Industrias Bachoco, S.A. de C.V.
Annual Report 2018

Plain-text annual report

2018 RECOGNIZED BY OUR QUALITY ANNUALREPORTBACHOCO’S PROFILE Industrias Bachoco is leader in the Mexican poultry industry and one of the ten largest poultry producers globally. The Company was founded in 1952 and became a public company in 1997, via a public offering of shares on the Mexican and the New York stock exchanges. Bachoco is a vertically-integrated company with operations in Mexico and the US with its headquarters located in Celaya, Guanajuato, Mexico. Its main business lines are: chicken, table eggs, balanced feed, swine, and others, including further process products of turkey and beef. Currently the Company is rated AAA (MEX), the highest rating awarded by Fitch Mexico, and HR AAA which signals that the Company and their bonds both have the highest credit quality by HR Ratings de Mexico S.A. de C.V. Enrique Robinson Bours Co-founder Bachoco owns and manages more than a 1000farms 10processing plants 9further processing plants 23hatcheries and more than 80distribution centers. 22feed mills Industrias Bachoco is leader in the Mexican poultry industry and one of the ten largest poultry producers globally.The Company was founded in 1952 and became a public company in 1997, via a public offering of shares on the Mexican and the New York stock exchanges. Bachoco is a vertically-integrated company with operations in Mexico and the US with its headquarters located in Celaya, Guanajuato, Mexico. Its main business lines are: chicken, table eggs, balanced feed, swine, and others, including further process products of turkey and beef. Currently the Company is rated AAA (MEX), the highest rating awarded by Fitch Mexico, and HR AAA which signals that the Company and their bonds both have the highest credit quality by HR Ratings de Mexico S.A. de C.V. 22feedmills 23hatcheries 10processing plantsBachoco owns and manages more than a 1000farms 9further processing plantsand more than 80distribution centers. INDEX Highlights Message to Shareholders CEO’s Letter Report from the Board of Directors Audit and Corporate Practices Committee Report from the Audit and Corporate Practices Committee Highlights to Investors Board of Directors Senior Management Team Recognized by our Quality Social Responsibility Consolidated Financial Statements 01 02 04 06 07 08 10 11 12 13 14 15 OPERATING DATA In millions pesos Net sales Gross profit Operating income EBITDA Result Net income EPS in pesos Earnings per ADR en pesos Gross margin Operating margin EBITDA margin Net margin 1 One dollar equals to $19.67 pesos $ In U.S. Dollar ¹ 2018 3,103.8 489.6 188.5 253.8 170.9 0.28 3.41 $ 15.8% 6.1% 8.2% 5.5% STATEMENT OF FINANCIAL DATA In U.S. Dollar ¹ In millions pesos TOTAL ASSETS Cash and cash equivalents Inventories TOTAL LIABILITIES Notes payable to banks Accounts payable Long-term debt TOTAL STOCKHOLDERS´ EQUITY Capital stock Retained earnings $ $ 2018 2,687.6 938.4 232.6 747.3 177.6 264.2 78.5 1,940.3 59.7 1,768.8 $ 2018 61,052.1 9,629.7 3,708.0 4,993.1 3,361.6 5.58 67.00 15.8% 6.1% 8.2% 5.5% 2017 58,050.0 10,547.1 5,291.3 6,424.1 4,954.4 8.25 98.97 18.2% 9.1% 11.1% 8.5% December 31, 2017 50,557.4 17,250.1 4,727.3 14,879.5 3,695.1 4,740.4 1,554.0 35,677.9 1,174.4 32,367.9 2018 52,865.6 18,458.5 4,575.6 14,699.9 3,492.8 5,196.3 1,544.8 38,165.7 1,174.4 34,792.3 2016 52,020.3 9,385.2 4,797.6 5,777.0 3,951.2 6.58 78.94 18.0% 9.2% 11.1% 7.6% 2016 45,090.5 15,659.8 3,970.7 13,374.3 3,097.5 4,545.2 950.4 31,716.2 1,174.4 28,245.0 EMPLOYEES 2018 27,597 2017 27,397 2016 25,725 NET SALES 5% 6% 5% 84% CHICKEN 6% EGG 5% BALANCES FED 5% OTHERS 84% MEXICO 71% EUA 29% HIGHLIGHTS SALES BY GEOGRAPHY MESSAGE TO SHAREHOLDERS Dear Shareholders of Industrias Bachoco: 2018 was for the Mexican Poultry Industry, a year with a better than expected first semester and a challenging second half. GDP in Mexico grew 2.0% and inflation rate was 4.8% which is significantly lower than the inflation rate reported in 2017. We observed high volatility on the Mexican peso exchange rate during most of the year, due in part to the election process held in Mexico at the middle of the year, which offset relatively stable raw material prices in USD terms. In the Mexican poultry industry, we observed a good balance between supply and demand in the first semester of 2018, and over-supply conditions in the second half. These conditions were mainly driven by the evolution of the Mexican economy through the year and by domestic industry Javier Bours Castelo Chairman of the Board of Director production. It is worth mentioning that poultry imports remained unchanged year over year, which reinforces the capacity and competitiveness of the Mexican industry. In June 2018, presidential elections in Mexico were held. Even when we observed a smooth transition between governments, we observed a very cautious consumer, particularly in our traditional markets. In the U.S., particularly in the second half of 2018, we observed challenging conditions mainly due to oversupply in animal proteins, which put pressure on chicken prices as well. However, the integration of our Albertville operation allowed us to capture some benefits from the low-price commodity market, since this facility is a meat net buyer. Regarding our cost of sales, prices of raw materials remained relatively stable during most part of the year in U.S. dollar terms. However, volatility in the Mexican exchange rate did not allow us to capitalize the benefit of stable raw materials in our Mexico Operation. Under the conditions mentioned above, we continued focusing on attending our customers, productivity efforts and financial discipline, as those are the main pillars of our performance. In particular, we received from the hands of the Mexican President, the “Premio Nacional Agroalimentario”, (National Agri Food Award), granted by the National Agricultural Council as the highest recognition for companies and agri-food organizations in Mexico. This is an award for achieving the highest quality in our production processes and products. Also, Reader´s Digest granted us the recognition as the most reliable company in the category of frozen food in Mexico. Bachoco was placed in the top 50 companies with the best reputation in Mexico according to MERCO survey; improving compared to 2017. Annual Report 2018 02 In our U.S. Operation, OK Foods was awarded vendor of the year by Hooters and El Pollo Loco. This is a recognition that has been given in the last years by different customers and is the result of our commitment to be the best alternative for our customers. Likewise, our CEO Rodolfo Ramos Arvizu continue ranked, as one of the most respected CEO’s in the country. At the end, we finished the year with positive results; We reached historically high total net sales, particularly, we reached the largest volume sold for a year in chicken and pet-food and an EBITDA margin of 8.2% for the whole year. Our financial structure continued strong as we ended the year with a net cash of $13,420.9 million, which will allow us to continue supporting our short and long-term growth plans. With these results, we continue strengthening our Balance Sheet, as well as preparing us for capitalizing future growth opportunities. The support of our management team and staff, as always, has been invaluable for us. With more than 27,000 people working day by day to always achieve better results. We know we still have opportunities to improve our performance, as well as many challenges and uncertainties to face, but we are confident in the hard work and commitment of our staff to reach the Company´s goals. I would like to remind you of the commitment that we have with all of you. Our goal is to keep our position in Mexico as the leader of the poultry sector and to be one of the main players worldwide, while continuing to grow our business with profitability, delivering positive results and maintaining the solid financial structure that always characterizes us. Javier Bours Castelo Chairman of the Board of Director 03 Annual Report 2018 CEO’S LETTER Dear Shareholders: All figures discussed below are information for 2018 with comparative figures of 2017. It was prepared under IFRS accounting principles, and is presented in millions of pesos unless otherwise indicated. According to the Mexican National Poultry Association estimates, in 2018 chicken volume produced in Mexico grew approximately 2.6%, within its normalized growth range, even when we observed oversupply conditions for the second part of the year. Regarding the US poultry industry, according to USDA sources, chicken volume produced in the US grew 2.2%, slightly above it’s normal rate of 1.0% to 1.5%, showing some oversupply conditions. During 2018, we continued consolidating our productivity and organic growth projects as well as integrating our Albertville Quality Foods and La Perla acquisitions which contributes to consolidate our presence in each geography. Despite the volatility and industry challenges we observed during 2018, our financial position remained strong and allowed us to remain close to our customers and delivering high quality products. 2018 & 2017 RESULTS Net sales in 2018 totaled $61,052.1 million, $3,002.1 million more or a 5.2% increase in net sales, when compared to $58,050.0 million reported in 2017. This increase was mainly due to higher prices and more volume sold in our poultry business line, in part due to the integration of our Albertville operation. In 2018, sales of our US operation represented 28.7% of our total sales, compared with 28.4% reported in 2017. Ro d o l fo R am o s A r v i zu C h i e f E xe c u t i ve Offi ce r The Company’s total poultry sales increased 5.4%, while our Others line increased 3.1%; both as a result mainly of higher prices when compared to 2017. Particularly in poultry, we reached an increase of 1.7% in volume sold and 3.7% increase in prices, this last one was mainly due to a higher mix of value-added products in our U.S operation as a result of the integration of our Albertville operation for the full year. Cost of sales totaled $51,422.4 million, 8.3% higher than the $47,503.0 million reported in 2017. The increase in cost of sales was mainly attributed to more volume sold and higher percentage of value-added products in our US operations. These numbers allowed us to reach a gross profit of $9,629.7 million, which represented 15.8% of gross margin; lower than the $10,547.1 million of gross profit and a margin of 18.2% reached in 2017. Total SG&A expenses in 2018 were $6,024.4 million, an increase of $601.0 million or 11.1% when compared to $5,423.4 million in 2017. Total SG&A expenses as a percentage of net sales represented 9.9% in 2017 and 9.3% in 2017. Particularly, we observed an increase in SG&A due to higher fuel and energy prices in our Mexico operation. Annual Report 2018 04 In 2018, we had other income of $102.7 million, compared with other expenses of $167.6 million reported in 2017. The decrease was mainly due to a full year amortization and impairment of intangible assets of our Albertville operation. The operating income in 2018 totaled $3,708.0 million with a margin of 6.1%, lower than the $5,291.3 million of operating income and 9.1% margin as reported in 2017. In 2018, we reached an EBITDA of $4,003.1 million, representing an EBITDA margin of 8.2%, compared to an EBITDA of $6,424.1 million in 2017, with a margin of 11.1%. Net financial income was $808.6 million, an increase when compared to the net financial income of $747.6 million in 2017. Total taxes were $1,155.0 million. This includes $1,246.8 million in income tax and a favorable effect of $91.9 million on deferred taxes. This figure compares to total taxes of $1,084.4 million which includes income tax of $1,711.5 and a favorable effect of $627.1 million of deferred tax in 2017. The effect in deferred taxes in 2017 was a result of the fiscal change approved in the U.S. at the end of that year. As a result, net income in 2018 was $3,361.6 million, a 5.5% net margin, which represents earnings per share of $5.58 pesos, while in 2017, net income totaled $4,954.4 million with an 8.5% net margin, and $8.25 pesos of earnings per share. Cash and equivalents as of December 31, 2018 totaled $18,458.5 million, an increase of $1,218.4 million or 7.1% more than the $17,240.1 million of cash and equivalents reported as of December 31, 2017. Total debt as of December 31, 2018 was $5,037.6 million, compared to total debt of $5,249.0 million reported as of December 31, 2017. As a result, our net cash as of December 31, 2018 totaled $13,420.9 million, compared with a net cash of $11,991.1 million as of December 31, 2017. Capex in 2018 totaled $1,982.6 million, a decrease when compared to $3,513.4 million reported in 2017, when we reported our acquisitions of Albertville and La Perla. In 2018, the Company continued with the implementation of new projects oriented toward organic growth and productivity improvements. Rodolfo Ramos Arvizu Chief Executive Officer 05 Annual Report 2018 Net sales in 2018 totaled $61,052.1 million This increase was mainly due to higher prices and more volume sold in our poultry business line, in part due to the integration of our Albertville operation REPORT FROM THE BOARD OF DIRECTORS As Chairman of the Board of Directors of Industrias Bachoco, and pursuant to the provisions of Section IV of Article 28 of the Securities Market Law, I hereby inform you of the following: This Board of Directors reviewed and approved the Chief Executive Officer’s report which supports the performance of management for fiscal year 2018, and it was based on the independent auditor’s Opinion. The Board believes that the CEO’s report was prepared in accordance with the Financial Reporting Standards and reflects the Company’s financial position and its operating results. We believe that the Company’s policies, accounting and reporting principles followed are adequate and consistent with the Audited Financial Statements. This Board directed the Company to continue acting in strict accordance with IFRS principals. We determined that during year 2018, the Company did not engage in unusual operations or other activities different from the normal course of the business. No exemptions were granted to any member of the Board, executive officers or any other member of the Company to take advantage of business opportunities for themselves or in favor of third parties. Lastly, the Board presented in the Annual Ordinary Shareholders’ Meeting the report of the Auditing and Corporate Practices Committee, the Chief Executive Officer’s report, the report on prompt compliance with tax obligations, and the report on the principal accounting and information policies and criteria followed by the Company in the preparation of its financial statements for fiscal year 2018. • Javier Bours Castelo Chairman of the Board of Directors Annual Report 2018 06 AUDIT AND CORPORATE PRACTICES COMMITTEE Bachoco has an Auditing and Corporate Practices Committee to support the Board of Directors, which is comprised of three Independent Directors and one Property Shareholder Director. This Committee was last ratified on the Annual and General Ordinary Shareholders´ Meeting on April 25, 2018. AUDIT COMMITTEE AND CORPORATE PRACTIES MEMBERS Guillermo Ochoa Maciel (President) Humberto Schwarzbeck Noriega Avelino Fernandez Salido Ricardo Aguirre Borboa 07 Annual Report 2018 In accordance with the terms of the Mexican Market Security Law (LMV), this report is issued by the President of the Audit and Corporate Practices Committee of Industrias Bachoco S.A.B. de C.V. (the “Society”). This report has been submitted to the Audit and Corporate Practices Committee of the Company, which validated content, scope and conclusions for the Board of Directors approval and through the Board, its validation in the Annual and General Ordinary Shareholders’ Meeting of the Company that will take place in April 2019. In the exercise of the Committee functions, and in attention of its responsibilities, the Committee has counseled with the Chief Financial Officer, the Internal Audit Manager and, the Chief Executive Officer of the Society. The resolutions adopted by the Audit Committee have been informed timely and submitted to the consideration of the Board of Directors by means of the respective report submitted to this ultimate superior social entity in the corresponding meetings. A file has been integrated from each meeting, including the reports and other relevant documents. Regarding Corporate Practices: We concluded that the Officers performance was aligned with the Company’s objectives. We reviewed the CEO and senior officers and compensation packages were granted. We verified that there was no existence of any grant or exceptions to Directors, senior officers, or other employees of the Company. In 2018, the total transactions in connection to related parties represented less than 3.0% of the Company’s net sales. After an exhaustive review of the transactions carried out with related parties, we concluded that they were conducted in fair-market terms. We reviewed policies and guidelines related to the use of goods that constitute the equity of the Company and its subsidiaries, by any related parties, as well as policies for granting of loans or any type of credit or guarantees. We analyzed and assessed the services provided by the independent experts, when it was required. Regarding Internal Audit Function: The Audit and Corporate Practices Committee has remained involved with the needs of the internal audit area to make sure they have the necessary human and material resources for the suitable performance of its function. The evaluations carried out by the Internal Audit, the external auditors, and the General Director have been reviewed, and it is concluded that the internal control processes provide reasonable security to prevent or detect errors or material irregularities in the normal course of social operations, although these processes are constantly improving and the corresponding revisions continue. ANNUAL REPORT OF THE PRESIDENT OF THE AUDIT AND CORPORATE PRACTICES COMMITTEE TO THE BOARD OF DIRECTORS Regarding Financial Information: The Financial Statements of the Company were discussed quarterly with the executives responsible for their preparation and review, there were no significant observations to the information presented. Before being forwarded to the Mexican Stock and Exchange, the Financial Statements were reviewed by the Committee for its approval or ratification by the Board of Directors. In each quarterly Committee´s meeting, reports to the Stock Exchange were analyzed and approved, having made the observations or suggestions of the case and recommending to the Board of Directors its approval (or ratification) in each case regarding its public disclosure. During the period in question, Financial Statements corresponding to 2018 fiscal year were reviewed and discussed, and did not submit observations and/or qualifications, in consequence, the Committee recommended its approval by the Board of Directors for submission to the Shareholders´ Meeting. Annual Report 2018 08 and Corporate Practices Committee has followed, within its competence and in accordance with the instructions received, the resolutions of the Board of Directors and the Shareholders ‘ Meeting during the reporting period. From all the above, the Audit and Corporate Practices Committee has fulfilled the functions stated in Article 42, paragraph II of the LMV, during the reporting period. • • OPINION OF THE AUDIT COMMITTEE TO THE BOARD OF DIRECTORS ON THE ANNUAL REPORT OF THE CHIEF EXECUTIVE OFFICER • After having listened and analyzed the CEO´s report for the fiscal year ended on December, 31, 2018, prepared in terms and for the purposes of the stated of Article 44, section XI of the Security Market Law, in relation to Article 172 of the General Law of Business Corporations and based on the reports of the External Audit presented to the Committee, the Audit and Corporate Practices Committee has determined that: (i) the accounting and information policies and criteria followed by the Company are adequate and sufficient, taking into account the Company´s particular circumstances; (ii) these accounting policies and criteria have been consistently applied in the information presented by the CEO; (iii) as consequence of the previous numerals (i) and (ii), the information presented by the CEO reflects the Company´s financial situation and results for the fiscal year 2018. Based on the above, under the terms and for the purpose of the provisions of the Article 42, paragraph II, section e) of the LMV, the Audit and Corporate Practices Committee recommend to the Board of Directors the approval of the CEO`s annual report for fiscal 2018, for its presentation to the Annual and General Ordinary Shareholder´s Meeting of the Company. • • • • • • Guillermo Ochoa Maciel President of Bachoco´s Audit and Corporate Practices Committee Regarding External Audit Performance: The services of Galaz, Yamazaki, Ruiz Urquiza, S.C. (Deloitte) continued to be used as External Auditors of the Company. We worked with Deloitte to insure the compliance, from both Deloitte and the Company, of the new regulation issued by the Mexican Authorities (Comision Nacional Bancaria y de Valores), regarding the “Circular Unica de Auditores Externos”, (External Audit New Regulation). The fees corresponding to 2018 were duly revised and approved. The Audited Financial Statements as of December 31, 2018 were received on the part of the External Auditor. The Audit Committee concludes that the performance of Galaz, Yamazaki, Ruiz Urquiza, S.C. (Deloitte) as External Auditors of the Company and of its partners in charge of the respective audit, is appropriate and that the communication between such Committee and the auditors referred herein is consistent. The External Auditors confirmed their independence. Regarding Accounting and Self- Regulatory Policies The main accounting policies followed by the Company were reviewed and approved in terms of the information received by reason of new regulations. During the period, the updates proposed by the Administration to various self- regulatory policies were reviewed, on which were favorably expressed for submission to the Board of Directors. The accounting policies, criteria, and information observed by the Company are adequate and sufficient. Conclusions The recommendations of the Audit and Corporate Practices Committee have been, or are being addressed by the Administration of the company. During the reported period, the Audit and Corporate Practices Committee did not receive from Shareholders, Directors, relevant executives, employees and in general from any third party, any remarks about accounting, internal controls and other matters related to the Internal or External Audit, other than those issued by the management during the preparation or revision of the respective documentation; no complaints were received about any irregular matters regarding the Administration. The Audit 09 Annual Report 2018 HIGHLIGHTS TO INVESTORS In 2018, the Company´s shares and ADRs reported a decrease in yield of 31.1% on the BMV and of 30.9% on NYSE. The founding family holds 73.25% of total shares, by two Trusts: Control Trust with 52.00% Underwriting Trust with 21.25% Bachoco in the stocks 600 million shares One single class (Class B) Full rights An ADR equals 12 shares 26.75% of float An estimated $38,712 million pesos in market capitalization SHARE PRICES Bolsa Mexicana de Valores In pesos per Share The New York Stock Exchange In dollars per ADR Año MaxM in Promedio CierreA ño MaxM in Promedio Cierre 2018 2017 2016 2015 2014 98.16 63.50 88.29 64.52 93.62 102.00 79.53 88.51 84.75 2 85.656 2.51 77.34 70.05 89.735 9.23 71.74 6.62 62.00 68.55 44.715 2018 2018 0175 2016 2015 Fuente: Yahoo Finanzas 63.843 8.08 55.23 6.20 56.39 67.614 49.68 63.494 5.64 54.09 61.24 39.56 57.30 49.02 49.23 40.37 50.84 49.88 5.65 41.17 Annual Report 2018 10 BOARD OF DIRECTORS PROPRIETARY SHAREHOLDERS DIRECTORS Javier Bours Castelo (Chairman of the Board), Jose Gerardo Robinson Bours Castelo, Jesus Enrique Robinson Bours Muñoz, Jesus Rodolfo Robinson Bours Muñoz, Arturo Bours Griffith, Octavio Robinson Bours, Ricardo Aguirre Borboa and, Juan Salvador Robinson Bours Martinez. INDEPENDENT PROPRIETARY DIRECTORS Avelino Fernandez Salido, Humberto Schwarzbeck Noriega, Guillermo Ochoa Maciel and David Gastelum Cazares. ALTERNATE SHAREHOLDERS DIRECTORS Jose Eduardo Robinson Bours Castelo alternate of Javier Bours Castelo and Jose Gerardo Robinson Bours Castelo. Jose Francisco Robinson Bours Griffith, alternate of Octavio Robinson Bours and Arturo Bours Griffith. Guillermo Pineda Cruz, alternate of Jesus Enrique Robinson Bours Muñoz and Jesus Rodolfo Robinson Bours Muñoz. Gustavo Luders Becerril, alternate of Juan Salvador Robinson Bours Martinez and Ricardo Aguirre Borboa. HONORARY MEMBERS OF THE BOARD Enrique Robinson Bours Almada, Mario Javier Robinson Bours Almada. SECRETARY OF THE BOARD Eduardo Rojas Crespo Bachoco’s Board of Directors is comprised of eight Proprietary Shareholder Directors, four Alternate Shareholder Directors, and four Independent Proprietary Directors. This board was last ratified on April 25, 2018. The Board’s main duties include the following: Determine policies, general strategies, and the organization and management criteria that guide the activities of the Company. Prepare and develop programs to optimize resource management and the operation of the business, such as budgets and financial planning. After considering the Auditing and Corporate Practices Committee’s opinion, approve the internal control and guidelines of the internal auditing of the Company. Authorize acquisitions or disposing, as well as the granting of guarantees or the taking of liabilities for a value equal to or higher than five per cent of the consolidated assets of the Company, except for investments in debt securities or bank instruments; provided such are made in accordance with the policies approved by the Board for such purposes. Review and authorize operating results and work plans, and the overall compensation of the Company’s senior officers. 