,976.5

 

 

 

3,708.0

 

 

 

5,291.3

 

Net finance income

 

 

381.3

 

 

 

808.6

 

 

 

747.6

 

Income tax

 

 

1,125.0

 

 

 

1,155.0

 

 

 

1,084.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit attributable to controlling interest

 

 

3,219.9

 

 

 

3,350.0

 

 

 

4,948.2

 

Profit attributable to non-controlling interest

 

 

12.9

 

 

 

11.6

 

 

 

6.2

 

Profit for the year

 

 

3,232.8

 

 

 

3,361.6

 

 

 

4,954.4

 

Basic and diluted earnings per share(1)

 

 

5.37

 

 

 

5.58

 

 

 

8.25

 

Basic and diluted earnings per ADR(2)

 

 

64.40

 

 

 

67.00

 

 

 

98.97

 

Dividends per share(3)

 

 

1.400

 

 

 

1.420

 

 

 

1.300

 

Weighted average shares outstanding(4)

 

 

599,972

 

 

 

599,981

 

 

 

599,998

 

 

30 

 

(1)

Basic and diluted earnings per share are calculated based on the weighted average number of basic and diluted shares and presented in pesos. No potentially dilutive shares exist in any of the years presented, for which reason, basic and diluted earnings per share are the same.

(2)

Each ADR represents twelve shares. Earnings per ADR are presented in pesos.

(3)

Dividends per share have been computed by dividing the total amount of dividends paid by the weighted average shares outstanding and are presented in pesos.

(4)

In thousands of shares.

(5)

Our 2019 results include the adoption of IFRS 16. For more information regarding the adoption of IFRS 16, see Note 2(e) of our Audited Consolidated Financial Statements included herein.

 

Operating Results 2019 vs 2018

 

The following table sets forth, for each of the periods indicated, our net revenues by main product lines as a percentage of total net revenues, in each period:

 

NET REVENUES BY OPERATING SEGMENTS

 

In millions of pesos

 

2019

 

 

2018

 

 

Change

 

 

 

$

 

 

% sales

 

 

$

 

 

% sales

 

 

$

 

 

% sales

 

Net Revenues

 

 

    61,655.2

 

 

 

100.0

 

 

 

    61,052.1

 

 

 

100.0

 

 

 

       603.1

 

 

 

1.0

 

Poultry

 

 

      55,653.0

 

 

 

90.3

 

 

 

      55,308.1

 

 

 

90.6

 

 

 

        344.9

 

 

 

0.6

 

Others

 

 

        6,002.2

 

 

 

9.7

 

 

 

        5,744.0

 

 

 

9.4

 

 

 

        258.2

 

 

 

4.5

 

 

NET REVENUES BY GEOGRAPHY

 

In millions of pesos

 

2019

 

 

2018

 

 

Change

 

 

 

$

 

 

% sales

 

 

$

 

 

% sales

 

 

$

 

 

% sales

 

Net Revenues

 

 

61,655.2

 

 

 

100.0

 

 

 

61,052.1

 

 

 

100.0

 

 

 

603.1

 

 

 

1.0

 

In Mexico

 

 

44,780.2

 

 

 

72.6

 

 

 

43,510.9

 

 

 

71.3

 

 

 

1,269.3

 

 

 

2.9

 

In the U.S.

 

 

16,875.0

 

 

 

27.4

 

 

 

17,541.2

 

 

 

28.7

 

 

 

(666.2

 

 

(3.8

 

Net Revenues

 

In 2019, net sales totaled $61,655.2 million, $603.1 million or 1.0% more than the $61,052.1 million reported in the same period in 2018. The sales increase is mainly attributed to higher prices in our poultry segment and higher volume sold in our Others segments.

 

In 2019, sales of our U.S. operations represented 27.4% of our total sales, compared with 28.7% in 2018. This slight decrease was primarily a result of higher sales in our Mexico operation.

 

The Company’s sales of poultry products increased 0.6% in 2019, mainly as a result of a 1.4% increase in poultry prices that was partially offset by a 0.8% decrease in volume sold. The decrease in volume sold was mainly due to a higher sales mix of smaller birds. The increase in prices was mainly observed in Mexico.

 

Sales of the “others” segment increased 4.5% due mainly to an increase of 13.7% in volume sold, which was partially offset by a decrease of 9.2% in prices.

 

The following table sets forth a breakdown of our cost of sales for each of the periods indicated:

 

COST OF SALES 

 

In millions of pesos 

 

2019

 

 

2018

 

 

Change

 

 

 

$

 

 

%/sales

 

 

$

 

 

%/sales

 

 

$

 

 

%

 

Cost of sales

 

 

51,557.4

 

 

 

83.6

 

 

 

51,422.4

 

 

 

84.2

 

 

 

135.0

 

 

 

0.3

 

Poultry

 

 

46,456.1

 

 

 

75.3

 

 

 

46,562.2

 

 

 

76.3

 

 

 

(106.1

 

 

(0.2

Others

 

 

5,101.3

 

 

 

8.3

 

 

 

4,860.2

 

 

 

8.0

 

 

 

241.1

 

 

 

5.0

 

 

31 

 

 

Our total cost of sales increased $135.0 million or 0.3% in 2019, when compared to the previous year.

 

This slight increase was mainly attributable to higher volume sold, primarily in our Others segment.

 

The largest single component of our cost of sales is the cost related to our balanced feed raw materials, which has accounted for approximately 65% of our total cost of sales in the last three years. The main components of our balanced feed raw materials are corn, sorghum and soybean meal and all of the components of raw materials are subject to high volatility caused by supply, weather conditions and exchange rates, among others.

  

Besides balanced feed costs, the cost of sales includes other factors such as salaries and wages and energy costs. These two factors represented approximately 10% and 5% of our total cost of sales, respectively.

 

There are many other factors with much smaller contributions to the overall cost of sales. All of these secondary factors individually registered immaterial changes from 2019 to 2018.

 

GENERAL, SELLING AND ADMINISTRATIVE EXPENSES

 

In millions of pesos    2019     2018     Change  
    $     %/sales     $     %/sales     $     %  
Total SG&A     6,116.6       9.9       6,024.4       9.9       92.2       1.5  
                                                 

 

In 2019, general, selling and administrative expenses totaled $6,116.6 million, compared to the $6,024.4 million reported in 2018, representing an increase of $92.2 million or 1.5%. Approximately 2% of this increase was attributable to more volume sold. This increase was partially offset by lower unit expenses. This decrease in unit expenses is primarily a result of capturing efficiencies across all our processes, particularly in our distribution network.

 

In 2019 and 2018, our general, selling and administrative expenses represented 9.9% and 9.9% of total sales, respectively.

