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The following is an excerpt from a 20-F SEC Filing, filed by GRUMA SA DE CV on 6/30/2005.
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GRUMA SAB DE CV - 20-F - 20050630 - COMPANY_INFORMATION

 

Our ability to repatriate dividends from Gruma Venezuela may be adversely affected by exchange controls and other recent events.  See “Item 3.  Risk Factors—Risks Related to Venezuela—Venezuela Presents Significant Economic Uncertainty and Political Risk.”

 

ITEM 4 .                                            Information on the Company.

 

HISTORY AND DEVELOPMENT

 

Gruma, S.A. de C.V. is a corporation ( sociedad anónima de capital variable) registered in Monterrey, Mexico under the Ley General de Sociedades Mercantiles , or the Mexican Companies Law on December 24, 1971 with a corporate life of 99 years.  Our full legal name is Gruma, S.A. de C.V., but we are also known by our commercial names:  Gruma and Maseca.  The address of our principal executive office is Calzada del Valle Ote. 407, Colonia del Valle, San Pedro Garza García, Nuevo León, 66220 México and our telephone number is (52) 81-83-99-33-00.  Our legal domicile is Monterrey, Nuevo León, México.

 

We were founded in 1949, when Roberto González Barrera, the Chairman of our board of directors and Chief Executive Officer, started producing and selling corn flour in Northeastern Mexico as an alternative ingredient in producing tortillas.  Prior to our founding, all corn tortillas were made using a rudimentary process.  We believe that the preparation of tortillas using the corn flour method presents major advantages, including greater efficiency and higher quality, which make tortillas consistent and readily available.The corn flour process has been a significant impetus for growth, resulting in expanding corn flour and tortilla production and sales throughout Mexico, the United States, Central America, Venezuela and Europe.  In addition, we have diversified our product mix to include wheat flour in Mexico and Venezuela.

 

One of our most important competitive advantages is our proprietary state-of-the art technology for the manufacturing of corn flour and tortillas and some other related products.  We have developed our own technology since the founding of our company.  Throughout the years we have been able to achieve vertical integration which is an important part of our competitive advantage.

 

The following are some significant historical highlights:

 

                  In 1949 , we founded GIMSA, which is engaged principally in the production, distribution and sale of corn flour in Mexico.  GIMSA’s corn flour is used mainly in the preparation of tortillas and other related products.  GIMSA pioneered the dry corn flour method of producing tortillas, which results in greater efficiency and product consistency in contrast to the centuries-old wet corn dough method.  We believe we are one of the largest corn flour producers in Mexico.

 

                  In 1972 , we entered the Central American market with our first operation in Costa Rica.  Today, we produce and sell corn flour in Costa Rica, Guatemala, Honduras and El Salvador, and export corn flour to Nicaragua.  To a lesser extent, we now produce tortillas in Costa Rica and Nicaragua.  In Costa Rica we also produce snacks and cultivate hearts of palm and process rice.

 

                  In 1977 , we entered the U.S. market.  Our operations have grown to include products such as tortillas, corn flour and other tortilla related products.  We are one of the largest producers and distributors of corn flour and packaged tortillas in the United States.

 

                  From 1989 to 1994 , Gruma Corporation significantly increased its installed capacity to meet the increasing demand for tortillas through the construction of several plants in different regions within the U.S.

 

                  From 1990 to 1995 , GIMSA significantly increased its installed corn flour manufacturing capacity to meet the expected growth potential in Mexico.

 

                  In 1993 , we entered the Venezuelan corn flour market through an investment in DEMASECA, a Venezuelan corporation producing corn flour.  We have held a 50% beneficial ownership in DEMASECA since 1998.  In August 1999, with the acquisition of MONACA, one of the largest

 

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corn flour and wheat flour producers in Venezuela, we significantly strengthened our presence in the Venezuelan market.

 

                  In 1994 , we began our packaged tortilla operations in Mexico as part of our strategy to broaden our product lines in Mexico, achieve vertical integration of our corn flour operations and capitalize upon our experience in producing and distributing packaged tortillas in the United States.  We are currently only focused in northern part of Mexico.

 

                  In 1996 , we strengthened our position in the U.S. corn flour market through an association with Archer-Daniels-Midland, which currently owns approximately 29% of our shares.  Through this association we combined our existing U.S. corn flour operations and strengthened our position in the U.S. corn flour market.  This association also allowed us to enter the Mexican wheat flour market by acquiring a 60% ownership interest in Archer-Daniels-Midland’s Mexican wheat flour operations.  As part of this association, we also received U.S.$258.0 million in cash and gained exclusivity rights from Archer-Daniels-Midland in specified corn flour and wheat flour markets.

 

                  From 1997 through 2000 , we initiated a significant plant expansion program.  During this period, we acquired MONACA in Venezuela (as described above) and several wheat flour plants in Mexico.  We also expanded two existing corn flour plants and built a bread plant in Mexico.  We acquired two existing tortilla plants and built three tortilla plants in the United States.  We also expanded a corn flour plant in Honduras, built a corn flour plant in El Salvador and built a frozen bread plant in Costa Rica.  We also completed construction of a tortilla plant in Coventry, England.

 

                  From 2001 to 2003 , as a result of our comprehensive review of our business portfolio and our focus on our core business, we discontinued our bread operations in Mexico.  In November 2001, we sold our bread business in Central America and the bread manufacturing equipment of our Mexican operations.  In 2002, we sold certain assets of our bread operations in the United States.  We rationalized our capital expenditures and most of them were oriented to capacity expansions and technology upgrades in our U.S. operations, where we have experienced significant growth.

 

                  In 2004 , we concluded two acquisitions in Europe in an effort to strengthen our presence in that region.  On July 2, we acquired Ovis Boske, a wheat flour tortilla company based in Holland.  On July 12, we acquired 51% of Nuova De Franceschi & Figli, a corn flour company based in Italy.   We continued to expand capacity and upgrade several of our U.S. operations, the most relevant of which was the expansion of a corn mill in Indiana.  This expansion is expected to be completed during the second half of 2005.  Additionally, we entered into a lease agreement for a facility in Ecuador to process hearts of palm.  We have an option to purchase that facility after the sixth year of the lease agreement.

 

                  In 2005 , we began the construction of a tortilla plant in Pennsylvania, which is expected to be operational by July 2005.  In addition, Gruma Corporation acquired part of the manufacturing assets of the Mexican food division of Cenex Harvest States.  These assets consist of three tortilla plants located in New Brighton, Minnesota; Railhead, Texas; and Phoenix, Arizona.  We expect these plants to help us to increase production capacity and take advantage of synergies by complementing our customer base and distribution network.

 

We are continuously considering potential acquisitions which could improve our market share, profitability and fit into our overall strategy.

 

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ORGANIZATIONAL STRUCTURE

 

We are a holding company and conduct our operations through subsidiaries.  The table below sets forth our principal subsidiaries.

 

Name of Company

 

Principal
Markets

 

Jurisdiction of
Incorporation

 

Percentage
Owned(1)

 

Products/
Services

 

 

 

 

 

 

 

 

 

 

 

Mexican Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grupo Industrial Maseca, S.A. de C.V. (“GIMSA”)

 

Mexico

 

Mexico

 

83%

 

Corn flour, tortillas

 

 

 

 

 

 

 

 

 

 

 

Molinera de México, S.A. de C.V. (“Molinera de México”)

 

Mexico

 

Mexico

 

60%

 

Wheat flour

 

 

 

 

 

 

 

 

 

 

 

U.S. and European Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gruma Corporation

 

United States Europe

 

Nevada

 

100%

 

Packaged tortillas, Other tortilla related products

 

 

 

 

 

 

 

 

 

 

 

Azteca Milling(2)

 

United States

 

Texas

 

80%

 

Corn flour

 

 

 

 

 

 

 

 

 

 

 

Central American Operation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gruma Centroamérica, LLC.