11 Annual Report 2018 R. Trent Goins Director of U.S. Operations Daniel Salazar Ferrer Chief Financial Officer Rodolfo Ramos Arvizu Chief Executive Officer Ernesto Salmon Castelo Director of Mexico Operations Andres Morales Astiazaran Director of Sales Ismael Sanchez Moreno Director of Human Resources Alejandro Elias Calles Gutierrez Director of Purchasing SENIOR MANAGEMENT TEAM Annual Report 2018 12 RECOGNIZED BY OUR QUALITY In Bachoco, we are convinced that in order to truly nourish and remain close to our customers, we must to deliver high quality products every day. For us, quality consists in fulfilling our customers and consumers’ needs. In order to achieve that, we have in place a very strict Alimentary Quality and Safety Internal System which audit and certifies each of our actions, throughout all our production and supply chain. In our processing plants, in México and the US, not only we comply with all regulations, we are focused in surpassing those requirements in order to warranty that our consumers will receive the best product in their tables. Proof of that is the recognitions we received from the hands of the Mexican President, the “Premio Nacional Agroalimentario”, (National Agri Food Award), granted by the National Agricultural Council as the highest recognition for companies and agri-food organizations in Mexico. 13 Annual Report 2018 TOGETHER FOR OUR BACHOCO TEAM We consolidated the Bachoco Welfare program by focusing on three specific areas: Occupational Welfare, Personal Welfare and Social Welfare. Through this program, the company seeks more people join our initiatives and perceive the value of belonging to a company focused on taking care of the life quality of its collaborators. RESPONSIBILITY SOCIAL Bachoco’s Social Responsibility program is based on 5 essential cornerstones seeking to achieve an integral onboarding for the improvement of collaborators, surrounding communities and the environment. We work hard every day to achieve these goals and 2018 was evidence of it. TOGETHER FOR OUR PLANET TOGETHER FOR OUR BUSINESS The interaction we have with the environment is a key aspect in which we seek to contribute in a positive way. Proof of these efforts are the water treatment plants in our production centers. We define strategic lines in which we focus our efforts. Following those strategic lines, we updated our Code of Ethics and created an Ethics Committee, we kept consolidating existing programs such as the deployment of Bachoco´s Cultural Model, the Corporative University and Bachoco Welfare, thinking always of our people. TOGETHER FOR OUR COMMUNITY TOGETHER FOR OUR PRODUCTS Our commitment and collaboration with neighboring communities constitutes one of our working areas. Beyond providing support in natural disaster situations, we also developed initiatives that contribute to the community improvement. Our work in safety and food quality is a continuous task and we consolidated it through the certification in SQF (Safe Quality Food). CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors Consolidated statements of financial position Consolidated statements of income and other comprehensive income Consolidated statements of changes in stockholders equity Consolidated statements of cash flows Notes to the consolidated financial statements INDUSTRIAS BACHOCO, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated Statements of Financial Position December 31, 2018, 2017 and 2016 (Thousands of pesos) Assets Note 2018 2017 2016 Liabilities and equity Note 2018 2017 2016 Current assets: Cash and cash equivalents Investment in securities at fair value through profit or loss Derivative financial instruments Accounts receivable, net Due from related parties Inventories Current biological assets Prepaid expenses and other current assets Assets held for sale Total currents assets Non-current assets: Property, plant and equipment, net Non-current biological assets Deferred income tax Goodwill Intangible assets Other non-current assets Total non-currents assets 7 8 8 9 20 10 11 12 13 14 11 21 15 16 17 $ 17,901,845 550,068 6,570 3,486,354 99 4,575,596 2,073,526 1,131,870 49,068 29,774,996 16,112,268 1,127,841 - 3,626,878 326 4,727,333 1,942,193 638,671 49,523 28,225,033 14,681,204 970,292 8,308 3,629,144 148,855 3,970,688 1,961,191 1,503,945 56,728 26,930,355 18,018,176 1,721,728 103,826 1,631,771 949,355 665,742 23,090,598 17,320,041 1,617,503 80,670 1,631,094 1,040,042 643,006 22,332,356 15,081,105 1,668,543 60,132 484,877 - 865,454 18,160,111 Current liabilities: Short-term debt Current portion of long-term debt Derivative financial instruments Trade payable and other accounts payable Income tax payable Due to related parties Total current liabilities Long term liabilities: Long-term debt, excluding current installments Deferred income tax Employee benefits Total long term liabilities Total liabilities Equity: Capital stock Share premium Reserve for repurchase of shares Retained earnings Accumulated other comprehensive income Foreign currency translation reserve Actuarial remeasurements, net Equity attributable to controlling interest Non-controlling interest Total equity Commitments Contingencies $ 3,427,820 64,973 0 5,196,347 248,290 147,514 9,084,944 1,544,807 3,767,320 302,818 5,614,945 2,852,400 842,651 6,821 4,740,366 731,654 55,252 9,229,144 1,553,973 3,843,379 252,965 5,650,317 1,444,800 1,652,725 - 4,545,177 483,618 189,966 8,316,286 950,412 3,912,575 195,019 5,058,006 14,699,889 14,879,461 13,374,292 1,174,432 414,470 562,047 34,792,320 (307) 1,273,671 (120,378) 38,096,255 69,450 38,165,705 1,174,432 414,385 493,141 32,367,912 - 1,268,021 (98,938) 35,618,953 58,975 35,677,928 1,174,432 414,385 449,641 28,244,970 - 1,465,657 (86,774) 31,662,311 53,863 31,716,174 18 18 8 19 21 20 18 21 22 25 22 27 28 Total assets $ 52,865,594 50,557,389 45,090,466 Total liabilities and equity $ 52,865,594 50,557,389 45,090,466 See accompanying notes to consolidated financial statements. INDUSTRIAS BACHOCO, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated Statements of Profit and Loss and Other Comprehensive Income Years ended December 31, 2018, 2017 and 2016 (Thousands of pesos, except share and per share amount) Net revenues Cost of sales Gross profit General, selling and administrative expenses Other income (expenses), net Operating income Finance income Finance costs Net finance income Profit before income taxes Income taxes Profit for the year Other comprehensive income (loss) items: Items that may be reclassified subsequently to profit or loss: Currency translation effect Hedge result Items that will not be reclassified subsequently to profit or loss: Actuarial remeasurements Income taxes related to actuarial remeasurements Other comprehensive income Comprehensive income for the year Profit attributable to: Controlling interest Non-controlling interest Profit for the year Comprehensive income attributable to: Controlling interest Non-controlling interest Comprehensive income for the year Note 23 23 30 29 29 21 22 2018 2017 2016 $ 61,052,092 (51,422,376) 58,050,025 (47,502,959) 52,020,303 (42,635,071) 9,629,716 10,547,066 9,385,232 (6,024,406) 102,660 (5,423,379) 167,642 (4,847,858) 260,202 3,707,970 5,291,329 4,797,576 1,140,749 (332,168) 808,581 1,087,641 (340,091) 747,550 969,174 (172,154) 797,020 4,516,551 6,038,879 5,594,596 1,154,978 1,084,444 1,643,433 $ 3,361,573 4,954,435 3,951,163 5,650 (307) (30,629) 9,189 (16,097) (197,636) - (17,377) 5,213 (209,800) 755,218 - 14,888 (4,466) 765,640 3,345,476 4,744,635 4,716,803 3,349,967 11,606 4,948,242 6,193 3,946,634 4,529 3,361,573 4,954,435 3,951,163 3,333,870 11,606 4,738,442 6,193 4,712,274 4,529 3,345,476 4,744,635 4,716,803 $ $ $ $ $ Weighted average outstanding shares 599,980,734 599,997,696 599,979,844 Basic and diluted earnings per share 26 $ 5.58 8.25 6.58 See accompanying notes to consolidated financial statements. CM /11/00 CM /11/00 CM /11/00 INDUSTRIAS BACHOCO, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 2018, 2017 and 2016 (Thousands of pesos) Attributable to controlling interest Capital stock Retained earnings Accumulated other comprehensive income Note Capital stock Share premium Reserve for repurchase of shares Retained earnings Hedge result Foreign currency translation reserve Actuarial remeasurements net Total Non-controlling interest Total equity Balance at January 1, 2016 $ 1,174,432 414,017 777,622 24,749,616 Dividends paid Dividends paid to non-controlling interest Reserve for repurchase of shares Repurchase and sale of shares Comprehensive income for the year: Profit for the year Other comprehensive income Total comprehensive income for the year Balance at December 31, 2016 Dividends paid Dividends paid to non-controlling interest Reserve for repurchase of shares Repurchase and sale of shares Comprehensive income for the year: Profit for the year Other comprehensive income Total comprehensive income for the year Balance at December 31, 2017 Dividends paid Dividends paid to non-controlling interest Reserve for repurchase of shares Repurchase and sale of shares Comprehensive income for the year: Profit for the year Other comprehensive income Total comprehensive income for the year Balance at December 31, 2018 25 25 25 25 25 25 - - - - - - - - - - 368 - - - - - (328,680) 699 - - - (779,960) - 328,680 - 3,946,634 - 3,946,634 1,174,432 414,385 449,641 28,244,970 - - - - - - - - - - - - - - - - 45,300 (1,800) - - - (780,000) - (45,300) - 4,948,242 - 4,948,242 1,174,432 414,385 493,141 32,367,912 - - - - - - - $ 1,174,432 - - - 85 - - - - 73,559 (4,653) (852,000) - (73,559) - - - 3,349,967 - - 414,470 - 562,047 3,349,967 34,792,320 - - - - - - - - - - - - - - - - - - - - - - (307) (307) (307) See accompanying notes to consolidated financial statements. 710,439 (97,196) 27,728,930 50,448 27,779,378 - - - - - 755,218 755,218 - - - - (779,960) - - 1,067 - (1,114) - - (779,960) (1,114) - 1,067 - 10,422 3,946,634 765,640 4,529 - 3,951,163 765,640 10,422 4,712,274 4,529 4,716,803 1,465,657 (86,774) 31,662,311 53,863 31,716,174 - - - - - - - - (780,000) - - (1,800) - (1,081) - - (780,000) (1,081) - (1,800) - (197,636) - (12,164) 4,948,242 (209,800) 6,193 - 4,954,435 (209,800) (197,636) (12,164) 4,738,442 6,193 4,744,635 1,268,021 (98,938) 35,618,953 58,975 35,677,928 - - - - - 5,650 5,650 1,273,671 - - - - (852,000) - - (4,568) - (21,440) 3,349,967 (16,097) (21,440) (120,378) 3,333,870 38,096,255 - (1,131) - - 11,606 - 11,606 69,450 (852,000) (1,131) - (4,568) 3,361,573 (16,097) 3,345,476 38,165,705 INDUSTRIAS BACHOCO, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2018, 2017 and 2016 (Thousands of pesos) Cash flows from operating activities: Profit for the year Adjustments for: Deferred income tax recognized in profit or loss Current income tax recognized in profit or loss Depreciation Intangible impairment loss Loss (gain) on disposal of plant and equipment Interest income Interest expense Unrealized foreign exchange loss on loans Note 2018 2017 2016 $ 3,361,573 4,954,435 3,951,163 21 21 14 16 29 29 (91,869) 1,246,847 1,226,917 21,430 23,227 (1,077,507) 332,168 43,400 (627,090) 1,711,534 1,075,788 - 41,890 (857,109) 255,997 82,600 382,904 1,260,529 925,748 - (157,245) (646,334) 172,154 270,850 Subtotal 5,086,186 6,638,045 6,159,769 Derivative financial instruments Accounts receivable, net Due from related parties Inventories Current and non-current biological assets Prepaid expenses and other current assets Assets held for sale Trade payable and other accounts payable Due to related parties Income taxes paid Employee benefits (13,391) 200,145 227 149,738 (236,179) (493,442) 455 457,941 92,262 (1,787,959) 49,853 15,129 162,906 3,967 (461,783) 70,941 875,307 7,205 (350,299) (134,714) (1,405,256) 57,946 (7,064) (1,144,991) 1,154 (562,905) (539,395) 82,324 3,320 (43,707) 24,338 (997,028) 34,801 Net cash provided by operating activities 3,505,836 5,479,394 3,010,616 Cash flows from investing activities: Payments for acquisition of property, plant and equipment Proceeds from sale of plant and equipment Restricted cash Investment in securities at fair value through profit or loss Other assets Interest collected Bussiness acquisition including advance payment Collection of principal of loans granted to related parties (1,977,567) 32,455 - 577,773 (27,983) 1,077,507 - - (2,126,361) 35,175 (24,058) (157,549) 2,125 857,109 (2,494,862) 144,562 (2,792,252) 278,340 (19,236) 272,322 4,583 646,334 - 44,513 Net cash used in investing activities (317,815) (3,763,859) (1,565,396) Cash flows from financing activities: Payment for repurchase of shares Proceeds from issuance of repurchased shares Dividends paid Dividends paid to non-controlling interest Proceeds from borrowings Principal payment on loans Interest paid (6,454) 1,887 (852,000) (1,131) 3,370,400 (3,588,067) (332,168) (1,800) - (780,000) (1,081) 5,378,915 (4,246,100) (255,997) (4,157) 5,224 (779,960) (1,114) 2,320,500 (2,670,474) (172,154) Net cash (used in) provided by financing activities (1,407,533) 93,937 (1,302,135) Net increase in cash and cash equivalents 1,780,488 1,809,472 143,085 Cash and cash equivalents at January 1 16,088,210 14,661,968 14,020,491 Effect of exchange rate fluctuations on cash and cash equivalents 33,147 (383,230) 498,392 Cash and cash equivalents at December 31 $ 17,901,845 16,088,210 14,661,968 See accompanying notes to consolidated financial statements. INDUSTRIAS BACHOCO, S.A.B. DE C.V. AND SUBSIDIARIES Notes to the Consolidated Financial Statements Years ended December 31, 2018, 2017 and 2016 (Thousands of Mexican pesos, except amounts per share) (1) Reporting entity Industrias Bachoco, S.A.B. de C.V. and subsidiaries (hereinafter, “Bachoco” or the “Company”) is a publicly traded company and was incorporated on April 17, 1980, as a legal entity. The Company’s registered address is Avenida Tecnológico 401, Ciudad Industrial, Celaya, Guanajuato, Mexico. The Company is engaged in breeding, processing and marketing poultry (chicken and eggs), swine and other products (primarily balanced animal feed). Bachoco is a holding company that has control over a group of subsidiaries (see note 5). The shares of the Company are listed on the Mexican Stock Exchange (BMV for its Spanish acronym) under the ticker symbol “Bachoco,” and in the New York Stock Exchange (NYSE), under the ticker symbol “IBA”. (2) Basis of preparation a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standard Board (IASB). On April 12, 2019, the accompanying consolidated financial statements and related notes were authorized for issuance by the Company’s Chief Financial Officer, Mr. Daniel Salazar Ferrer, for review and approval by the Audit Committee, Board of Directors and stockholders. In accordance with Mexican General Corporate Law and the Company’s bylaws, the stockholders are empowered to modify the consolidated financial statements after their issuance should they deem it necessary. b) Basis of measurement The accompanying consolidated financial statements were prepared on the historical cost basis (historical cost is generally based on the fair value of the consideration given in exchange for goods and services), except for the following items in the consolidated statement of financial position, which are measured at fair value: • Derivative financial instruments for trading and hedging, and investment in securities at fair value through profit or loss • Biological assets Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurements in its entirety, which are described as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs, other than quoted prices included within Level 1, which are observable either directly or indirectly. Level 3 inputs are unobservable inputs. c) Functional and presentation currency These consolidated financial statements are presented in thousands of Mexican pesos (pesos or $), the official currency of Mexico, which is the currency in which the Company’s accounting records are maintained and functional currency, except for the foreign subsidiaries for which the U.S. dollar is the functional currency as well as the currency in which accounting records are maintained. For disclosure purposes, in the notes to the consolidated financial statements, “thousands of pesos” or “$” means thousands of Mexican pesos, and “thousands of dollars” means thousands of U.S. dollars. When deemed relevant, certain amounts are included between parentheses as a translation into thousands of dollars, into thousands of Mexican pesos, or both, as applicable. These translations are performed for the convenience of the reader at the closing exchange rate issued by Bank of Mexico, which is $19.67, $19.66 and $20.64 pesos to one U.S. dollar as of December 31, 2018, 2017 and 2016, respectively. d) Use of estimates and judgments The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and significant assumptions are reviewed on an ongoing basis. Changes in estimates are recognized in the period in which they occur and in any future periods affected. The following are the critical accounting estimates and assumptions used by management in the application of the Company’s accounting policies, which are significant to the amounts recognized in the consolidated financial statements. Critical accounting judgments i. Fair value of biological assets The Company estimates the fair value of biological assets as the price that would be received or paid in an orderly transaction between market participants at the measurement date. As part of the estimate, the Company considers the maturity periods of such assets, the necessary time span for the biological assets to reach a productive stage, as well as future economic benefits obtained. The balance of current biological assets includes hatching eggs, growing pigs and growing poultry, while the balance of non-current biological assets includes poultry in its different production stages, and breeder pigs. Non-current biological assets are valued at production cost less accumulated depreciation or accumulated impairment losses, as there is no observable or reliable market for such assets. Additionally, the Company believes that there is no reliable method for measuring the fair value of non-current biological assets. Current biological assets are valued at fair value when there is an observable market, less estimated selling expenses. ii. Business combinations or acquisition of assets Management uses its professional judgment to determine whether the acquisition of a group of assets constitutes a business combination. This determination may have a significant impact in how the acquired assets and assumed liabilities are accounted for, both on initial recognition and subsequent thereto. iii. Aggregation of operating segments The Company’s chicken and egg operating segments are aggregated to present one reportable segment (Poultry) as they have similar products and services, production processes, classes of customers, methods used for distribution, the nature of the regulatory environment in which they operate, and similar economic characteristics as evidenced by similar five-year trends in gross profit margins. These factors are evaluated at least annually. Key sources of estimation uncertainty on the application of accounting policies i. Assessments to determine the recoverability of deferred tax assets On an annual basis the Company prepares projections to determine if it will generate sufficient taxable income to utilize its deferred tax assets associated with deductible temporary differences, including tax losses and other tax credits. ii. Useful lives and residual values of property, plant and equipment Useful lives and residual values of intangible assets and property, plant and equipment are used to determine amortization and depreciation expense of such assets and are determined with the assistance of internal and external specialists as deemed necessary. Useful lives and residual values are reviewed periodically at least once a year, based on the current conditions of the assets and the estimate of the period during which they will continue to generate economic benefits to the Company. If there are changes in the related estimate, measurement of the net carrying amount of assets and the corresponding depreciation expense are affected prospectively. iii. Measurements and disclosures at fair value Fair value is a measurement based on the price a market participant would be willing to receive to sell an asset or pay to transfer a liability, and is not a measure specific to the Company. For some assets and liabilities, observable market transactions or market information may be available. For other assets and liabilities, observable market transactions and market information may not be available. However, the purpose of a measurement at fair value in both cases is to estimate the price at which an orderly transaction to sell the asset or to transfer the liabilities would be carried out among the market participants at the date of measurement under current market conditions. When the price of an identical asset or liability is not observable, the Company determines the fair value using another valuation technique which maximizes the use of relevant observable information and minimizes the use of unobservable information. As the fair value is a measurement based on the market, it is measured using the assumptions that market participants would use when they assign a price to an asset or liability, including assumptions about risk. iv. Impairment of long-lived assets and goodwill The carrying amount of long-lived assets is reviewed for impairment when situations or changes in circumstances indicate that it is not recoverable, except for goodwill which is reviewed on an annual basis. If there are indicators of impairment, a review is carried out to determine whether the carrying amount exceeds its recoverable value and whether it is impaired. The recoverable value is the highest of the asset’s fair value, less selling costs, and its value in use which is the present value of the future estimated cash flows generated by the asset. The value in use calculation requires the Company’s management to estimate the future cash flows expected to arise from the asset and/or from the cash-generating unit and an appropriate discount rate in order to calculate present value. v. Employee retirement benefits The Company uses assumptions to determine the best estimate for its employee retirement benefits. Assumptions and estimates are established in conjunction with independent actuaries. These assumptions include demographic hypotheses, discount rates and expected increases in remunerations and future employee service periods, among others. Although the assumptions are deemed appropriate, a change in such assumptions could affect the value of the employee benefit liability and the results of the period in which it occurs. vi. Expected credit losses on accounts receivable The expected credit losses on financial assets are estimated using a provision matrix based on the Company's historical experience of credit losses, adjusted for factors that are specific to each of the Company's customer and debtor groups, general economic conditions and an assessment of both current and forecast conditions at each reporting date. vii. Contingencies A contingent liability is defined as: • A possible obligation that arises from past events and whose existence can only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company, or • a present obligation that arises from past events but is not recognized because: a. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or b. the amount of the obligation cannot be measured with sufficient reliability. The assessment of such contingencies requires the exercise of significant judgments and estimates on the possible outcome of those future events. The Company assesses the probability of loss arising from lawsuits and other contingencies with the assistance of its legal advisors. These estimates are reconsidered periodically at each reporting period. e) Issue of new IFRS i. New and amended IFRS that affect reported balances and/or disclosures in financial statements In the current year, the Company adopted a series of new and amended IFRS issued by the IASB which went into effect on January 1, 2018 as it relates to its consolidated financial statements. IFRS 9, Financial Instruments IFRS 9, Financial Instruments, includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. The details of these new requirements, and their impact on the consolidated statements of financial position of the Company, are described below. Classification and measurement of financial assets All recognized financial assets that are within the scope of IFRS 9 are required to be measured subsequently at amortized cost or fair value, based on the Company's management of financial assets and the contractual cash flows characteristic of financial assets. The Company has not made changes in the classification of financial assets based on the application of IFRS 9; therefore, the adoption of such classification and measurement provisions has not had an impact on its consolidated statements of financial position, results and other comprehensive results. Impairment of financial assets IFRS 9 introduces a new model of impairment of expected loss and limited changes to the requirements of classification and measurement of financial assets. Specifically, the new impairment model is based on the expected credit losses rather than the losses incurred, and will be applied to debt instruments valued at amortized cost or at fair value through other comprehensive income, leases receivable, contract asset, certain written loan commitments and financial guarantee contracts. Regarding the new fair value measurement category through other comprehensive income, the impairment provisions will be applicable to debt instruments that (i) are held within a business model whose objectives are achieved through the collection of contractual cash flows and the sale of financial assets and (ii) have contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The Company has not identified a material impact on its financial assets from the application of the impairment provisions of IFRS 9, neither in its investment positions nor in its trade accounts receivable. General Hedge Accounting The new general hedge accounting requirements retain the three types of hedge accounting schemes currently available in IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non- financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity’s risk management activities have also been introduced. IFRS 15, Revenue from Contracts with Customers Under this standard, revenue is recognized as control is passed, either over time or at a point in time. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In applying the revenue model to contracts within its scope, an entity will: 1) Identify the contract with a customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations in the contract; 5) Recognize revenue when (or as of) the entity satisfies a performance obligation. The Company conducted an analysis of revenues with customers and determined that the adoption of this standard has no impact on its consolidated financial statements. Amendments to IFRS 2, Share-based Payment The amendments to IFRS 2, Share-based Payment, clarify the classification and measurement of share-based payment transactions. The amendments contain clarifications and amendments addressing the accounting for cash-settled share-based payment transactions; classification of share-based payment transactions with net settlement features; and accounting for modifications of share-based payment transactions from cash-settled to equity-settled. The adoption of these amendments had no impact on the consolidated financial statements of the Company as it does not have share-based payment plans. IFRIC 22, Foreign Currency Transactions and Advance Considerations The interpretation clarifies that when the entity pays or receives consideration in advance in a foreign currency, the date of transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income, is the date when the anticipated consideration has been paid or received in advance, i.e. when the advance payment or the income received in advance was recognized. The adoption of this interpretation had no impact on the Company’s consolidated financial statements because it already accounts for transactions that involve the payment or receipt of advance consideration in a foreign currency in a manner that is consistent with the modifications. Amendments IFRS 4- The application of IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts Amendments to IFRS 4, Insurance Contracts, provide two options for entities that issue insurance contracts: i) an optional temporary exemption from applying IFRS 9 (referred to as the "deferral approach"); and ii) an option that allows entities presenting the changes in the fair value of the designated financial assets, in other comprehensive income (OCI), instead of in profit or loss (referred to as the "overlay approach"). The overlay approach will be applicable when IFRS 9 is applied for the first time. The deferral approach is effective for annual periods beginning on or after January 1, 2018 and will only be available for three years after that date. The modifications have had no impact on the Company’s consolidated financial statements. ii. New IFRS issued but not yet effective The Company has not applied the following new and revised IFRS that have been issued, but are not yet effective for periods beginning on January 1, 2018. IFRS 16, Leases IFRS 16, Leases was issued in January 2016 and supersedes IAS 17, Leases and related interpretations. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. IFRS 16 is effective for periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 has also been applied. Under IFRS 16 a lessee recognizes a right-of-use asset and a lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly and the liability accrues interest. This will typically produce a front-loaded expense profile (whereas operating leases under IAS 17 would typically have had straight-line expenses) as an assumed straight-line depreciation of the right-of-use asset and the decreasing interest on the liability will lead to an overall decrease of expense over the reporting period. The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease if that can be readily determined. The Company has decided to use an incremental borrowing rate. The Company has decided to account for lease payments as an expense on a straight-line basis over the lease term for leases with a lease term of 12 months or less and containing no purchase options (this election is made by class of underlying asset); and leases where the underlying asset has a low value when new, such as personal computers or small items of office furniture. IFRS 16 establishes different transitional provisions, the Company has chosen the modified retrospective application where the comparative period is not restated. IFRS 16 will change the way in which the Company accounts for leases previously classified as operating leases under IAS 17, which were accounted for off-balance sheet. In the initial application of IFRS 16, as of January 1, 2019, for all leases (except those that the Company has elected to account for as an expense), the Company: • Recognizes right-of-use assets and lease liabilities in the consolidated statement of financial position, initially measured at the present value of the future lease payments; • Recognizes depreciation of right-of-use assets and interest on lease liabilities in the consolidated statement of profit or loss; • Separates the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within financing activities) in the consolidated cash flow statement. Under IFRS 16, right-of-use assets will be tested for impairment in accordance with IAS 36, Impairment of Assets. This will replace the previous requirement to recognize a provision for onerous lease contracts. For the first time application of IFRS 16, the Company has carried out an implementation project, which has shown that the new definition in the standard will not significantly change the scope of contracts that meet the definition of a lease for the Company. A preliminary assessment indicates that $ 18,290, monthly lease payments are related to leases other than short-term leases and leases of low-value assets, and therefore the amount to be recognized by the Company as a right-of-use asset and the corresponding liability as of January 1, 2019 will range from $900,000 to $950,000, with respect to all such leases. The effect of adoption arises from right-of-use assets and related liabilities related to leases of buildings, machinery and equipment and transport equipment. The impact on the 2019 consolidated statement of profit or loss will be comprised of an increase in the annual depreciation of approximately $193,129 and the annual interest expense of approximately $33,572. IFRIC - 23 Uncertainty about treatment in the income tax This interpretation deals with the determination of taxable income (loss), tax bases, unused fiscal losses, unused tax credits and tax rates, when there is uncertainty about their treatment in accordance with IAS 12. Specifically, it considers: If tax treatments should be considered collectively • • Assumptions about tax authorities’ examinations • The determination of taxable income (loss), tax bases, unused tax losses, unused tax credits and tax rates • The effects of changes in the facts and circumstances This interpretation will be effective on January 1, 2019. The Company's management considers that the application of this interpretation will not have a significant impact on its consolidated financial statements, since its current practices for determining the effects of income taxes on its consolidated financial statements incorporate considerations similar to those set forth in the interpretation. Annual Improvements 2015-2017 Cycle The annual improvements include amendments to IFRS 3 and IFRS 11, to IFRS 12 and to IAS 23, which are all effective for annual periods beginning on or after January 1, 2019. The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, the entity must remeasure previously held interests in that business. The amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business. The amendments to IFRS 12 clarify that the effects on income taxes for dividends (or distributions of profit) should be recognized in results regardless of how the tax arises. The amendments to IAS 23 clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalization rate on general borrowings. The Company is in the process of determining the potential impacts on its consolidated financial statements derived from the adoption of these amendments. (3) Significant accounting policies The significant accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. a) Basis of consolidation i. Subsidiaries Subsidiaries are entities controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control is lost (see note 5). Profits and losses of subsidiaries acquired or sold during the year are included in the consolidated statements of profit and loss and other comprehensive income from the acquisition date to the disposal date. Where necessary, the financial statements of subsidiaries are adjusted to align their accounting policies with the Company’s consolidated accounting policies. ii. Transactions eliminated in consolidation Significant intercompany balances and transactions, and any unrealized gains and losses arising from transactions between consolidated companies have been eliminated in preparing these consolidated financial statements. iii. Business combinations Business combinations are accounted for using the acquisition method. For each business combination, any non-controlling interest in the acquiree is valued either at fair value or according to the proportionate interest in the acquiree’s identifiable net assets. In a business combination, the Company evaluates the assets acquired and the liabilities assumed for proper classification and designation according to the contractual terms, economic circumstances and relevant conditions at the acquisition date. Goodwill is originally valued at cost, and represents any excess of the transferred consideration over the net assets acquired and liabilities assumed. If the net amount of identifiable acquired assets and assumed liabilities as of the acquisition date exceeds the sum of the consideration transferred, the amount of any non-controlling interest in the acquired entity and the fair value of the prior shareholding of the acquirer in the acquired entity (if any), any excess is immediately recognized in the consolidated statement of profit and loss and other comprehensive income as a bargain purchase gain. Transaction costs, other than those associated with the issuance of debt or equity securities, that the Company incurs related to a business combination are expensed as incurred. Certain contingent consideration payable are measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not re-measured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit and loss. b) Foreign currency i. Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of the Company at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain and loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for interest and principal payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. ii. Translation of foreign operations Assets and liabilities, including goodwill and fair value adjustments arising on acquisition, of foreign operations whose functional currency differs from the reporting currency, are translated into Mexican pesos at the exchange rates at the reporting date. Income and expenses are translated to pesos at the average exchange rate of the period of the transactions. Foreign currency differences associated with translating foreign operations into the reporting currency (Mexican peso) are recognized in other comprehensive income, and presented in the foreign currency translation reserve in stockholders’ equity. Foreign exchange gains and losses arising from amounts receivable or payable to a foreign operation, whose settlement is neither planned nor likely in the foreseeable future, are considered part of a net investment in a foreign operation and are recognized under the “other comprehensive income” account, and presented within stockholders’ equity in the foreign currency translation reserve. For the years ended December 31, 2018, 2017 and 2016 the Company did not enter into such transactions. c) Financial instruments i. Financial assets Classification of financial assets The Company classifies and measures its financial assets under the following criteria: • The Company's debt instruments are subsequently measured at amortized cost if the financial asset is maintained in a business model whose objective is to hold financial assets with the objective of obtaining contractual cash flows; and the contractual terms of the financial asset give rise on specific dates to cash flows that are only principal and interest payments on the amount of the principal. • Furthermore, debt instruments are subsequently measured at fair value through other comprehensive income if the financial asset is maintained within a business model whose objective is met by obtaining contractual cash flows and selling financial assets; and the contractual terms of the financial asset give rise, on specific dates, to cash flows that are only principal and interest payments on the outstanding amount of the principal. • By default, all other financial assets are subsequently measured at fair value through profit and loss. Recognition and derecognition of financial assets Assets are initially recognized on the date of the contract in which the Company becomes a member of the contractual provisions of the instruments. And they are initially valued at their fair value. Transaction costs that are directly attributable to the acquisition or issuance of financial assets and liabilities (other than financial assets at fair value through profit or loss) are added to or reduced from the fair value of the financial assets or liabilities, where applicable, at initial recognition. Transaction costs directly attributable to the acquisition of financial assets and liabilities at fair value through profit or loss are recognized immediately in profit or loss. All regular purchases or sales of financial assets are recognized and derecognised on a trade date. Regular purchases or sales are purchases or sales of financial assets that require the delivery of assets within the period established by the regulation or usual practices in the market. All recognized financial assets are subsequently measured in full, either at amortized cost or fair value, according to the classification of financial assets. Financial assets of the Company include cash and cash equivalents, investment in securities at fair value through profit or loss, derivative financial instruments and trade receivables. The Company initially recognizes accounts receivable and cash equivalents on the date that they arise. All other financial assets (including assets measured at fair value through profit and loss) are initially recognized on the trading date, which is the date that the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial asset when the contractual rights to cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which all the risks and rewards of ownership of the financial asset are substantially transferred. Financial assets and liabilities are offset and the net amount is presented in the consolidated statement of financial position solely if the Company has a legal right to offset the amounts and intends either to settle them on a net basis of financial assets and liabilities or otherwise realize the asset and settle the liability simultaneously. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less from the acquisition date, which are subject to an insignificant risk of changes in their fair value, and are used by the Company in the management of its short-term commitments. Receivables Receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, receivables are measured at amortized cost. Receivables comprise trade, due from related parties and other receivables. Impairment of financial assets As of 2018, the Company evaluates whether its financial assets accounted for at amortized cost and at fair value through other comprehensive income are impaired on the basis of losses due to expected credit losses. The amount of expected credit losses is updated on each reporting date to reflect changes in credit risk since the initial recognition of the respective financial instrument. The Company recognizes lifetime expected credit losses for commercial accounts receivable, contract assets and accounts receivable for leases. The expected credit losses on these financial assets are estimated using a provision matrix based on the Company's historical experience of credit losses, adjusted for factors that are specific to the debtors, the general economic conditions and management’s assessment of both the current and forecast conditions at the reporting date, including the time value of money when appropriate. The Company considers a significant increase in credit risk to have occurred when the asset’s credit rating falls to the level of speculation, or when the rating has decreased by more than 2 levels with respect to the level at which it was acquired. Additionally, the Company considers that default has occurred when a financial asset is more than 90 days past-due, unless there is reasonable and reliable information demonstrating that a later default criterion is more appropriate. For all other financial instruments, the Company recognizes the lifetime expected credit loss when there has been a significant increase in credit risk since the initial recognition. However, if the credit risk in the financial instrument has not increased significantly since the initial recognition, the Company measures the provision for losses for that financial instrument in an amount equal to the 12-month expected credit losses. During 2017 and 2016, the method used to determine the impairment of financial assets was based on an incurred loss model. ii. Financial liabilities Debt and/or equity instruments are classified as financial liabilities or as equity according to the substance of the contractual agreement and the definitions of liability and equity. All financial instrument liabilities are initially recognized on the trade date, which is the date that the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial instrument liability when its contractual obligations are met, cancelled or expire. The Company has the following non-derivative financial instrument liabilities: short-term and long-term debt, and trade and other payables and accounts payable to related parties. The aforementioned financial liabilities are originally recognized at fair value, plus costs directly attributable to the transaction. Subsequently, these financial liabilities are measured at amortized cost using the effective interest method or at fair value through results during their contractual term. iii. Derivative financial instruments The Company participates in a variety of derivative financial instruments to manage its exposure to exchange rate risks, including currency forward contracts. Derivative financial instruments entered into for fair value hedging or for trading purposes are initially recognized at fair value; any attributable transaction costs are recognized in profit and loss as incurred. Government grants are recognized initially as a liability, and subsequently recognized to profit and loss as the related obligation is settled. Subsequent to the initial recognition, such derivative financial instruments are measured at fair value, and changes in such value are immediately recognized in profit and loss unless the derivative is designated and is effective as a hedging instrument, in which case, its recognition in profit and loss will depend on the nature of the hedging. Fair value of derivative financial instruments that are traded in recognized financial markets is based on quotes issued by these markets; when a derivative financial instrument is traded in the “over the counter” market, the fair value is determined based on internal models and market inputs accepted in the financial environment. A derivative with a positive fair value is recognized as a financial asset, while a derivative with a negative fair value is recognized as a financial liability. Derivatives are not offset in the financial statements unless the Company has both the legal right and the intention to offset. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realized or settled within 12 months. Other derivatives are presented as current assets or current liabilities. The Company analyzes if there are embedded derivatives that should be segregated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related. A separate instrument with the same terms as those of the embedded derivative meets the definition of a derivative, and the combined instrument is not measured at fair value through profit and loss. Changes in fair value of the separable embedded derivatives are immediately recognized in profit and loss. iv.Hedge Accounting The Company designates certain derivatives as hedging instruments with respect to foreign currency risk with fair value hedges, cash flow hedges or hedges of net investments in foreign operations. Firm commitments that hedge foreign currency risk are accounted for as cash flow hedges. At the beginning of the hedge relationship, the Company documents the relationship between the hedging instrument and the hedged item, together with its risk management objectives and its strategy to carry out various hedging transactions. In addition, at the beginning of the hedge and on an ongoing basis, the Company documents whether the instrument is effective to offset changes in the fair values or cash flows of the hedged item attributable to the hedged risk, which is when the hedging relationships comply with all of the following coverage effectiveness requirements: • There is an economic relationship between the hedging instrument and the hedged item; • The effect of credit risk does not dominate the value of the changes resulting from the economic relationship; and • The coverage ratio of the coverage ratio is the same as that resulting from the amount of the hedged item that the Company actually covers and the amount of the hedging instrument that the Company actually uses to cover that amount of the hedged item. If the hedging instrument no longer meets the effectiveness requirement related to the hedging relationship, but the risk management objective for that designated hedging relationship remains the same, the Company adjusts the hedging relationship (that is, rebalances) so that it meets the qualification criteria again. The Company designates the entire change in the fair value of a forward contract (that is, it includes the forward elements) as the hedging instrument for all its hedging relationships that involve forward contracts. The Company designates only the intrinsic value of option contracts as a hedged item, that is, excluding the time value of the option. Changes in the fair value of the option are recognized in other comprehensive income and are accumulated in the cost of the hedge reserve. If the hedged item is related to the transaction, the fair value is reclassified to profit or loss when the hedged item affects the profit or loss. If the hedged item is related to the period of time, then the accumulated amount in the cost of the hedge reserve is reclassified to profit or loss in a rational manner: the Company amortizes the accumulated hedge reserve to profit or loss using the straight-line method. These reclassified amounts are recognized in profit or loss on the same line as the hedged item. If the hedged item is a non-financial item, the accumulated amount in the cost of the hedge reserve is eliminated directly from equity and is included in the initial carrying amount of the recognized non-financial item. In addition, if the Company expects that part or all of the accumulated loss in the cost of the hedge reserve will not be recovered in the future, that amount will be reclassified immediately to results. v. Capital stock Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of ordinary shares are recognized as a deduction from equity, net of any tax effects. Stock repurchase When share capital recognized as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the reserve for repurchase of shares. When treasury shares are sold or are re-issued subsequently, the amount received as well as the resulting surplus or deficit on the transaction is recognized in equity. d) Property, plant and equipment i. Recognition and measurement Property, plant and equipment, except for land, are recorded at acquisition cost less accumulated depreciation and any accumulated impairment losses. Land is measured at the acquisition costs less any accumulated impairment losses. Acquisition cost includes the purchase price, as well as any cost directly attributable to the acquisition of the asset, including all costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. When components of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. An item of property, plant and equipment is derecognized at the time of disposal or when no future economic benefits are expected to arise from the continued use of the asset. Gains or losses on the sale of an item of property, plant and equipment are determined by comparing the proceeds from the sale with the carrying amount of property, plant and equipment, and are recognized net under “other income (expenses)” in profit and loss for the year. ii.Subsequent costs The replacement cost of an item of property, plant and equipment is capitalized if the future economic benefits associated with the cost are expected to flow to the Company and the related cost is reliably determined. The carrying amount of the replaced item is written off from the accounting records. Maintenance and repair expenses related to property, plant and equipment are expensed as incurred. iii. Depreciation Depreciation is calculated on the cost of the asset less its residual value, using the straight line method, based on the estimated useful life of the assets. Depreciation is recognized in profit and loss beginning from the time when the assets are available for use. Below are the estimated useful lives for 2018, 2017 and 2016: Buildings Machinery and Equipment Vehicles Computers Furniture Average useful Life 46 19 11 8 11 The Company has estimated the following residual values as of December 31, 2018, 2017 and 2016: Buildings Machinery and Equipment Vehicles Computers Furniture e) Goodwill Residual Value 9% 8% 5% 0% 2% Goodwill arises as a result of the acquisition of a business over which control is obtained and is measured at cost less cumulative impairment losses; it is subject to annual tests for impairment. f) Intangible assets They are mainly comprised of trade names and customer relationships derived from the acquisition of businesses in the United States of America. The cost of intangible assets acquired through a business combination represents their fair value at the acquisition date and they are recognized separately from goodwill. Subsequently, they are valued at cost minus amortization and accumulated impairment losses. Intangible assets are classified as having a definite or indefinite life. Those with a defined life are amortized under the straight-line method during their estimated life and when there are impairment indicators, they are tested for impairment. The amortization methods and the useful life of the assets are reviewed and adjusted, if necessary, at the date of each statement of financial position. Amortization is charged to income in the general expenses category. Those with an indefinite life are not amortized, but are subject to impairment tests at least annually. g) Biological assets Biological assets whose fair value can be measured reliably are measured at fair value less costs of sale, with any change therein recognized in profit and loss. Costs of sale include all costs that would be necessary to sell the assets, excluding finance costs and income taxes. The Company’s biological assets consist of growing poultry, poultry in its different production stages, hatching eggs, breeder pigs, and growing pigs. When fair value cannot be reliably, verifiably and objectively determined, assets are valued at production cost less accumulated depreciation, and any cumulative impairment loss. Depreciation related to biological assets forms part of the cost of inventories and current biological assets and is ultimately recognized within cost of sales in the statement of profit and loss and other comprehensive income. Depreciation of poultry and breeder pigs is estimated based on the expected future life of such assets and is calculated on a straight-line basis. Poultry in its different production stages Breeder pigs Expected average useful life (weeks) 40-47 156 Biological assets are classified as current and non-current assets, based on the nature of such assets and their purpose, whether for commercialization or for reproduction and production. h) Leased assets Operating leases entered into by the Company are not recognized in the Company’s statement of financial position. Operating lease rentals paid by the Company are recognized in profit and loss using the straight-line method over the lease term, even though payments may not be made on the same basis. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets. However, when there is no reasonable certainty that ownership will be obtained at the end of the lease term, assets are depreciated over the shorter of the lease term or their useful lives. As of December 31, 2018, 2017 and 2016, the Company has not entered into any significant finance lease agreements. i) Inventories Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on average cost, and includes expenditures incurred for acquiring inventories, production or transformation costs, and other costs incurred for bringing them to their present location and condition. Agricultural products derived from biological asses are processed chickens and commercial eggs. Net realizable value is the estimated selling price in the ordinary course of business, less the costs necessary to make the sale. Cost of sales represents cost of inventories at the time of sale, increased, if applicable, by reductions in inventory to its net realizable value, if lower than cost, during the year. The Company records the necessary reductions in the value of its inventories for impairment, obsolescence, slow movement and other factors that may indicate that the use or performance of the items that are part of the inventory may be lower than the carrying value. j) Impairment i. Financial assets A financial asset that is not recorded at fair value through profit and loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if there is objective evidence of a loss event after the initial recognition of the asset, and that such loss event had a negative impact on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets are impaired includes default or delinquency by a debtor, restructuring of an amount due to the Company, evidence that a debtor may go bankrupt, or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged reduction in its fair value below its cost is objective evidence of impairment. The Company considers evidence of impairment for financial assets valued at amortized cost (accounts receivables) both individually and collectively. All individually significant receivables and other financial assets are assessed for specific impairment. Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics. In assessing collective impairment, the Company follows an expected loss model and the calculation is applicable to all receivables regardless of whether or not they have objective evidence of impairment. For these estimates, management uses historical trends of probabilities of default, timeliness of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are greater or less than those implied by historical trends. An impairment loss related to a financial asset valued at amortized cost is calculated as the difference between the carrying amount of the asset and the present value of estimated future cash flows discounted at the effective interest rate. Losses are recognized in profit and loss and reflected in an allowance account against receivables. ii. Non-financial assets The carrying amounts of the Company’s non-financial assets, other than inventories, biological assets and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the recoverable amount of the asset is estimated or cash generating units, as the lowest between its value in use and the fair value less cost of sale. Goodwill and indefinite-lived intangible assets are tested annually for impairment on the same dates. The Company defines the cash generating units and also estimates the periodicity and cash flows that they should generate. Subsequent changes in the group of cash-generating units, or changes in the assumptions that support the cash flow estimates or the discount rate could impact the carrying amounts of the respective asset. The main assumptions for developing estimates of recoverable amounts requires the Company’s management to estimate the future cash flows expected to arise from the cash- generating unit and a suitable discount rate in order to calculate its present value. The Company estimates cash flow projections considering current market conditions, determination of future prices of goods and volumes of production and sales. In addition, for the purposes of the discount and perpetuity growth rates, the Company uses indicators of market and expectations of long-term growth in the markets in which it operates. The Company estimates a discount rate before taxes for the purposes of the goodwill impairment test that reflects the risk of the corresponding cash-generating units and that enables the calculation of present value of expected future cash flows, as well as to reflect risks that were not included in the cash flow projection assumptions and premises. The discount rate that the Company estimates is based on the weighted average cost of capital. In addition, the discount rate estimated by the Company reflects the return that market participants would require if they had made a decision about an equivalent asset, as well as the expected generation of cash flow, time, and risk-and-return profiles. The Company annually reviews the circumstances which led to an impairment loss arising from cash-generating units to determine whether such circumstances have been changed and that may result in the reversal of previously recognized impairment losses. An impairment loss in respect of goodwill is not reversed. For other long-lived assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if the impairment loss had not been recognized. Impairment losses are recognized in profit and loss. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of CGUs), and subsequently to reduce the carrying amount of the other long-lived assets within the cash-generating unit (or group of CGUs) on a pro rata basis. k) Held-for-sale assets Available for sale assets mainly consist of foreclosed assets. Foreclosed assets are initially recorded at the lower of fair value less costs to sell or the net carrying amount of the related account receivable. Immediately before being classified as held-for-sale, assets are valued according to the Company’s accounting policies in accordance with the applicable IFRS. Subsequently, held- for-sale assets are recorded at the lower of the carrying amount and fair value less costs to sell. Impairment initial classification of held-for-sale assets and subsequent remeasurement gains and losses are recognized in profit and loss. Recognized gains shall not exceed cumulative impairment losses previously recognized. losses on l) Other assets Other long-term assets primarily include advances for the purchase of property, plant and equipment, investments in insurance policies and security deposits. The Company owns life insurance policies of some of the former stockholders of Bachoco USA, LLC (foreign subsidiary). The Company records these policies at net cash surrender value which approximates its fair value (see note 17). m) Employee benefits The Company grants to its employees in Mexico and abroad, different types of benefits as described below and as detailed in note 22. i.Defined contribution plan A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions to a separate entity and has no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognized as an employee benefit expense in profit and loss in the periods during which the related services are rendered by employees. Prepaid contributions are recognized as an asset to the extent that the Company has the right to a cash refund or a reduction in future payments is available. Contributions to a defined contribution plan due more than 12 months after the end of the period in which the employees render the service are discounted at present value. ii. Defined benefit plan A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. It is funded by contributions made by the Company and is intended to meet the Company’s labor obligations to its employees. The Company´s net obligations in respect of defined benefit plans is calculated separately for each plan, estimating the amount of the future benefit that the employees have earned in return for their service in the current and prior years; that benefit is discounted to determine its present value, and is reduced by the fair value of the plan assets. The discount rate is the yield at the end of the reporting period on high quality corporate bonds (or governmental bonds in the instance that a deep market does not exist for high quality corporate bonds, which is the case in Mexico) that have maturity dates approximating the terms of the Company´s obligations and that are denominated in the currency in which the benefits are expected to be paid. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset. Defined benefit costs are categorized as follows: • • Service cost (including current service cost, past service cost, as well as gains and losses on curtailments and settlements) Net interest expense or income The Company presents service cost as part of operating income in the consolidated statements of profit or loss and other comprehensive income (loss). Gains and losses for reduction of service are accounted for as past service costs. The calculation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Company, the recognized asset is limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans. When the benefits of a plan are modified or improved, the portion of the improved benefits related to past services by employees is recognized in profit and loss on the earlier of the following dates: when there is a modification or curtailment to the plan, or when the Company recognizes the related restructuring costs or termination benefits. Remeasurement adjustments, comprising actuarial gains and losses, the effect of changes to the asset ceiling (if applicable) and the return on plan assets (excluding interest), are reflected immediately with a charge or credit recognized in other comprehensive income in the period in which they occur. Remeasurement recognized in other comprehensive income is reflected immediately in equity and is not reclassified to profit or loss. iii. Short-term benefits Short-term employee benefits are valued on a non-discounted basis and are expensed as the respective services are rendered. A liability is recognized for the amount expected to be paid under the short-term cash bonus plans or statutory employee profit sharing (PTU for its acronym in Spanish), if the Company has a legal or constructive obligation to pay such amounts as a result of prior services rendered by the employee, and the obligation may be reliably estimated. iv. Termination benefits from constructive obligations The Company recognizes, as a defined benefit plan, a constructive obligation from past practices. The liability accrues based on the services rendered by the employee. Payment of this benefit is made in one installment at the time that the employee voluntarily ceases working for the Company. n) Provisions A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. When the effect of time value of money is significant, the amount of the provision is the present value of the disbursements expected to be necessary to settle the obligation. The discount rate applied is determined before taxes, and reflects market conditions at the reporting date and takes into account the specific risk of the relevant liability, if any. The unwinding of the present value discount is recognized as a financial cost. o) Interests in joint operations A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The Company as a joint operator recognizes, in relation to its interest in a joint operation: its assets, including its share of any assets held jointly; its liabilities, including its share of any liabilities incurred jointly; its revenue from the sale of its share of the output arising from the joint operation; its share of the revenue from the sale of the output by the joint operation, and its expenses, including its share of any expenses incurred jointly. The Company accounts for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the IFRSs applicable to such assets, liabilities, revenues and expenses. The Company has joint operations derived from the agreements for the development of its biological assets. For such operations, the Company accounts for its biological assets, its obligations derived from technical support, as well as the expenses it incurs with respect to the joint operations. The live poultry produced by the joint operation is ultimately used internally by the Company and may be sold by the Company to third parties. As a result, the joint operation itself does not generate any revenues with third parties. p) Revenues During 2017 and 2016 revenues from the sale of goods in the course of ordinary activities are measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenues are recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration relating to the transaction is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. If it is probable that discounts will be granted and the amount can be measured reliably, the discount is recognized as a reduction of revenue. Beginning in 2018, revenues from the sale of goods in the course of ordinary activities are measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenues are recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that control over the product has been transferred to the customer. If it is probable that discounts will be granted and the amount can be measured reliably, the discount is recognized as a reduction of revenue. The Company generally does not accept sales returns. No asset is recognized for product returns, due to the fact that such products are not expected to be sold or recovered in another manner given that they are perishable. To the extent sales returns occur, the product returns are made simultaneously with the delivery and acceptance of the product (same day). The Company has concluded that all performance obligations are satisfied at the time of delivery of the product to the customer. The Company has a variety of credit terms for its various distribution channels, all of which have short terms, consistent with market and industry practices. Accordingly, there are no financing components. A significant portion of sales in Mexico are collected in cash on delivery. q) Financial income and costs and dividend income Financial income comprises interest income from funds invested, fair value changes on financial assets at fair value through profit or loss and foreign currency exchange gains. Interest income is recognized in profit and loss, using the effective interest method. Dividend income is recognized in profit and loss on the date that the Company´s right to receive the payment is established. Financial costs comprise interest expense for borrowings, foreign currency exchange losses and fair value changes on financial assets at fair value through profit and loss. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit and loss using the effective interest method. Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the costs of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Exchange gains and losses are reported on a net basis. r) Income taxes Income tax expense is comprised of current and deferred tax. Current income taxes and deferred income taxes are recognized in profit and loss provided they do not relate to a business combination, or items recognized directly in equity or in other comprehensive income. Current income tax is the expected tax payable or receivable on the taxable income or loss for the fiscal year, which can be applied to taxable income from previous years, using tax rates enacted or substantively enacted in each jurisdiction at the reporting date, plus any adjustment to taxes payable with respect to previous years. Current income tax payable also includes any tax liability arising from the payment of dividends. Deferred income tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities and the amounts used for tax purposes. Deferred income tax is not recognized for: • the initial recognition of assets or liabilities in a transaction that is not a business combination and did not affect either accounting or taxable profit or loss; • differences related to investments in subsidiaries to the extent that it is probable that the Company is able to control the reversal date, and the reversion is not expected to take place in the near future. • taxable temporary differences arising from the initial recognition of goodwill. Deferred income tax is determined by applying the tax rates that are expected to apply in the period in which the temporary differences will reverse, based on the regulations enacted or substantively enacted at the reporting date. The measurement of deferred income tax assets and liabilities reflect the tax consequences derived from the manner in which the Company expects to recover or settle the carrying amounts of its assets and liabilities. In determining the amount of current and deferred income tax, the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Company believes that the balance for its income tax liabilities are appropriate for all tax years subject to be reviewed by the tax authorities based on its assessment of several factors, including the interpretation of the tax laws and prior experience. A deferred income tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred income tax assets are reviewed at each reporting date and are reduced to the extent that it is not probable that the related tax benefit will be realized. s) Earnings per share The Company presents information on basic and diluted earnings per share (EPS) related to its ordinary shares. Basic EPS is computed by dividing the profit and loss attributable to the holders of the Company’s common shares by the weighted average number of outstanding ordinary shares during the period, adjusted for treasury shares held. Diluted EPS is determined by adjusting the profit and loss attributable to the holders of the ordinary shares and the outstanding weighted average number of ordinary shares, adjusted for treasury shares held, for the potential dilutive effects of all ordinary shares, including convertible instruments and options on shares granted to employees. At December 31, 2018, 2017 and 2016, the Company has no potentially dilutive shares, for which reason basic and diluted EPS are the same. t) Segment information An operating segment is a component of the Company: i) that is engaged in business activities from which revenues and expenses may be obtained and incurred, including revenues and expenses related to transactions with any of the other components of the Company, ii) whose results are reviewed periodically by the chief operating decision maker for the purpose of resource allocation and assessment of segment performance, and iii) for which discrete financial information exists. The Company discloses reportable segments based on operating segments whose revenues exceed 10% of the combined revenues from all segments, whose absolute value of profit or loss exceeds 10% of the combined absolute value of profit or loss from all segments, whose assets exceed 10% of the combined assets from all segments, or that result from the aggregation of two or more operating segments that share similar economic characteristics and meet the aggregation criteria under IFRS (note 2 d). u) Costs and expenses by function Costs and expenses in the consolidated statements of profit and loss and other comprehensive income were classified by their function. The nature of costs and expenses is presented in Note 23. v) Statement of cash flows The Company presents cash flows from operating activities by using the indirect method, in which the income or loss is adjusted by the effects of items that do not require cash flows, including those related to investing or financing activities. The Company classifies all interest received from its investments and accounts receivable as investment activities, and all interest paid