Bimbo's Penny sees promotional activity 'stabilizing'

by Josh Sosland
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WASHINGTON — After ramping up with the return to market of products formerly baked by Hostess Brands, Inc., promotional activity of baked foods in the U.S. market appears to be stabilizing, said Fred Penny, president of Bimbo Bakeries USA.

Mr. Penny spoke Oct. 24 during a conference call with investment analysts in connection with the release of third-quarter financial results by Grupo Bimbo S.A.B. de C.V. Discussing improved profitability at B.B.U., Mr. Penny described “some modest improvement in bread pricing realization.”

“We are focused going forward on improving our forward promotional efficiency as well,” he said.

As previously reported, operating income of the U.S. and Canadian baking business of Bimbo was 1,145 million pesos ($84.4 million) in the third quarter ended Sept. 30, up 28% from 898 million pesos in the third quarter of 2013. Net sales were 24,741 million pesos ($1,824 million), up 21% from 20,400 million pesos in the prior year quarter.

Mr. Penny remarked further about the competitive environment, responding to a financial analyst who both asked about promotional spending and offered comments to the effect that bakers go through a recurrent cycle in which promotional spending goes up, “the industry finds out it is ineffective,” and bakers adjust the spending downward.

In his reply to the analyst’s question, Mr. Penny sought to offer context to the issue by describing the overall market picture for baked foods and specific developments in the past two years.

“I would say the mainstream bread and private label segment, particularly sliced bread and buns and rolls, is essentially a flat category, and it has been for a number of years,” he said. “And so the industry benefited from the Hostess liquidation in 2013. But as those brands have come back in, as I mentioned earlier, that consumption has to come from somewhere. And those brands coming back in certainly triggered a response from everyone who is competing to try to retain as much of their business as they could. And so I think that was another event that you might argue caused some heightened promotional activity.”

With the reintroduction of Hostess brands largely completed, Mr. Penny offered words of guarded optimism.

“I do think there is some stability coming into the market,” he said. “I would hope that that continues. From our standpoint, we have a fairly complex portfolio in these brands, and businesses that have been rolled up through historic acquisitions here we have been through two in the last five years. We are focused on optimizing our portfolio, and as we do that work also optimizing our promotional spend behind all those various categories and brands.

“And so that is an opportunity for us, but it’s going to take some time. It’s a very complex portfolio, but we are focused on it from here on in.”

The gain in profitability for B.B.U. in the third quarter was achieved despite restructuring expenses above year-earlier levels, Mr. Penny said. In some cases, restructuring initiatives originally slated for 2015 have been accelerated, Mr. Penny said.

“In addition, toward the end of this quarter, I initiated an organization transformation that will change the design of most of the supply chain and further drive costs down for us as we move into 2015 and beyond,” he said.

Details of the organization transformation were not offered.

Mr. Penny went on to predict “substantially lower” restructuring expenses as 2015 progresses.

Commenting further on the B.B.U. results during the quarter, Mr. Penny emphasized the strength of the company’s breakfast and sweet goods business, describing the segment as enjoying “positive momentum.”

“I think it’s important to note that overall our businesses, all of our categories are still ahead of where they were at the end of 2012 pre the Hostess liquidation,” he said. “And so that was obviously a major event in the industry and when those brands came back in it would be natural to expect that volume has to be sourced from the remaining players in the industry.”

In prepared comments, Daniel Servitje told the analysts the U.S. and Canadian commercial bread category “remains challenging in a still weak consumption environment.”

While the difficulties have been especially taxing for the mainstream and private label segments, premium brands are “not immune to these pressures” either, he said.

Helping the B.B.U. business has been the introduction of new and innovative products combined with ongoing portfolio optimization, he said.

He also commented on asset optimization, route restructuring and capital investments aimed at lowering costs.

“Since the acquisition of Sara Lee, we have executed significant transformational projects to drive productivity within our own supply chain and route distribution systems,” Mr. Servitje said. “We are finding additional opportunities to invest in restructuring our business to ensure we are a low-cost supplier. As we accelerate these opportunities we will exceed our expected savings, which will provide a foundation for profitable future growth.”

Commenting briefly on Canada Bread, Mr. Servitje said Bimbo completed a 100-day plan during the third quarter, that the integration was “on track” and that best practices have been shared.

“We are now working to integrate systems and processes,” he said. “We are very pleased with our progress to date.”

Net sales in Mexico were down 3.1% in the third quarter. The company attributed the decline to a “weak consumer environment” and said volume was higher in key categories, including bread and buns. Mr. Servitje said the company is seeking a deeper understanding of the root causes of its challenges in Mexico.

“(The company is)  going back to the drawing board and understanding what are the causes of some of these drops and finding a more affordable portfolio of products in the different categories, offering basically a matrix of products at the different price points,” he said. “So I would say that that is basically what we were aiming for and that’s our efforts to recover volume.

“On a different front, we are reformulating some of our products. We try to offer more formulas that go alongside with our health and wellness initiatives.”
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