 

Costa Rica, Honduras, Guatemala, El Salvador, Nicaragua, Ecuador

 

Nevada

 

100%

 

Corn flour, Packaged tortillas, Snacks, Hearts of Palm, Rice

 

Gruma Venezuela(3)

 

 

 

 

 

 

 

 

 

Molinos Nacionales, C.A. (“MONACA”)

 

Venezuela

 

Venezuela

 

95%

 

Corn flour, Wheat flour, Other products

 

 

 

 

 

 

 

 

 

 

 

Derivados de Maíz Seleccionado, C.A. (“DEMASECA”)

 

Venezuela

 

Venezuela

 

50%

 

Corn flour

 

 

 

 

 

 

 

 

 

 

 

Other Subsidiaries

 

 

 

 

 

 

 

 

 

Productos y Distribuidora Azteca, S.A. de   C.V. (“PRODISA”)

 

Mexico

 

Mexico

 

100%

 

Packaged tortillas, Other related products

 

 

 

 

 

 

 

 

 

 

 

Investigación de Tecnología Avanzada,   S.A. de C.V. (“INTASA”)

 

Mexico

 

Mexico

 

100%

 

Construction, Technology and Equipment operations

 

 


(1)                     Percentage of equity capital owned by us directly or indirectly through subsidiaries.

(2)                     A limited partnership between Gruma Corporation (80%) and Archer-Daniels-Midland (20%).

(3)                     Together these subsidiaries are referred to as “Gruma Venezuela.”

 

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Our subsidiaries accounted for the following percentages and amount of our net sales in millions of pesos of constant purchasing power as of December 31, 2004 for the years ended December 31, 2002, 2003 and 2004.

 

 

 

Year ended December 31,

 

 

 

2002

 

2003

 

2004

 

 

 

In Millions
of Pesos

 

Percentage
of Net Sales

 

In Millions
of Pesos

 

Percentage
of Net Sales

 

In Millions
of Pesos

 

Percentage
of Net Sales

 

Gruma Corporation

 

Ps.

9,907

 

47

%

Ps.

11,127

 

48

%

Ps.

12,683

 

51

%

GIMSA

 

5,209

 

25

 

5,471

 

23

 

5,787

 

23

 

Gruma Venezuela

 

2,637

 

13

 

3,308

 

14

 

3,300

 

13

 

Molinera de México

 

1,882

 

9

 

2,095

 

9

 

1,885

 

8

 

Gruma Centroamérica

 

1,152

 

5

 

1,138

 

5

 

1,226

 

5

 

Others (and eliminations)

 

146

 

1

 

172

 

1

 

111

 

0

 

 

Association with Archer-Daniels-Midland

 

We entered into an association with Archer-Daniels-Midland in September 1996.  Archer-Daniels-Midland is one of the world’s largest corn refiners, oil seed processors and flour millers and produces, processes, transports and exports agricultural products worldwide.  Through our partnership we have improved our position in the U.S. corn flour market and gained an immediate presence in the Mexican wheat flour market.

 

As a result of this association, we and Archer-Daniels-Midland combined our U.S. corn flour operations to form Azteca Milling, L.P., a limited partnership in which we hold; indirectly, 80% and Archer-Daniels-Midland holds indirectly, 20%.  We and Archer-Daniels-Midland agreed to produce and distribute corn flour in the United States exclusively through Azteca Milling.  In addition, we acquired 60% of the capital stock of Archer-Daniels-Midland’s wholly-owned Mexican wheat milling operations, Molinera de México, S.A. de C.V.  Archer-Daniels-Midland retained the remaining 40%.  We and Archer-Daniels-Midland agreed to, produce and distribute wheat flour in Mexico exclusively through Molinera de México.  As part of this agreement, we also received U.S.$258.0 million in cash and gained exclusivity rights from Archer-Daniels-Midland in specified corn flour and wheat flour markets.  In return, Archer-Daniels-Midland received 74,696,314 of our newly issued shares, which represented at that time approximately 22% of our total outstanding shares and the right to designate two of the 15 members of our board of directors and their corresponding alternates.  Currently, Archer-Daniels-Midland owns, directly and indirectly, approximately 29% of our outstanding shares.   See “Item 3.  Key Information—Risk Factors—Risks Relating to Our Controlling Shareholders and Capital Structure—Archer-Daniels-Midland, Our Strategic Partner, Has Influence Over Some Corporate Decisions.” and  “Item 10.  Additional Information—Material Contracts—Archer-Daniels-Midland.”

 

Capital Expenditures

 

Our capital expenditures for 2002, 2003 and 2004 were U.S.$70 million, U.S.$58 million and U.S.$115 million, respectively.  Our capital expenditures include investments in property, plant and equipment, acquisitions of new plants and brands and investments in common stock.  In 2000, we completed our four-year expansion program that required a capital expenditure of approximately U.S.$709 million.  This large expansion program was financed primarily through borrowed funds and capital contributions.  Since these expenditures allowed us to expand our production capacity, in 2001 and 2002 we focused on more moderate growth, thereby significantly lowering our capital expenditures.  Investments of approximately U.S.$72 million in 2001 (including a U.S.$17 million early lease buyout option on certain of Gruma Corporation’s production equipment), U.S.$70 million in 2002 and U.S.$58 million in 2003 were significantly lower than the annual averages during the period 1997-2000 and were mainly applied to capacity expansions in the United States and technology upgrades in all subsidiaries.  Investments in 2004 were mainly applied to Gruma Corporation for the expansion of corn flour and tortilla capacity, including two European acquisitions, the acquisition of a tortilla plant in Las Vegas and general facilities upgrades at our U.S. plants.  These investments were made to accommodate the continuous growth in our

 

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business.  We have budgeted approximately U.S.$150 to 160 million for capital expenditures in 2005.  We anticipate financing these expenditures through our own cash flows and, to a lesser extent, our bank lines of credit.  This capital expenditures budget does not include any potential acquisitions.

 

A significant portion of the capital expenditures budgeted for 2005 is intended to be used for additional corn flour and tortilla capacity in the United States.  One of the most important projects included in this capital expenditure budget is the construction of a new tortilla plant in Pennsylvania, which began in January 2005 and which is expected to be operational by July 2005. We expect our expansions in the U.S. tortilla business, including the acquisition of part of the manufacturing assets of the Mexican food division of Cenex Harvest States, which occurred in May 2005, to increase U.S. production capacity by approximately 16%.  In addition, the expansion of the Gruma Corporation corn flour mill located in Evansville, Indiana is expected to be completed during the second half of 2005.  The expected additional production capacity will be approximately 10% of Gruma Corporation’s existing U.S. corn flour capacity.

 

During the first quarter of 2005, we spent approximately U.S.$23 million on capital expenditures.  For more information on capital expenditures please refer to the discussion of the specific subsidiary.

 

We continue to analyze the Asian markets, but our current expectation is that our investment in our first plant in China will be approximately U.S.$15 million and the expected production capacity of such plant will be sufficient to support the current level of sales of our products.  We expect this plant to be operational during 2006.

 

The following table sets forth the aggregate amount of our capital expenditures during the periods indicated.

 

 

 

Year ended December 31,

 

 

 

2002

 

2003

 

2004

 

 

 

(in millions of U.S. dollars(1))

 

Gruma Corporation

 

$

47.0

 

$

38.2

 

$

93.2

 

GIMSA

 

2.9

 

7.2

 

5.4

 

Gruma Venezuela

 

0.0

 

3.5

 

7.9

 

Molinera de México

 

3.4

 

3.6

 

5.4

 

Gruma Centroamérica

 

0.7

 

0.0

 

0.0

 

Others and eliminations

 

15.5

 

5

 

2.9

 

Total consolidated

 

$

69.5

 

$

57.5

 

$

114.8

 

 


(1)           Amounts in respect of some of the capital expenditures were paid for in currencies other than the U.S. dollar.  These amounts were translated into U.S. dollars at the exchange rate in effect at the end of each year on which a given capital expenditure was made.  As a result, U.S. dollar amounts presented in the table above may not be comparable to data contained elsewhere in this Annual Report.