 

The main components that comprised our general, selling and administrative expenses in the past three years are the following: freight and transportation equipment expenses (about 37%), labor (about 35%) and publicity (about 4%), with no significant variation in these percentages.

 

OTHER (EXPENSE) INCOME NET 

 

 In millions of pesos   2019     2018     Change
    $     %/sales     $     %/sales     $     %
Other (expense) income net     (4.7     (0.0     102.7       0.2       (107.4 )   NA
                                             

 

Other (expense) income includes mainly the gains and losses on sales of by-products, sales of hens, asset disposal, sales of unused fixed assets and others.

 

Other (expense) income net in 2019 is comprised of $1,203.8 million of other income, which is more than partially offset by other expenses of $1,208.6 million as compared to other income of $1,041.7 million and other expense of $939.0 million in 2018. The increase in other expenses in 2019 was mainly due to a one-time charge related to intangible asset write-offs in our U.S. operation.

 

32 

 

 

OPERATING INCOME

 

In millions of pesos   2019     2018     Change  
    $     %/sales     $     %/sales     $     %  
Operating income     3,976.5       6.4       3,708.0       6.1       268.6       7.2  
                                                 

Operating income in 2019 totaled $3,976.5 million, an increase compared to the operating income of $3,708.0 million reached in 2018. The increase in operating income is mainly due to higher sales coupled with stable cost of sales and selling and administrative expenses, each as described above.

 

The operating margin in 2019 and 2018 was 6.4% and 6.1%, respectively.

 

NET FINANCE INCOME

 

    For the year ended December 31,     Change  
In millions of pesos    2019
$
    % over sales     2018
$
    % over sales     $     %  
Net finance income     381.3       0.6 %     808.6       1.3 %     (427.3     (52.8
Financial income     991.6               1,140.7               (149.1     (13.1
Financial expense     610.4               332.2               278.2       83.7  

 

In 2019, we reported net financial income of $381.3, compared to net financial income of $808.6 million in 2018. This decrease was mainly due to an increase in financial expense driven by our foreign currency exchange loss, given that part of our cash position is denominated in U.S. dollars and the Mexican peso appreciated by 2019 year-end as compared to the U.S. dollar.

 

Financial income of $991.6 million in 2019 was mainly attributable to a $988.0 million of interest income. This financial income was partially offset by financial expense of $610.4 million, which was mainly driven by $272.2 million in foreign currency exchange loss (as explained above) and $250.8 million in interest expense.

 

For more details, see Note 29 to our Audited Consolidated Financial Statements.

  

TOTAL INCOME TAX

 

The following table sets forth our tax position for each of the periods indicated and is described in more detail in Note 21 to our Audited Consolidated Financial Statements included herein:

 

    For the year ended
December 31,
       
In millions of pesos     2019     2018     Change  
    $     $     $     %  
Total income taxes (benefit) expense     1,125.0       1,155.0       (30.0     (2.6
Current income tax     1,064.3       1,246.8       (182.5 )     (14.6 )
Deferred income tax     60.7       (91.9 )     152.5       (166.0 )

 

In 2019, total income tax expense was $1,125.0 million, compared to income tax expense of $1,155.0 million in 2018. This decrease is mainly attributable to a $182.5 million variance in current income taxes, partially offset by a $152.5 increase in deferred taxes.

 

The effective income tax rate was 26.0% for both 2019 and 2018.

 

Deferred income tax increased primarily as a result of (i) an increase of $733.9 million in accounts payable, and (ii) $132.7 million in accounts receivable. This increase was partially offset by (i) a $564.0 million decrease in prepaid expenses, and (ii) $231.0 million in tax loss carry forwards.

 

33 

 

 

PROFIT FOR THE YEAR

 

The following table sets forth our profit for the year for each of the periods indicated:

 

    For the years ended
December 31,
       
In millions of pesos, except per share amounts   2019     2018     Change  
    $     $     $     %  
Profit for the year attributable to:     3,232.8       3,361.6       (128.7 )     (3.8 )
Controlling interest     3,219.9       3,350.0       (130.0 )     (3.9 )
Non-controlling interest     12.9       11.6       1.3       11.1  
Basic and diluted earnings per share(1)     5.37       5.58       (0.22 )     (3.88 )
Net income per ADR(1)     64.40       67.00       (2.60 )     (3.88 )

 

(1) In pesos.

  

As a result of the factors detailed above, our net income for 2019 totaled $3,232.8 million, or $5.37 per basic and diluted share ($64.40 per ADR), which represents a $128.7 million or 3.8% decrease compared to the $3,361.6 in net income or $5.58 per basic and diluted share ($67.00 per ADR) reported in 2018.

 

Our consolidated net margin in 2019 was 5.2% compared to a consolidated net margin of 5.5% in 2018.

 

EBITDA RESULT

 

The following table shows reconciliation of EBITDA and EBITDA margin to consolidated net income for each of the periods indicated.

 

    For the years ended
December 31,
             
In millions of pesos     2019     2018     Change  
    $     $     $     %  
Net income     3,232.8       3,361.6                 (128.7 )     (3.8 )
Income tax expense     1,125.0       1,155.0       (30.0 )     (2.6
Net finance income     (381.3 )     (808.6 )               427.3       (52.8
Depreciation and amortization     1,286.4       1,285.1       1.3       0.1  
EBITDA result     5,263.0       4,993.1       269.9       5.4  
EBITDA margin (%)     8.5 %     8.2 %     -       -  

 

EBITDA result in 2019 and 2018 reached $5,263.0 and $4,993.1 million, respectively, representing an EBITDA margin of 8.5% and 8.2%, respectively.

 

Operating Results 2018 vs 2017

 

Information about our operating results for the fiscal year ended December 31, 2018 compared with the fiscal year ended December 31, 2017 is included in Item 5 of our 2018 Annual Report on Form 20-F, which is available via the SEC’s website at www.sec.gov and our website at www.bachoco.com.mx.

 

Critical Tax and Accounting Policies

 

The following information is a summary of the fiscal and accounting policies that could materially affect the Company’s operations or investments.

 

Income Tax Year 2019

 

The Company and each of its subsidiaries file separate income tax returns. Through December 31, 2013, BSACV, the Company’s main subsidiary, was subject to the simplified regime, with a tax rate of 21%. Beginning in January 1, 2014, BSACV is now subject to a new regime for agriculture, livestock, forestry and fisheries, which applies to companies exclusively dedicated to these activities, and in our case it applies a 30% tax rate.

 

Our subsidiary Bachoco, US LLC, is located in the U.S. and it has the same fiscal period as the rest of the subsidiaries located in Mexico.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation, which revises the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35.0% to 21.0%

 

For more information, please see Note 21 of the Audited Consolidated Financial Statements.

 

34 

 

 

Use of Estimates and Judgments in Certain Accounting Policies

 

The following are the critical judgments, apart from those involving estimations, that the Company’s management has made in the process of applying its accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements.