as financing activities. (4) Business and asset acquisitions a) Acquisition of Albertville Quality Foods, Inc. On July 14, 2017, the Company, through its subsidiary OK Foods, Inc., acquired 100% of the outstanding voting shares of Albertville Quality Foods, Inc. (Acquired Co. I). Acquired Co. I's operating results are included in the consolidated financial statements as of the date of acquisition. Acquired Co. I is dedicated to the production and sale of processed and value- added products based on animal protein, and is located in the state of Alabama, in the United States of America. The aggregate purchase price paid in cash amounted to $2,449,862 (138.10 million dollars). Acquired Co. I was merged with OK Foods, Inc. at the end of 2017. The purchase of Acquired Co. I benefits the Company’s Poultry segment because it significantly increases OK Foods, Inc.’s product portfolio, significantly increases the client base in the United States of America and opens the opportunity for cross-sales between the clients of Acquired Co. I and OK Foods, Inc., significantly strengthening the presence of OK Foods, Inc. in the self-service channel. Regarding production activities, the acquisition increases the manual cutting process capacity, thereby reducing OK Foods, Inc.’s current cutting costs with external suppliers, and will optimize the production processes by adopting the best practices of both companies for the benefit of the operation as a whole. These benefits are not recognized separately from Goodwill because they do not meet the recognition criteria for identifiable intangible assets. The assets acquired and the assumed liabilities of Acquired Co. I were recognized based on the best estimate of their fair value at the acquisition date. The Company used various valuation techniques to determine fair value. Cost and market approaches were used to determine the value of the property, plant and equipment. Customer relationships and trademarks are valued based on discounted cash flow analysis, relief from royalty and multi-period excess earnings valuation approaches, which use significant unobservable inputs, or level 3 inputs, as defined by the fair value hierarchy. Under these valuation approaches, management made estimates and assumptions about sales, operating margins, growth rates, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data. Due to their liquidity or short-term maturities, as appropriate, the Company concluded that Acquired Co. I´s pre-acquisition carrying amounts for cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities approximate their fair value at the acquisition date, while inventories are recorded at their net realizable value. Identifiable assets acquired and liabilities assumed The following is a summary of the recognized amounts of assets acquired and liabilities assumed at the acquisition date, compared to the consideration paid: Current assets, other than inventories Inventories Property, plant and equipment Other current assets Intangible assets Total assets Current liabilities Deferred income tax Acquired net identifiable assets, net Consideration paid Goodwill at acquisition date $ $ Acquisition value 202,873 304,594 547,987 10,189 969,942 2,035,585 (155,798) (472,088) 1,407,699 2,449,862 1,042,163 Goodwill arises because the transferred consideration exceeds the identifiable assets acquired net of liabilities assumed on the acquisition date. The goodwill that arose from the acquisitions is not expected to be deductible for tax purposes. Certain estimated values in the acquisition, including goodwill, intangible assets and deferred taxes, have not yet been definitively determined and are subject to revision as new information emerges and the analyses are completed. The purchase price was allocated based on the information available on the date of acquisition. Had the acquisition occurred on January 1, 2017, management estimates that consolidated revenues and consolidated profits for the year ended December 31, 2017 would have totaled $61,093,104 and $5,202,397, respectively. In determining these amounts, management has assumed that the provisional adjustments to fair value recognized at the date of acquisition would have been similar if the acquisition had occurred on January 1, 2017. Costs related to acquisition. During 2017, the Company incurred costs related to the acquisition of Acquired Co. I of $16,145 corresponding to external legal fees and due diligence costs, which are included in other expenses in the Company’s consolidated statement of profit and loss and other comprehensive income for the year ended December 31, 2017 (see note 30). b) Acquisition of Proveedora La Perla, S.A. de C.V. On July 11, 2017, the Company acquired 100% of voting stock of Proveedora La Perla S.A. de C.V. (Acquired Co. II). Acquired Co. II's operating results are included in the consolidated financial statements as of that date. Acquired Co. II is dedicated to the production and sale of pet food and treats, and is located in the state of Queretaro, Mexico. The purchase price in cash amounted to $45,000. The purchase of Acquired Co. II benefits the Other segment due to the fact that it expands its current production capacity for dry pet food. In addition, Acquired Co. II has equipment for the production of wet pet food and pet treats, which will allow the Company to enter this market where it currently does not participate. The production facilities of Acquired Co. II will allow for a reduction of logistics cost since they are within close proximity of the Company´s clients located in the central region of the country, and it will contribute improved customer service. This acquisition will allow for accelerated growth in the pet food business. The assets acquired and the assumed liabilities of Acquired Co. II were recognized based on the best estimate of their fair value at the acquisition date. The fair value of the assets was determined using cost and market approaches. The cost approach, which estimates the value based on the current replacement cost of an asset by another asset of equal usefulness, was used mainly for plant and equipment. The market approach, in which the value of an asset is based on available market prices for comparable assets, was used mainly for real estate. Due to their liquidity or short-term maturities, as appropriate, the Company concluded that Acquired Co. II’s pre-acquisition carrying amounts for cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities approximate their fair value at the acquisition date, while inventories are recorded at their net realizable value. Identifiable assets acquired and liabilities assumed The following is a summary of the recognized amounts of acquired assets and assumed liabilities at the date, compared to the consideration paid: Current assets, other than inventories Inventories Property, plant and equipment Total assets Current liabilities Deferred income tax Acquired net identifiable assets Consideration paid Bargain purchase gain (note 30) $ $ Acquisition value 13,835 5,846 584,884 604,565 (392,646) (79,423) 132,496 45,000 87,496 The bargain purchase gain arises because the net of fair value of the assets at the acquisition date exceeds the amount of the consideration transferred. The business strategies followed by the acquiree in the past resulted in a high cost structure and limited opportunity for improving profitability, resulting in a fair value of the business below that of its component parts. For this reason, a gain was recognized in other income (expense) (see note 30) in the consolidated statement of profit or loss and other comprehensive income. Had the acquisition occurred on January 1, 2017, management estimates that consolidated revenues and consolidated profits for the year ended December 31, 2017 would have totaled $58,182,059 and $5,086,470, respectively. In determining these amounts, management has assumed that the provisional adjustments to fair value recognized at the date of acquisition would have been similar if the acquisition had occurred on January 1, 2017. Costs related to acquisition. During 2017, the Company incurred costs related to the acquisition of Acquired Co. II of $15,465 corresponding to external legal fees and due diligence costs, which are included in other expenses in the Company’s consolidated statement of profit and loss and other comprehensive income. (5) Subsidiaries of the Company A list of subsidiaries and the Company’s shareholding percentage in such subsidiaries as of December 31, 2018, 2017 and 2016 are presented below: Name Shareholding percentage in subsidiaries Bachoco, S.A. de C.V. Bachoco USA, LLC. & Subsidiary Campi Alimentos, S.A. de C.V. Induba Pavos, S.A. de C.V. Bachoco Comercial, S.A. de C.V. PEC LAB, S.A. de C.V. Aviser, S.A. de C.V. Operadora de Servicios de Personal, S.A. de C.V. Secba, S.A. de C.V. Servicios de Personal Administrativo, S.A. de C.V. Sepetec, S.A. de C.V. Wii kit RE LTD. Proveedora La Perla S.A. de C.V. Country México U.S. México México México México México México México México México Bermuda México December 31, 2018 99.99 100.00 99.99 99.99 99.99 64.00 99.99 99.99 99.99 99.99 99.99 100.00 100.00 2017 99.99 100.00 99.99 99.99 99.99 64.00 99.99 99.99 99.99 99.99 99.99 100.00 100.00 2016 99.99 100.00 99.99 99.99 99.99 64.00 99.99 99.99 99.99 99.99 99.99 100.00 - The main subsidiaries of the group and their activities are as follows: - Bachoco, S.A. de C.V. (BSACV) (includes four subsidiaries which are 51% owned, and over which BSACV has control). BSACV is engaged in breeding, processing and marketing poultry goods (chicken and eggs). - Bachoco USA, LLC. holds the shares of OK Foods, Inc. and, therefore, all operations controlled by the Company in the United States of America. Effective January 1, 2016, the Company merged O.K. Industries, Inc., O.K. Farms, Inc., O.K. Foods, Inc. and Ecology Management, Inc. into one surviving entity, O.K. Foods, Inc. The primary activities of Bachoco USA, LLC and its subsidiary are comprised of the production of chicken products and hatching eggs, mostly marketed in the United States of America and, to a lesser extent, in other foreign markets. - Campi Alimentos, S.A. de C.V., is engaged in producing and marketing balanced animal feed, mainly for sales to third parties. - The main activity of Bachoco Comercial, S.A. de C.V. is the distribution of chicken, turkey and beef value-added products. - The main activity of Induba Pavos, S.A. de C.V. is the leasing of property, plant and equipment to its related parties. - PEC LAB, S.A. de C.V. is the holding of the shares of Pecuarius Laboratorios, S.A. de C.V. Its main activity consists of the production and distribution of medicines and vaccines for animal consumption. - Aviser, S.A. de C.V., Operadora de Servicios de Personal, S.A. de C.V., Secba, S.A. de C.V., Servicios de Personal Administrativo, S.A. de C.V. and Sepetec, S.A de C.V. are engaged in providing administrative and operating services rendered to their related parties. - On December 2016 Wii kit RE LTD. was constituted in Bermuda as a subsidiary of the Company with 100% of the shareholding. It is a Class I reinsurance company that provides insurance coverage to its affiliates. - In July 2017, the Company acquired Proveedora La Perla, S.A. of C.V., in Mexico, as a subsidiary of the Company with 100% participation, it is dedicated to the elaboration and commercialization of balanced animal feed and pet treats. None of the Company’s contracts or loan agreements restrict the net assets of its subsidiaries. (6) Operating segments Reportable segments have been determined based on a line of product approach. Intersegment transactions have been eliminated. The poultry segment consists of chicken and egg operations. The information included in the “Others” segment corresponds to operations of swine, balanced feed for animal consumption and other by-products that do not meet the quantitative thresholds to be considered as reportable segments. Inter-segment pricing is determined on an arm’s length basis comparable to those which would be used with or between independent parties in comparable transactions. The accounting policies of operating segments are as those described in note 3 t). Below is the information related to each reportable segment. Performance is measured based on each segment’s income before taxes, in the same manner as it is included in management reports that are regularly reviewed by the Company’s Board of Directors. a) Operating segment information Year ended December 31, 2018 Poultry Other Net revenues Cost of sales Gross profit Finance income Finance costs Income before taxes Income taxes Net income attributable to controlling interest Property, plant and equipment, net Goodwill Intangible assets Total assets Total liabilities Purchases of property, plant and equipment Depreciation and amortization $ 55,308,141 46,562,214 8,745,927 1,094,377 288,703 4,025,050 1,028,335 2,986,328 16,060,590 1,543,755 962,738 47,205,252 13,364,922 1,747,286 1,121,751 5,743,951 4,860,162 883,789 46,372 43,465 491,501 126,643 363,639 1,957,586 88,016 (13,383) 5,660,342 1,334,967 235,297 105,166 Total 61,052,092 51,422,376 9,629,716 1,140,749 332,168 4,516,551 1,154,978 3,349,967 18,018,176 1,631,771 949,355 52,865,594 14,699,889 1,982,583 1,226,917 Total revenues Intersegments Net revenues Net revenues Cost of sales Gross profit Finance income Finance costs Income before taxes Income taxes Net income attributable to controlling interest Property, plant and equipment, net Goodwill Intangible assets Total assets Total liabilities Purchases of property, plant and equipment Depreciation and amortization Total revenues Intersegments Net revenues Poultry revenues 55,312,273 (4,132) 55,308,141 Other revenues 5,785,289 (41,338) 5,743,951 Year ended December 31, 2017 Other $ $ $ Poultry 52,479,393 42,767,202 9,712,191 943,477 295,011 5,522,187 958,201 4,558,370 15,464,404 1,543,078 1,040,042 45,165,551 13,525,194 3,154,390 982,019 5,570,632 4,735,757 834,875 144,164 45,080 516,692 126,243 389,872 1,855,637 88,016 - 5,391,838 1,354,267 358,988 93,769 Total 58,050,025 47,502,959 10,547,066 1,087,641 340,091 6,038,879 1,084,444 4,948,242 17,320,041 1,631,094 1,040,042 50,557,389 14,879,461 3,513,378 1,075,788 Poultry revenues 52,484,264 (4,871) 52,479,393 $ $ Other revenues 5,616,254 (45,622) 5,570,632 Year ended December 31, 2016 Poultry Other Net revenues Cost of sales Gross profit Finance income Finance costs Income before taxes Income taxes Net income attributable to controlling interest Property, plant and equipment, net Goodwill Total assets Total liabilities Purchases of property, plant and equipment Depreciation and amortization $ 46,852,482 38,285,367 8,567,116 840,640 149,319 5,077,042 1,494,918 3,578,049 13,478,294 396,861 40,035,990 11,909,391 2,226,493 840,624 5,167,821 4,349,704 818,116 128,534 22,835 517,554 148,515 368,585 1,602,811 88,016 5,054,476 1,464,901 233,251 85,124 Total 52,020,303 42,635,071 9,385,232 969,174 172,154 5,594,596 1,643,433 3,946,634 15,081,105 484,877 45,090,466 13,374,292 2,459,744 925,748 Total revenues Intersegments Net revenues b) Geographical information Poultry revenues 46,856,888 (4,406) 46,852,482 $ $ Other revenues 5,214,481 (46,660) 5,167,821 When submitting information by geographic area, revenue is classified based on the geographic location where the Company’s customers are located. Segment assets are classified in accordance with their geographic location. Geographical information for the “Others” segment is not included below because the operations are carried out entirely within Mexico. Year ended December 31, 2018 Domestic poultry Foreign poultry Operations between geographical segments Total $ 37,766,974 17,599,239 (58,072) 55,308,141 979,034 742,694 13,002,755 212,833 - 3,057,835 1,330,922 962,738 - - - 1,721,728 16,060,590 1,543,755 962,738 Year ended December 31, 2017 Domestic poultry Foreign poultry Operations between geographical segments Total $ 36,013,268 16,533,664 (67,539) 52,479,393 899,691 717,812 12,143,632 212,833 - 3,320,772 1,330,245 1,040,042 - - - - 1,617,503 15,464,404 1,543,078 1,040,042 Net revenues Non-current assets other than financial instruments, deferred tax assets, post- employment benefit assets, and investments in insurance policies Non-current biological assets Property, plant and equipment, net Goodwill Intangible assets Net revenues Non-current assets other than financial instruments, deferred tax assets, post- employment benefit assets, and investments in insurance policies Non-current biological assets Property, plant and equipment, net Goodwill Intangible assets Year ended December 31, 2016 Domestic poultry Foreign poultry Operations between geographical segments Total $ 33,414,262 13,496,189 (57,969) 46,852,482 902,662 765,881 10,481,074 212,833 2,997,221 184,028 - - - 1,668,543 13,478,294 396,861 Net revenues Non-current assets other than financial instruments, deferred tax assets, post- employment benefit assets, and investments in insurance policies Non-current biological assets Property, plant and equipment, net Goodwill c) Major Customers In Mexico, the Company’s products are traded among a large number of customers, without significant concentration with any specific customer. Therefore, in 2018, 2017 and 2016, no customer represented over 10% of the Company’s total revenues. As of December 31, 2018 and 2017, the Company did not have operations with an individual customer that represented a significant concentration in the United States of America. As of December 31, 2016 the Company had transactions with The Sygma Network, Inc. representing 9% of total sales outside of Mexico. (7) Cash and cash equivalents The consolidated balances of cash and cash equivalents as of December 31, 2018, 2017 and 2016 are as follows: Cash and banks Investments with maturities less $ than three months Cash and cash equivalents Restricted cash Total cash and cash equivalents and restricted cash $ 2018 13,566,098 4,331,423 17,897,521 December 31, 2017 15,464,312 623,898 16,088,210 2016 9,890,007 4,771,961 14,661,968 4,324 24,058 19,236 17,901,845 16,112,268 14,681,204 Restricted cash corresponds to the minimum margin required by the intermediary for the Company’s derivative financial instruments on commodities in order to meet future commitments that may stem from adverse market movements affecting prices on the open positions as of December 31, 2018, 2017 and 2016. (8) Financial instruments and risk management The Company is exposed to market risks, liquidity risks and credit risks for the use of financial instruments, for which reason it exercises its risk management. This note presents information on the Company’s exposure to each one of the aforementioned risks, as well as the Company’s objectives, policies and processes for the measurement and management of financial risks. Risk management framework The philosophy adopted by the Company seeks to minimize risks and, therefore maximize business stability, focusing decisions on creating an optimum combination of products and assets that produce a risk – return ratio more in agreement with the risk profile of its stockholders. In order to establish a clear and optimum organizational structure with respect to risk management, a Risk Committee has been established which is the specialized body in charge of defining, proposing, approving and implementing the objectives, policies, procedures, methodologies and strategies, as well as the determination of the maximum limits of exposure to risk and contingency plans. At December 31, 2018, 2017 and 2016, the Company has not identified embedded derivatives. The Company’s derivative financial instruments as of December 31, 2018 meet the requirements to be treated as hedges for accounting purposes (1,500 thousand dollars of notional, other disclosures are considered non-material). During 2017 and 2016 the derivative instruments held by the Company do not meet the requirements to be treated as hedges for accounting purposes. Management by type or risk a) Categories of financial assets and liabilities The Company’s financial assets and liabilities are shown below: Financial assets Cash and cash equivalents Investment in securities at fair value through profit or loss Other financial assets Accounts receivable Due from related parties Long-term receivables Derivative financial instruments Financial liabilities Financial debt Trade payables, sundry creditors and expenses payable Due to related parties 2018 December 31, 2017 2016 $ 17,901,845 16,112,268 14,681,204 550,068 66,177 2,444,013 99 171,222 6,570 1,127,841 64,629 2,599,208 326 162,337 - 970,292 65,509 2,524,942 148,855 161,690 8,308 $ (5,037,600) (5,249,024) (4,047,937) (4,593,344) (4,163,443) (4,095,089) (189,966) (147,514) (55,252) Derivative financial instruments - (6,821) - b) Credit risk Credit risk is defined as the potential loss of a portfolio of an amount owed to the Company due to lack of payment from a debtor, or for breach by a counterparty with which derivative financial instruments and investment in securities transactions are conducted. The risk management process contemplates the use of derivative financial instruments, which are exposed to a market risk, as well as counterparty risk. Measurement and monitoring of counterparty risk In terms of valuation and monitoring of over the counter (OTC) derivative financial instruments and investments in securities, the Company currently measures its counterparty risk by identifying the Credit Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA). For investments in securities denominated in Mexican pesos, the financial instruments valuation models used by price vendors incorporate market movements and credit quality of issuers, thereby implicitly including the counterparty risk of the transaction in the fair value measurement; therefore, the position in investment in securities includes the counterparty risk and no additional adjustment is carried out. The price of the instruments obtained from the price vendor is the mid-point between the bid price and the ask price (the “mid-price”). Investments in securities denominated in a foreign currency, not listed in Mexico, are recorded at prices contained in the broker's statements of account. The Company validates these market prices using Bloomberg, which incorporate market movements and the credit quality of issuers; thereby implicitly including the counterparty risk of the transaction and no related adjustment is carried out. The prices obtained from Bloomberg are mid prices. Trade accounts receivable and other accounts receivable measurement and monitoring It is the policy of the Company to establish an allowance for doubtful accounts to cover the balances of accounts receivable that are not likely to be recovered. To set the required allowance, the Company considers historical losses, assesses current market conditions, as well as customers' financial conditions, accounts receivable in litigation, price differences, portfolio aging and current payment patterns. The impairment assessment of accounts receivable is performed on a collective basis, as there are no accounts with individually significant balances. The Company's products are marketed to a large number of customers without, except as described in note 6 c, any significant concentration with a specific customer. As part of the objective evidence that an account receivable portfolio is impaired, the Company considers past experiences with respect to collection, increases in the number of overdue payments in the portfolio exceeding the average loan period, as well as observable changes in national and local economic conditions that correlate to defaults. The Company has a credit policy under which each new customer is analyzed individually in terms of its creditworthiness before offering it payment terms and conditions. The Company's review includes internal and external assessments, and in some cases, bank references and a search in the Public Registry of Properties. For each customer, purchase limits are established, which represent the maximum credit amount. Customers that do not meet the Company's credit references can solely conduct transactions in cash or through advance payments. The allowance for doubtful accounts includes trade accounts receivable that are in process of legal recovery, which amount to $142,388, $141,636 and $130,290 as of December 31, 2018, 2017 and 2016, respectively. The reconciliation of movements of the allowance for doubtful accounts, and the analysis of past-due accounts receivable but not impaired, are presented in note 9. The Company receives credit enhancements on credit lines granted to its clients, which consist of real and personal property, such as land, buildings, houses, vehicles, letters of credit, cash deposits and others. As of December 31, 2018, 2017 and 2016, the fair value of such credit enhancements, determined by an appraisal at the time the credit lines were granted, is $572,085, $618,481 and $570,546, respectively. The fair value of trade accounts receivable is similar to the carrying amount, as the terms granted under credit lines are of a short term nature and do not include significant finance components. Investments The Company limits its exposure to credit risk investing solely with counterparties that have been rated on a well-recognized credit rating scale or are deemed to be investment grade. Management constantly monitors credit ratings, and as it invests solely in securities with high credit ratings, it is not expected that any counterparty will fail to fulfill its obligations. Financial guarantees granted It is the Company’s policy to grant financial guarantees solely to 100% owned subsidiary companies. Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure, which as of the reporting date is as follows: Cash and cash equivalents Investments in securities at fair value $ through profit or loss Other financial assets Accounts receivable net of guarantees received Derivative financial instruments $ December 31, 2018 2017 17,901,845 16,112,268 14,681,204 2016 550,068 66,177 1,127,841 64,629 970,292 65,509 2,143,390 1,986,102 6,570 2,264,941 8,308 - 20,510,762 19,448,128 17,990,254 c) Liquidity risk Liquidity risk is defined as the potential loss stemming from the impossibility to renew liabilities or enter into other liabilities under normal terms, the early or forced sale of assets or the need to grant unusual discounts in order to meet obligations, or by the fact that a position cannot be disposed of, acquired or covered promptly through the establishment of an equivalent contrary position. Liquidity risk management process considers the management of the assets and liabilities included in the consolidated statements of financial position (Assets Liabilities Management - ALM) in order to anticipate funding difficulties because of extreme events. Monitoring The Company’s areas of risk management and financial planning measure, monitor and report to the Risk Committee liquidity risks associated with the ALM and prepare limits for the authorization, implementation and operation thereof, as well as contingent action measures in case of liquidity requirements. Liquidity risk caused by differences between current and projected cash flows at different dates are measured and monitored, considering all asset and liability positions of the Company denominated in local and foreign currency. Similarly, funding diversification and sources to which the Company has access are evaluated. The Company quantifies the potential loss arising from early or forced sale of assets or sale at unusual discounts to meet its obligations in a timely manner, as well as by the fact that a position cannot be disposed of, acquired or covered timely through the establishment of a contrary equivalent position. Liquidity risk monitoring considers a liquidity gap analysis, scenarios for lack of liquidity and use of alternative sources of financing. Below are the contractual maturities of the financial liabilities, including estimated interest payments. As of the date of the consolidated financial statements, there are no financial instruments which have been offset or recognized positions that are subject to offsetting rights. Maturity table Trade payables, sundry creditors and expenses payable Due to related parties Variable-rate maturities In U.S. dollars In pesos Interest Total financial liabilities $ $ December 31, 2018 1 to 3 years 3 to 5 years Less than 1 year 4,593,344 147,514 - - 2,757,459 735,334 145,860 8,379,511 - 44,014 270,977 314,991 - - - 1,500,793 79,719 1,580,512 Trade payables, sundry creditors and expenses payable $ Due to related parties Derivative financial instruments Variable-rate maturities In U.S. dollars In pesos Interest Total financial liabilities Trade payables, sundry creditors and expenses payable Due to related parties Variable-rate maturities In U.S. dollars In pesos Interest Total financial liabilities $ $ $ December 31, 2017 1 to 3 years 3 to 5 years Less than 1 year 4,163,443 55,252 6,821 2,752,400 942,651 162,785 8,083,352 - - - - 53,973 244,484 298,457 - - - 1,500,000 203,840 1,703,840 December 31, 2016 1 to 3 years 3 to 5 years Less than 1 year 4,095,089 189,966 1,444,800 1,652,725 142,100 7,524,680 - - - 950,412 136,859 1,087,271 - - - - - - At least on a monthly basis, management evaluates and advises the Board of Directors on its liquidity. As of December 31, 2018, the Company has evaluated that it has sufficient resources to meet its obligations in the short and long term; therefore, it does not consider having liquidity gaps in the future and it will not be necessary to sell assets to pay its debts at unusual discounts or at out-of-market prices. d) Market risk Market risk is defined as the potential loss arising from the portfolio of derivative financial instruments and investment in securities for changes in risk factors that affect the valuation of short or long positions. In this sense, the uncertainty of future losses resulting from changes in market conditions (interest rates, foreign currency, prices of commodities, among others), which directly affects movements in the price of both assets and liabilities, is detected. The Company measures, monitors and reports all financial instruments subject to market risk, using sensitivity measurement models to show the potential loss associated with movements in risk variables, according to different scenarios on rates, prices and types of change during the period. Monitoring Sensitivity analyses are prepared at least monthly and are compared with the limits established. Any excess identified is reported to the Risk Committee. Stress tests At least monthly, the Company conducts stress tests calculating the value of the portfolios and considering changes in risk factors observed in historical dates of financial stress. i. Commodities price risk With respect to risks related to commodities designated in a formal hedging relationship, the Company seeks protection against downward variations in the agreed-upon price of corn and/or sorghum with the producer, which may represent an opportunity cost as there are lower prices in the current market upon receiving the inventory, and to hedge the risk of a decline in prices between the receipt date and that of inventory consumption. Purchases of corn and/or sorghum are formalized through an agreement denominated "Forward buy-sell agreement", which has the following characteristics: • Transaction date • Number of agreed-upon tons • Harvest, state and agricultural cycle from which the harvest originates • Price of product per ton, plus quality award or penalty Agricultural agreements that result in firm commitments are linked to two corn and/or sorghum agricultural cycles, and in contracting purchases, both contracting cycles and dates are itemized as follows: • Fall-winter Cycle - The registration window period is at the discretion of the Agency of Services for Distribution and Development of Agricultural Markets (ASERCA, for its Spanish acronym), which is usually between December and March, while the fall-winter cycle harvest period takes place during May, June and July. However, corn and/or sorghum harvest could lengthen up to one month or several months, depending on the weather conditions, such as drought and frost. • Spring-summer Cycle - The registration window period is at the discretion of ASERCA; the spring-summer cycle usually takes place during the July and August and the harvest depends on each state of the country and is highly variable. As of December 31, 2018 and 2017, the Company participates in the ASERCA program as buyer of the corn and / or sorghum crops, for which the Company must prove that a risk management instrument is maintained against market price fluctuations. Based on the foregoing, the Company entered into “put” options with maturities in March 2019 and 2018, July, September and December 2018 and 2017, with companies listed on the Chicago Mercantile Exchange. As of December 2018, the gain on valuation is $217 (11 thousand dollars), during 2017, there is no gain or loss from the valuation of these instruments. As of December 31, 2016, the Company has economic hedging positions comprised of corn long “puts” with ASERCA, maturing in March 2017, July, September and December 2017 and 2016. The gain on valuation of these instruments is $3,189 during 2016, recorded within cost of sales. As of December 31, 2018 and 2017, there is no subsidy by ASERCA for the purchase of hedging "puts" to the consumer; however, the Company participates in the "Agriculture by Contract" program with ASERCA, where contracts for the purchase of "put" options are registered with companies listed on the Chicago market exchange and the benefit of this program is the recovery of the breach of Call hedge purchased, in turn, by the producer with ASERCA. Accordingly, as of December 31, 2018 and 2017, no benefits have been realized under this scheme. As of December 31, 2016 the Company maintains a contractual agreement with ASERCA in which the Company will pay 80% of the option premium and ASERCA will pay the remaining 20%. In case the option is “In the Money” (Strike>Forward), the Company will recover the 80% portion paid and an additional 10% which is equivalent to 50% of the portion paid by ASERCA. Due to its nature and in accordance with IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, the portion paid by ASERCA must be recognized as income over the term of the instrument in order to match it against the costs it is intended to offset, on a systematic basis. The effect of such benefit as of December 31, 2016 is $67,080 (3,250 thousand dollars). With respect to the risk in commodities that are not designated in a formal hedging relationship and to which the Company is exposed, sensitivity tests on corn and sorghum futures agreements are performed, considering different (bullish and bearish) scenarios. The results of these sensitivity analyses are presented in paragraph g) of this note. ii. Chicken price risk The Company is exposed to financial risks mainly related to changes in the price of chicken. The Company presently does not anticipate that the price of chicken decreased to a level that represents a risk to the Company in the future; therefore, as of December 31, 2018, 2017 and 2016, it has not entered into any derivative financial instrument or other agreement for managing the risk related to a decrease in chicken price. The Company reviews chicken prices frequently in order to evaluate the need of having a financial instrument to manage the risk. iii. Exchange risk The Company is exposed to the effects of exchange rate volatility, mainly in relation to Mexican pesos/dollars exchange rates on the Company’s assets and liabilities, including: investments in securities and derivative financial instruments hedging commodities, which are denominated in a currency other than the Company’s functional currency. In this regard, the Company has implemented a sensitivity analysis to measure the effects that currency risk may have over the assets and liabilities described. The Company protects itself from exchange rate risk through economic hedging with derivative financial instruments, which cover a percentage of its estimated exposure to exchange rate volatility in relation to projected sale and purchase transactions. All instruments entered into as economic hedges of foreign exchange risk have maturities of less than one year from the contract date. As of December 31, 2018, 2017 and 2016, the Company entered into derivative financial instrument positions as economic hedges to cover exchange rate risks. iv. Foreign currency position The Company has financial instrument assets and liabilities denominated in foreign currency on which there is an exposure to currency risk. Below is the foreign currency position that the Company has as of December 31, 2018, 2017 and 2016. 2018 December 31, 2017 2016 Dollars Mexican Pesos Dollars Mexican Pesos Dollars Mexican Pesos 384,119 7,555,616 325,493 6,399,186 126,395 2,608,800 19,447 252 403,818 382,519 4,950 7,943,085 29,212 1,915 356,619 574,312 37,640 7,011,138 27,863 2,488 156,746 575,085 51,350 3,235,235 Assets Cash and cash equivalents $ Investment in securities at fair value through profit or loss Accounts receivable Total assets Liabilities Trade accounts payable Financial debt Total Liabilities Net asset position Net liability position (194,701) (3,829,765) (154,858) (140,186) (2,757,459) (140,000) (334,887) (6,587,224) (294,858) 61,761 1,355,861 68,931 $ - - - (3,044,515) (103,854) (2,143,547) (70,000) (1,444,800) (2,752,400) (5,796,915) (173,854) (3,588,347) - (17,108) - (353,112) 1,214,223 - The Company carries out a sensitivity analysis related to the potential effects of changes in exchange rates on its financial information. These results are shown in paragraph g) of this note. These analyses represent the scenarios that management considers reasonably possible of occurring. The following is a detail of exchange rates effective during the fiscal year: Average exchange rate Dollars $ 2018 19.23 2017 18.91 2016 18.68 Spot exchange rate at December 31, 2017 19.66 2018 19.67 2016 20.64 The exchange rate at the date of issuance of the consolidated financial statements is $18.86. v. Interest rate risk The Company is exposed to fluctuations in rates for certain financial instruments, such as investments, bank loans and debt securities. This risk is managed taking into account market conditions and the criteria of its Risk Committee and Board of Directors. Interest rate fluctuations impacted mainly bank loans by changing either their fair value (fixed rate debt) or the future cash flows (variable rate debt). Management does not have a formal policy to determine how much of the Company's exposure should be at fixed or variable rate. However, at the time of obtaining new loans, management uses its judgment considering technical analyses and market forecasts to decide whether fixed or variable rate instruments would be more favorable during the periods of such instruments. To monitor this risk, the Company performs sensitivity tests at least monthly to measure the effect of the change in interest rates in the instruments described in the preceding paragraph, which are summarized in subsection g) of this note. e) Financial instruments at fair value The amounts of accounts payable and accounts receivable approximate their fair value because of their nature and short-term maturities. The table below summarizes the presents the fair value of the financial instruments that are recognized at amortized cost, together with the carrying amount included in the consolidated statement of financial position: Liabilities recorded at amortized cost Financial debt Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value 2017 $ 5,037,600 5,037,688 5,249,024 5,255,932 4,047,937 4,062,999 2016 2018 f) Fair value hierarchy The fair value of financial assets and liabilities is determined as follows: • The fair value of the financial assets and liabilities that have standard terms and conditions and are traded in active liquid markets, which are determined by reference to quoted market prices (market approach), therefore, these instruments are considered Level 1 hierarchy according to the classification of fair value hierarchy described in note 2 b). • The fair value of derivative financial instruments of the Company (Commodities) is determined based on the futures prices of the Chicago Stock Exchange, so these instruments are considered Level 2 hierarchy. The following table summarizes financial instruments carried at fair value: As of December 31, 2018 Investment in securities at fair value through profit or loss Derivative financial instruments Level 1 Level 2 Level 3 Total $ $ 550,068 - 550,068 - 6,570 6,570 - - - 550,068 6,570 556,638 As of December 31, 2017 Investment in securities at fair value through profit or loss Derivative financial instruments As of December 31, 2016 Investment in securities at fair value through profit or loss Derivative financial instruments Level 1 Level 2 Level 3 Total $ $ $ $ 969,309 - 969,309 158,532 (6,821) 151,711 - - - 1,127,841 (6,821) 1,121,020 Level 1 Level 2 Level 3 Total 970,292 - 970,292 - 8,308 8,308 - - - 970,292 8,308 978,600 Information regarding the hierarchy of fair value measurements related to financial liabilities that are not carried at fair value, but for which disclosures are required, is summarized below: As of December 31, 2018 Financial debt - bank institutions Financial debt – debt securities As of December 31, 2017 Financial debt - bank institutions Financial debt – debt securities As of December 31, 2016 Financial debt - bank institutions Financial debt – debt securities Level 1 Level 2 Level 3 Total - $ (1,500,793) $ (1,500,793) (3,536,895) - (3,536,895) - - - (3,536,895) (1,500,793) (5,037,688) Level 1 Level 2 Level 3 Total $ - (1,506,908) $ (1,506,908) (3,749,024) - (3,749,024) - - - (3,749,024) (1,506,908) (5,255,932) Level 1 Level 2 Level 3 Total - $ (1,512,530) $ (1,512,530) (2,550,469) - (2,550,469) - - - (2,550,469) (1,512,530) (4,062,999) g) Quantitative sensitivity measurements The following are sensitivity analyses for the most significant risks to which the Company is exposed as of December 31, 2018, 2017 and 2016. These analyses represent the scenarios that management believes are reasonably possible of occurring in future periods and were performed in accordance with the policies of Risk Committee. i. Derivative Financial Instruments related to exchange rate and commodities risks As of December 31, 2018 the Company has taken positions on derivative financial instruments to hedge exchange rate risks and commodities. A 15% increase in the Mexican peso with respect to the U.S. dollar as of the end of 2018, 2017 and 2016 would have resulted in a valuation gain of $28,767, $25,971 and $41,235 on the fair value of the Company’s exchange rate derivative financial instruments position. On the other hand, a decrease of 15% in the aforementioned rate would have resulted in an additional valuation loss during the respective periods of $48,429, $43,493 and $47,639. The following table shows the Company’s sensitivity to an increase and decrease of 15% for 2018, 2017 and 2016 in the “bushell” price of corn and short ton price of soybeans. Effect of Increase Effect of Decrease 2018 2017 2016 2018 2017 2016 $ (2,665) (16,094) (9,085) $ 105 21,229 8,785 Loss (profit) for the year ii. Interest rate risk As described in Note 18, the Company has financial debt denominated in pesos and dollars, which bear interest at variable rates based on TIIE and LIBOR, respectively. The following table shows the Company’s sensitivity to an increase and decrease of 50 basis points for 2018, 2017 and 2016, in the variable rates to which the Company is exposed. Effect of Increase Effect of Decrease 2018 2017 2016 2018 2017 2016 $ 30,192 43,485 15,385 $ (30,192) (43,485) (15,385) Loss (profit) for the year iii. Exchange risk As of December 31, 2018, the Company's net monetary liability position in foreign currency was $1,355,861. The following table shows the Company’s sensitivity of an increase and decrease of 10% for 2018, 2017 and 2016, in exchange rate, which would have an effect in the result from foreign currency position. Effect of Increase Effect of Decrease 2017 2017 2016 2018 2017 2016 Loss (profit) for the year $ (135,586) (121,422) 35,311 $ 135,586 121,422 (35,311) (9) Accounts receivable, net As of December 31, 2018, 2017 and 2016, accounts receivable are as follows: Trade receivables Allowance for doubtful accounts Other receivables Income tax receivable Recoverable value-added tax and other recoverable taxes $ $ 2018 2,523,950 (79,937) - 114,935 December 31, 2017 2,673,705 (96,900) 22,403 57,186 2016 2,482,077 (97,400) 140,265 115,428 927,406 3,486,354 970,484 3,626,878 988,774 3,629,144 Past-due but not impaired portfolio Below is a classification of trade accounts receivable according to their aging as of the reporting date, which has not been subject to impairment: Past due 0 to 60 days Past due by more than 60 days 2018 144,604 17,250 161,854 December 31, 2017 200,413 6,190 206,603 $ 2016 164,458 3,395 167,853 The Company believes that non-impaired amounts that are past-due by more than 60 days can still be collected, based on the historical behavior of payments and analysis of credit ratings of customers. Reconciliation of movements in allowance for doubtful accounts Balance as of January 1 Increase in allowance Amounts written off Currency translation effect $ Balance as of December 31, $ 2018 (96,900) (7,862) 24,826 (1) (79,937) 2017 (97,400) (14,800) 15,287 13 (96,900) 2016 (81,641) (18,405) 2,818 (172) (97,400) As of December 31, 2018, 2017 and 2016 the Company has receivables in legal proceedings (receivables for which legal counsel is seeking recoverability) of $142,388, $141,636 and $130,290, respectively. To determine the recoverability of an account receivable, the Company considers any change in the credit quality of the account receivable from the date of authorization of the credit line to the end of the reference period. In addition, the Company estimates that the credit risk concentration is limited as the customer base is very large and there are no related party receivables or receivables from entities under common control. Expected credit losses Beginning in 2018, the Company recognizes expected credit losses for life for trade accounts receivable, which are estimated using a provision matrix based on the Company's historical experience of credit losses, adjusted for factors that are specific each of the Company’s customer and debtor groups, general economic conditions and an assessment of both the current and forecast conditions at the reporting date, including the time value of money when appropriate. During 2017 and 2016, the estimated credit losses were based on the incurred loss model. The expected credit losses for 2018 in trade accounts receivable under IFRS 9 were estimated at $45,823, considering the balances of the portfolio and the different customer groups of the Company. As part of the implementation analysis and once planned activities were executed, the Company decided to maintain its previously recorded estimated reserve for doubtful accounts for its subsidiaries, although such amounts were higher than the expected credit losses in 2018. (10) Inventories As of December 31, 2018, 2017 and 2016, inventories are as follows: Raw materials and by-products Medicine, materials and spare parts Balanced feed Processed chicken Commercial eggs Processed beef Processed turkey Other processed products Total $ $ 2018 1,688,527 903,337 322,522 1,548,597 52,050 39,709 10,762 10,092 4,575,596 December 31, 2017 1,861,092 820,417 296,538 1,561,912 46,185 58,563 64,918 17,708 4,727,333 2016 1,515,824 808,492 275,845 1,154,207 37,242 36,599 122,722 19,757 3,970,688 Inventory consumption for the years ended December 31, 2018, 2017 and 2016 was $40,115,184, $37,567,550 and $34,018,493, respectively. (11) Biological assets For the years ended December 31, 2018, 2017 and 2016, biological assets are as follows: $ Balance as of January 1, 2018 Increase due to purchases Sales Net increase due to births Production cost Depreciation Transfers to inventories Other Balance as of December 31, 2018 $ $ Balance as of January 1, 2017 Increase due to purchases Sales Net increase due to births Production cost Depreciation Transfers to inventories Other Balance as of December 31, 2017 $ Current biological assets 1,942,193 334,710 - 274,286 33,189,920 - (33,690,071) 22,488 2,073,526 Current biological assets 1,961,191 291,361 - 277,621 30,892,045 - (31,435,017) (45,008) 1,942,193 Non-current biological assets 1,617,503 629,902 (119,297) 2,292,178 1,729,478 (2,136,224) (2,292,178) 366 1,721,728 Non-current biological assets 1,668,543 599,273 (87,230) 2,112,110 1,532,189 (2,058,461) (2,112,110) (36,811) 1,617,503 Total 3,559,696 964,612 (119,297) 2,566,464 34,919,398 (2,136,224) (35,982,249) 22,854 3,795,254 Total 3,629,734 890,634 (87,230) 2,389,731 32,424,234 (2,058,461) (33,547,127) (81,819) 3,559,696 $ Balance as of January 1, 2016 Increase due to purchases Sales Net increase due to births Production cost Depreciation Transfers to inventories Other Balance as of December 31, 2016 $ Current biological assets 1,651,794 237,525 - 240,085 29,620,380 - (29,886,985) 98,392 1,961,191 Non-current biological assets 1,434,131 604,527 (109,776) 2,034,670 1,515,440 (1,903,086) (2,034,670) 127,307 1,668,543 Total 3,085,925 842,052 (109,776) 2,274,755 31,135,820 (1,903,086) (31,921,655) 225,699 3,629,734 The “Other” category includes the change in fair value of biological assets that resulted in a decrease of $22,270 in 2018, increase of $22,598 in 2017 and decrease of $18,276 in 2016, respectively. The Company is exposed to different risks relating to its biological assets: • • • • • Future excesses in the offer of poultry products and a decline in the demand growth of the chicken industry may negatively affect the Company’s results. Increases in raw material prices and price volatility may negatively affect the Company’s margins and results. In addition, in the case of the Company’s operations in the United States of America, the cost of corn and grain may be affected by an increase in the demand for ethanol, which may reduce the market’s available corn inventory. Operations in Mexico and the United States of America are based on animal breeding and meat processing, which are subject to sanitary risks and natural disasters. Hurricanes and other adverse climate conditions may result in additional inventory losses and damage to the Company’s facilities and equipment. (12) Prepaid expenses and other current assets As of December 31, 2018, 2017 and 2016, prepaid expenses and other current assets are as follows: Advances to suppliers of inventories Prepaid expenses of services Prepaid expenses of insurance and bonds Other current assets Total 2018 704,563 217,074 