 

For more information on capital expenditures for each subsidiary, please see the sections entitled “Operation and Capital Expenditures” under the relevant sections below.

 

BUSINESS OVERVIEW

 

We believe we are one of the largest corn flour and tortilla producers and distributors in the world based upon revenue and sales volume.  We also believe we are one of the leading producers and distributors of corn flour and tortillas in the United States, one of the leading producers of corn flour and wheat flour in Mexico and one of the leading producers of corn flour and wheat flour in Venezuela, based upon revenue and sales volumes.  We believe that we are also one of the largest producers of corn flour and tortillas in Central America, and one of the largest tortilla producers in Europe based upon revenue and sales volume.

 

Our focus has been and continues to be the efficient and profitable expansion of our core business—corn flour, tortilla, and wheat flour production.  We pioneered the dry corn flour method of tortilla production, which

 

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offers several advantages over the centuries-old traditional wet corn dough method.  These advantages include higher production yields, reduced production costs, more uniform quality and longer shelf life.  The corn flour method of production offers significant opportunities for growth.  Using our technology and know-how, we expect to encourage tortilla and tortilla chip producers in the United States, Mexico, Central America,, and elsewhere to convert to the corn flour method of tortilla and tortilla chip production.  Additionally, we expect to increase the presence of our other core businesses, including packaged tortillas in the United States, Mexico, Central America, Europe, and Asia, and wheat flour in Mexico and Venezuela.

 

The following table sets forth our revenues by geographic market for years ended December 31, 2002, 2003 and 2004.

 

 

 

Year ended December 31,

 

 

 

2002

 

2003

 

2004

 

 

 

(in millions of Pesos of constant purchasing power
as of December 31, 2004)

 

United States (includes European operations)

 

Ps.

9,907

 

Ps.

11,127

 

Ps.

12,683

 

Mexico

 

7,237

 

7,738

 

7,784

 

Venezuela

 

2,637

 

3,308

 

3,300

 

Central America

 

1,152

 

1,138

 

1,226

 

Total

 

Ps.

20,933

 

Ps.

23,311

 

Ps.

24,993

 

 

Strategy

 

Our strategy for growth is to focus on our core business—the manufacturing of tortillas, corn flour and wheat flour—and to capitalize upon our leading positions in the corn flour and tortilla industries.  We have taken advantage of the increasing popularity of Mexican food and, more importantly, tortillas in the U.S., Europe and Asia.  We are continuously considering potential acquisitions which could improve our market share, profitability and fit into our overall strategy.  Our strategy includes the following key elements:

 

Expand in the Growing Retail and Food Service Tortilla Markets in New Regions in the United States :  We believe that the size and growth of the U.S. retail and food service tortilla markets offer significant opportunities for expansion.

 

Expand in the Growing Tortilla Markets in Europe and Asia: We believe that new markets in other continents such as Europe and Asia, offer us significant opportunities.  In Asia, we have established a presence by exporting our products to major customers in the region and are investing in our first plant in China which is expected to be operational during 2006.  We believe our recent acquisitions in Europe will enable us to better serve markets in Europe and in the Middle East through stronger vertical integration, improvements in logistical efficiencies, and enhanced knowledge of our local markets.  We will continue to evaluate ways to profitably expand into these rapidly growing markets.

 

Continue the Process of Establishing Gruma Corporation’s MISSION ® and Guerrero Tortilla Brands as the First and Second National Brands in the United States :  We intend to achieve this by increasing our efforts at building brand name recognition and by further expanding and utilizing Gruma Corporation’s distribution network, first in Gruma Corporation’s existing markets, where we believe there is potential for further growth, and second, in regions where Gruma Corporation currently does not have a significant presence but where we believe strong demand for tortillas already exists.

 

Encourage Transition from Traditional Cooked-Corn Method to Corn Flour Method :  We pioneered the dry corn flour method of tortilla production, which offers several advantages over the centuries-old traditional wet corn dough method.  We continue to view the transition from the traditional method to the corn flour method of making tortillas and tortilla chips as the primary opportunity for increased corn flour sales.  We will continue to encourage this transition through improving customer service, advertising and promoting our MASECA ® brand corn flour, as

 

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well as leveraging off of our manufacturing capacity and distribution networks in Mexico, the United States, Central America and Venezuela.

 

Continually Improve Service and Quality of Our Products to Customers and Consumers :   We continue to develop customer relationships by ensuring that our customer-service and sales representatives develop an intimate knowledge of their clients’ businesses and by working with clients to help them improve their products, services, and sales to their consumers.  We continuously work to improve service and the quality of our products to consumers, raise consumer awareness of our products, and stay informed of our consumers’ preferences.

 

Improve Operating Efficiencies : We have cost and expense reduction opportunities in our administrative areas that should allow us to continue improving margins and cash flow in the mid-term.  One of the ways in which we are accomplishing this is by implementing shared services within our operations in order to achieve greater efficiencies through synergies in information technology, accounting, cash management and supply chain management systems.  We expect that these efforts will enable us to achieve significant savings and greater profitability.  We also intend to continue our research and development efforts in order to further improve the efficiency of our proprietary corn flour and tortilla production technology, which we believe provides us a significant advantage over our competitors.

 

U.S. and European Operations

 

Overview

 

We conduct our United States and European operations principally through our subsidiary Gruma Corporation, which manufactures and distributes corn flour, packaged tortillas, corn chips and related products.  Gruma Corporation commenced operations in the United States in 1977, initially developing a presence in certain major tortilla consumption markets by acquiring small tortilla manufacturers and converting their production processes from the traditional “wet corn dough” method to our dry corn flour method.  Eventually, we began to build our own state-of-the-art tortilla plants in certain major tortilla consumption markets.  We have vertically integrated our operations by (1) building corn flour and tortilla manufacturing facilities in the United States, (2) establishing corn purchasing operations, (3) launching marketing and advertising campaigns to develop brand name recognition, (4) expanding distribution networks for corn flour and tortilla products, and (5) using our technology to design and build proprietary corn flour, tortilla and tortilla chip manufacturing machinery for use in our U.S. and European operations.

 

In September 1996, we combined our U.S. corn flour milling operations with Archer-Daniels-Midland’s corn flour milling operations into a newly formed limited partnership, known as Azteca Milling, L.P., in which Gruma Corporation holds an 80% interest.

 

During 2000, Gruma Corporation opened its first European tortilla plant in Coventry, England, initiating our entry into the European market.  During July 2004 Gruma Corporation concluded two acquisitions in Europe, a tortilla plant in Holland and a 51% ownership of a corn flour plant in Italy in an effort to strengthen our presence in that region.

 

Gruma Corporation

 

Gruma Corporation operates primarily through its Mission Foods division, which produces tortillas and related products, and Azteca Milling, L.P., a limited partnership between Gruma Corporation (80%) and Archer-Daniels-Midland (20%) which produces corn flour.  We believe Gruma Corporation is one of the leading manufacturers and distributors of packaged tortillas and related products throughout the United States, Europe and Asia through its Mission Foods division.  We believe Gruma Corporation is also one of the leading producers of corn flour in the United States through its Azteca Milling divison.

 

Principal Products .  Mission Foods manufactures and distributes packaged corn and wheat tortillas and related products (which include tortilla chips) under the MISSION ® and GUERRERO ® brand names in the United States, as well as other minor regional brands.  By continuing to build MISSION ® into a strong national brand and GUERRERO ® into a strong Hispanic focused brand, Mission Foods expects to increase market penetration, brand

 

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awareness and profitability.  Azteca Milling manufactures and distributes corn flour in the United States under the MASECA ® brand.

 

Sales and Marketing .  Mission Foods serves both retail and food service customers.  Retail customers, which represent most of our business, include supermarkets, mass merchandisers and smaller independent stores, while food service customers include major chain restaurants, food service distributors, schools, hospitals and the military.