 

Business combinations or acquisition of assets

 

Management uses its professional judgment to determine whether the acquisition of a group of assets constitutes a business combination. This determination may have a significant impact in how the acquired assets and assumed liabilities are accounted for, both at the initial recognition and subsequently.

 

Fair value of biological assets

 

The Company estimates the fair value of biological assets as the price that would be received or paid in an orderly transaction between market participants at the measurement date. As part of the estimate, the Company considers the maturity periods of such assets, the necessary time span for the biological assets to reach a productive stage, as well as future economic benefits obtained.

 

The balance of current biological assets is integrated by hatching eggs, growing pigs and growing poultry, while the balance of non-current biological assets is integrated by poultry in its different production stages and breeder pigs.

 

Non-current biological assets are valued at their production cost less accumulated depreciation or accumulated impairment losses, because the Company believes that there is no observable or reliable market for such assets. Also, the Company believes that there is no reliable method for measuring the fair value of non-current biological assets. Current biological assets are valued at fair value when there is an observable market, less sale expenses.

 

Aggregation of operating segments

 

The Company’s chicken and egg operating segments are aggregated to present one reportable segment (Poultry) as they have similar products and services, production processes, classes of customers, methods used for distribution, regulatory environments in which they operate, and similar economic characteristics as evidenced by similar five-year trends in gross profit margins. These factors are evaluated at least annually.

 

Discount rate estimation to calculate the present value of future minimum rent payments

 

The Company estimates the discount rate to be used in determining the lease liability, based on the incremental borrowing rate (“IBR”).

 

The Company uses a two-level model, with which it determines the elements that make up the discount rate: (i) reference rate, and (ii) credit risk component. In this model, Management also considers its policies and practices to obtain financing, distinguishing between borrowings obtained at the corporate level (that is, by the holding company), or at the level of each subsidiary. Finally, for real estate leases, or in leases where there is significant and observable evidence of their residual value, the Company estimates and evaluates an adjustment for the characteristics of the underlying asset, taking into account the possibility that such asset may be granted as collateral or guarantee against the risk of default.

 

Estimate of the term of the lease contracts

 

The Company defines the term of the leases as the period for which there is a contractual payment commitment, considering the non-cancellable period of the contract, as well as the renewal and early termination options that are likely to be exercised. The Company is party to lease agreements that do not have a defined mandatory term, a defined renewal period (if it contains a renewal clause), or annual automatic renewals. Accordingly, to measure the lease liability, the Company estimates the term of the contracts, considering their contractual rights and limitations and the business plan, as well as Management's intentions for the use of the underlying asset. Additionally, the Company considers the early termination clauses of its contracts and the probability of exercising them as part of its estimation of the lease term.

 

Key sources of estimation uncertainty

 

Below are critical estimates and assumptions in the application of accounting policies with significant effects on the amounts recognized in the consolidated financial statements, as well as information on assumptions and uncertainty of estimates that have a significant risk of resulting in a material adjustment in future years.

 

Expected credit losses on accounts receivable

 

The expected credit losses on financial assets are estimated using a provision matrix based on the Company's historical experience of credit losses, adjusted for factors that are specific to each of the Company's customer and debtor groups, general economic conditions and an assessment of both current and forecast conditions at each reporting date.

 

Useful lives and residual values of property, plant and equipment

 

Useful lives and residual values of property, plant and equipment are used to determine depreciation expense of such assets and are defined according to the analysis by internal and external specialists. Useful lives and residual values are reviewed periodically at least once a year, based on the current conditions of the assets and the estimate of the period during which they will continue to generate economic benefits to the Company. If there are changes in the estimate, measurement of the net carrying amount of assets and the corresponding depreciation expense are prospectively affected.

 

35 

 

 

Measurements and disclosures at fair value

 

Fair value is a measurement based on the price a market participant would be willing to receive to sell an asset or pay to transfer a liability, and is not a measure specific to the Company. For some assets and liabilities, observable market transactions or market information may be available. For other assets and liabilities, observable market transactions and market information may not be available. However, the purpose of a measurement at fair value in both cases is to estimate the price at which an orderly transaction to sell the asset or to transfer the liabilities would be carried out among the market participants at the date of measurement under current market conditions.

 

When the price of an identical asset or liability is not observable, the Company determines the fair value using another valuation technique that maximizes the use of relevant observable information and minimizes the use of unobservable information. As the fair value is a measurement based on the market, it is measured using the assumptions that market participants would use when they fix a price to an asset or liability, including assumptions about risk.

 

Impairment of long-lived assets and goodwill

 

The carrying amount of long-lived assets is reviewed for impairment when situations or changes in circumstances indicate that it is not recoverable, except for goodwill, which is reviewed on an annual basis, at a minimum. If there are indicators of impairment, a review is carried out to determine whether the carrying amount exceeds its recoverable value and whether it is impaired. The recoverable value is the highest of the asset’s fair value, less selling costs, and its value in use, which is the present value of the future estimated cash flows generated by the asset. The value in use calculation requires the Company’s management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value.

 

Employee retirement benefits

 

The Company uses various assumptions to determine the best estimate for its employee retirement benefits. Assumptions and estimates are established in conjunction with independent actuaries. These assumptions include demographic hypotheses, discount rates and expected increases in remunerations and future employee service periods, among others. Although the assumptions are deemed appropriate, a change in such assumptions could affect the value of employee benefit liabilities and the results of the period in which such a change occurs.

 

Contingencies

 

A contingent liability is defined as:

 

  - a possible obligation that arises from past events and whose existence can only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company, or

 

  - a present obligation that arises from past events but is not recognized because:

 

  a. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
     
  b. the amount of the obligation cannot be measured with sufficient reliability.

  

The assessment of such contingencies requires the exercise of significant judgments and estimates on the possible outcomes of those future events. The Company assesses the probability of loss arising from lawsuits and other contingencies with the assistance of its legal advisors. These estimates are reconsidered periodically at each reporting period.

 

Recently Adopted and New Accounting Pronouncements

 

In 2019, we adopted a series of new and amended IFRS standards issued by the IASB, which went into effect on January 1, 2019 as it relates to our consolidated financial statements.

 

IFRS 16, Leases, went into effect on January 1, 2019 and introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset’s value is not material. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. Lessor accounting however remains largely unchanged and the distinction between operating and finance leases is retained.

 

For the adoption of IFRS 16, we chose the modified retrospective application through which all effects were recorded as of January 1, 2019, without adjusting the financial statements of the comparative years.

