Industrias Bachoco, S.A. de C.V. (IBA)

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Diego Hernandez Diaz

The company is the largest poultry company in Mexico with over 800 production and distribution facilities. The company is headquartered in Celaya, Mexico. Traded on the BMV (Bachoco) and on the NYSE(IBA)^[2]

Business and Financial Metrics

IBA's main strategy follows four basic ideas:

1. Market penetration through expanded or improved distribution channels - IBA owns its own distribution channel and has proprietary knowledge regarding market distribution.
2. High responsiveness to market demands - Because of their product offering IBA has a structure that allows it to vary any of a variety of characteristics – size, weight, color, presentation – in accordance to market demand. It also places a high emphasis on developing relationships with growing customer segments.
3. Low-cost and optimization programs: IBA enjoys economies of scale.
4. Branding – IBA focuses on brand differentiation and has been successful in establishing premium brands in Mexico.

• During the third quarter of 2009 total sales increased 19.3%. The EBITDA margin of 3.6% was a significant improvement from the previous years -2.0%.This was mainly due to an increase of price. This was despite a continued economic slow-down in the first half of 2009. The consumer faced declining purchasing power. IBA was affected by higher raw material costs (especially soybean meal) in accordance to rising cost in the commodity market. The economic slow-down prevented the company to transfer the increased COGS to product prices.

• In 2008 capital expenditures were 1,098.8BB MXN with which new processing technology was installed in processing plants, chicken production capacity was increased, two new farms in Cd. Obregon and Hermosillo were finished, the transportation fleet was updated and construction for new farms in the state of Chiapas was begun.

• The operating margin in 2008 was 1.1%, historically one of the lowest margins for the Company ever. This was due to the economic slowdown in Mexico, increase in raw materials price and oversupply of the chicken markets which offset the increased level of sales.

• Net sales increased to 20,125.3BB MXN in 2008 due increased sales in all business lines. Growth in chicken, table eggs, balanced feed and swine increased, 9.5%, 20.4%, 0.9% and 35.3% respectively.

• COGS increased 20.8% to 17,482.5BB MXN due to a substantial increase in the price of raw materials, particularly grain – one of IBAs largest components of COGS.

• Loss before income and taxes was 1,160.1BB MXN in 2008 – a step decline from 2007’s 1,585.0BB MXN.

^[3]

• During 2009 Industrias Bachoco was expected to register a single deferral of taxes of about 200MM MXN during the fourth trimester due to changing tax rates. ^[4]

Image:BACHOCO averageXchangerate

Business Segments

• Chicken (77.6% of net revenues): The Mexican market has a historical preference for fresh chicken with yellow skin pigmentation. The market for value-added chicken is small but growing. Products include: live chicken, public market chicken, rotisserie chicken, supermarket broiler, chicken parts, and value-added products.
• Table eggs (9.0% of net revenues): Bachoco is the second largest producer of table eggs in Mexico. Products include brown and white eggs.
• Balanced feed (9.2% of net revenues): Mexico is the world’s third largest producer of balanced feed and second largest in Latin America.
• Swine (4.2% of net revenues)
• Other lines : this is mainly the sale of by-products like poultry manure.

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Main subsidiaries:

• Acuícola Bachoco, S.A. de C.V.
• Aviser, S.A. de C.V.
• Bachoco, S.A. de C.V. (“BSACV”)
• Bachoco Comercial, S.A. de C.V
• Campi Alimentos, S.A. de C.V.
• Huevo y Derivados, S.A. de C.V.
• Operadora de Servicios de Personal, S.A. de C.V.
• Pecuarius Laboratorios, S.A. de C.V.
• Secba, S.A. de C.V.
• Sepetec, S. A. de C.V.
• Servicios de Personal Administrativo, S.A. de C.V.
• Induba Pavos, S.A. de C.V.

^[6]

Trends and Forces

Inflation and Exchange Rates

With the Mexican economy in a slump, inflation or interest rates increasing decreases consumer purchasing power significantly; this will have a direct effect on basic product companies. Depreciation (or fluctuations) in the exchange rate of the peso relative to the dollar could have the same overall effect.

Mexican Politics

The current Mexican president Felipe Calderon –part of the Partido de Accion Nacional (National Action Party)- was elected into office in 2006, no single party (Mexico has a multi-party political system) managed to establish majority in either of the houses in Mexico (Congress or Senate). This misalignment has and will continue to result in a certain level of political gridlock and political uncertainty.

Chicken Industry Pricing

The Chicken Industry has been characterized by a long-term decline in real-term pricing. The industry follows of cycle of high prices and profitability followed by overproduction which leads to periods of lower prices and profitability.

Increased U.S. competition

Since 2003 when NAFTA eliminated import tariffs and quotas American companies have been able to export their products which are generally frozen and value-added poultry products. This is especially true in periods of overproduction in the U.S. With weakening tariff barriers (as set out by NAFTA), American exports can be expected to increase. ^[7]

Competition

• Bachoco is the largest producer of chicken in Mexico. The top three players of mass-produced chicken and chicken products account for 55% of the market with about 190 smaller companies accounting for the rest. While Bachoco enjoys considerable economies of scale compared to smaller producers in Mexico (the large scale poultry industry has high barriers to entry), it faces competition from both Mexican and American producers.
• The three remaining business segments are highly fragmented. Market share in table eggs, swine and balanced feed are 12%, <1% and 3.9%.

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References

1. ↑ http://www.nyse.com/about/listed/iba.html
2. ↑ Company 6k, December 12, 2009
3. ↑ Company 20F, 2009
4. ↑ Company Website, Press Releases
5. ↑ Company 6k, October 26,2009
6. ↑ Company 20F, 2009
7. ↑ Company 20F, 2009
8. ↑ Company 20F, 2009