 

In the tortilla market, Mission Foods’ current marketing strategy is to increase market penetration by increasing consumer awareness of tortilla products in general, to expand into new regions and to focus on product innovation and consumer and customer needs.  Mission Foods promotes its products primarily through cooperative advertising programs with supermarkets as well as radio and television advertising, targeting both Hispanic and non-Hispanic populations, although advertising on non-Hispanic television is more limited.  We believe these efforts have contributed to greater consumer awareness.  Mission Foods also targets food service companies and works with restaurants, institutions and distributors to address their individual needs and provide them with a full line of products.  Mission Foods continuously attempts to identify new customers and markets for its tortillas and related products in the United States, and more recently Europe and Asia.

 

Azteca Milling distributes approximately 38% of the corn flour it produces to Mission Foods’ plants throughout the United States and Europe.  Azteca Milling’s third-party customers consist largely of other tortilla manufacturers, corn chip producers, and retail customers.  Azteca Milling sells corn flour in various quantities, ranging from four-pound retail packages to bulk railcar loads.

 

We anticipate continued growth in the U.S. market for corn flour, tortillas, and related products.  In dollar terms, Gruma Corporation’s net sales have increased at a compounded annual rate of 9.0% between 2000 and 2004.  We believe that the growing consumption of Mexican-style foods by non-Hispanics in the United States, Europe and Asia will continue to increase demand for tortillas and tortilla related products.  Also influential is the fact that tortillas are no longer solely used as Mexican food, for example, the use of tortillas for wraps, which will continue to increase demand for tortillas.  Growth in recent years in the corn flour market is attributable to this increase of corn tortilla and tortilla chip consumption in the U.S. market as well as the conversion of tortilla and tortilla chip producers from the wet corn dough process to our dry corn flour method, the increase of Hispanic population, higher retail sales, and stronger and increased distribution.

 

Competition and Market Position .  We believe the tortilla market is highly fragmented, regional in nature and extremely competitive.  Mission Foods’ main competitors are hundreds of tortilla producers, who manufacture locally or regionally and tend to be sole proprietorships.  In addition, a few large companies have tortilla manufacturing divisions that compete with Mission Foods, for example, Tyson, Bimbo, and General Mills.  We believe Mission Foods was one of the leading manufacturers and distributors of packaged tortillas and related products throughout the United States and Europe in 2004.

 

Competitors within the corn flour milling industry include corn flour milling divisions of large companies, such as Cargill and Minsa.  Azteca Milling competes with these corn flour manufacturers in the United States primarily on the basis of superior quality, technical support, customer service and brand recognition.  However, we believe there is great potential for growth by converting tortilla and tortilla chip manufacturers that still use the traditional method to our corn flour method.  We believe Azteca Milling was one of the leading producers of corn flour in the United States in 2004.

 

We believe there is a significant growth potential for tortillas in Europe.   For now most of our production is limited to private label.  We believe we are one of the largest tortilla producers in Europe, and our main competitor is General Mills.

 

Operation and Capital Expenditures .  Annual total production capacity for Azteca Milling and Mission Foods is estimated at 1,548,000 tons as of December 31, 2004, with an average utilization of 86% in 2004.  The average size of our plants measured in square meters is approximately 9,200 (about 99,000 square feet) as of December 31, 2004.  Capital expenditures for the past three years were U.S.$178.4 million, mostly for expansion and upgrades of existing facilities, as well as our two acquisitions in Europe and one in Las Vegas.  Gruma

 

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Corporation’s capital expenditures projected for 2005 include the construction of a tortilla plant in Pennsylvania, capacity expansions at other existing facilities in the U.S. in addition to certain manufacturing and technology upgrades. We expect our expansions in the U.S. tortilla business, including the acquisition of part of the manufacturing assets of the Mexican food division of Cenex Harvest States which occurred in May 2005, to increase U.S. production capacity by approximately 16%.  The expansion of the corn flour business includes one new production unit at the plant located in Evansville, Indiana.  The expected additional production capacity will be approximately 10% of the existing U.S. corn flour capacity of Gruma Corporation.  These budgeted capital expenditures do not include any potential acquisition.

 

Mission Foods produces its packaged tortillas and other related products at 20 manufacturing facilities located primarily in large population centers in the western and southwestern United States, one plant in Coventry, England, and one plant in Roermond, Holland.  Food safety for all of Mission Foods’ plants in the United States are graded by the American Institute of Baking or, AIB.  During 2004, the AIB awarded Mission’s U.S. plants its highest certification, AIB-HAACP, with the exception of the newly acquired plants in Nevada, Texas, Arizona and Minnesota.  These recently acquired plants should start their AIB certification process during 2006.  Food safety for both tortilla plants in England and Holland is graded by several different certifications, such as the International Food Standards (IFS), as required by different European countries, and the British Retail Consortium.

 

Azteca Milling produces corn flour at six plants located in Amarillo, Edinburg and Plainview, Texas; Evansville, Indiana; Henderson, Kentucky; and Madera, California.  Gruma Corporation also has a 51% ownership of a corn flour plant in Ceggia, Italy.  All plants are located within important corn growing areas.  Due to Azteca Milling’s manufacturing practices and processes, we are the only corn milling company to achieve ISO 9002 certification as well as certification by the American Institute of Baking.  All six facilities located in the U.S. have achieved ISO 9002 certification.

 

Seasonality.  We believe there is no significant seasonality in our products, however part of our products tend to experience a slight volume increase during the summer months.  Tortillas and tortilla chips sell year round, with special peaks during the summer, when we increase our promotion and advertising taking advantage of several holidays and major sporting events. Tortilla and tortilla chip sales decrease slightly towards the end of the year when many Mexicans go back to Mexico for the holidays. Sales of corn flour fluctuate seasonally as demand is higher in the fourth quarter during the holidays.

 

Raw Materials .  Corn is the principal raw material used in the production of corn flour, which is purchased from local producers or, if market conditions require, U.S. or international spot markets.  Azteca Milling buys corn only from farmers and grain elevators that agree to supply varieties of corn approved for human consumption.  Azteca Milling tests and monitors the raw materials for certain strains of bacteria and chemicals not approved for human consumption.  In addition, Azteca Milling has implemented certain testing protocols to identify genetically modified proteins in raw materials it purchases.

 

Because corn prices tend to be somewhat volatile, Azteca Milling engages in a variety of non-speculative hedging activities in connection with the purchase of its corn supplies, including the purchase of corn futures contracts.  In so doing, Azteca Milling attempts to assure corn availability approximately 12 months in advance of harvest time and guard against price volatility approximately 6 months in advance.  The Texas Panhandle currently is the single largest source of food-grade corn.  Azteca Milling is also involved in short-term contracts for corn procurement with many corn suppliers.  Where suppliers fail to deliver, Azteca Milling can easily access the spot markets.  Azteca Milling does not anticipate any difficulties in securing adequate corn supplies in the future.

 

Corn flour for Mission Foods’ products is supplied by Azteca Milling and, to a much lesser extent, GIMSA.  Wheat flour for the production of wheat tortillas is purchased from third party producers at prices prevailing in the commodities markets.  Because wheat flour prices tend to be somewhat volatile, Mission Foods engages in a variety of non-speculative hedging activities in connection with the purchase of wheat flour, including the purchase of wheat futures contracts.  Mission Foods believes the market for wheat flour in the United States is sufficiently large and competitive to ensure that wheat flour will be available at competitive prices to supply Mission Foods’ needs.

 

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Wheat flour for the production of wheat tortillas in Europe is purchased from third party producers at prices prevailing in the commodities markets.  In order to reduce supply and price fluctuations, contracts are placed for periods of twelve months or longer.  Mission Foods believes the market for wheat flour in Europe is sufficiently large and competitive to ensure that wheat flour will be available at competitive prices to supply Mission Foods’ needs.

 

Most of the corn for the corn flour operations in Italy is purchased domestically, at prices prevailing in the commodities markets.