 

In the initial application of IFRS 16, as of January 1, 2019, for all leases (except for those that we elected to account for as an expense), we:

Recognized right-of-use assets and lease liabilities in our consolidated statement of financial position, initially measured at the present value of the future lease payments in the amount of $922.4 million.
Recognized depreciation of right-of-use assets of $302.8 million and interest on lease liabilities of $37.8 million in the consolidated statement of profit or loss.
Presented separately the total amount of cash paid for liability principal of $325.2 million (presented within financing activities) and interest of $37.8 million (presented within financing activities) in the consolidated statement cash flow.

 

See Note 2(e) of our Audited Consolidated Financial Statements for more details.

 

  B. Liquidity and Capital Resources

 

We are a holding company with no significant operations of our own, and we receive dividends from our operating subsidiaries from time to time. Our principal sources of liquidity are:

 

  - The sales of our products through our subsidiaries in the Mexican and U.S. markets;

 

36 

 

 

  - Credit lines we use from time to time; as of December 31, 2019 and 2018, the unused credit lines of the Company totaled $3,326.0 and $5,723.0 million, respectively. The Company did not pay any commission or charge for the unused credits.

 

  - The current Mexican bond issuance program available until August 2022. For more details, please refer to Item 12 (“Description of Securities Other than Equity Securities”) of this Annual Report.

 

Liquidity and Capital Resources 2019 vs 2018

 

TOTAL CASH, CASH EQUIVALENTS, INVESTMENT IN SECURITIES AND DERIVATIVES FINANCIAL INSTRUMENTS

 

    As of December 31,              
In millions of pesos   2019     2018     Change  
    $     $     $     %  
Total cash, cash equivalents, and investment in securities and derivative financial instruments    

 

19,182.7

      18,458.5      

 

724.2

     

 

3.9

 
Cash and cash equivalents     18,662.7       17,901.8       760.9       4.2  
Investment in securities     502.0       550.1       (48.1 )     (8.7 )
Derivative financial instruments     18.0       6.6       11.4       172.7  

 

In 2019, cash and cash equivalents, and investments in securities at fair value through profit or loss totaled $19,182.7 million, $724.2 million or 3.9%, more than the $18,458.5 million recorded in 2018, mainly due to the net cash provided from our operating activities. Of this total amount, $1.5 million corresponded to cash and cash equivalents in our U.S. operations.

 

ACCOUNTS RECEIVABLE

 

    As of December 31,              
In millions of pesos   2019     2018     Change  
    $     $     $     %  
Total accounts receivable     3,867.1       3,486.4       380.8       10.9  
                                 

In 2019 accounts receivable increased $380.8 million, or 10.9%, when compared to 2018. This is mainly due to increases of $228.7 million in recoverable value-added tax, $73.0 million in income tax receivable and $72.0 million in trade receivables.

 

For more detail, please see Note 9 of the Audited Consolidated Financial Statements.

 

ACCOUNTS PAYABLE

 

    As of December 31,        
In millions of pesos   2019     2018     Change  
    $     $     $     %  
Total accounts payable     5,158.8       5,196.3       (37.5 )     (0.7 )
                                 

In 2019, accounts payable decreased $37.5 million or 0.7% when compared to 2018. This decrease is mainly due to a $78.6 million decrease in sundry creditors and expenses payable and a decrease of $23.6 million in trade payables, partially offset by increases of $52.9 million in direct employee benefits and $18.3 million in statutory creditors and expenses.

 

For more detail, please see Note 19 of the Audited Consolidated Financial Statements.

 

37 

 

 

TOTAL DEBT 

 

    As of December 31,        
In millions of pesos   2019     2018     Change  
    $     $     $     %  
Total debt     4,928.6       5,037.6       (109.0 )     (2.1 )
Short-term debt (1)     3,440.4       3,492.8       (52.4 )     (1.5 )
Long-term debt (2)     -       44.0       (44.0 )     (100.0 )
Short-term debt (Local bond issue)                                
Long-term debt (Local bond issue)     1,488.2       1,500.8       (12.6     (0.8

 

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

(2) Does not include current installments of long-term debt.

 

As of December 31, 2019, total debt was $4,928.6 million, a decrease of $109.0 million or 2.1% when compared to $5,037.6 million of total debt as of December 31, 2018. This decrease was due to payments we made on our Mexican peso-denominated debt due in 2019.

 

Most of our long-term debt consists of a Mexican bond issuance of $1,500.0 million in the third quarter of 2017, due in 2022. This bond accrues interest at the reference rate of 28-day TIIE (“Equilibrium Interbank Interest Rate”), plus accruing interest at TIIE + 0.31%. The funds obtained were primarily used for liability management purposes as we used the proceeds to repay the bonds we issued in 2012, due in 2017

  

For details of maturity of our debt and the prevailing interest rates, see Note 18 of our Audited Consolidated Financial Statements.

 

WORKING CAPITAL 

 

In millions of pesos   2019     2018     Change  
    $     $     $     %  
Working Capital     22,189.1       20,690.1       1,499.1       7.2  
Total current assets     31,097.2       29,775.0       1,322.3       4.4  
Total current liabilities     8,908.1       9,084.9       (176.8 )     (1.9 )

 

The working capital in the table above was calculated as current assets minus current liabilities.

 

In 2019, our working capital increased $1,499.1 million or 7.2% when compared to year 2018, due primarily to increases in our inventories, accounts receivable and our level of cash, which in turn resulted from an increase in cash from operating activities, as well as a decrease in income taxes payable.

 

We believe our current level of working capital is sufficient for the regular course of our operations. Nevertheless, our working capital needs may be susceptible to change, as they depend mainly on the cost of our main raw materials, which affect our inventory cost, and on the amount of accounts payable. Our working capital can also change from one quarter to another as the cost of buying domestic raw material depends of the given harvest season.

 

Liquidity and Capital Resources 2018 vs 2017

 

Information about our liquidity and capital resources for the fiscal year ended December 31, 2018 compared with the fiscal year ended December 31, 2017 is included in Item 5 of our 2018 Annual Report on Form 20-F, which is available via the SEC’s website at www.sec.gov and our website at www.bachoco.com.mx.

  

CAPITAL EXPENDITURES

 

In millions of pesos, for the years ended December 31,   2019     2018     2017  
    $     $     $  
Capital Expenditures     2,069.3       1,982.6       3,513.4  
                         

Most of the capital investments in the past years were financed with cash flows generated from our own operations.

 

In 2019, we made capital expenditures of $2,069.3, an increase when compared to the $1,982.6 million spent in 2018. Capital expenditures made in 2019 where mainly allocated to our organic growth strategies and productivity projects to improve our performance in both our Mexico and U.S. operations.

 

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In 2018, we made capital expenditures of $1,982.6, a decrease when compared to the $3,513.4 million spent in 2017 when we made two acquisitions. Capital expenditures made in 2018 where mainly allocated to our organic growth strategies and some productivity projects in order to alleviate bottle neck in different parts of our process and supply chain.

