Penny: B.B.U. 'prepared to compete' in new market structure
by Eric Schroeder
MEXICO CITY — The management team at Bimbo Bakeries USA, a division of Grupo Bimbo S.A.B. de C.V., “is comfortable” that it is on pace to achieve the 10% to 11% EBITDA margin goal for 2015 that the company established at the time of acquisition of the Sara Lee bakery business in late 2010, said Fred Penny, president of B.B.U.
“We continue to work hard on achieving the synergies on our asset restructuring and the key projects that are going to drive the improvement that we’re looking for,” Mr. Penny said during a July 24 conference call with analysts to discuss second-quarter results.
In comments following the announcement of results, Mr. Penny also addressed several questions about the impact of the gradual re-emergence of Hostess bread and snack cake brands.
“It clearly is going to make the market more competitive both in sweet goods and ultimately in bread as the brands re-emerge,” he said. “How that’s going to happen remains to be seen, but we’re prepared to compete going forward in the new market structure that we’re going to have.”
Specifically, Mr. Penny was asked about the impact of ramped-up promotional activities from both Flowers Foods, Inc. and the new Hostess Brands, L.L.C.
“As it relates to bread at least, when we look at I.R.I. (Information Resources, Inc.) … I wouldn’t say that I’ve noticed a ‘significant’ change in promotional activity,” he said. “I think the market generally … has remained fairly competitive in bread, and given the overall state of the economy and consumer expectations, I’m not surprised by that.
“There has been a significant increase in marketing activity, specifically with the Hostess cake re-emergence, which is now essentially a week in the market, and again, I wouldn’t characterize that as a surprise. From our own strategy standpoint, we’ve launched Sara Lee earlier this year — Sara Lee cakes — in basically the entire U.S. now, and we’re on a go forward basis.
“We are going to support that launch with marketing and promotional activities as we feel the need to do, and we will just continue to be focused on our strategies by category in every part of the market.”
By introducing snack cakes under the Sara Lee brand, B.B.U. has taken a step Sara Lee Corp. did not during the 10 years it was a major player in the fresh baked foods business. Instead, Sara Lee focused on building a bread business under the Sara Lee brand during the 10 years following its 2001 acquisition of The Earthgrains Co.
With the introduction of snack cakes under the Sara Lee brand, two different companies are now selling what are broadly referred to as sweet goods under the Sara Lee brand. In addition to B.B.U., Hillshire Brands Co. sells the heritage frozen dessert products of Sara Lee, including pound cakes, cakes, cheesecakes, pies and sweet breakfast products.
The new Sara Lee snack cakes offered by B.B.U. include Chocolate Crème Cupcakes, Golden Crème Cakes, Devil’s Food Crème Cakes, Buttery Sunshine Cakes, Crumb Cakes and Golden Fudge Cakes.
As previously reported, operating income of Bimbo Bakeries USA in the second quarter ended June 30 was 1,031 million pesos ($82.5 million), up 29% from 797 million pesos in the second quarter of 2012. Sales were 19,986 million pesos ($1,599 million), down 3%, from 20,706 million in the second quarter last year. Grupo Bimbo said U.S. sales growth in the second quarter would have been 4.8% but for the impact of foreign exchange.
Daniel Servitje, chairman and chief executive officer, said during the conference call the performance at B.B.U. underscores the extent of volume growth across the country as well as positive performance in almost all categories and channels.
“What is particularly notable about this quarter is that despite negative exchange rates, higher wheat costs and an increasing integration expense, there was an almost 40% rise in dollar terms in operating income, which was purely driven by revenue growth, asset optimization strategy, integration synergies and waste reduction initiatives to the tune of almost $38 million during the quarter,” he said.
To meet its 2013 objectives in the United States, Mr. Servitje said B.B.U. has identified a number of priorities for the second half of the year, including accelerating momentum in new products, continuing to aggressively grow brands in order to expand market share gains, and accelerating regional assets restructuring projects and supply chain optimization in order to drive greater efficiency.
In comments on non-U.S. markets, Mr. Servitje said Bimbo continues to face challenges in Brazil and several other “tough markets,” where “results are clearly not meeting our expectations,” he said.
In Brazil, Grupo Bimbo is approaching a revival through a three-prong approach. The first prong deals with a gross revenue strategy in which the company is developing the traditional channel and improving profitability at the modern channel while launching new products and optimizing its portfolio. The second prong involves a restructuring of the value chain through purchasing, production, labor and logistics. The third and final prong has to do with the long-term sustainability of the business, an area Mr. Servitje said the company is addressing by implementing an ERP system.
“There is a cost for undertaking these efforts as evidenced by the $50 million expense this quarter, $42 million of which was a non-cash charge for certain write-downs,” he said. “We are making good progress on the restructuring and are determined to finish it this year. This has a full focus of Grupo Bimbo’s top management and obviously is the No. 1 priority for the current leadership of the Brazilian and South American operations. We are accountable for its successful execution.”
Elsewhere, despite narrowing losses during the quarter behind a number of successful product launches and new efficiencies in the manufacturing platform, Iberia is expected to experience several more challenging quarters in the short term, Mr. Servitje said.