In tough quarter in U.S., Servitje sees positives

by Josh Sosland
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MEXICO CITY — Despite a wide range of headwinds, Bimbo Bakeries USA experienced only a modest narrowing of operating margins during its most recent quarter, said Daniel Servitje, the chief executive officer of Grupo Bimbo S.A.B. de C.V.

In a conference call with investment analysts Oct. 28, Mr. Servitje said the company’s profit margin contracted 20 basis points during the period.

As previously reported, operating profit in the United States during the third quarter of fiscal 2011 was NP1,006 million ($76,598,000), down 4% from NP1,046 million a year ago. Sales fell narrowly to NP12,045 million ($917,343,000) from NP12,163 million.

Volumes were lower during the quarter, and commodity prices rose. But Mr. Servitje identified a host of unusual additional costs B.B.U. endured.

“We also faced rising fuel costs, start-up expenses at our new Topeka (Kas.) plant and expenses related to the extreme condition in the Northeast, which affected three of our plants in the region,” he said. “All this was on top of our ongoing market penetration investment.”

Mr. Servitje attributed the weakness in sales volume to a “still soft consumption environment.”

“But there were a few bright spots like Bimbo and Marinella sweet baked goods, the Entenmann’s line and the breakfast category,” he said. “New product launches like the Arnold and Oroweat Flax and Fiber Premium bread line and Thomas Pumpkin Spice bagels are leveraging our successful innovation track record with such standouts in recent years as sandwich thins bagel minis and others.”

While he did not comment on the pending acquisition of the North American Fresh Bakery business of Sara Lee, Mr. Servitje pledged to “share more information on all of this with you in the coming weeks and months.”

The challenging quarter in the United States stood in stark contrast to highly successful quarters in the Grupo Bimbo markets in Mexico and Latin America.

Mr. Servitje emphasized “very healthy 14%” growth from a year ago in sales in Mexico, noting that 40% of the gain came from volume growth.

“Every category of our portfolio generated improvement with outperformance in the tortilla, sweet baked goods, cookie and snack categories,” he said. “We also continue to introduce new products with a whole grain stamp certified by the Whole Grains Council, which designates products that adhere to strict formulations and help consumer’s identify the specific inclusional profile they are looking for.”

Regarding profitability, Mr. Servitje said Bimbo was able to offset a significant proportion of higher commodity costs in Mexico with distribution efficiencies, limiting the margin contraction to 1.3 percentage points.

Even more impressive than Mexico was a 24% sales gain in Latin America, primarily attributable to volume gains but also reflecting pricing initiatives.

“We continue to add new clients as part of our ongoing market expansion efforts,” Mr. Servitje said. “This investment in distribution combined with higher raw material costs resulted in a 3.2 percentage point loss in operating margin.”

Asked by an analyst to elaborate on commodity costs, Mr. Servitje said the company’s hedging policies generally call for coverage of three months for principal inputs and “up to nine in some cases if it merits.”

A financing gain that accounted for much of the quarterly profit gain reflected balance sheet moves ahead of the company’s Sara Lee acquisition, Mr. Servitje said.

“That basically comes from the loan position we have in terms of dollars because we were preparing to make the payments for the Sara Lee acquisition,” he said. “We were already funded.”
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