129,582 80,651 1,131,870 December 31, 2017 234,458 235,652 88,533 80,028 638,671 $ $ 2016 929,815 217,244 185,678 171,208 1,503,945 (13) Assets held for sale As of December 31, 2018, 2017 and 2016, assets held for sale are as follows: Buildings Land Other Total 2018 December 31, 2017 18,920 27,310 2,839 49,068 18,920 27,765 2,838 49,523 $ $ 2016 21,551 32,338 2,839 56,728 The Company recognized gains (losses) on sales of these assets of (13), $2,437 and $0 during 2018, 2017 and 2016, respectively. (14) Property, plant and equipment As of December 31, 2018, 2017 and 2016, property, plant and equipment are comprised as follows: Cost Land Buildings and construction Machinery and equipment Transportation equipment Computer equipment Furniture Leasehold improvements Construction in progress Total Accumulated depreciation Buildings and construction Machinery and equipment Transportation equipment Computer equipment Furniture Total $ $ $ $ Balance as of January 1, 2018 1,353,643 11,440,284 14,021,881 1,773,153 125,991 169,752 2,661 1,435,147 30,322,512 Additions Disposals 24,400 513,033 1,255,026 101,645 10,441 12,985 1,689 63,364 1,982,583 - (11,546) (96,727) (82,543) (318) (4,258) - - (195,392) Currency translation effect 47 1,705 1,864 18 69 (24) - 3,186 6,865 Balance as of December 31, 2018 1,378,090 11,943,476 15,182,044 1,792,273 136,183 178,455 4,350 1,501,697 32,116,568 Balance as of January 1 2018 (5,323,314) (6,706,824) (771,406) (81,504) (119,423) (13,002,471) Depreciation for the year Disposals (221,565) (857,930) (118,439) (16,598) (12,385) (1,226,917) 9,315 66,578 60,276 305 3,218 139,692 Currency translation effect (1,261) (7,046) (95) (237) (57) (8,696) Balance as of December 31, 2018 (5,536,825) (7,505,222) (829,664) (98,034) (128,647) (14,098,392) Cost Land Buildings and construction Machinery and equipment Transportation equipment Computer equipment Furniture Leasehold improvements Construction in progress Total Accumulated depreciation Buildings and construction Machinery and equipment Transportation equipment Computer equipment Furniture Total Cost Land Buildings and construction Machinery and equipment Transportation equipment Computer equipment Furniture Leasehold improvements Construction in progress Total Accumulated depreciation Buildings and construction Machinery and equipment Transportation equipment Computer equipment Furniture Total Balance as of January 1, 2017 1,210,052 10,603,293 12,035,769 1,611,153 118,759 174,183 5,186 1,459,682 27,218,077 Additions Disposals 156,000 896,020 2,158,477 269,462 13,210 19,515 - 694 3,513,378 (8,851) (3,200) (106,310) (105,982) (3,173) (23,505) (2,525) (33,419) (286,965) Currency translation effect (3,558) (55,829) (66,055) (1,480) (2,805) (441) - 8,190 (121,978) Balance as of December 31, 2017 1,353,643 11,440,284 14,021,881 1,773,153 125,991 169,752 2,661 1,435,147 30,322,512 Balance as of January 1 2017 (5,131,723) (6,064,744) (741,253) (70,293) (128,959) (12,136,972) Depreciation for the year Disposals (202,513) (735,461) (111,073) (15,069) (11,672) (1,075,788) 2,074 69,960 80,177 3,160 20,779 176,150 Currency translation effect 8,848 23,421 743 698 429 34,139 Balance as of December 31, 2017 (5,323,314) (6,706,824) (771,406) (81,504) (119,423) (13,002,471) Balance as of January 1, 2016 1,160,809 10,017,180 10,706,221 1,286,212 85,842 155,995 8,742 1,268,545 24,689,546 Additions Disposals 40,398 423,357 1,408,298 433,746 29,702 20,548 - 103,695 2,459,744 (6,257) (69,520) (355,957) (114,222) (2,134) (5,183) (3,556) - (556,829) Currency translation effect 15,102 232,276 277,207 5,417 5,349 2,823 - 87,442 625,616 Balance as of December 31, 2016 1,210,052 10,603,293 12,035,769 1,611,153 118,759 174,183 5,186 1,459,682 27,218,077 Balance as of January 1 2016 (4,942,844) (5,627,281) (751,539) (60,198) (119,553) (11,501,415) Depreciation for the year Disposals (192,810) (630,370) (81,783) (10,544) (10,241) (925,748) 38,726 297,180 94,872 2,918 2,038 435,734 Currency translation effect (34,795) (104,273) (2,803) (2,469) (1,203) (145,543) Balance as of December 31, 2016 (5,131,723) (6,064,744) (741,253) (70,293) (128,959) (12,136,972) $ $ $ $ $ $ $ $ Carrying amounts, net 2018 Land Buildings and construction Machinery and equipment Transportation equipment Computer equipment Furniture Leasehold improvements Construction in progress Total $ $ 1,378,090 6,406,651 7,676,822 962,609 38,149 49,808 4,350 1,501,697 18,018,176 December 31, 2017 1,353,643 6,116,970 7,315,057 1,001,747 44,487 50,329 2,661 1,435,147 17,320,041 2016 1,210,052 5,471,570 5,971,025 869,900 48,466 45,224 5,186 1,459,682 15,081,105 Additions of property, plant and equipment in 2017 include assets acquired through business combinations of $1,132,871 that consist of the following: Land Buildings and construction Machinery and equipment Transportation equipment Furniture Total $ $ 133,347 500,608 491,101 2,137 5,679 1,132,871 Depreciation expense during the years ended December 31, 2018, 2017 and 2016 was $1,226,917, $1,075,788 and $925,748, respectively, which was charged to cost of sales and operating expenses. (15) Goodwill Balances at beginning of the year Business combinations (Note 4) Foreign currency effects Balances at end of year 2018 $ 1,631,094 - 677 $ 1,631,771 2017 484,877 1,042,163 104,054 1,631,094 2016 454,295 - 30,582 484,877 The recoverable amount of the cash-generating unit is determined based on a calculation of its value in use, which uses projections of the estimated cash flows based on financial budgets approved by management for a determined projection period, which are discounted using an annual discount rate. Projections of the cash flows during the budgeted period are based on sales projections which include increases due to inflation, as well as the projection of expected gross margins and operating margins during the budgeted period. Cash flows that exceed such period are extrapolated using an annual stable growth rate, which is the long-term weighted average growth rate for the market in which the cash-generating unit operates. The assumptions and balances of each cash-generating unit are as follows: Cash-generating unit Bachoco - Istmo and Peninsula regions Campi Ok Farms - Morris Hatchery, Inc. Arkansas Ok Farms - Morris Hatchery Inc. Georgia Ok Foods- Albertville Quality Foods, Inc. Cash-generating unit Bachoco - Istmo and Peninsula regions Campi Ok Farms - Morris Hatchery, Inc. Arkansas Ok Farms - Morris Hatchery Inc. Georgia Ok Foods- Albertville Quality Foods, Inc. Cash-generating unit Bachoco - Istmo and Peninsula regions Campi Ok Farms - Morris Hatchery, Inc. Arkansas Ok Farms- Morris Hatchery Inc. Georgia 2018 Final balance of the year Projection period (years) 5 5 5 5 5 212,833 88,015 65,233 110,147 1,155,543 1,631,771 2017 Final balance of the year Projection period (years) 5 5 5 5 5 212,833 88,015 65,200 110,091 1,154,955 1,631,094 2016 Annual discount rate (%) 13.17% 13.17% 5.87% 5.87% 5.87% Annual growth rate (%) 3.00% 3.00% 0.00% 0.00% 0.00% Annual discount rate (%) 12.52% 12.52% 6.14% 6.14% 6.14% Annual growth rate (%) 3.00% 3.00% 0.00% 0.00% 0.00% Final balance of the year Projection period (years) 212,833 88,015 68,449 115,580 484,877 5 5 5 5 Annual discount rate (%) 12.91% 12.91% 8.62% 8.62% Annual growth rate (%) 2.70% 2.10% 0.00% 0.00% $ $ $ $ $ $ (16) Intangible assets The balances as of December 31, 2018 and 2017 for $949,355 and $1,040,042 are mainly comprised of trade names and customer relationships derived from the purchase transaction of the Acquired Co. I (note 4). Customer relationships are generally amortized over 15 years based on the pattern of revenue expected to be generated from the use of the asset. Indefinite life intangible assets are initially recorded at their fair value and are not amortized, but they are reviewed for impairment at least annually or more frequently if impairment indicators arise. During 2018, the Company decide to discontinue a product line that it was no longer producing and did not have any success in selling the trademarks associated with that line. Accordingly, an impairment charge of $11,756 in trade names was recognized. The remaining intangible assets were evaluated internally and an independent external impairment study was performed to determine the fair value. This study resulted in impairment charges of $3,535 in the trade names in addition to the amounts listed above. The total impairment charges recognized during 2018 for intangible assets were $21,430. Intangible assets consist of the following: Amortizable intangible assets Customer relationships Accumulated amortization Impairment loss Total net amortizable intangible assets Trade names not subject to amortization Impairment loss Total intangible assets 2018 2017 2016 $ $ 1,020,500 (95,911) (6,139) 918,450 46,196 (15,291) 949,355 1,028,747 (34,876) - 993,871 46,171 - 1,040,042 - - - - - - - (17) Other non-current assets Other non-current assets consist of the following: Advances for purchase of property, plant and equipment Investments in life insurance (note 3 (l)) Security deposits Other long-term receivable Intangible assets in process Other Total non-current assets $ $ 2018 December 31, 2017 326,676 66,177 20,745 171,222 26,898 54,024 665,742 331,691 64,629 16,796 162,337 11,506 56,047 643,006 2016 552,417 65,509 15,132 161,690 12,200 58,506 865,454 (18) Financial debt a) Short-term financial debt is as follows: December 31, 2018 2017 2016 Loan in the amount of 70,000 thousand dollars, maturing in June 2017, at LIBOR (3) rate plus 0.44 percentage points. $ Loan in the amount of 70,000 thousand dollars, maturing in July 2017, at LIBOR (3) rate plus 0.425 percentage points. Denominated in pesos, maturing in January 2018, at TIIE (1) FIRA (2) rate plus 0.60 percentage points Loan in the amount of 70,000 thousand dollars, maturing in June 2017, at LIBOR (3) rate plus 0.50 percentage points. Denominated in pesos, maturing in January 2019, at - - - - TIIE (1) FIRA (2) rate plus 1.25 percentage points. 100,306 Loan in the amount of 140,000 thousand dollars, maturing in February 2019, at fixed rate 2.29 percentage points. Denominated in pesos, maturing in February 2019, at TIIE (1) rate plus 1.25 percentage points. Denominated in pesos, maturing in March 2019, at TIIE (1) rate plus 1.25 percentage points. Denominated in pesos, maturing in May 2019, at TIIE (1) rate plus 0.40 percentage points. Total short-term debt 2,757,460 300,028 250,023 20,003 1,376,200 1,376,200 100,000 - - - - - - - - - 1,444,800 - - - - - 1,444,800 $ 3,427,820 2,852,400 The annual weighted average interest rate of short-term loans denominated in pesos for 2018 and 2017 was 9.14% and 8.06%, respectively, and during 2016, no short-term debt denominated in pesos was contracted. The average interest rate for loans outstanding as of December 31, 2018 and 2017 was 9.15% and 8.06%, respectively. The annual weighted average interest rate of short-term loans denominated in dollars for the years 2018, 2017 and 2016 was 2.26%, 1.22% and 1.04%, respectively. The average interest rate for loans outstanding as of December 31, 2018, 2017 and 2016 was 2.29%, 1.57% and 1.05%, respectively. (1) (2) (3) TIIE (for its acronym in Spanish) = Interbank Equilibrium Rate FIRA (for its acronym in Spanish) = Agriculture Trust Funds LIBOR= London Interbank Offered Rate b) Long-term debt consists of the following: Denominated in pesos, maturing in September 2017, at TIIE (1) rates plus 0.63 percentage points. $ Denominated in pesos, maturing in 2017 and 2018, at TIIE (1) FIRA (2) rates less 0.25 percentage points. Denominated in pesos, maturing in 2018, at TIIE (1) FIRA (2) rates less 0.60 percentage points. Denominated in pesos, maturing in 2019, at TIIE (1) FIRA (2) rates plus 0.25 percentage points. Denominated in pesos, maturing in 2019, at TIIE (1) FIRA 2018 December 31, 2017 2016 - - - - 98,000 553,651 603,739 289,000 293,400 53,980 53,973 53,978 (2) rates plus 0.50 percentage points. - - 54,000 Denominated in pesos, maturing in 2023, at TIIE (1) FIRA (2) plus 0 percentage points. Debt securities (subsection (d)) Debt securities (subsection (d)) Total Less current maturities Long-term debt, excluding current maturities $ 55,007 - 1,500,793 1,609,780 (64,973) 1,544,807 - - - 1,500,000 - 1,500,000 2,396,624 2,603,137 (842,651) (1,652,725) 950,412 1,553,973 The annual weighted average interest rate on long-term debt for 2018, 2017 and 2016 was 8.42%, 7.72% and 4.04%, respectively. The average rate for outstanding loans as of December 31, 2018, 2017 and 2016 was 8.46%, 7.48% and 5.63%, respectively. (1) TIIE (for its acronym in Spanish) = Interbank Equilibrium Rate (2) FIRA (for its acronym in Spanish) = Trust Established in Relation to Agriculture During 2018 and 2017 the Company did not make early payments on its long-term debt, during 2017 the Company made early payments on its long-term debt of $53,900, the Company did not make early payments on its long-term debt. As of December 31, 2018, 2017 and 2016, unused lines of credit amounted to $5,723,011, $7,031,813 and $5,551,263, respectively. In all such years, the Company did not pay any fee for undrawn balances. c) Maturities of long-term debt, excluding current maturities, as of December 31, 2017, are as follows: Year Amount 2019 $ 2020 2021 2022 2023 1,807 12,000 12,000 1,512,000 7,000 1,544,807 Interest expense on total loans during the years ended December 31, 2018, 2017 and 2016, amounted to $185,913, $188,597 and $129,769, respectively. Certain bank loans establish certain affirmative and negative covenants, as well as the requirement to maintain certain financial ratios, which have been met as of December 31, 2018, among which are: a) Provide financial information at the request of the bank. b) Not to contract liabilities with financial cost or grant loans that may affect payment obligations. c) Notify the bank regarding the existence of legal issues that could substantially affect the financial situation of the Company. d) Not to perform substantial changes to the nature of the business, or the administrative structure. e) Not to merge, consolidate, separate, settle or dissolve except for those mergers in which the Company or surety are the merging company and do not constitute a change in control of the entities of the group to which the Company or the surety belong at the date of the agreement. d) Issuance of debt securities On August 28, 2012, the Company was authorized to issue debt securities in the total amount of the program of $5,000,000 or the equivalent in UDIS (1), on a revolving basis, for a term of five years from the date of the authorization letter from the Mexican Banking and Securities Commission. The initial issuance dated August 31, 2012 was for $1,500,000 pesos with ticker symbol: "BACHOCO 12" for a term of 1,820 days, equivalent to 65 periods of 28 days, approximately five years, with 15,000,000 debt securities and a par value of $100 pesos per certificate. On August 25, 2017, the debt securities issued with ticker "BACHOCO 12" expired, and were paid according to the contractual terms of the issuance. On August 25, 2017, a second issuance of debt securities was carried out for a total amount of $1,500,000 with ticker symbol: “BACHOCO 17” for a term of 1,820 days, equivalent to 65 periods of 28 days, approximately five years, with 15,000,000 debt securities and a par value of $100 pesos per certificate. From the date of issuance, and while the debt securities have not been paid, they will accrue annual gross interest on their face amount, at an annual interest rate, which is calculated by adding 0.31 percentage points at the 28-day TIIE, and in the event the 28-day TIIE is not published, at the nearest term published by the Bank of Mexico. The debt issue that expired in 2017 accrued a gross interest on its nominal value, at an annual interest rate, which was calculated by adding 0.60 percentage points to the 28-day TIIE. The amortization of the debt securities is carried out at the expiration of the contractual term of each issuance. Direct costs arising from debt issuance or contract are deferred and amortized as part of financial expense using the effective interest rate through the expiration of each transaction. Such costs include commissions and professional fees. (1) UDIS = Investment units Derived from the issuance of the Debt securities, the Company is subject to certain requirements, affirmative and negative covenants, with which they comply as of December 31, 2017. e) Reconciliation of liabilities arising from financing activities Balance as of January 1 Changes that represent cash flows Proceeds from borrowings Principal payment on loans Changes that do not represent cash flows Others Balance as of December 31 (19) Trade accounts and other accounts payable Trade payables Sundry creditors and expenses payable Provisions Statutory employee profit sharing Retained payroll taxes and other local taxes Direct employee benefits Interest payable Others $ $ December 31, 2018 $ 5,249,024 2017 4,047,937 3,370,400 5,378,915 (3,588,067) (4,246,100) 6,243 $ 5,037,600 68,272 5,249,024 December 31, 2017 2018 3,996,014 597,330 103,494 68,432 259,828 160,431 10,728 90 5,196,347 3,684,220 479,223 103,474 42,940 241,739 171,784 16,904 82 4,740,366 2016 3,646,410 448,679 105,434 42,134 214,558 76,721 11,160 81 4,545,177 Note 8 discloses the Company’s exposure to the exchange and liquidity risks related to trade accounts payable and other accounts payable. In December 2009, the Mexican Federal Competition Agency (CFC, for its Spanish acronym) released a news report in which it announced an investigation on the Mexican poultry industry in reference to possible monopolistic practices. As a result of this investigation, CFC imposed several fines to the Company for supposedly having certain practices where the price of chicken was manipulated. Although the Company and its legal advisors considered that the interposed legal processes were well sustained and attended, a provision that was considered adequate was recognized. During 2016 these judgments were concluded in favor of the Company's interests, for which reason the provision recorded for this purpose was canceled. Additionally, the National Water Commission (CNA, for its Spanish acronym) imposed credits and fines to the Company for supposed infractions made by the Company in water administration for exploitation of livestock. The Company has recognized a provision for the amount that it expects to be probable to pay. Bachoco USA, LLC. is involved in claims with the United States of America Department of Labor and the Unites State Immigration and Customs Enforcement, and various other matters related to its business, including workers’ payment claims and environmental issues. As of December 31, 2018, 2017 and 2016, the Company has recorded provisions of $39,340 (2,000 thousand dollars), $39,320 (2,000 thousand dollars) and $41,280 (2,000 thousand dollars) for estimated probable payments. (20) Transactions and balances with related parties (a) Transactions with management Compensation The following table shows the compensation paid to the directors and executives for services provided in their respective positions for the years ended December 31, 2018, 2017 and 2016: Compensation December 31, 2018 61,189 2017 56,201 $ 2016 53,531 (b) Transactions with other related parties Below is a summary of the Company’s transactions and balances with other related parties, which are comprised of affiliates that are under common control: i.Revenues Transaction value December 31, 2017 2018 2016 Sales of products to: Vimifos, S.A. de C.V. Frescopack, S.A. de C.V. Taxis Aéreos del Noroeste, S.A. de C.V. $ $ 8,812 - 28 8,840 47,344 41,715 $ 10 66 1,013 48,367 1,927 43,708 $ Balance as of December 31, 2017 2018 2016 - - 99 99 326 - 4,261 32 - 326 144,562 148,855 The balance of Taxis Aéreos del Noroeste, S.A. de C.V. as of December 31, 2016 for $144,562 corresponds to a loan that bears interest and is due in the short term. ii.Expenses and balances payable to related parties Purchases of food, raw materials and packing supplies Vimifos, S.A. de C.V. Frescopack, S.A. de C.V. Pulmex 2000, S.A. de C.V. Qualyplast, S.A. de C.V. Purchases of vehicles, tires and spare parts Maquinaria Agrícola, S.A. de C.V. Llantas y Accesorios, S.A. de C.V. Autos y Accesorios, S.A. de C.V. Autos y Tractores de Culiacán, S.A. de C.V. Camiones y Tractocamiones de Sonora, S.A. de C.V. Agencia MX-5, S.A de C.V. Alfonso R. Bours, S.A. de C.V. Cajeme Motors S.A. de C.V. Airplane leasing expenses Taxis Aéreos del Noroeste, S.A. de C.V. Transaction value December 31, 2017 2018 2016 2018 Balance as of December 31, 2017 2016 $ 557,490 392,226 193,396 179,357 26,700 37,794 95 230 554,282 $ 103,371 28,951 137,752 5,227 41,122 41 193 12,830 29,537 8,138 - 126,396 35,931 7,528 64 $ - 38,581 18,776 793 35,225 24,645 34,446 29,457 40,575 64 3,374 4,712 64 4,207 57 17,671 14,037 39,504 1,486 19,490 47 307 30 85,448 15 428 29 153,802 25 394 7,974 216 7 40 5 79 172 4 95 1 1,898 3,449 1,985 5,298 6,137 2 94 710 $ 8,368 7,854 7,739 20 $ 147,514 68 55,252 474 189,966 As of December 31, 2018, 2017 and 2016, balances payable to related parties correspond to current accounts denominated in pesos that bear no interest and are payable on a short-term basis. (21) Income Tax Under the tax legislation in Mexico and the United States of America in effect through December 31, 2018, entities are subject to pay Income Tax (ISR, by its Spanish acronym). a) ISR The Company and each of its subsidiaries file separate income tax returns (including its foreign subsidiary, which files income tax returns in the United States of America, based on its fiscal year ending in April of every year). For the years ended December 31, 2018, 2017 and 2016, the applicable rate under the general tax regime in Mexico is 30%; this rate will be applicable in future years as well. The applicable rate during 2017 and 2016 for the Company’s US subsidiary is 35% (plus state and federal taxes) and as of January 1, 2018 the rate is 21% (plus state and federal taxes). As of December 31, 2018, 2017 and 2016, BSACV, the Company’s primary operating subsidiary is subject to the agriculture, cattle-raising, forestry and fishing regime of the ISR law, which is applicable to entities exclusively dedicated to such activities. The ISR Law establishes that such activities are exclusive when no more than 10% of an entity’s total revenues are generated from something other than those activities or from industrialized products. b) Tax charged to profit and loss For the years ended December 31, 2018, 2017 and 2016, the income tax (benefit) expense included in profit and loss is as follows: Operation in Mexico: Current ISR Deferred ISR Foreign operation: Current ISR Deferred ISR Total ISR expense Total income tax expense 2018 1,242,553 (33,718) 1,208,835 4,294 (58,151) 1,154,978 December 31 2017 1,512,721 (157,646) 1,355,075 198,813 (469,444) 1,084,444 $ $ 2016 1,215,171 264,086 1,479,257 45,358 118,818 1,643,433 The income tax expense attributable to income before income taxes differed from the amount computed by applying the ISR rate of 30% in 2018, 2017 and 2016 due to the items listed below: December 31, Expected expense Increase (decrease) resulting from: Net effects of inflation (Non-taxable income) Non-deductible expenses Effect of rate difference of foreign subsidiary Effect from non- deductible employee benefits Effect of change of income tax rate in the United States of America Cancellation of loss by acquisition Other Income tax expense 2017 ISR 1,811,667 Percentage ISR 30% $ 1,678,379 2016 Percentage 30% (329,516) (5%) (144,611) (2%) 2018 Percentage ISR $ 1,354,965 30% $ (276,758) 16,648 (16,572) - (6%) 0% (0%) 88,330 702 1% 0% 1% 14,550 21,979 71,868 90,820 2% 83,953 - - (14,126) $ 1,154,978 - - (443,104) (7%) - (0%) 26% $ (129,036) 1,448 1,084,444 (2%) 0% 18% $ - 1,268 1,643,433 0% 0% 1% - - 0% 29% c) Deferred income tax The Company and each one of its subsidiaries determine the deferred taxes that are reflected at a consolidated level on stand-alone basis. BSACV, the main operating subsidiary of the Company, is subject to tax payment under the agriculture, cattle-raising, forestry and fishing regime, in which the tax base for ISR is determined on collected revenues minus paid deductions. The tax effects of temporary differences, tax losses and tax credits that give rise to significant portions of deferred tax assets and liabilities as of December 31, 2018, 2017 and 2016 are detailed below: Deferred tax assets Accounts payable Employee benefits PTU payable Tax loss carryforwards Other provisions Total deferred tax assets Deferred tax liabilities Property, plant and equipment Prepaid expenses Total deferred tax liabilities Net deferred tax assets Deferred tax assets Accounts payable Tax loss carryforwards Goodwill Other provisions Total deferred tax assets Deferred tax liabilities Inventories Accounts receivable Property, plant and equipment Prepaid expenses Intangible assets Derivative financial instruments Total deferred tax liabilities Net deferred tax liability $ $ $ 2018 December 31, 2017 2016 27,738 53,398 20,536 - 2,205 103,877 51 - 51 103,826 16,404 45,519 12,917 7,025 81,865 - 59 1,136 1,195 80,670 831 42,221 12,700 2,760 1,754 60,266 82 52 134 60,132 December 31, 2018 2017 2016 1,483,275 59,883 3,879 76,025 1,623,062 1,639,156 366,825 2,503,172 647,480 233,749 - 5,390,382 3,767,320 1,170,771 22,013 7,562 54,020 1,254,366 964,676 676 19,846 24,049 1,009,247 1,601,498 421,191 2,428,358 