MEXICO CITY, MEXICO — The U.S. bread category is trending downward at an annual rate of 2% to 3%, said Fred Penny, president of Bimbo Bakeries USA. Penny offered analysis of the U.S. baking market during a conference call with investment analysts July 22 in connection with quarterly financial results issued by parent company Grupo Bimbo S.A.B. de C.V.
As previously reported, operating income of the U.S. and Canada business of Grupo Bimbo climbed 47% in the second quarter ended June 30. At 1.52 billion pesos ($94 million), operating profit was up 47% from 1.03 billion pesos in the same period a year earlier. Net sales were 28.30 billion pesos ($1.769 billion), up 31%.
Net majority income of Grupo Bimbo in the second quarter was 1,747 million pesos ($109 million), up 8% from the second quarter of 2014. Net sales were 53.09 billion pesos ($3.317 billion), up 18%.
Penny’s remarks, offered in response to an analyst’s question, followed a brief overview of the BBU business by Daniel Servitje, chairman and chief executive officer (CEO).
“In the United States there was pressure on volumes, which mostly mirrored the actions in our trade spend programs as well as the price increases in the mainstream business implemented since the end of the first quarter,” Servitje said. “Categories like sweet baked goods, breakfast and snacks continue to grow while the Little Bites brand outperformed in the market.
“We launched the Healthfull brand and Nature’s Harvest brands nationally. Both of these innovations come as part of our portfolio development meant to expand our better-for-you products. BBU restructuring expenses were 67% lower than the second quarter of last year. Furthermore, we have generated over $80 million in savings year to date, helping strengthen EBITDA in the quarter. Looking forward our energy will concentrate on creating a world-class direct-store delivery DSD operation and a sustainable cost reduction culture, as well as boosting promotional effectiveness and optimizing the product portfolio through real-time tools and enhanced analytics.”
Turning to Canada, Servitje said the acquisition of the Saputo baking division earlier this year, including two production plants in western Canada, has gone smoothly.
“As for performance, Canada posted a soft quarter primarily due to volume pressures related to industry dynamics and integration expenses, specifically in IT systems, which we will continue to have for the rest of the year,” he said.
Servitje noted that because Canada Bread was acquired in May 2014, year-to-year sales comparisons will not be skewed by the acquisition going forward.
Servitje also announced a change of leadership in the Bimbo business in Canada.
Asked for elaboration on the volume decline in the United States, Penny pointed his finger principally on the bread market.
“I would say the following on the volume pressures, primarily we have seen it in mainstream bread, traditional bread led really by private label,” he said. “We are a major provider of private label and private label has continued to trend negative in the category. So that has been one of the volume pressures. And on the branded side it has really been in our mainstream branded business where we — as I said in prior calls — have been working on getting more efficient trade promotions in the marketplace, which is both about depth and frequency and also some frontline pricing that we took at the end of the quarter."
“That’s against a backdrop of I would say a soft consumption category. The overall bread category is trending 2% to 3% down depending on what part of the U.S. you look at. So I think it’s going to take some time for the category and the consumer to adjust, and we are watching that closely.
“Having said that, our premium bread business, Arnold, Brownberry, Oroweat brands are solid, and we look for improvement out of that segment of the business. And as Daniel noted, sweet baked goods and breakfast have continued to grow well for us and are performing well. So on balance we have seen some softness, but it has really been driven on the mainstream side. And we are just going to have to work our way through that in the coming quarters.”
Even as the company has worked to become more disciplined in trade promotions for a full quarter, Penny offered no signs of overall improvement across the industry during the quarter. He counseled patience when asked by an analyst whether the pricing environment was deteriorating.
“I wouldn’t say it is necessarily getting worse, but from a pricing standpoint we have really been into it for call it barely three months, which is really not a lot of time for the consumer to fully adjust and react,” he said. “And so, we are — if we need to course correct, we will course correct, but certainly we are going to keep a close watch on it.”
Asked what percentage of the company’s BBU sales come from “faster growing categories,” such as breakfast bread, Penny said, “It is roughly 50-50 split between mainstream private label food service and the remaining pieces of our business, the premium segments.”
Servitje said the integration of the Sara Lee fresh baking business in the U.S. is essentially completed, but the Canada Bread integration is still ongoing. A conversion of the enterprise resource planning system will be implemented over the next six to eight months at an estimated cost of $10 million to $15 million, he said.
“So that is what we are expecting, as well as also starting to get some of the integration activities in the manufacturing side going,” he said. “As it was announced, we will be closing a plant in Halifax in the next month, and we are improving our facilities in the Atlantic side of Canada as well.”
Adding additional color to the recently announced plan to acquire the Panrico sweet goods business in Iberia, Servitje said the transaction will boost Bimbo annual sales in Europe by 70%.
“We will significantly strengthen our profile on the Iberian market in terms of the product portfolio, our distribution, reach and our manufacturing facilities,” he said. “Furthermore, there will be substantial synergy opportunities that we expect to capture during the integration process on the order of €40 million to €50 million in the next 30 months after completion.”
He estimated one-time integration costs associated with the synergies to total about €70 million.
“We expect EBITDA margin to be at the end in the range of 9% to 10%,” he said.
Subject to regulatory approval, Servitje predicted the transaction would be completed by the end of the calendar year.