 

Distribution .  An important element of Mission Foods’ sales growth has been the expansion and improvement of its tortilla distribution network, including a direct-store-delivery system to distribute most of its products.  Tortillas and other freshly made products are generally delivered daily to customers, especially in retail sales and in regions where we have plants.  In regions where we do not have plants, there is no daily distribution and tortillas are sometimes sold refrigerated.  In keeping with industry practice, Mission Foods generally does not have written sales agreements with its customers.  Nevertheless, from time to time, Mission Foods enters into consumer marketing agreements with retailers, in which certain terms on how to market our products are agreed.  Mission Foods has also developed a food service distribution network on the west and east coasts of the United States, and in certain areas of the midwestern United States.

 

The vast majority of corn flour produced by Azteca Milling is sold to tortilla and tortilla chip manufacturers and is delivered directly from the plants to the customer.  Azteca Milling’s retail customers are primarily serviced by a network of distributors, although a few large retail customers have their corn flour delivered directly to them from the plants.

 

Mexican Operations

 

Overview

 

Our largest business in Mexico is the manufacture and sale of corn flour, which we conduct through our subsidiary GIMSA.  Through our association with Archer-Daniels-Midland, we have also entered the wheat milling business in Mexico through Molinera de México.  Our other subsidiaries engage in the manufacturing and distribution of packaged tortillas and other related products in northern Mexico,  conduct research and development regarding corn flour and tortilla manufacturing equipment, produce machinery for corn flour and tortilla production and construct our corn flour manufacturing facilities.

 

GIMSA—Corn Flour Operation

 

Principal Products.  GIMSA produces, distributes and sells corn flour in Mexico, which is then used in the preparation of tortillas and other related products.  In 2004, GIMSA had net sales of Ps.5,787 million.  We believe GIMSA is one of the largest corn flour producers in Mexico.  GIMSA estimates that its corn flour is used in one third of the corn tortillas consumed in Mexico.  It sells corn flour in Mexico under the brand name MASECA ® .  MASECA ® flour is a ready-mixed corn flour that becomes a dough when water is added.  This corn dough can then be pressed to an appropriate thickness, cut to shape and cooked to produce tortillas and similar food products.

 

GIMSA produces over 40 varieties of corn flour for the manufacture of different food products.  It sells corn flour to tortilla and tortilla chip manufacturers as well as in the retail market.  GIMSA’s principal corn flour product is a standard fine-textured, white flour used to manufacture tortillas.

 

GIMSA also produces and sells tortillas through several small tortilla shops mainly located in central Mexico.  GIMSA’s tortilla sales represent approximately 1% of its total sales volume and approximately 2% of its net sales.

 

Sales and Marketing .  GIMSA sells packaged corn flour in bulk principally to thousands of tortilla and tortilla chip manufacturers who purchase in 20-kilogram sacks and in the retail market which purchases in one-kilogram packages.  To a lesser extent, GIMSA also produces and sells tortillas to the end consumer.

 

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The following table sets forth GIMSA’s bulk and retail sales volumes of corn flour in Mexico and tortilla sales volume for the periods indicated.

 

 

 

Year Ended December 31,

 

 

 

2002

 

2003

 

2004

 

 

 

Tons

 

%

 

Tons

 

%

 

Tons

 

%

 

Corn Flour

 

 

 

 

 

 

 

 

 

 

 

 

 

Bulk

 

1,167,037

 

84

 

1,182,875

 

84

 

1,223,585

 

85

 

Retail

 

206,344

 

15

 

204,730

 

15

 

207,858

 

14

 

Tortillas

 

23,856

 

2

 

18,460

 

1

 

16,400

 

1

 

Total

 

1,397,237

 

100

 

1,406,065

 

100

 

1,447,843

 

100

 

 

GIMSA’s corn flour customer base is comprised primarily of bulk sales to small tortilla producers, or tortillerías , which purchase corn flour in 20-kilogram sacks and produce tortillas on their premises, which are then sold locally.  Retail sales of corn flour are channeled to two distinct markets:  urban centers and rural areas.  Sales to urban consumers are made mostly through supermarket chains that use their own distribution networks to distribute MASECA ® flour or through wholesalers who sell the product to smaller grocery stores throughout Mexico.  Sales to rural consumers are made principally through the Mexican government’s social and distribution program Distribuidora Conasupo, S.A. , or DICONSA, which consists of a network of small government-owned stores and which supplies rural areas with basic food products.  GIMSA’s sales representatives are mainly concerned with promoting the dry corn flour method to tortilla producers.

 

Mexico’s tortilla industry is highly fragmented, consisting mostly of tortillerías , many of which continue to utilize, what is in our opinion, the relatively inefficient wet corn dough method of tortilla production.  We estimate that the traditional wet corn dough method accounts for approximately half of all tortillas produced in Mexico.  Tortilla producers that do not utilize corn flour buy the wet dough from dough producers or buy and mill their own corn and produce tortillas themselves.

 

This traditional method is a rudimentary practice requiring more energy, time and labor because it involves cooking the corn in water and with lime, milling the cooked corn, creating and shaping the dough, and then making tortillas from that dough.  We pioneered the dry corn flour method in which we mill the raw corn in our facilities into corn flour.  Tortilla producers and consumers, once they acquire the corn flour, may then simply add water to transform the flour into wet dough to produce tortillas.  We believe the preparation of tortillas using the dry corn flour method possesses several advantages over the traditional method.  Our internal studies show that the dry corn flour method consumes less water, electricity, fuel and labor.  We estimate that one kilogram of corn processed through the corn flour method yields more tortillas on average than a similar amount of corn processed using the traditional method.  Corn flour is also transported more easily than wet corn dough and has a shelf life of approximately three months, compared with one or two days for wet corn dough.  The market for wet corn dough is limited due to the perishable nature of the product, restricting sales of most wet corn dough producers to their immediate geographic areas.  Additionally, the corn flour’s longer shelf life makes it easier for consumers in rural areas, where tortillerías are relatively scarce, to produce their own tortillas.

 

We believe in the benefits of our dry corn flour method and, thus also, believe that we have substantial opportunities for growth by encouraging a transition to our method.  Corn flour is primarily used to produce corn tortillas, a principal staple of the Mexican diet.  The tortilla industry is one of the largest industries in Mexico as tortillas constitute the single largest component of Mexico’s food industry.  However, there is still reluctance to abandon traditional practice, particularly in central and southern Mexico, because corn dough producers and/or tortilla producers using the traditional method incur lower expenses by working in an underground economy.  Additionally, generally such producers are not required to comply with environmental regulations, which also represent savings for them.  To the extent regulations in Mexico are enforced and we and our competitors are on the same footing, we expect to benefit from these developments.

 

GIMSA has embarked on several programs to promote corn flour sales to tortilla producers and consumers.  GIMSA offers incentives to potential customers, such as small independent tortillerías , to convert to the corn flour

 

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method from the traditional wet corn dough method.  The incentives GIMSA offers include new, easy to use equipment designed specifically for small-volume users, financing, and individualized training.  For example, in order to assist traditional tortilla producers in making the transition to corn flour, GIMSA also sells specially designed mixers made by Tecnomaíz, S.A. de C.V., or Tecnomaíz, one of our research and development subsidiaries.  For more information about our research and development department, see “—Miscellaneous—INTASA—Technology and Equipment Operations.”   GIMSA also helps its tortillería customers to improve sales by directing consumer promotions to heighten the desirability of their products and increase consumption, which, in turn, should increase corn flour sales.  These efforts to improve sales include prime time advertising on television as well as radio, magazine and billboard advertising.  In 2005, we intend to have GIMSA’s specialized sales teams continue their efforts to provide better and more individualized service to different types of customers.