 

In 2017, we made capital expenditures of $3,513.4 million, which were mainly allocated towards (i) our organic growth plans by investing in projects that will make our processes more efficient, as well as alleviating bottlenecks and in the replacement of part of our transportation fleet and of other equipment in all of our facilities; and (ii) part of our acquisitions of La Perla and AQF.

 

The Company plans to carry out several projects, primarily in Mexico, to gradually increase our poultry production over the course of the next few years.

 

See Note 14 of our Audited Consolidated Financial Statements for more details.

 

LEASES

 

In millions of pesos, for the years ended December 31,   2019(1)   2018     2017  
    $   $     $  
Leases expense     96.8     453.2       416.4  
                       

(1)Our 2019 results include the effects of adoption of IFRS 16. For more information regarding the adoption of IFRS 16, see Notes 23 and 24 of our Audited Consolidated Financial Statements included herein. 

 

During 2019, 2018 and 2017, we entered into leases for certain offices, production sites, computer equipment and vehicles. These agreements have terms ranging between one and five years and some of them contain renewal options.

 

As of December 31, 2019, under IFRS 16, total lease liabilities were $803.0 million; comprised of current lease liabilities of $149.5 million and long term lease liabilities of $653.5 million.

 

See Note 24 to our Audited Consolidated Financial Statements for more information.

 

Financial Instruments

 

In the normal course of our business, we use various financial instruments to hedge exposure to financial risks involving fluctuations in currency exchange rates and commodity price risk in connection with fluctuations in the prices for our feed ingredients.

 

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The main risk that the Company faces is the volatility in the Mexican peso-U.S. dollar exchange rate.

 

A large variation in Mexican peso-U.S. dollar exchange rate could affect our financial results, as a greater percentage of our sales are made in pesos, and a large percentage of our purchases of raw material are made in U.S. dollars.

 

As part of our normal operations, we purchase financial derivative instruments in order to ensure greater certainty for our purchases in U.S. dollars. We plan based on a six month period into the future and, depending on the expected uncertainty for that period, decide if it is economically advisable to purchase or sell any hedging instrument.

 

We have followed different strategies with respect to derivatives that involved call and put options in U.S. dollars. Our risk committee approves any change in policies and reviews the application of current policies.

 

See Note 8 to our Audited Consolidated Financial Statements for more information.

 

DEBT IN FOREIGN CURRENCY 2019 vs 2018

 

    As of December 31,        
    2019     2018     Change  
    $     $     $     %  
Short-term financial debt liabilities in foreign currency(1)     2,831.2       2,757.5       73.7       2.7  
                                 

(1) The foreign currency is U.S. dollars.

 

 In 2019, our bank debt denominated in U.S. dollars totaled $2,831.2 million pesos (equivalent to $149.9 million USD), $73.7 pesos, or 2.7% more than the $2,757.5 million pesos (equivalent to $140.2 million USD) in 2018. The short-term bank debt in U.S. dollars had an annual average interest rate of 2.36% in 2019, and 2.26% in 2018.

 

The Company’s risk committee approves any change in policies and reviews the application of current policies.

 

At the end of 2019, we had assets denominated in U.S. dollars of $11,202.2 million pesos and liabilities of $5,255.4 million pesos, resulting in a net position of $5,946.8 million pesos (or $314.8 million USD).

 

For more details, see Note 8 and Note 18 to our Audited Consolidated Financial Statements.

 

DEBT IN FOREIGN CURRENCY 2018 vs 2017

 

Information about our debt in foreign currency for the fiscal year ended December 31, 2018 compared with the fiscal year ended December 31, 2017 is included in Item 5 of our 2018 Annual Report on Form 20-F, which is available via the SEC’s website at www.sec.gov and our website at www.bachoco.com.mx.

 

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C. Research and Development, Patents and Licenses, etc.

 

None.

 

D. Trend Information

 

The most significant trends that might have a negative impact on the Company’s operating performance are the following:

 

  Despite the stability we have observed in the prices of our main raw material prices in U.S. dollar terms, we may see future volatility in prices depending on the market for crops in Mexico and the U.S and volatility in exchanges rates, particularly as a result of uncertain conditions linked to COVID-19.

 

  We might be affected by more aggressive competition from our peers in the markets in which we operate.

 

  We may also be negatively affected by any poultry sanitary issues that may arise in regions where our production centers are located, which may affect our production volumes and production costs.

 

  Finally, Mexico may see future macroeconomic uncertainties and volatility as there are concerns of a global recession as a result of the COVID-19 pandemic observed in early 2020. The outbreak of COVID-19 has negatively impacted the global financial markets, resulting in, among others, exchange rate volatility (including the Mexican peso to U.S. dollar exchange rate) and the fall of stock prices (including the price of our stock), trends which may continue. There are other broad and continuing concerns related to the potential effects of COVID-19 on international trade (including shipping and transportation channels, supply chains and export levels), travel, employee productivity, securities markets, and other economic activities that may have a destabilizing effect on financial markets and economic activity. There may also be changes in domestic and international governmental policies in response to the COVID-19 pandemic that could negatively affect our daily operations and our ability to supply our products. In addition, we are likely to experience reduced demands in certain sectors in which we compete, as our customers limit visits to certain food markets. Furthermore, although we are considered an essential productive sector in both Mexico and the U.S., in the case of a shutdown involving any of our subsidiaries or our customers, we may be unable to meet the needs of our customers for an unknown period of time, which could adversely affect our business, financial condition and results of operations.

 

E. Off-Balance Sheet Arrangements

 

In 2019, except for our operating lease agreements, we do not have off-balance sheet arrangements that might have current or future effects on the Company’s financial condition. Disclosure of operating leases is included in this Annual Report under Item 5-B.

 

F. Tabular Disclosure of Contractual Obligations

 

Our major categories of indebtedness included the following:

 

  As of December 31, 2019 and 2018, we had $0.0 and $65.0 million in current portion of long-term debt, respectively.

 

  Long-term debt to banks, excluding the current installments of long-term debt, as of December 31, 2019 and 2018 were $1,488.2 and $1,544.8 million, respectively.

 

  The weighted average interest rates on long-term debt, for years 2019 and 2018 were 8.53% and 8.42%, respectively.

 

See Note 18 of our Audited Consolidated Financial Statements for more detail.

 

The Company has certain leases related to operating assets, including farms and administrative offices. The following table summarizes the Company´s contractual obligations as of December 31, 2019. The table does not include current installments of long-term debt, accounts payable or pension liabilities.

 

CONTRACTUAL OBLIGATIONS

 

In millions of pesos   Total     2019     2020     2021     2022     2023  
          $     $     $     $     $  
Long-term debt(1)     1,488.2                               1,488.2          
Leases(2)     653.5               263.2       190.6       144.3       55.5  

 

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(1) See Note 18(c) of the Audited Consolidated Financial Statements for more detail.
(2) See Note 24 of the Audited Consolidated Financial Statements for more detail.