392,800 253,898 - 5,097,745 3,843,379 1,612,890 438,146 2,566,002 302,958 - 1,826 4,921,822 3,912,575 d) Unrecognized deferred tax liabilities Deferred taxes related to investments in subsidiaries have not been recognized as the Company is able to control the moment of the reversal of the temporary difference, and the reversal is not expected to take place in the foreseeable future. Deferred income tax on investments in subsidiaries not recognized as of December 31, 2018, 2017 and 2016 amounts to $2,049,327, $2,587,954 and $1,962,545, respectively. The Company's policy has been to distribute accounting profits when the respective taxes have been paid and in the case of foreign profits, such tax may be duly credited in Mexico. e) Movement in temporary differences during the fiscal year January 1, 2018 (1,187,175) (45,519) (12,917) (22,013) (61,045) (7,562) 253,898 1,601,498 421,191 2,428,417 393,936 3,762,709 Recognized in profit and loss Acquired or/ Recognized directly in equity (323,784) (1,317) (7,619) (37,004) (17,240) 3,604 (19,825) 37,319 (54,366) 74,819 253,544 (91,869) (54) (6,562) - (866) 55 79 (324) 339 - (13) - (7,346) January 1, 2017 Recognized in profit and loss Acquired or/ Recognized directly in equity (965,507) (42,221) (12,700) (3,436) (25,803) (19,846) - 1,612,890 438,146 2,566,084 303,010 1,826 3,852,443 (223,640) 1,915 (217) (18,577) (35,577) 10,895 - (82,523) (16,955) (351,511) 90,926 (1,826) (627,090) 1,972 (5,213) - - 335 1,389 253,898 71,131 - 213,844 - - 537,356 $ $ $ $ December 31, 2018 (1,511,013) (53,398) (20,536) (59,883) (78,230) (3,879) 233,749 1,639,156 366,825 2,503,223 647,480 3,663,494 December 31, 2017 (1,187,175) (45,519) (12,917) (22,013) (61,045) (7,562) 253,898 1,601,498 421,191 2,428,417 393,936 - 3,762,709 Accounts payable Employee benefits PTU payable Tax loss carryforwards Other provisions Goodwill Intangible assets Inventories Accounts receivable Property, plant and equipment Prepaid expenses Net deferred tax liability Accounts payable Employee benefits PTU payable Tax loss carryforwards Other provisions Goodwill Intangible assets Inventories Accounts receivable Property, plant and equipment Prepaid expenses Derivative financial instruments Net deferred tax liability Accounts payable Employee benefits PTU payable Tax loss carryforwards Other provisions Goodwill Inventories Accounts receivable Property, plant and equipment Prepaid expenses Derivative financial instruments Net deferred tax liability $ $ January 1, 2016 (1,093,909) (32,572) (9,516) (11,317) (6,846) (22,326) 1,400,793 382,182 2,356,019 353,260 (859) 3,314,909 Recognized in profit and loss Acquired or/ Recognized directly in equity 134,658 (14,115) (3,184) 7,881 (18,200) 6,272 167,441 55,964 93,752 (50,250) 2,685 382,904 (6,256) 4,466 - - (757) (3,792) 44,656 - 116,313 - - 154,630 December 31, 2016 (965,507) (42,221) (12,700) (3,436) (25,803) (19,846) 1,612,890 438,146 2,566,084 303,010 1,826 3,852,443 f) Tax on assets and tax loss carryforwards As of December 31, 2018, tax loss carryforwards expire as shown below. Amounts are indexed for inflation as permitted by Mexican income tax law: Amount as of December 31, 2018 Year 2017 2018 Tax loss carryforwards $ $ 58,710 196,197 254,907 Year of expiration / maturity 2027 2028 (22) Employee benefits a) Employee benefits in Mexico Defined contribution plans The Company has a defined contribution plan which receives contributions from both the employees and the Company. Employees can make contributions from 1% to 5% of their wage and from 2016, the Company is obligated to make contributions as follows: i) 20% of employee contributions for employees with 1 - 4.99 years of service, ii) 40% of employee contributions for employees with 5 – 9.99 years of service, and iii) 100% matching contributions for employees with 10 or more years of service or when the employee reaches 40 years of age, regardless of the years of service. When an employee retires from the Company he/she has the right to receive the contribution he/she has made to the plan, and i) if the employee retires between the first and the 4.99 year of services (4 year of services during 2015), he/she does not have the right to receive the contribution made by the Company, ii) if he/she retires on the fifth year of services he/she has the right to receive 50% of the contributions made by the Company and, for each additional service year, the employee has the right to receive an additional 10% of the contributions made by the Company. The expenses for paid contributions to defined contribution plans, other than those mandated by Mexican law, were $0, $0 and $1,597, in 2018, 2017 and 2016, respectively. The Company makes payments equivalent to 2% of the integrated wage of its workers to the defined contribution plan for the retirement saving fund system established by Mexican law. The expense for this concept was $62,028, $56,063 and $50,047, in 2018, 2017 and 2016, respectively. Defined benefits plan The Company has a defined benefit pension plan covering non-unionized personnel in Mexico. The benefits are based on the age, years of service and the employee’s payment. The retirement age is 65 years, with a minimum of 10 years of services, and there is an option for an anticipated retirement option, in certain circumstances, at 55 years of age. The Company’s policy to fund the pension plan is to make contributions up to the maximum amount that can be deducted for ISR. Additionally, according to the Mexican Federal Labor Law, the Company is obligated to pay a seniority premium as a retirement benefit if an employee retires and has of least 15 years of services, which consists of a sole payment of 12 days for each worked year based on the last wage, limited to the two minimal wages established by law. The Company recognizes constructive obligations from past practices. Such constructive obligations are associated with service time the employee has worked for the Company. The payment of this benefit is disbursed in a single installment at the time the employee voluntarily stops working for the Company. As of 2018 this obligation is only recognized for directors and executives. The plans in Mexico expose the Company to actuarial risks such as interest rate risk, longevity risk and salary risk: Interest risk Longevity risk Salary risk A decrease in the interest rate for the governmental bonds will increase the plan’s liability. The present value of the defined benefit plan liability is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plan’s liability. The present value of the defined benefit plan liability is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plan’s liability. The projected net liability presented on the consolidated statements of financial position is as follows: Present value of unfunded obligations Present value of funded obligations Total present value of benefit obligations (PBO) Plan assets at fair value Projected liability, net i. Composition and return of plan assets 2018 302,818 197,254 December 31, 2017 252,965 259,245 $ 2016 195,019 267,535 500,072 (197,254) 302,818 $ 512,210 462,554 (259,245) (267,535) 195,019 252,965 Actual return of the plan assets 2018 2017 2016 Composition of the plan assets 2017 2016 2018 Fixed income securities Variable income securities Total 5.10% 7.18% 7.16% 67% 61% 64% (10.95%) 12.78% 10.07% 33% 100% 39% 100% 36% 100% ii. Movements in the present value of defined benefit obligations (PBO) PBO as of January 1 Benefits paid by the plan Service cost Interest cost Actuarial (gains) losses recognized in other comprehensive income Past service cost – plan amendments PBO as of December 31 2018 462,986 (38,393) 28,084 41,410 2017 462,554 (32,940) 28,968 40,170 494 5,491 500,072 13,458 - 512,210 $ $ iii. Movements in the fair value of plan assets Plan assets at fair value as of January 1 Transfer of assets to fund defined contribution benefit plan Benefits paid by the plan Expected return on plan assets Actuarial losses in other comprehensive income Fair value of plan assets as of December 31 $ 2018 259,245 2017 267,535 $ (38,327) (16,772) 23,244 (10,664) (17,049) 23,342 (30,136) 197,254 (3,919) 259,245 2016 447,099 (26,031) 29,604 34,857 (24,827) 1,852 462,554 2016 286,881 (25,600) (9,457) 25,650 (9,939) 267,535 iv. Expense recognized in profit and loss Current service cost Interest cost, net v. Actuarial gains and (losses) 2018 2017 2016 $ $ 28,084 18,166 46,250 28,968 16,828 45,796 29,604 9,207 38,811 Amount accumulated as of January, 1 Recognized during the year Amount accumulated as of December, 31 $ $ 2018 (140,617) (30,630) 2017 (123,240) (17,377) 2016 (138,128) 14,888 (171,247) (140,617) (123,240) vi. Actuarial assumptions Primary actuarial assumptions at the consolidated financial statements date (expressed as weighted averages) are as follows. Discount rate as of December, 31 Rate for future salary increases Social security wage increase rate 2018 10.50% 4.50% 3.50% 2017 9.25% 4.50% 3.50% 2016 9.00% 4.50% 3.50% The assumptions related to mortality are based on statistics and experiences over the Mexican population. The average expected life of an individual that retires at 65 years of age is 17.13 years for men and 10.92 years for women (Experience Chart of Demographic Mortality for Active EMSSA 1997). vii. Historical information Present value of defined benefit obligation Plan assets at fair value Plan deficit $ Experience adjustments arising from plan liabilities $ $ Experience adjustments arising from plan assets $ 2018 500,072 (197,254) 302,818 494 (30,136) December 31, 2017 512,210 (259,245) 252,965 13,458 (3,919) 2016 462,554 (267,535) 195,019 (24,827) (9,939) viii.Sensitivity analysis of the defined benefits obligations as of December 31, 2018, 2017 and 2016 2018 Discount rate 10.50% Rate increase (+ 1%) Rate decrease (- 1%) Pension plan (358,635) (313,585) (364,699) Seniority premium Constructive obligation Total PBO (119,973) (109,872) (121,572) (21,464) (20,258) (21,649) (500,072) (443,715) (507,920) 2017 Discount rate 9.25% Rate increase (+ 1%) Rate decrease (- 1%) 2016 Discount rate 9.00% Rate increase (+ 1%) Rate decrease (- 1%) Pension plan (343,485) (314,460) (377,114) Pension plan (308,885) (280,316) (312,017) Seniority premium Constructive obligation Total PBO (99,735) (94,308) (105,810) (68,990) (65,113) (73,338) (512,210) (473,881) (556,262) Seniority premium Constructive obligation Total PBO (93,877) (88,657) (99,733) (59,792) (56,237) (63,796) (462,554) (425,210) (475,546) ix. Expected cash flows Total 2019-2029 $ 482,775 x. Future contributions to the defined benefits plan The Company does not expect to make contributions to the defined benefit plans in the following financial year. b) Foreign employee benefits Defined contribution plans Bachoco USA, LLC. (foreign subsidiary) has a defined contribution retirement 401(k) plan, covering all employees who meet certain eligibility requirements. The Company contributes to the plan at the rate of 50% of employee’s contributions up to a maximum of 2% of the individual employee’s contribution. The cumulative contribution expense for this plan was $12,999, $11,497 and $10,909 for the year ended December 31, 2018, 2017 and 2016, respectively. Equity-based compensation Bachoco USA, LLC. has a deferred payment agreement with certain key employees. Amounts payable under this plan are vested after 10 years from the date of the agreement. The benefit value of each unit is equal to the increase in the initial book value from the date of the agreement to the conclusion of the vesting period. Under the agreement, 26,000 units were outstanding as of December 31, 2018, 2017 and 2016, all of which were fully vested. The total liability under this plan totaled $20,922, $3,378 and $3,337 as of December 31, 2018, 2017 and 2016, respectively. No expense was recognized for this plan for the year ended December 31, 2018, 2017 and 2016. c) PTU Industrias Bachoco, S.A.B de C.V. and BSACV has no employees. Each of the subsidiaries of the Company that has employees in Mexico is required under Mexican laws to pay employees, in addition to their payment and benefits, statutory employee profit sharing in an aggregate amount equal to 10% of each subsidiary’s taxable income. The accrued liability as of December 31, 2018, 2017 and 2016 is shown in note 19, Trade payable and other accounts payable. (23) Costs and expenses by nature Cost of sales General, selling and administrative expenses Total costs and expenses Inventory consumption Wages and salaries Freight Maintenance Other utility expenses Depreciation Leases Other Total (24) Operating leases Company as lessee 2018 51,422,376 2017 47,502,959 2016 42,635,071 6,024,406 57,446,782 5,423,379 52,926,338 4,847,858 47,482,929 40,115,184 7,348,795 4,809,678 1,719,907 1,591,920 1,226,917 453,162 181,219 57,446,782 37,567,550 6,605,584 4,176,508 1,471,392 1,334,339 1,075,788 416,437 278,740 52,926,338 34,018,493 5,971,382 3,712,349 1,292,763 1,005,570 925,748 403,116 153,508 47,482,929 $ $ $ $ The Company has entered into operating leases for certain offices, production facilities, and automotive and computer equipment. Some leases contain renewal options. These agreements have terms between one and five years. Lease expenses 2018 453,162 2017 416,437 2016 403,116 $ The amount of annual rentals payable, arising from lease agreements for the following five years is as follows: 2019 2020 2021 2022 2023 $ 117,496 103,347 97,548 70,956 50,751 (25) Stockholders’ equity and reserves a) Capital risk management An adequate capital risk management allows ongoing business continuity and the maximization of the return towards the Company’s investors, which is why management has taken actions that ensure the Company maintains an adequate balance of the funding sources that build its capital structure. Within its activities in risk management, the Company ensures that the ratio between financial debt and EBITDA of the last 12 months doesn’t exceed 2.75 times and that the interest coverage ratio is at least 3 to 1. During 2018, 2017 and 2016 these ratios were below the thresholds established by the Company’s Risk Committee. b) Common stock and premiums As of December 31, 2018, 2017 and 2016, the Company’s capital stock is represented by 600,000,000 Series “B” registered shares with a par value of $1 peso per share. The Robinson Bours family owned 496,500,000 shares through two family trusts: the placement trust and the control trust, which collectively represented 82.75% of the Company’s total shares. On December 9, 2013, the members of the placement trust decided to sell 57,000,000 shares that represent 9.5% of the total shares of the Company. The transaction was conducted through the BMV at market price. After the sale of the shares, the Company’s capital stock was as follows: Familiar Trusts - Control Trust - Placement Trust Floating Position (2) Before the Transaction Shares (1) Position 496,500,000 82.75% 312,000,000 52.00% 184,500,000 30.75% 103,500,000 17.25% After the Transaction Shares (1) Position 439,500,000 73.25% 312,000,000 52.00% 127,500,000 21.25% 160,500,000 26.75% (1) All Series B shares with voting power. (2) Operating at the BMV and the NYSE. Based on the information provided to the Company, as of December 31, 2018, stockholders with 1% or more interest in the Company, in addition to the family trusts, are as follows: Renaissance Technologies LLC Shares Position 7,559,952 1.26% c) Other comprehensive income items i. Foreign currency translation reserve This concept is related to the translation of the Company’s U.S. operations from their functional currency (U.S. dollar) to the reporting currency, the Mexican peso. ii. Actuarial remeasurements Actuarial remeasurements are recognized as other components of comprehensive income and are related to variations in actuarial assumptions that generate actuarial gains or losses as well as adjust the actual yields from plan assets from the net interest cost calculated over the net defined benefits liability balance. Actuarial remeasurements are presented net of income tax within other comprehensive income in the consolidated statement of changes in stockholders’ equity, the amount of these actuarial remeasurements net of taxes as of December 31, 2018, 2017 and 2016 amounts to $120,378, $98,938 and $86,774, which includes a deferred tax effect of $50,867, $41,679 and $36,466, respectively. d) Reserve for repurchase of shares In 1998, the Company approved a stock repurchase plan in conformity with the Mexican Securities Trading Act and created a reserve for that purpose of $180,000 charged to retained earnings in such year. On April 25, 2018, pursuant to a resolution at the General Ordinary Stockholders’ Meeting, an amount of $568,500 was approved to be used in the reserve for acquisition own shares. The following table shows the movements of the reserve for acquisition of shares during the years ended December 31, 2018, 2017 and 2016: Balance as of January 1 (+) Total shares purchased (-) Total shares sold Balance as of December 31 2018 20,000 86,928 (20,000) 86,928 2017 - 20,000 - 20,000 2016 10,000 100,157 (110,157) - The net amount of repurchase and treasury share sale transactions gave rise to additional paid in capital of $85, loss of ($1,800), and gave rise to additional paid in capital of $368 during the years ended December 31, 2018, 2017 and 2016, respectively, recognized within equity. As of December 31, 2018, the Company has 86,928 treasury shares. e) Dividends During the years ended December 31, 2018, 2017 and 2016, the Company has declared and paid the following dividends: On April 25, 2018, the Company declared a payment of dividends in cash at nominal value of $852,000 or $1.42 pesos per outstanding share. The payment was made in two equal installments, on May 11 and July 6, 2018. On April 26, 2017, the Company declared a payment of dividends in cash at nominal value of $780,000 or $1.30 pesos per outstanding share. The payment was made in two equal installments, on May 11 and July 6, 2017. On April 27, 2016, the Company declared a payment of dividends in cash at nominal value of $780,000 or $1.30 pesos per outstanding share, from which there is a reduction of $40 for the dividend corresponding to repurchased shares. The payment was made in two equal installments, on May 12 and July 7, 2016. Dividends that the Company pays to stockholders are subject to ISR solely insofar as such dividends exceed the balance in its net tax income account (CUFIN) consisting of income in which ISR is already paid by the Company. The ISR paid on dividends corresponds to a tax payable by legal entities and not by individuals. However, as a result of changes to the income tax law described in note 20(a), beginning on January 1, 2014, a new withholding tax of 10% for resident individuals in Mexico and for all residents in foreign countries who receive dividends from entities was established. Such tax is considered a withholding tax by the entity that pays the dividends. This tax will be applicable only to the income generated from period 2014. Thus, the Company must update its CUFIN from income generated up to December 31, 2013 and must calculate a new CUFIN with the income generated from January 1, 2014. The Company obtains most of its revenue and net income from BSACV. For fiscal years 2018, 2017 and 2016, net income of BSACV, accounted for 63%, 63% and 65%, respectively, of consolidated net income. Dividends for which BSACV pays ISR will be credited to the Company’s CUFIN account, and accordingly, any future liabilities arising from ISR will be incurred when such amounts are distributed as dividends to the stockholders. f) Tax balances of stockholders’ equity CUFIN IBSA individual IBSA Consolidated $ Balance as 2013 7,221,441 7,595,797 Balance from2014 Total 7,732,775 15,170,021 14,954,216 22,765,818 The restated amount as of December 31, 2018 on tax bases of the contributions made by stockholders (CUCA), totaling $2,971,796, may be refunded to them tax-free, to the extent that such amount is the same or higher than equity. (26) Earnings per share The basic and diluted earnings per share for the years ended December 31, 2018, 2017 and 2016 are $5.58, $8.25 and $6.58, respectively. The calculation of earnings per share was based on income attributable to ordinary stockholders of $3,349,967, $4,948,242 and $3,946,634 for the years ended December 31, 2018, 2017 and 2016, respectively. The average weighted number of common outstanding in 2018, 2017 and 2016 was 599,980,734, 599,997,696 and 599,979,844 shares, respectively. The Company has no ordinary shares with potential dilutive effects. (27) Commitments • Bachoco USA, LLC has self-insurance programs for health care costs and workers’ payments. The subsidiary is liable for health care claims up to $6,885 (350 thousand dollars) each year per plan participant and workers’ payments claims up to $19,670 (1,000 thousand dollars) per event. Self-insurance costs are recorded based on the aggregate of the liability for reported claims and an estimated liability for claims incurred but not reported. The provision for this concept is recorded in the accompanying consolidated statement of financial position within current liabilities amounting to $74,766 (3,801 thousand dollars), $98,221 (4,996 thousand dollars) and $75,873 (3,676 thousand dollars) as of December 31, 2018, 2017 and 2016, respectively. Likewise, the consolidated statement of comprehensive income includes expenses relating to self-insurance plans of $139,783, (7,269 thousand dollars), $221,644, (11,721 thousand dollars) and $120,729 (6,463 thousand dollars) for the years ended December 31, 2018, 2017 and 2016, respectively. The Company is required to maintain letters of credit on behalf of the subsidiary of $57,043, (2,900 thousand dollars) during 2018, $57,014, (2,900 thousand dollars) during 2017 and $70,176 and $58,514 (3,400 thousand dollars) as of December 31, 2016, to secure self-insured workers' payments. • The Company has entered into grain supply agreements with third parties as part of the regular course of its operations. • The Company has entered into certain contracts with suppliers under which advanced payments are rendered in order to assure the supply of materials and services. (28) Contingencies a) Insurance The Company has established a risk management program under a best practices methodology that assures the main risks of the business with the objective of reducing losses due to relevant claims. At the end of 2016 the Company set up a captive reinsurance company to complement its risk management strategy. Notwithstanding the foregoing, since all the exposures are not covered, there is a risk that the loss or destruction of certain assets may have a significant adverse effect on the Company’s operations and financial situation. b) Lawsuits The Company is involved in a number of lawsuits and claims arising from the regular course of business. In the opinion of the Company’s management, they are not expected to have significant effects on the Company’s financial position, operating results and future consolidated statements of cash flows. c) Tax contingencies In accordance with tax laws, Mexican authorities are empowered to review transactions carried out during the five years prior to the most recent ISR return filed. For the operations in the United States of America, the authorities of that country are empowered to review transactions carried out during the three years prior to the due date of the most recent annual tax return. The Company has not identified factors that may indicate the existence of a contingency. (29) Financial income and costs Interest income Income from interest in accounts receivable Foreign exchange gain, net Effects of valuation of derivative financial instruments Financial income 2018 1,072,991 2017 848,148 2016 637,977 $ 4,516 39,323 8,961 230,532 8,357 297,463 23,919 - 1,140,749 1,087,641 25,377 969,174 Effects of valuation of derivative financial instruments Interest expense and financial expenses on financial debt Commissions and other financial expenses Financial costs Financial income, net $ (30) Other income (expenses) - (84,094) - (185,913) (188,597) (129,769) (146,255) (42,385) (332,168) (340,091) (172,154) 808,581 797,020 747,550 (67,400) Other income Sale of scrap of biological assets, raw materials, by-products and other Bargain purchase gain of domestic business acquisition (note 4b) Total other income Other expenses Cost of disposal of biological assets, raw materials, by-products and other Other Total other expenses Total other income (expenses), net $ 2018 2017 2016 $ 1,041,677 896,840 1,076,902 - 1,041,677 87,496 984,336 - 1,076,902 (737,077) (201,940) (939,017) 102,660 (731,110) (85,584) (816,694) 167,642 (704,152) (112,548) (816,700) 260,202 DEPOSITARY BANK BNY MELLON BNY Mellon Shareowner Services T. US: 1-888-269-2377 T. 201-680-6825 E-mail: shrrelations@cpushareownerservices.com Website: www.mybnymdr.com Proxy Services shareowner@bankofny.com Toll Free: 1.888.269.2377 T. (212)815.374.00 INDEPENDENT AUDITORS Deloitte Touche Tohmatsu/ Galaz, Yamazaki, Ruiz Urquiza, S.C. T. +52 (442) 238.29.34 CORPORATE HEADQUARTERS Industrias Bachoco S.A.B de C.V. Av. Tecnológico 401 Celaya, Guanajuato 38030, México T. +52 (461) 618.35.00 INVESTOR RELATIONS María Guadalupe Jáquez Andrea Guerrero T. +52 (461) 618.35.55 (México) inversionistas@bachoco.net Consult online our Annual Report 2018: https://bit.ly/2UgGK1m www.bachoco.com.mx 

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