 

During 2004, GIMSA implemented initiatives focused on developing a successful business model for its customers to increase the consumption of corn-flour based products generally and its products specifically.  GIMSA’s strategy was based on a comprehensive business proposal that included the following product, service and marketing objectives:

 

                  development of new types of corn flour for its customers;

 

                  design of individualized support regarding the type of machinery required for their business, financial advisory and training;

 

                  assistance to customers in the development of new profitable distribution methods to increase their market penetration and sales;

 

                  development of tailored marketing promotions to increase consumption in certain customer segments; and

 

                  assistance to customers in the development of new higher margin products such as tortilla chips, taco shells and enchilada tortillas, reflecting current consumption trends.

 

During 2004 GIMSA implemented a national marketing campaign in Mexico to emphasize the benefits and nutritional value of tortillas made with 100% MASECA ® corn flour.  This campaign targeted both consumption of tortillas made by GIMSA’s customers and consumption of its retail corn flour packages sold directly to consumers by repositioning the use of corn flour not only for making tortillas but for a wide variety of foods which are part of the Mexican diet.  We believe this campaign has helped to increase the recognition of the MASECA ® brand, created a greater awareness about tortillas made with 100% MASECA ® corn flour and created a greater awareness of the nutritional value of tortillas made of natural ingredients.  We believe this campaign has also helped us to position MASECA ® corn flour as a nutritional product which can be used in the production of tortillas and other foods.  In addition, we believe that this campaign has also helped contribute to the perception that tortillas are a healthy alternative to other food products.

 

Competition and Market Share .  GIMSA faces competition on three levels—from other corn flour producers, from sellers of wet corn dough and from the many tortillerías that produce their own wet corn dough on their premises.  Our estimates indicate that about half of tortilla producers continue to use the traditional wet corn dough method.

 

GIMSA’s biggest challenge in increasing market share is the prevalence of the traditional method (cooked-corn method).  In the corn flour industry, GIMSA’s principal competitors are Grupo Minsa, S.A. de C.V. and regional corn flour producers.  We compete against other corn flour manufacturers on the basis of quality, brand recognition, technology, customer service and nationwide coverage.  We believe that GIMSA has certain competitive advantages resulting from its proprietary technology, greater economies of scale and broad geographic coverage, which may afford it opportunities to more effectively source raw materials and reduce transportation costs.

 

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Operations and Capital Expenditures .  GIMSA currently owns 17 corn flour mills, all of which are located throughout Mexico, typically within corn growing regions and those of large tortilla consumption.  One of the plants (Chalco) is temporarily closed.  The Chalco plant has been inactive since October 1999.  GIMSA has temporarily shifted production to other plants to achieve savings in overhead costs.  These idled assets are not being depreciated since the carrying value is expected to be recovered and the remaining useful life is maintained.  During 2004 GIMSA decided to delay the use of these assets, which was planned for the fourth quarter of 2004, and instead increased the utilization of existing capacity at our other plants as part of our programs for production efficiency.

 

In recent years, GIMSA’s capital expenditures for its plants were primarily used to update technology and corn flour production process.  GIMSA spent U.S.$2.9 million, U.S.$7.2 million and U.S.$5.4 million for these purposes in 2002, 2003 and 2004, respectively.  Although no assurances can be given as to future levels of capital expenditures, during the first quarter of 2005 GIMSA spent U.S.$1.7 million on investments in its fixed assets in 2005, and currently projects total investments in fixed assets during 2005 of approximately U.S.$10.0 million, which will be used primarily for upgrading production equipment, acquisition of transportation equipment and information technology upgrades.  As of December 31, 2004, on average, the size of our plants measured in square meters was approximately 20,360 (approximately 219,200 square feet).

 

To enhance our presence in particular geographic areas, we have transferred a minority interest in certain GIMSA subsidiaries to local investors, unions and development agencies.  Pursuant to an agreement between GIMSA and Investigación de Tecnología Avanzada , or INTASA, our wholly-owned subsidiary, INTASA provides technical assistance to each of GIMSA’s operating subsidiaries for which each pays to INTASA a fee equal to 0.5% of its consolidated net sales.  Each of GIMSA’s corn flour facilities uses proprietary technology developed by our technology and equipment operations.  For more information about our in-house technology and design initiatives, see “—Miscellaneous—INTASA—Technology and Equipment Operations.”

 

Seasonality.  The demand for corn flour varies slightly with the seasons.  After the May/June and December harvests, when corn is more abundant and thus less expensive, tortilla producers are more inclined to purchase corn and use the traditional method.  In the months immediately preceding such harvests, corn is more costly and in shorter supply and more tortilla producers then employ the corn flour method of production.

 

Raw Materials .  Corn is the principal raw material required for the production of corn flour, and constituted approximately 68% of GIMSA’s cost of sales for 2004.  We believe GIMSA has the most extensive nationwide corn purchasing capabilities of any corn flour producer in Mexico, providing us with a competitive advantage.   We purchase corn primarily from Mexican growers and grain elevators, and from world markets at international prices under import permits granted by the Mexican government.  All of our domestic corn purchases are made on a spot basis pursuant to short-term contractual arrangements, some of which are in the form of oral agreements entered into at the beginning of the harvest.  Compañía Nacional Almacenadora, S.A. de C.V., a subsidiary of GIMSA, contracts for and purchases the corn, and also monitors, selects, handles and ships the corn.

 

We believe that the diverse geographic locations of GIMSA’s production facilities in Mexico enables GIMSA to achieve savings in raw material transportation and handling.  In addition, by sourcing corn locally for its plants, GIMSA is better able to communicate with local growers concerning the size and quality of the corn crop and is better able to maintain quality control.  In Mexico, GIMSA purchases corn on delivery in order to strengthen its ability to obtain the highest quality corn on the best terms.

 

Traditionally, domestic corn prices in Mexico tend to be higher than those abroad, and typically follow trends in the international market only when corn prices are increasing.  During most periods, the price at which GIMSA purchases corn depends on the international corn market.  As a result, corn prices are sometimes unstable and volatile.   For more information regarding the government’s effect on corn prices, see “Item 4.  Information on the Company—Regulations.”

 

In addition to corn, the other principal materials and resources used in the production of corn flour are packaging materials, water, lime and energy.  GIMSA believes that its sources of supply for these materials and resources are adequate, although energy and packaging costs tend to be volatile.

 

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Distribution .  GIMSA’s products are distributed through independent transport firms contracted by GIMSA.  Most of GIMSA’s sales are made free-on-board at GIMSA’s plants, in particular those to tortilla manufacturers.  With respect to other sales, in particular retail sales (one-kilogram packages) to the Mexican government and sales to large supermarket chains, GIMSA pays the freight cost.

 

Molinera de México—Wheat Flour Operation

 

Principal Products .  In 1996, in connection with our association with Archer-Daniels-Midland, we entered the wheat milling market in Mexico by acquiring a 60% ownership interest in Archer-Daniels-Midland’s wheat flour operation, Molinera de México.  Molinera’s main product is wheat flour, although it also sells wheat bran and other byproducts.  Our wheat flour brands are REPOSADA ® , PODEROSA ® and SELECTA ® , among others.

 

Sales and Marketing .  In 2004, approximately 90% of Molinera’s wheat flour production was sold in bulk and 10% was sold for the retail segment.  Most of the bulk sales are made to thousands of bakeries and, to a lesser extent, to cookie and pasta manufacturers.  Most of the retail sales are made to large supermarkets and wholesalers throughout Mexico.  Through wholesalers, our products are distributed to small grocery stores.

 

Our marketing strategy depends on the type of customer and region.  Overall, our aim is to offer products according to customers’ specifications as well as technical support.  We are trying to increase our market share in bakeries by offering products with consistent quality.  In the retail segment we target small grocery stores through wholesalers, and supermarkets through centralized and national level negotiations.  We are focusing on improving customer service, continuing to increase our distribution of products to supermarkets’ in-store bakeries, and developing new types of pre-mixed flours for the supermarket in-store bakery segment.  We provide direct delivery to supermarkets, supermarkets’ in-store bakeries, wholesalers, industrial customers and some large bakeries.  Most small bakeries and small grocery stores are served by wholesalers.