 

  

The following table sets forth the maturity amounts of interest to be paid in connection with the long-term debt described above.

 

INTEREST

 

In millions of pesos   Total     Less than
1 year
    From 1 To
3 years
    From 3 to 5
years
 
Interest   $ 342.2     $ 134.5     $ 207.6     $    
                                 

G. Safe Harbor

 

Not applicable.

 

Item 6. Directors, Senior Management and Employees

 

A. Directors and Senior Management

 

We produce and sell our products throughout Mexico and in parts of the United States. As described further below, our operations are closely controlled by our majority shareholder, which directs our business strategy and operations through various committees that are made up of members of our Board of Directors (“BOD”). The principal BOD committees include the Executive Committee (“EC”), the Investments Committee (“IC”) and the Audit and Corporate Practices Committee (“ACPC”) (collectively, the “BOD Committees”). The BOD Committees, in turn, rely on the Chief Executive Officer (“CEO”) who oversees a group of managers, comprised of regional operating managers and executive managers, to execute the Company’s operating plan.

 

The Chief Operating Decision Maker (CODM) role is carried out by our BOD. The BOD is integrated by eight Proprietary Shareholder Directors, four Independent Directors and four Alternate Directors.

 

We are controlled by the Robinson Bours family, who collectively own 73.25% of our outstanding voting shares. The Robinson Bours family plays an active role in managing the Company through its participation in our BOD, where it holds a majority vote thereby granting it control over all of the BOD’s committees, activities and decisions.

 

In addition to carrying out the traditional roles of a typical board of directors, such as authorizing annual budgets, major investments and the hiring and compensation of executive management, the activities of our BOD also encompass managing certain key aspects of the Company’s operations, such as assuring the production of the Company’s products, exploiting growth opportunities and maximizing profitability. The BOD relies on its committees to carry out such management functions.

 

The EC is an intermediate management body, comprised entirely by Robinson Bours family members, that meets at least 10 times a year with the Company’s CEO. During such meetings, the following matters, among others, are addressed:

 

  General business strategy for the Company, including growth strategy and initiatives.

  Analysis and approval of the Company’s organizational structure.

  Discussion of relevant matters of the Company’s operations, including, among others, the identification and follow up on both opportunities as well as significant adverse events.

  Analysis and follow up on the financial performance of the Company.

 

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  Approval and appointment of management.

 

The IC is comprised of the same members as the EC, is responsible for analyzing all investment and capital expenditure proposals and meets at least six times a year with the CEO. Based on their analysis, the IC and the CEO identify which investment and capital expenditure proposals to submit to the BOD for approval.

 

The ACPC is comprised mainly by independent directors. The mandate of the ACPC is to establish and monitor controls and procedures in order to ensure that the financial information we distribute is useful, appropriate and reliable and accurately reflects our financial position. On November 3, 2015, during our shareholders’ ordinary meeting, Mr. Guillermo Ochoa Maciel was elected chairman of the ACPC. Mr. Ochoa Maciel possesses all the characteristics included in the definition of an “audit committee financial expert” within the meaning of Item 16A. He was appointed as an independent member of the BOD and as an independent director financial expert.

 

Our CEO is the only management team member who reports directly to the BOD, and is responsible for executing the operating plans for all product lines that are developed jointly between the BOD’s committees and the CEO, and approved by the BOD. Given the CEO’s responsibilities in overseeing the Company’s operating managers, which are discussed in more detail below, we have considered whether the CEO plays the role of CODM for the Company. However, in our judgment, the BOD is the CODM, by virtue of the BOD’s close involvement in the CEO’s activities, the resulting overlap in the respective functions of the CEO and the BOD and the BOD’s ability to override decisions taken by the CEO.

 

The individual responsible for reporting to the BOD and executing the Company’s operating plan is our CEO.

 

The BOD, through the EC, meets with the CEO generally on a monthly basis.

 

The financial information that is reviewed by the CODM in preparation for the meetings and the financial information that is discussed during those meetings is comprised of the following:

 

  A discrete monthly statement of profit and loss for our operating segments, up to gross profit level;

  Updates regarding raw materials price conditions;

  Certain key performance measures such as volume, prices and estimated cost on a discrete basis for our operating segments;

  Consolidated entity-wide earnings before interest, income taxes, depreciation and amortization (EBITDA);

  A consolidated entity-wide statement of profit and loss;

  A consolidated entity-wide statement of financial position; and

  A consolidated entity-wide statement of cash flow.

 

The CODM normally makes additional requests for supplemental financial information, which vary depending on the circumstances. Examples of such supplemental financial information, which is disaggregated by product, include:

 

  Enhanced discussion and analysis of significant period to period changes in operating results,

  Further detail regarding gross profit and cost, and

  Sales analysis explaining differences from prior period sales and deviations from our budget.

 

The CEO formally meets with the full BOD four times a year, usually in January, April, August and October of each year.

 

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The financial information that is reviewed by the CODM in preparation for the meetings and the financial information that is discussed during those meetings is comprised of the following:

 

  A discrete monthly statement of profit and loss for our operating segments, up to gross profit level;

  A consolidated entity-wide statement of profit and loss;

  A consolidated entity-wide statement of financial position; and

  A consolidated entity-wide statement of cash flow.

 

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.

 

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.

 

At our annual stockholders’ meeting held on April 24, 2019, we ratified the membership of our Board of Directors.

 

Currently our board of directors is composed of the following members:

 

MEMBERS OF THE BOARD   Year of Birth   Member since
Chairman of the Board and Proprietary Shareholder Director:        
Javier R. Bours Castelo   1953   1982
Proprietary Shareholder Directors:        
Jose Gerardo Robinson Bours Castelo   1958   2008
Jesus Enrique Robinson Bours Muñoz   1951   1994
Jesus Rodolfo Robinson Bours Muñoz   1957   2002
Arturo Bours Griffith   1955   1994
Octavio Robinson Bours   1952   1997
Ricardo Aguirre Borboa   1954   1994
Juan Salvador Robinson Bours Martinez   1965   1994
Alternate Directors:        
Jose Eduardo Robinson Bours Castelo   1956   1994
Jose Francisco Bours Griffith   1950   1994
Guillermo Pineda Cruz   1948   1994
Gustavo Luders Becerril   1953   2011
Independent Directors:        
Avelino Fernandez Salido   1938   2003
Humberto Schwarzbeck Noriega   1954   2003
Guillermo Ochoa Maciel   1955   2015
David Gastelum Cazares   1951   2016
Secretary of the Board:        
Eduardo Rojas Crespo   1969   2008

 

Honorary Members of the Board

 

Enrique Robinson Bours Almada and Mario Javier Robinson Bours Almada are co-founders of the Company and Honorary members of the board.

