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 FactorsRisks Related to
VenezuelaVenezuela Presents Significant Economic Uncertainty and Political
Gruma, S.A. de C.V. is a corporation (
sociedad anónima de capital variable)
Monterrey, Mexico under the
Ley General de Sociedades
, 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,
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
The following are some significant historical
founded GIMSA, which is engaged principally in the production, distribution and
sale of corn flour in Mexico. GIMSAs
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.
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
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
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.
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
flour and wheat flour producers in Venezuela, we significantly strengthened our
presence in the Venezuelan market.
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.
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-Midlands 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.
, 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.
, 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.
continuously considering potential acquisitions which could improve our market
share, profitability and fit into our overall strategy.
We are a holding company and conduct our operations
through subsidiaries. The table below
sets forth our principal subsidiaries.
Name of Company
Grupo Industrial Maseca, S.A. de C.V. (GIMSA)
Corn flour, tortillas
Molinera de México, S.A. de C.V.
and European Operations
United States Europe
Packaged tortillas, Other tortilla related products
Costa Rica, Honduras,
Guatemala, El Salvador, Nicaragua, Ecuador
Corn flour, Packaged tortillas, Snacks, Hearts of
Molinos Nacionales, C.A. (MONACA)
Corn flour, Wheat flour, Other products
Derivados de Maíz Seleccionado, C.A. (DEMASECA)
Productos y Distribuidora
Azteca, S.A. de
Packaged tortillas, Other
Investigación de Tecnología Avanzada,
Construction, Technology and Equipment operations
equity capital owned by us directly or indirectly through subsidiaries.
partnership between Gruma Corporation (80%) and Archer-Daniels-Midland (20%).
subsidiaries are referred to as Gruma Venezuela.
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,
of Net Sales
of Net Sales
of Net Sales
Molinera de México
Others (and eliminations)
We entered into an association with
Archer-Daniels-Midland in September 1996.
Archer-Daniels-Midland is one of the worlds 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
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-Midlands 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 InformationRisk FactorsRisks Relating
to Our Controlling Shareholders and Capital StructureArcher-Daniels-Midland,
Our Strategic Partner, Has Influence Over Some Corporate Decisions. and Item 10.
Additional InformationMaterial ContractsArcher-Daniels-Midland.
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 Corporations 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
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 Corporations existing U.S. corn flour
During the first quarter of 2005, we spent
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,
(in millions of U.S.
Molinera de México
Others and eliminations
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.
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 businesscorn flour, tortilla, and wheat
flour production. We pioneered the dry
corn flour method of tortilla production, which
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,
(in millions of Pesos of
constant purchasing power
as of December 31, 2004)
United States (includes European operations)
Our strategy for growth is to focus on our core
businessthe manufacturing of tortillas, corn flour and wheat flourand 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
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
Expand in the Growing Tortilla Markets in Europe
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
and Guerrero Tortilla Brands as the First and
Second National Brands in the United States
intend to achieve this by increasing our efforts at building brand name
recognition and by further expanding and utilizing Gruma Corporations distribution network, first in Gruma
Corporations 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
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
well as leveraging off of our manufacturing capacity
and distribution networks in Mexico, the United States, Central America and
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
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-Midlands 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 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.
. Mission Foods manufactures and distributes
packaged corn and wheat tortillas and related products (which include tortilla
chips) under the MISSION
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
awareness and profitability. Azteca Milling manufactures and distributes
corn flour in the United States under the MASECA
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
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 Millings 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 Corporations 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,
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
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
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
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
Missions 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
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 Millings 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.
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.
. 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
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.
of the corn for the corn flour operations in Italy is purchased domestically,
at prices prevailing in the commodities markets.
. 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 Millings 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.
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 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
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. GIMSAs
principal corn flour product is a standard fine-textured, white flour used to
GIMSA also produces and sells tortillas through
several small tortilla shops mainly located in central Mexico. GIMSAs tortilla sales represent
approximately 1% of its total sales volume and approximately 2% of its net
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.
The following table sets forth GIMSAs bulk and retail
sales volumes of corn flour in Mexico and tortilla sales volume for the periods
Year Ended December 31,
GIMSAs corn flour customer base is comprised
primarily of bulk sales to small tortilla producers, or
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
flour or through wholesalers who sell the product
to smaller grocery stores throughout Mexico.
Sales to rural consumers are made principally through the Mexican
governments 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. GIMSAs sales
representatives are mainly concerned with promoting the dry corn flour method
to tortilla producers.
Mexicos tortilla industry is highly fragmented,
consisting mostly of
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 flours longer shelf
life makes it easier for consumers in rural areas, where
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
Mexicos 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
to convert to the corn flour
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 MiscellaneousINTASATechnology 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 GIMSAs 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. GIMSAs 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
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
flour. This campaign targeted both
consumption of tortillas made by GIMSAs 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 levelsfrom
other corn flour producers, from sellers of wet
corn dough and from the many
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.
GIMSAs biggest challenge in increasing market share
is the prevalence of the traditional method (cooked-corn method). In the corn flour industry, GIMSAs 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.
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,
GIMSAs 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
our wholly-owned subsidiary, INTASA provides technical assistance to each of
GIMSAs operating subsidiaries for which each pays to INTASA a fee equal to
0.5% of its consolidated net sales. Each
of GIMSAs 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 MiscellaneousINTASATechnology
and Equipment Operations.
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.
. Corn is the principal raw material required
for the production of corn flour, and constituted approximately 68% of GIMSAs 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
GIMSAs 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
governments effect on corn prices, see Item 4. Information on the CompanyRegulations.
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.
. GIMSAs products are distributed through
independent transport firms contracted by GIMSA. Most of GIMSAs sales are made free-on-board
at GIMSAs 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 MéxicoWheat
. 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-Midlands wheat flour
operation, Molinera de México. Molineras
main product is wheat flour, although it also sells wheat bran and other
byproducts. Our wheat flour brands are
Sales and Marketing
. In 2004, approximately 90% of Molineras 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 Mexicos
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 Méxicos capital expenditures in
2005 will be used for transportation
equipment, a new production line for premixed flour and general manufacturing
Molineras 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.
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.
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).
In 1972, we entered the Costa Rican market. Our operations since then have expanded into
Guatemala, Honduras, El Salvador, and Nicaragua.
. 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
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
brand. Hearts of palm
are exported to numerous European countries as well as the United States and
Sales and Marketing
. The largest portion, 119,128 tons or 77%,
of Gruma Centroaméricas sales volume in 2004 derived from the sale of corn
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 Centroaméricas 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
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.
Typically, corn flour sales volume is lower during the second quarter of
the year due to higher availability and lower prices of corn.
. 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.
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, Venezuelas 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
. 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
, TIA BERTA
. We sell wheat flour under the ROBIN HOOD
brand, rice under the MONICA
brand and oats
under the LASSIE
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
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
99,000 square feet) as of December 31, 2004.
Capital expenditures for the past three years were
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.
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
. Corn and, to a lesser extent, wheat are our
most important raw materials. Corn is
purchased in Venezuela and is subject to the corn markets 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.
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
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
, as well as high-capacity
corn and flour tortilla-makers that are supplied only to us.
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, GFNortes
results of operations are accounted for in our consolidated results of
operations using the equity method of accounting.
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.
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.
Ley Federal de Competencia
(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
controls for products and services of national interest qualified as
such by Presidential decree, and established the
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
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.
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
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.