 

Competition and Market Share .  We believe that we are one of Mexico’s largest wheat flour producers based on revenues and sales volume.  Molinera de México competes with many small wheat flour producers.  We believe the wheat flour industry is highly fragmented and estimate that there are about 90 participants.  Our main competitors are Munsa, Trimex, Tablex, La Espiga and Elizondo.

 

Operations and Capital Expenditures.   At the time we acquired our interest in Molinera, the operation consisted of two production facilities having an aggregate estimated annual production capacity of 157,000 tons.  From September 1997 through January 2000, we increased our production capacity by 357% from 157,000 to 717,000 tons through acquisitions of wheat flour mills and companies operating in the wheat flour and related products market.  Today we own and operate nine wheat flour plants, in one of which we hold only a 40% ownership interest.  The facilities’ average extent of utilization is estimated at 84% for 2004.  On average, the size of our plants measured in square meters is approximately 12,800 (approximately 137,800 square feet) as of December 31, 2004.

 

Capital expenditures from 2002 through 2004 amounted to U.S.$12 million.  Molinera de México’s capital expenditures in 2005 will be used for transportation equipment, a new production line for premixed flour and general manufacturing upgrades.

 

Seasonality.   Molinera’s sales are seasonal in that higher sales volumes are achieved in the fourth and first quarters during the winter, when we believe per capita consumption of wheat-based products, especially bread and cookies, increases due in part to the celebration of holidays occurring during these quarters.

 

Raw Materials.  Wheat is the principal raw material required for the production of wheat flour.  Molinera de México purchases approximately 19% of its wheat from Mexican growers, and 81% from world markets.  Molinera de México purchases from local farmers, farmers associations and trading companies.  In the case of domestic wheat, purchases are made pursuant to short-term oral arrangements, the terms of which are negotiated at the time of execution.  These arrangements are usually made approximately two months in advance of the beginning of the harvest.  In the case of imported wheat, which we import from the United States and Canada through several trading companies, purchases are made based on short-term requirements, with the aim of maintaining low levels of inventories.

 

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In recent years the price of wheat domestically and abroad has been volatile.  Volatility is due to the availability of wheat, which depends on various factors including the size of the harvest (which depends in large part on the weather).

 

Central American Operations

 

Overview

 

In 1972, we entered the Costa Rican market.  Our operations since then have expanded into Guatemala, Honduras, El Salvador, and Nicaragua.

 

Gruma Centroamérica

 

Principal Products .  Gruma Centroamérica produces corn flour, and to a lesser extent tortillas and snacks.  We also cultivate and sell hearts of palm and process and sell rice.  We believe we are one of the largest corn flour producer in the region.  We sell corn flour under the MASECA ® , TORTIMASA ® and MASARICA ® brands.  In Costa Rica, we sell packaged tortillas under the TORTI RICA ® brand.  We operate a Costa Rican snack operation which manufactures tortilla chips, potato chips and similar products under the TOSTY ® brand.  Hearts of palm are exported to numerous European countries as well as the United States and Canada.

 

Sales and Marketing .  The largest portion, 119,128 tons or 77%, of Gruma Centroamérica’s sales volume in 2004 derived from the sale of corn flour.

 

Gruma Centroamérica corn flour bulk sales are oriented predominantly to small tortilla manufacturers through direct delivery and wholesalers.  Supermarkets make up the customer base for retail corn flour.  Bulk sales volume represented 70% and retail sales represented 30% of Gruma Centroamérica’s corn flour sales volume during 2004.

 

Competition and Market Share .  We believe that we are one the largest corn flour producers in Central America based on revenues and sales volume.  We believe that there is significant potential for growth in Central America as corn flour is used in only approximately 24% of all tortilla production; the majority of tortilla manufacturers use the wet corn dough method.  Additionally, we believe we are one of the largest producers of tortillas, and snacks, and one of the largest processors of rice.

 

 Within the corn flour industry, our main competitors are Minsa, Del Comal and Instamasa.  However, one of our main growth potentials  is to convert tortilla manufacturers that still use the traditional method to our corn flour method.

 

Operations and Capital Expenditures.  We have an annual installed production capacity of 220,000 tons for corn flour and other products as of December 31, 2004, with an average utilization of 70% during 2004.  We operate a corn flour plant in each of Costa Rica, Honduras, Guatemala and El Salvador for a total of four plants throughout the region.  In Costa Rica, we also have one plant producing tortillas, one plant producing snacks, one plant processing hearts of palm and one plant processing rice.  In Nicaragua we have one small tortilla plant.  Additionally, during 2004 we entered into a lease agreement for a facility in Ecuador to process hearts of palm.  On average, the size of our plants measured in square meters is approximately 3,800 (approximately 40,900 square feet) as of December 31, 2004.

 

During 2002, 2003 and 2004, most of our capital expenditures were oriented to technology upgrades, the construction of a tortilla plant, a distribution center and administrative offices in Costa Rica.  Total capital expenditures for the past three years was approximately U.S.$0.7 million.  Capital expenditures for 2005 will be mostly oriented to manufacturing upgrades.

 

Seasonality.   Typically, corn flour sales volume is lower during the second quarter of the year due to higher availability and lower prices of corn.

 

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Raw Materials .  Corn is the most important raw material needed in our operations and is obtained primarily from local growers.  However, when domestic supply is insufficient, we turn to the international markets through import permits granted by the governments of countries in which we have corn flour plants.  Price fluctuation and volatility are subject to domestic conditions, such as annual crop results, and to a lesser extent, international conditions.

 

Gruma Venezuela

 

Overview

 

In 1993, we entered the Venezuelan corn flour industry through a participation in DEMASECA, a corn flour company in Venezuela.  We have held a 50% beneficial ownership in DEMASECA since 1998.  Local investors own the remaining 50% interest.  In August 1999, we acquired 95% of DAMCA International Corporation, a Delaware corporation which owned 100% of MONACA, Venezuela’s second largest corn and wheat flour producer at that time, for approximately U.S.$94 million.  Archer-Daniels-Midland acquired 5% of DAMCA International Corporation.  We believe this acquisition enhanced our existing grain-based products business in Venezuela.  DEMASECA and MONACA are collectively referred to as “Gruma Venezuela.”

 

In recent years, Venezuela has experienced considerable volatility and depreciation of its currency, high interest rates, political instability and declining asset values.  In 2003, in response to the general strike and in an effort to shore up the economy and control inflation, the Venezuelan authorities imposed foreign exchange and price controls.  Further economic stagnation is expected to result as a consequence of these market distortions.  These developments have had and may continue to have an adverse effect on us.

 

DEMASECA and MONACA

 

Principal Products .  Gruma Venezuela produces and distributes corn flour as well as wheat flour, rice, oats and other products.  We sell corn flour under the brand names JUANA ® , TIA BERTA ® and DECASA ® .  We sell wheat flour under the ROBIN HOOD ® and POLAR ® brand, rice under the MONICA ® brand and oats under the LASSIE ® brand.

 

Sales and Marketing.  Venezuelans use corn flour to produce and consume arepas, which are made at home or in restaurants for household consumption rather than manufactured by specialty shops or other large manufacturers.  In 2004, we sold corn flour only in the retail market in one and two kilogram bags to independent distributors, supermarkets, wholesalers, and government channels.  We sell wheat flour both in bulk and retailer, distributing in 45 kilogram bags and in one kilogram bags, respectively.  During 2004, sales volumes for Gruma Venezuela were 219,313 tons of corn flour, 228,463 tons of wheat flour and approximately 56,663 tons of other products.  Bulk sales to customers such as bakeries made up 77% of our total wheat flour sales volume in 2004.  The remaining 23% of sales in 2004 were in the retail market, which includes independent distributors, supermarkets and wholesalers.

 

Competition and Market Share .  With the MONACA acquisition in 1999, we significantly increased our share of the corn flour market and entered the wheat flour market.  We believe we are one of the largest corn flour and wheat flour producers in Venezuela.

