Grupo Bimbo S.A.B. de C.V

by Corporate Profiles
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For Grupo Bimbo S.A.B. de C.V., Mexico City, the focal point in the United States in 2012 is crystal clear — the largest integration in U.S. wholesale baking history.

The endeavor follows the purchase late in 2011 by Bimbo of the fresh baking business in North America of Sara Lee Corp. First announced in 2010 but held up for longer than a year by the Department of Justice, the acquisition has created a U.S. operation for Bimbo with 75 baking plants and nearly $6 billion in annual sales. By purchasing the Sara Lee business, which operated 41 baking plants and 4,100 routes when the acquisition was first announced, B.B.U. widened its position as the nation’s largest baker by a wide margin. Flowers Foods, Inc., the next largest wholesale baker, operates 44 baking plants and has annual sales of about $2.8 billion.

Just before the Sara Lee transaction was completed, Daniel Servitje, Bimbo’s chief executive officer, said Bimbo would hit the ground running when the deal finally was closed.

“The integration process will begin immediately after closing, and we expect to gradually reach $150 million in annual synergies,” he added.

Related to the integration is compliance with an agreement with the Justice Department requiring the divestiture of the Sara Lee and EarthGrains brands in California and smaller brands in the Harrisburg/Scranton region of Pennsylvania and the Kansas City, Oklahoma City and Omaha metropolitan areas.

In April, Bimbo said it was divesting the Sara Lee and EarthGrains brands in California and smaller brands in the Harrisburg/Scranton region of Pennsylvania and the Kansas City, Oklahoma City and Omaha metropolitan areas. The smaller brands include Sara Lee’s EarthGrains brand and B.B.U.’s Mrs Baird’s brand in the Kansas City area; Sara Lee’s EarthGrains brand in the Oklahoma City area; Sara Lee’s EarthGrains and Healthy Choice brands in the Omaha area; and Sara Lee’s Holsum and Milano brands in the Harrisburg/Scranton area.

When Mr. Servitje sat down in the middle of 2012 for an interview with Milling & Baking News, a successful integration was top of mind when asked about Bimbo’s long-term aspirations in the United States.

“I hope by 2015 we are through with the integration of Sara Lee, and our company is seamless to our customers and ourselves,” he said. “Also, that we have a single information technology system and an enriched culture, which is common to all of Bimbo. And, that we are a low-cost operator striving to provide the best value for customers.”

As part of the integration, Bimbo Bakeries USA remains committed to significant capital investment, Mr. Servitje said.

“Gary (Prince, president of B.B.U.) from day one declared we intended to invest $1 billion in the next five years to renew manufacturing assets and strengthen our distribution capability,” Mr. Servitje said. “The reason is quite simple. The U.S. baking industry has many plants that are 40, 50, 60 or 70 years old. You can’t do much about them, because you can’t support much of these assets’ renewal. We see opportunities to focus on new priorities that can bring higher payback. We know we need to focus on becoming a low-cost baker because customers and consumers demand it more than ever.”

He went on to say the company’s investments will be carefully considered in a way to maximize returns.

“Our plans are not the same everywhere,” he said. “In some instances it will be a new plant. In others, it will be better utilizing existing assets. In others, it’s replacing ovens. It’s an entire gamut of possibilities, which we won’t address automatically. We will analyze thoroughly, project-by-project.”

Among reasons Mr. Servitje is optimistic about its prospects in the United States, even while so many other companies have struggled, is the value Bimbo brings as a company focused on the long term.

“Baking has been for many U.S. companies an industry the parent company did not expect to be operating in,” he said. “So in many cases of companies we acquire we have been the fifth, sixth or seventh parent. We tell them now this is a safe harbor. It’s motivating because people understand we are a committed parent. It’s another reason we believe we add value to the U.S. or other countries.”

While a committed parent, Mr. Servitje said Bimbo’s corporate leadership will be careful to avoid too much of a top down approach toward integrating and managing B.B.U.

“I don’t think it’s a one-way view, Grupo Bimbo out,” he said. “It’s a two-way interaction. We want to learn as much as we can from the various businesses and see what could be applied elsewhere. I want to avoid the ‘not invented here’ syndrome or being very selective in applying best practices. We give awards to plants that have adopted best practices.”

A longer term focus was evident in comments by Armando Giner, a corporate vice-president who is in charge of investor relations at Grupo Bimbo, about 2012 year-to-date results, showing profits under considerable pressure. He spoke with Milling & Baking News in connection with the interview of Mr. Servitje.

“We said this will be a transitional year, and it will be,” Mr. Giner said. “We know we won’t have the type of results we are used to achieving and that margins would be significantly reduced. The combination of the integrations of Sara Lee and Fargo (Argentina) with the commodity and cost pressures facing all bakers will impact our short-term results. But, we believe we can achieve margins that we achieved in 2010 as we expand the base of the business in the U.S. and other countries. We are patient as we prefer to maintain a long-term strategy versus simply focusing on the next quarter.”

Operating income of B.B.U. in the second quarter ended June 30 was 796 million pesos ($59.1 million) in the second quarter ended June 30, down 15% from 934 million pesos in the second quarter of 2011. Sales in the quarter were 20,706 million pesos ($1,538 million). The results were a drag on corporate profitability. Group majority income of Grupo Bimbo was 888 million pesos ($65.9 million) in the second quarter of fiscal 2012, down 1% from 895 million pesos in the second quarter of 2011. Sales were 43,266 million pesos ($3,213 million), up 43%.