MEXICO CITY, MEXICO — Despite significant margin pressure during the first quarter of 2012, prospects for Grupo Bimbo SAB de CV later in the year, including for Bimbo Bakeries USA, are bright, said Daniel Servitje, chief executive officer.
Servitje identified reasons for optimism during a conference call with investment analysts April 27, following the release of first-quarter earnings.
Also during the call, Gary Prince, president and chief executive officer of BBU, said the recent announcement of four U.S. plant closings to enhance efficiencies will be followed by further closings later this year.
As previously announced, group majority income of Grupo Bimbo in the first quarter ended March 31 was 601 million pesos ($45.6 million), down 47% from 1,411 million in the first quarter of 2011. Sales were 40,919 million pesos ($3,101 million), up 39%. The company’s overall profit margins narrowed to 4.1% from 7.5% in the first quarter of 2011.
In his opening remarks during the call, Servitje commented on the underlying U.S. business as well as progress Bimbo was making with the integration of the North American Fresh Bakery business of Sara Lee Corp., acquired in the final quarter of 2011.
“Volumes in general are still weaker than in the year-ago period, but the rate of decline has slowed compared to the 2011 average and we are continuing to see positive momentum in certain categories such as sweet baked goods and English muffins,” Servitje said. “Additionally, we have started to roll out Sara Lee breads and buns in the Northeast region.”
Still, a turnaround is not imminent, he said.
“We expect a tough first half of the year, especially given price on wheat and volume performance in the U.S., but the back half will show improvement,” he said. “Some important progress will be made, also, on the integration. But we are also committed to focus on our strategic initiatives to position ourselves as a low-cost producer and to drive sales and volume growth.
“Certain factors will remain uncertain, such as the commodity environment and the U.S. consumer confidence, but I would say we have even more confidence today about our short- and long-term targets. This comes from some months of visibility into the Sara Lee operation, as well as important improvements coming out of Latin America, particularly in Brazil, Argentina, Peru and Panama, which are benefiting from our turnaround initiatives and all the investments we have made in the region in recent years. It is important to mention that while the region is growing, we will continue to face challenges with the ongoing volatility there.
“Overall, we expect a continuation of the trends we are seeing now, meaning true volume growth in Mexico, very healthy growth in Latin America, and a strong recovery in the U.S.”
He said integration of information technology systems has headlined priorities in the U.S. but identified three additional areas of focus.
“These are leadership, and the structure is already in place at all levels; sales growth, which will come from national and local customer alignment as well as region-specific strategies; and productivity and synergy execution, which covers the synergies we had originally identified, as well as other cost-cutting opportunities while executing the manufacturing asset strategy,” he said. “I should also point out that we’re working to complete the required divestitures before the end of this year.”
Commenting on the sale of $800 million in debt securities in recent months and 5 billion pesos of domestic bonds, Servitje said the transactions successfully extended maturities by almost two years, with “a comfortable amortization schedule” beginning in 2014.
Even with pressures on profits, the company’s debt to EBITDA ratio has decreased to 2.9 times. “We are committed to bringing that figure to our target level in the medium term,” he said.
In questions and answers, Prince said a decision has been made to quicken the pace of integration to improve medium-term prospects for the company. This accelerated pace had the effect of further pressuring financial results in the first quarter.
“If you go back to the original premise of this deal, we had synergies of $150 million forecasted,” Prince said. “We had costs to capture those synergies of roughly $120 million and we had capex in the range of $200 million to $250 million a year. On the capex side, it’s roughly 1.1 to 1.2 times depreciation.
“On the cost side, we’ve decided, due to the external environment of inflation and the cautious consumer and the challenges at retail to really expedite and fast forward our integration plan on numerous fronts. And the cost still remains the same, call it, $100 million to $120 million, to generate roughly the same in savings. And over the course of the year — and we’ve announced the closure of four plants and we’re busy on our I.T. integration and a number of other fronts — but over the course of the year, we'll have further closures and restructuring going on and those charges, still in that range of $100 million to $120 million.”
In a follow up, Prince was asked whether this acceleration will help generate better results in 2013.
“Exactly,” he said. “And it’s really a year, also, of two halves here. In the first half, we do have headwinds, and we certainly expect improvement in the second half. And I’m very mindful, at the end of the day, that on the numeric front, we had a tough quarter, no doubt, in the U.S. And whether it was inflation or accounting changes of IFRS, the purchase accounting, and while I don’t think we stand alone on the tough operating environment, that said, the numbers really don’t reflect our team’s work and they are busy, in my judgment, working on the right things. We have huge opportunities to become a much more productive company and that’s really what the premise of this transaction was all about is using the combined scale and the opportunity that we have is enormous in many regions of the country.”
IFRS is a reference to Bimbo’s adoption in the first quarter of International Financial Reporting Standards in its quarterly financials. The company said principal effects stem from employee profit sharing registered above the operating line, higher depreciation costs reflecting updated asset valuations and different accounting treatment for employee benefits.
Servitje added his agreement that 2012 will be “the toughest year” in terms of integration but said additional integration-related work will be done in 2013 and 2014. He noted the scope of this work will be smaller and that during this period Bimbo will begin to reap synergies from earlier integration.
The recently announced rollout of the Sara Lee brand in the Northeast was the subject of a question that generated an update on the project and a discussion by both Prince and Servitje of BBU brands.
“The Sara Lee brand has begun to be rolled out into the Northeast,” Prince said. “It’s now in the Northern part, New England, New York, and in the Atlantic region, and it’ll be in New York shortly. We will have fully rolled out Sara Lee into the Northeast sometime here within the next month.
“We're very optimistic, and it’s meeting our early expectations in the early rollout stages. I think it allows us to mix out in the Northeast. It gives us a national footprint. We have a few more rollouts in the Southeast to do and in the Ohio-Pittsburgh area, but we anticipate getting those done later this year and we’ll have another national brand heading toward $1 billion when we do that.”
Prince said the build-out of the Sara Lee brand geographically does not diminish the value of the company’s diverse portfolio of bread brands.
“We have brands that have rich histories in the regions they grew up in, and they have tremendous potential, along with the national brands that we have in this combination,” he said. “So, we have lots to work with. We’re really in the early stages. It takes months to get things organized in the field with our customers. They have long lead times, for instance, on listings and changes, that kind of thing. So, we’re really in the front end of getting positioned to get those brands working harder for us, pretty much in every region of the country. So, whether it’s a regional brand, a Mrs Baird’s or Rainbo or Colonial or Stroehmann in the Northeast, along with Sara Lee on a national basis, we have lots to work with and we’re quite bullish about our growth potential.”
Servitje said his view of the BBU brand portfolio has only brightened in recent months.
“I would say that we are more bullish on our brands with the integration of the two former companies than we were before,” he said. “So, even though there are a lot of things that we are working on to get us to the — through the integration process, at the end the brands and the structure will be stronger as a result of this combination, definitely.”