 

In corn flour, our main competitor is Alimentos Polar, C.A..  In wheat flour, our principal competitor is Cargill.

 

Operation and Capital Expenditures .  We operate five corn flour plants, four wheat flour plants, two rice plants, and two plants that produce oats and spices in Venezuela with a total annual production capacity of 786,000 tons as of December 31, 2004 and an average utilization of approximately 64% during 2004.  However, one corn flour plant, representing 33,708 tons, and one rice plant, representing 22,216 tons, are temporarily idle.  On average, the size of our plants measured in square meters is approximately 9,200 (approximately 99,000 square feet) as of December 31, 2004.

 

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Capital expenditures for the past three years were U.S.$11.4 million.  Capital expenditures for 2005 are expected to be focused on acquisition of distribution equipment and upgrades for manufacturing and information technologies which are expected to be financed with internal cash generation.

 

Seasonality.  Sales fluctuate seasonally as demand for flour-based products is lower during those months when most schools are closed for vacation.  In addition, sales are higher in November as customers build inventory to satisfy increased demand during the holiday season in December.

 

Raw Materials .  Corn and, to a lesser extent, wheat are our most important raw materials.  Corn is purchased in Venezuela and is subject to the corn market’s volatility.  All wheat is purchased from the U.S. and Canada with its availability and price volatility dependent upon those markets.  We do not engage in any type of hedging activity for our supplies since country risk for Venezuela greatly increases the cost of these instruments.

 

Miscellaneous—INTASA—Technology and Equipment Operations

 

We have had our own technology operations since the founding of the company.  Since 1976 our technology and equipment operations have been conducted principally through INTASA, which has two subsidiaries:  Tecnomaíz, S.A. de C.V., or Tecnomaíz, and Constructora Industrial Agropecuaria, S.A. de C.V., or CIASA.  The principal activity of these subsidiaries is to provide research and development, equipment, and construction services to us and small equipment to third parties.  Through Tecnomaíz, we also engage in the design, manufacture and sale of machines for the production of tortillas and tortilla chips.  The machinery for the tortilla industry includes a range of capacities, from machines that make 50 to 300 corn tortillas per minute to dough mixers.  The equipment is sold under the TORTEC ® and BATITEC ® trademarks in Mexico.  Tecnomaíz also manufactures high volume energy efficient corn and wheat tortilla systems that can produce up to 1,200 corn tortillas and 400 wheat tortillas per minute.

 

We carry out proprietary technological research and development for corn milling and tortilla production as well as all engineering, plant design and construction through INTASA and CIASA.  These companies administer and supervise the design and construction of our new plants and also provide advisory services and training to employees of our corn flour and tortilla manufacturing facilities.  We manufacture corn tortilla-making machines for sale to tortilla manufacturers and for use in “in-store tortillerías ,” as well as high-capacity corn and flour tortilla-makers that are supplied only to us.

 

Banorte Investment

 

As of December 31, 2004, we hold approximately 10.9% of the outstanding shares of GFNorte, a Mexican finance services holding company and parent of Banco Mercantil del Norte, S.A., or Banorte, a Mexican bank.  As of the same date, our investment in GFNorte represented approximately 7% or Ps.1,682 million of our total assets.  In accordance with Mexican GAAP, GFNorte’s results of operations are accounted for in our consolidated results of operations using the equity method of accounting.

 

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REGULATION

 

Mexican Regulation

 

Corn Commercialization Program

 

Since December 1996, ASERCA, a Mexican government agency, has administered a program designed to promote the purchase of corn in certain regions of Mexico.  This program supports Mexican corn growers exclusively.  The ASERCA program has the following general guidelines:

 

                              Support corn growers by setting a target price and paying the difference versus market price.

 

                              Support corn growers by providing economic support to reduce the cost of raw materials required for its corn crops.

 

                              Support a portion of the freight expenses related to the distribution of excess corn to regions far from the corn growing area in seasons when there is excess corn.  This support for freight expenses applies to any corn buyer that can prove that the purchased corn will be consumed in regions where there is no corn available and that are distant to the regions where corn is grown.  In the case of the corn flour industry, the distance must be at least 740 km outside the corn growing area, excluding the central zone of Mexico.

 

Environmental Regulations

 

Our Mexican operations are subject to Mexican federal, state and municipal laws and regulations relating to the protection of the environment.  The principal federal environmental laws are the Ley General de Equilibrio Ecológico y Protección al Ambiente (the General Law of Ecological Equilibrium and Protection of the Environment, or the Mexican Environmental Law), which is enforced by the Secretaría de Medio Ambiente y Recursos Naturales (the Ministry of the Environment and Natural Resources, or SEMARNAT) and the Ley Federal de Derechos (the Mexican Federal Law of Governmental Fees).  Under the Mexican Environmental Law, each of our facilities engaged in the production of corn flour, wheat flour, and packaged tortillas is required to obtain an operating license from SEMARNAT upon initiating operations, and then annually submit a certificate of operation to maintain the operating license.  Furthermore, the Mexican Federal Law of Governmental Fees requires that Mexican manufacturing plants pay a fee for the discharge of residual waste water to drainage.  Rules have been promulgated concerning hazardous substances and water, air and noise pollution.  In particular, Mexican environmental laws and regulations require that Mexican companies file periodic reports with respect to air and water emissions and hazardous wastes.  They establish standards for waste water discharge.  We must also comply with zoning regulations as well and rules regarding health, working conditions and commercial matters.  SEMARNAT and the Federal Bureau of Environmental Protection can bring administrative and criminal proceedings against companies that violate environmental laws, as well as close non-complying facilities.

 

We believe we are currently in compliance in all material respects with all applicable Mexican environmental regulations.  The level of environmental regulation and enforcement in Mexico has increased in recent years.  We expect this trend to continue and to be accelerated by international agreements between Mexico and the United States.  To the extent that new environmental regulations are promulgated in Mexico, we may be required to incur additional remedial capital expenditures to comply.  Management is not aware of any pending regulatory changes that would require additional remedial capital expenditures in a significant amount.

 

Competition Regulations

 

The Ley Federal de Competencia Económica (the Federal Economic Competition Law or the Mexican Competition Law), was approved by the Mexican Congress and published in the Diario Oficial de la Federación on December 24, 1992 and became effective on June 22, 1993.  The Mexican Competition Law and the Reglamento de la Ley Federal de Competencia Económica (the Regulations of the Mexican Competition Law), effective as of March 5, 1998, regulate monopolies and monopolistic practices and require Mexican government approval of certain mergers and acquisitions.  The Mexican Competition Law grants government the authority to establish price

 

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controls for products and services of national interest qualified as such by Presidential decree, and established the Comisión Federal de Competencia , or Federal Competition Commission, to enforce the law.  Mergers and acquisitions and other transactions that may restrain trade or that may result in monopolistic or anti-competitive practices or combinations must be approved by the Federal Competition Commission.  The Mexican Competition Law may potentially limit our business combinations, mergers and acquisitions and may subject us to greater scrutiny in the future in light of our market presence, although it has had little effect on our operations, and we do not believe that this legislation will have a material adverse effect on our existing or developing business operations.

 

U.S. Federal and State Regulations

 

Gruma Corporation is subject to regulation by various federal and state agencies, including the Food and Drug Administration, the Occupational Safety and Health Administration, the Federal Trade Commission, the Environmental Protection Agency and the Texas Department of Agriculture.  We believe that we are in compliance in all material respects with all environmental and other legal requirements.  Our food manufacturing and distribution facilities are subject to periodic inspection by various public health agencies, and the equipment utilized in these facilities must generally be governmentally approved prior to operation.

 

European Regulation

 

We are subject to regulation in each country in which we operate in Europe.  We believe that we are currently in compliance with all applicable legal requirements in all material respects.

 

Central America and Venezuela

 

Gruma Centroamérica and Gruma Venezuela are subject to regulation in each country in which they operate.  We believe that Gruma Centroamérica and Gruma Venezuela are currently in compliance with all applicable legal requirements in all material respects.

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