 

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The following table identifies the relationships among members of each of the four Bours families:

 

Cousins   In-law related
Brothers:    
● Arturo Bours Griffith    
● Octavio Robinson Bours    
● Jose Francisco Bours Griffith    
     
Brothers:    
● Jesus Enrique Robinson Bours Muñoz   ● Guillermo Pineda Cruz
● Jesus Rodolfo Robinson Bours Muñoz    
     
Brothers:    
● Francisco Javier R. Bours Castelo    
● Jose Gerardo Robinson Bours Castelo    
● Jose Eduardo Robinson Bours Castelo   ● Ricardo Aguirre Borboa
● Juan Salvador Robinson Bours Martinez   ● Gustavo Luders Becerril

 

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.

 

Javier R. Bours Castelo, Chairman of the Board of Directors since 2002. Before his election as Chairman, he was Vice-Chairman for several years. Mr. Bours holds a degree in Civil Engineering from the Instituto Tecnologico 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., Inmobiliaria Trento S.A. de C.V., Agriexport S.A. de C.V., Acuicola Boca, S.A. de C.V., and Centro de Servicios Empresariales del Noroeste, S.A. de C.V.

 

Jose Gerardo Robinson Bours Castelo, Proprietary Shareholder Director since 2008. He previously served as Director of Planning and Projects. Mr. Bours holds a degree in Computer Systems Engineering from the ITESM. He currently serves as member of the Board of the following companies: Megacable Holdings, S.A.B. de C.V., Congeladora Horticola, S.A. de C.V., Ocean Garden S.A., Industrias Boca, S.A. de C.V. and Fertilizantes Tepeyac S.A. de C.V, Vimifos S.A de C.V. and member of the regional board of Citi Banamex and Banorte. He is also Chairman of Fundacion Mexicana para el Desarrollo Rural del Valle del Yaqui and the ITESM in Obregon..

 

Jesus Enrique Robinson Bours Muñoz, Proprietary Shareholder Director since 1994. He has previously worked in Bachoco 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 Rassini S.A de C.V. and Megacable Holdings, S.A.B. de C.V.

 

Jesus Rodolfo Robinson Bours Muñoz, Proprietary Shareholder Director since 2002. 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 Ganadera Cocoreña S.P.R. de R.L., and Chairman of the Board of the Cultural Center of Cocorit, A.C. He is currently partner and Director of Productos Orgánicos la Cocoreña S.P.R. de R.L and Cervecera Komunila S.A. de C.V.

 

Arturo Bours Griffith, Proprietary Shareholder Director since 1994. He is also Chairman of the board of Qualyplast, S.A. de C.V., and a member of the board of Megacable Holdings, S.A.B. de C.V., Centro de Servicios Empresariales del Noreste, S.A. de C.V., and Taxis Aereos del Noroeste, S.A. de C.V.

 

Octavio Robinson Bours, Proprietary Shareholder Director since 1997. Mr. Robinson Bours holds a degree in Agricultural Engineering from the ITESM. He has experience in swine production, agriculture and aquaculture. He is a board member of several companies such as Productos Agropecuarios La Choya, S.A. de C.V., Agropecuaria Bomanz S.A. de C.V., Gasbo S.A. de C.V., Kowi S.A. de C.V., INDEPROM, S.A. de C.V., SOFOM ENR.

 

Ricardo Aguirre Borboa, Proprietary Shareholder Director since 1994. He is also a member of the Audit Committee and Corporate Practices of Bachoco. Mr. Aguirre holds a degree in Agricultural Engineering from the ITESM. He is member of the Board of Directors of: the newspaper El Debate, Tepeyac Produce, Inc., Servicios del Valle del Fuerte, S.A. de C.V., Agrobo, S.A. de C.V., Agricola Santa Veneranda, S.P.R. de R.L., Colegio Mochis, Grupo Financiero Banamex, in Sinaloa, and Director of Granja Rab, S.A. de C.V.

 

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Juan Salvador Robinson Bours Martinez, Proprietary Shareholder Director since 1994. He 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 of Llantas y Accesorios, S.A. de C.V. and member of the Board of Megacable Holdings, S.A.B. de C.V.

 

Jose Eduardo Robinson Bours Castelo, member of the Board since 1994. Mr. Robinson is an alternate Director for Mr. Francisco Javier R. Bours Castelo and Mr. Jose Gerardo Robinson Bours Castelo. 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 was governor of the state of Sonora. In addition, Mr. Robinson was Chairman of the Board of National Agribusiness Council (Consejo Nacional Agropecuario), Chairman of the Board of Umbrella Organization of the Private Sector Mexico (Consejo Coordinador Empresarial), and Member of the Board of Nafinsa, Bancomext and Focir, and was Chairman of the board and Chief Executive Officer of Del Monte Foods.

 

Jose Francisco Bours Griffith, Alternate Director of Mr. Octavio Robinson Bours and Mr. Arturo Bours Griffith, since 1994. Mr. Bours Griffith holds a degree in Civil Engineering from the Universidad Autonoma de Guadalajara. Mr.  Bours Griffith has worked at Bachoco as Engineering Manager. He is currently dedicated to agricultural operations and has run two aquaculture farms for 17 years.

 

Guillermo Pineda Cruz, Alternate Director of Jesus Enrique Robinson Bours and Mr. Arturo Bours Griffith since 1994. Mr. Pineda holds a degree in Civil Engineering from the ITESM and a master’s degree in Business Administration from the Instituto Tecnologico de Sonora. He is also a member of the Board of Directors of Citibanamex and was a regional member of the Board of Directors of Grupo Financiero Serfin, Inverlat and InverMexico. He co-founded Edificadora PiBo, S.A. de C.V. since 1983 and is currently the Chairman of its Board of Directors.

 

Gustavo Luders Becerril, Alternate Director of Juan Salvador Robinson Bours Martinez and Mr. Ricardo Aguirre Borboa, was named Alternate Director during the annual general meeting held in April 2011. Mr. Luders holds an Accounting degree from ITESM. He is a vegetable and fruit grower.

 

Avelino Fernandez Salido, Independent Director, has been a member of the board since 2003. He is also a member of the board of Banamex and BBVA Bancomer. He is also Chairman of the Board of the following companies: Grupo Cajeme Motors, S.A. de C.V., Navojoa Motors, S.A. de C.V., Turymayo S.A. de C.V., Gasolineras Turymayo S.A. de C.V. and Agroempaques Turymayo S.A. de C.V, His business experience is in the marketing of grains.

 

Guillermo Ochoa Maciel, Independent Director and has been a member of the board since November 2015. Mr. Ochoa Maciel holds a degree in public accounting from the Universidad de Guadalajara, México. Mr. Ochoa Maciel was employed at KPMG Cardenas Dosal, S.C., for over 36 years (the last 26 as firm partner). Since 2015, he has been the chairman of the board and director of his own consulting and real estate development firm. Mr. Ochoa Maciel has significant experience in financial audits, corporate governance matters (including Sarbanes-Oxley compliance) and equity and debt transactions both locally in Mexico as well as internationally (both private and SEC-registered) as well as IFRS and U.S. GAAP accounting matters. Mr. Ochoa Maciel was elected chairman of the Audit and Corporate Practices Committee during the ordinary stockholders’ meeting that took place on November 3, 2015.

 

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David Gastelum Cazares, Independent Director and has been a member of the board since the annual general meeting held on April 27, 2016. Mr. Gastelum holds a degree in Veterinary Medicine from the school of Veterinary Medicine of the Universidad Nacional Autonoma de Mexico (“UNAM”) and is also a graduate of the Instituto Panamericano de Alta Dirección de Empresas (“IPADE”). He joined our company in 1979 and served as a pullet sales manager 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. He assumed the Director of Sales position from 1992 to 2013. For several years, he was the vice-president of poultry meat at the Mexican Poultry Association and a member of the Latin American Poultry Association (ALA). From 2014 to 2016 he was the General Director of Monteblanco, a company that produces and sells mushrooms. In 2016, he took the course of Directors in Action in IPADE in Mexico City. Mr. Gastelum is also member of the board of directors of the Unión Nacional de Avicultores (UNA). In 2017, he was recognized at the Annual convention of the National Association of Poultry Science Specialists (ANECA). In 2017, he was named as an Independent Director and Chairman of the Administration and Planning Committee of the Group “Frío” in Guadalajara, Mexico. In April of 2018 he joined the board of directors of Universal Wipes, dedicated to the production and commercialization of wet wipes. In 2019, he joined the board of directors of “Podologia Integral,” a company dedicated to foot health.

 

Humberto Schwarzbeck Noriega, Independent Director, has been a member of the board since 2003. He holds a degree in economics from ITESM. He is currently CEO of Yeso Industrial de Navojoa S.A. de C.V.

 

Eduardo Rojas Crespo was named Secretary of the Board of Directors in 2008. He holds a Law Degree from UNAM. He holds a post-graduate diploma on Environmental Law and Due Diligence, and a Specialty as well as a Master’s Degree, both in Corporate Law; these three from the Anahuac University. He also holds a diploma on economic competition from the Centro de Investigación y Docencia Económicas (“CIDE”) and has completed studies on Business Management at the IPADE. 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.

 

Honorary members

 

Mr. Enrique Robinson Bours Almada, Chairman of the Board and co-founder of the Company, he retired in April 2002. Mr. Bours led the Company for 50 years. The Board named Mr. Javier Robinson Bours Castelo, Mr. Enrique Robinson Bours’s nephew, as his successor.

 

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. Jose Gerardo Robinson Bours Castelo as a Proprietary Shareholder Director in the place of Mr. Mario Javier Robinson Bours Almada.

 

Executive Officers

 

EXECUTIVE OFFICERS

 

Name   Position   Year of Birth
Rodolfo Ramos Arvizu   Chief Executive Officer   1957
Trent Goins   Chief Executive Officer, U.S. Operations   1978
Ernesto Salmon Castelo   Director of Mexico Operations   1962
Andres Morales Astiazaran   Director of Sales   1968
Daniel Salazar Ferrer   Chief Financial Officer   1964
Alejandro Elias Calles Gutierrez   Director of Purchasing   1956
         

EXCECUTIVE OFFICERS THAT HAVE LEFT THE COMPANY, OR CHANGED POSITIONS IN THE LAST 12-MONTHS

 

Ismael Sanchez Moreno, Human Resources Director, left the company in 2020. The responsibilities of this position currently fall under the scope of our CEO and CFO until we appoint a replacement. 

 

A biography of the Executive Officers is set forth below:

 

Rodolfo Ramos Arvizu, Chief Executive Officer. Mr. Ramos joined us in 1980 and he was named as Chief Executive Officer in November 2010. Previously, Mr. Ramos had served Bachoco as its Technical Director since 1992 and also held positions in the Egg Quality Control Training Program and in Poultry Management. He also served 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 ITESM and a Diploma from the IPADE (D1).

 

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Trent Goins joined OK Foods in January 2003 as a management trainee. He was made Regional Sales Manager in 2005 with responsibility for retail sales. In 2008, Goins became Senior Vice President of Sales and Marketing, a position he held until his appointment as CEO/President of OK Foods in February 2014. Mr. Goins has served as past president and current board member of The Poultry Federation and is presently a member of the National Chicken Council, where he serves on the Executive Committee.

 

Daniel Salazar Ferrer, Chief Financial Officer. He 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 Tecnologica de Mexico, a master’s degree in Business Administration from ITESM, and a Diploma from the IPADE (A-D2).

 

Ernesto Salmon Castelo, Director of Mexico Operations, joined us in 1991 and assumed his current position in 2018. Previously, Mr. Salmon 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, Corporate Industrial and Engineering Director, Southeastern Division Manager, Bajio Division Manager and Director of Operations from 2004 to 2018. Mr. Salmon holds a degree in Chemical Engineering and a master’s degree in Business Administration from the Instituto Tecnologico de Sonora.

 

Andres Morales Astiazaran, Director of Sales and Marketing, assumed this position in January 2014. Previously, Mr. Morales was Director of Marketing and Modern Channels 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 ITESM and attended marketing courses at Northwestern University, the University of Chicago, ITESM and the IPADE (D1).

 

Alejandro Elias Calles Gutierrez, was named purchasing Director in 2010. Mr. Calles joined Bachoco in January 2010 as Manager of Purchasing. Previously, Mr. Calles worked as the CEO of “Agroinsumos Cajeme,” Chairman of the Board of the “Distrito de Riego” in the Yaqui River, Secretary of the SAGARPA in the state of Sonora, and Leader of the Secretaries of SAGARPA in Mexico and Manager of the leasing department of Inverlat. Mr. Calles holds a degree in Agronomy from the ITESM.

 

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B. Compensation

 

The table below sets forth the aggregate compensation paid to our directors and executive officers, for services they rendered in their respective capacities, for the years ended December 31, 2019, 2018 and 2017.

 

TOTAL COMPENSATION

    As of December 31,  
    2019     2018     2017  
 In millions of pesos   $     $     $  
Compensation, net (in million pesos)     52.6       61.2       56.2  
                         

C. Board Practices

 

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.

 

Audit and Corporate Practices Committee

 

The mandate of the Audit and Corporate Practices 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 and Corporate Practices Committee must do the following:

 

  Submit an annual report to the Board of Directors;
 
  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;
 
  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;
 
  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;